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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from August 1, 1998 to December 31, 1998.
Commission file number 1-14382
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SUNSTAR HEALTHCARE, INC.
(Name of small business issuer in its charter)
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DELAWARE 59-3361076
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 International Parkway, Suite 230, Heathrow, Florida 32746
(Address of principal executive offices/Zip Code)
(407) 304-1066
(Issuer's telephone number)
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock Nasdaq SmallCap Market and Boston
Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 90 past days.
YES_________ NO X
------------
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
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-KSB
or any amendment to this form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $23,090,682
-----------
The aggregate market value of voting stock of the Registrant held by
non-affiliates of the Registrant on March 15, 1999 was $7,690,179 (based on the
average closing bid and asked prices of the Registrant's Common Stock on March
15, 1999 of $4.125 and $4.500 respectively).
As of March 15, 1999, 2,919,330 shares of the Registrant's Common Stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1999 Annual Meeting
are incorporated by reference in Part III. The Company's Proxy Statement will be
filed within 120 days after the five months ended December 31, 1998.
Transitional Small Business Disclosure Format (check one): YES X NO____
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________________________________________________________________________________
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PART I
ITEM 1. BUSINESS
SunStar Healthcare, Inc. ("SunStar" or the "Company") was incorporated
under the laws of the State of Delaware in December 1995 by National Home Health
Care Corp. ("NHHC"), a publicly-held Delaware corporation. In January 1996,
NHHC, then the sole shareholder of the Company, contributed to SunStar all of
the outstanding capital stock of its wholly owned subsidiaries First Health,
Inc. ("First Health") and Brevard Medical Center, Inc. ("Brevard"), which
included all of the outstanding capital stock of Brevard's wholly owned
subsidiary, SunStar Health Plan, Inc. ("SHP") (formerly known as Boro Medical
Corp.). Subsequently, the Company restructured its subsidiaries such that
Brevard, First Health and SHP all became direct, wholly-owned subsidiaries of
SunStar. Except where the context otherwise indicates, the Company, First
Health, Brevard and SHP collectively are referred to herein as "SunStar" or as
the "Company".
On May 15, 1996, the Company completed an initial public offering (the
"IPO") pursuant to the Securities Act of 1933, as amended, which resulted in the
issuance of 1,300,000 shares of Common Stock, par value $.001 (the "Common
Stock"). The IPO yielded net proceeds to the Company of $5,230,372. On June 7,
1996, the underwriters in the IPO exercised their over-allotment option in full
to purchase additional shares of Common Stock, resulting in the Company's sale
of an additional 195,000 shares of Common Stock, par value $.001, and
realization of $853,125 in net proceeds.
On July 16, 1998, the Company completed a Private Placement (the
"Private Placement") under Rule 506 of Regulation D ("Regulation D") promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
which the Company sold 474,330 shares of previously unissued Common Stock. The
Private Placement resulted in net proceeds to the Company of $1,355,251.
As of April 13, 1999, the Company sold 496,425 Units (the "Units", each
a "Unit"), resulting in net proceeds to the Company of approximately $4,199,000
pursuant to a private offering (the "Offering") under Rule 506 of Regulation D.
Each Unit consisted of (i) one share of Series A Preferred Stock, par value
$.001 per share (the "Series A Preferred Stock"), of the Company, each share of
Series A Preferred Stock convertible into shares of Common Stock, subject to
adjustment, and accruing dividends at the cumulative rate of 10% per share per
annum; and (ii) one warrant to purchase one share of Common Stock at $5.00 per
share up to 60 months from the date of the Offering. The purchase price per Unit
was $10.00. The Offering, originally scheduled to terminate on March 31, 1999,
was extended by the Board of Directors for purposes of accepting one additional
investor to which updated due diligence information was provided prior to the
investment.
The Company is a managed healthcare company whose wholly owned
subsidiary, SHP, provides comprehensive healthcare benefits to individuals,
families and small and large employer groups in its service areas through its
health maintenance organization ("HMO") contracts. As originally organized, the
Company also operated seven outpatient primary care medical centers (the
"Medical Centers") located in central Florida. On April 15, 1998, the Company
sold substantially all of the assets of the Medical Centers, pursuant to an
Asset Purchase Agreement ("Asset Purchase Agreement"), thereby completing the
Company's transformation from a "provider" of medical services through its
Medical Centers to a "payor" for medical services through its statewide HMO. The
Company's sale of the Medical Centers has permitted the Company to focus its
full attention and resources on the rapid expansion of SHP.
On February 24, 1997, SHP was awarded an HMO Certificate of Authority
by the Department of Insurance in the State of Florida ("DOI") and began
accepting its first HMO members effective May 1, 1997. Commencing from an
initial service area of a single county in eastern central Florida, SunStar has
subsequently received eight approvals from the Florida Agency for Healthcare
Administration ("AHCA") to expand its service territory to 52 counties in
central, northern, southwestern and southeastern Florida, including the
metropolitan areas of Tampa, Orlando, Jacksonville, Sarasota, Naples, Fort
Meyers, Miami, Fort Lauderdale and Palm Beach. On January 13, 1998, SunStar
filed an application to become a contracting party with the
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Healthcare Financing Administration ("HCFA") to provide HMO health service
benefits to Medicare beneficiaries residing in Florida. At the request of HCFA,
SunStar has withdrawn its original application filed under superceded Tax Equity
Fiscal Responsibility Act rules and is in the process of finalizing its new
application due by April 15, 1999. HCFA has assured SunStar that its original
filing date will be used to prioritize the site visit and approval process. The
Medicare Service Area will include four counties in Central Florida and at least
three counties in South Florida.
The Company's HMO products provide comprehensive healthcare benefits to
enrollees, including ambulatory and inpatient physician services,
hospitalization, pharmacy, dental, optical, mental health, ancillary diagnostic
and therapeutic services. In general, a fixed monthly enrollment fee covers all
HMO services, although the benefit plans require co-payments in addition to the
basic enrollee premium. These co-payments are made directly to the provider of
services by the member. Although a primary care physician assumes overall
responsibility for the coordination of care, the Company offers its members
access to its network of physicians without the need of a referral from the
member's primary care physician.
As of February 1, 1999 the Company served approximately 75,000 enrolled
plan members in 52 counties. The Company has established a growing distribution
network of more than 3,000 brokers and 125 general agencies to market its HMO
products. The Company has also established a comprehensive delivery system of
contractual providers numbering approximately 17,000 physicians and 130
hospitals. The Company outsources all billing, enrollment and claims processing
functions through a third party administrator ("TPA") which provides a dedicated
SunStar team with whom the Company maintains close contact for coordination and
review. In February 1999, the Company verbally notified the current TPA of its
intention to terminate the service contract effective July 1, 1999. During March
1999, written notice of termination was received. On March 26, 1999, the
Company's management finalized an agreement for similar services with a
different TPA. Management anticipates completion of the conversion from the
existing TPA to the new TPA by July 1, 1999.
The Company's objective is to continue to establish relationships with
qualified physicians, hospitals and other healthcare providers who are willing
to provide quality medical services to members of managed care organizations at
a reasonable cost. The Company believes that these efforts will enable it to
provide a variety of low-cost managed healthcare products to attract individuals
and employer groups willing to enroll in the Company's HMO. The Company has
focused initially on enrolling medically underwritten individuals in central and
northern Florida. Currently, the Company has entered the small group and large
group markets with a suite of tailored products and is in the process of
extending and improving upon its service area throughout the State of Florida.
Upon obtaining HCFA approval, the Company will also expand its HMO product
offerings to the Medicare market.
The Company's strategy and preliminary and future expansion plans may
be subject to change as a result of numerous factors, including the Company's
ability to raise capital, progress or delays in the Company's expansion efforts,
changes in market conditions, competitive conditions and new or different
opportunities which may become available to the Company in the future.
Effective April 6, 1999, four of the directors resigned from the Board
of Directors of the Company. Three of the four former directors, Frederick H.
Fialkow, Steven Fialkow and Bernard Levine, M.D., are directors of National Home
Health Care Corp. ("National") and the fourth, Richard Seidelman, M.D., is
unaffiliated with National. On April 13, 1999, the remaining directors of the
Company, Warren D. Stowell, President, Chief Executive Officer and Chairman of
the Board of Directors, and David A. Jesse, Executive Vice President, Chief
Operating Officer and Secretary, appointed Jerry Balter, Managing Partner of the
Ulysses Group, a health care and emerging technology advisory firm, to fill one
of the vacancies created by the resignations and to serve on both the audit and
compensation committees of the Company. Mr. Balter has agreed to so serve until
the next Annual Meeting of the shareholders of the Company, which is expected to
be held in May. Management anticipates that a complete slate of proposed
directors, including Messrs. Stowell, Jesse and Balter and a nominee of the
placement agent in the Offering, will be nominated for election to the Board of
the Company at such Annual Meeting.
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HCFA AGREEMENT.
SHP also has a prepaid cost reimbursement contract with HCFA, pursuant
to which the Company provides prescribed primary healthcare services to Medicare
beneficiaries who enrolled directly with the Company prior to January 1, 1996.
The Company provides medical services pursuant to the HCFA agreement to
approximately 2,000 Medicare enrollees through Brevard Medical Care, Inc.
("BMC"), a non affiliate entity. Medicare enrollees pay a nominal annual
enrollment fee without monthly premiums, deductibles or copayments for primary
care services.
Pursuant to the terms of the agreement with HCFA, the Company is paid a
monthly premium in advance for each Medicare beneficiary enrolled by the
Company. Payments under the agreement are based on estimated costs incurred in
connection with medical services and are subject to year-end adjustments. The
Company is subject to governmental audit to ensure the basis of medical costs
incurred. The Company's 1996 HCFA cost report was recently audited and no
material adjustments were made. Revenues, net of expenses related to the HCFA
contract are reported as operating income on the Consolidated Statement of
Operations for the five months ended December 31, 1998.
Pursuant to amendments to the Social Security Act, effective January 1,
1996, the Company is prohibited from enrolling Medicare beneficiaries who are
not members of employer groups or unions under its agreement with HCFA until it
establishes Medicare HMO operations. Effective January 1, 1999, the Company has
obtained HCFA approval to convert the existing contract under Section 1833 of 42
Code of Federal Regulations into a cost contract under Section 1876 of 42 Code
of Federal Regulations, which allows the Company to continue service to the
2,000 enrollees in Brevard County before it establishes Medicare HMO operations.
Pursuant to the Asset Purchase Agreement, the Company agreed to
transfer the existing HCFA contract held by SHP to the buyer subject to HCFA
approval. During November 1998, HCFA declared the contract non-transferable and
effective January 1, 1999, the Company entered into an agreement to exclusively
use BMC to provide non-urgent and non-emergent primary care medical services to
its members of the new plan referred to above. The Company will pay a fixed
capitated amount per member per month to BMC in exchange for BMC providing all
the primary care medical services to such members.
COMPETITION.
The managed healthcare industry is very competitive and has experienced
significant changes in recent years, primarily due to rising healthcare costs.
Employer groups have demanded a variety of healthcare options, such as
traditional indemnity insurance, HMOs, point of service plans and preferred
provider options, offered either through third-parties or by self-funding. The
Company's HMO competes with providers of all of these products, including United
Healthcare of Florida, Inc., Humana Medical Plan, Inc., Prudential Healthcare,
Inc., Health Options, Inc. and CIGNA Healthcare of Florida, Inc., most of which
have substantially greater financial, management, marketing, personnel and other
resources than the Company. Additional competitors may enter the Company's
markets in the future. Although, effective January 1, 1999, the Company has
received authorization for premium rate increases of 12% for individual and
small groups, the Company must respond to various competitive factors affecting
the healthcare industry, including trends relating to demand for healthcare
services, regulatory, economic and political factors, changes in patient
demographics and competitive pricing strategies by HMOs and other healthcare
plans. The Company will face significant competition in many of the geographic
areas it has entered. As a result of these factors, premium pricing has been
competitive, which has contributed to instances in the State of Florida whereby
HMOs have experienced significant operating losses and financial failures over
the past several years. The Company may not be able to compete successfully in
any such market.
INSURANCE.
Although the Company has sold the Medical Centers, the Company could
under certain circumstances become liable for negligent acts performed by
employees of the Medical Centers while such centers were owned and operated by
the Company. The Company insured such malpractice risks on a claims-made basis.
The Company had secured claims-made coverage from August 1, 1997 through April
15, 1998, with retroactive coverage through July 1, 1993. The Company does not
accrue for possible losses attributable to incidents which may have occurred and
not been identified under the Company's incident reporting system because the
amount, if any, is not readily
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estimable. While the Company may be indemnified by the buyer of the Medical
Centers, or is otherwise insured, against liability for such acts, the Company
could be subject to potential professional liability claims to the extent that
such claims exceed the limits of any applicable insurance coverage.
As an HMO operator, the Company could become liable for the negligent
acts of physicians and for negligence in recruiting and selecting physicians.
The Company currently maintains managed care professional liability insurance
with limits of $1,000,000 in the aggregate and $1,000,000 per occurrence and
requires physicians in the network to maintain malpractice liability insurance
in amounts which it deems adequate for the types of medical services provided.
However, such insurance may not be sufficient to cover potential claims, and
adequate levels of coverage may not be available in the future at a reasonable
cost. A partially or completely uninsured successful claim against the Company
could have a material adverse effect on the Company's business and financial
condition.
The Company also carries "stop-loss" reinsurance to reimburse it for
costs resulting from catastrophic injuries or illnesses to its HMO members.
Premiums for these policies are reported as HMO medical costs and insurance
recoveries, if any, are recorded as a reduction of HMO medical costs. Under the
excess loss reinsurance policies, the Company recovers for claims of each
enrollee or each covered dependent of each enrollee, on an annual basis, in
excess of the deductible established in the policy subject to certain
limitations. The deductible under the policy for commercial healthcare hospital
claims is currently $50,000.
GOVERNMENT REGULATION.
The healthcare industry is subject to extensive, stringent and
frequently changing federal and state regulation, which is interpreted by
regulatory authorities with broad discretion. The federal government and the
State of Florida have each enacted statutes extensively regulating the
activities of HMOs that are applicable to the Company's operations. Among the
areas regulated are the scope of benefits required to be made available to
members, the manner in which member rates are structured, procedures for review
of quality assurance, enrollment requirements, composition of policy making
bodies to assure member representation, the interrelationship between HMOs and
their healthcare providers, licensure and financial condition. Under federal
regulations, services to members must be provided substantially on a fixed
prepaid basis, without regard to the actual degree of utilization of services.
Although premiums established by an HMO may vary from account to account through
composite rate factors and special treatment of certain broad classes of
enrollees, traditional experience rating of accounts (i.e., setting premiums for
a group account based on that group's part use of healthcare services) is not
permitted under federal regulations.
In Florida, HMOs must also comply with certain other provisions of
state health and insurance laws, including the licensing of salespersons and
maintenance of subscriber grievance procedures, insolvency protection and
minimum statutory financial requirements. Under Section 625 of the Florida
Insurance Code, each HMO shall deposit with the Florida Department of Insurance
cash or eligible securities with a minimum market value of $300,000. At December
31, 1998, the Company maintained $300,000 in deposits for such regulatory
requirements. Pursuant to Section 641 of the Florida Insurance Code, SHP is
required to maintain a minimum capital surplus in an amount which is the greater
of $800,000 or 10% of total liabilities or 1% of annualized premium. Effective
September 30, 1999, the capital surplus requirement increased to an amount which
is the greater of $1,150,000 or 10% of total liabilities or 1.25% of annualized
premium. Dividends are restricted to 10% of statutory surplus and the entire net
operating profits and related net capital gains derived during the immediately
preceding fiscal year unless prior approval is received from the DOI. Pursuant
to the Florida Administrative Code, the DOI may require an HMO to submit a
corrective action plan in the event that net income before taxes over the past
four quarterly reporting periods is less than 2% of total revenue. Based on this
criteria, at December 31, 1998, SHP is required to maintain a minimum capital
surplus of approximately $1,752,000. At December 31, 1998, SSHP's audited
statutory financial statements reflect an actual surplus of approximately
$405,000. The Company must file periodic reports with, and will be subject to
periodic review by, the federal and state licensing authorities which regulate
the Company.
The Company believes that it is in compliance with all other federal,
state and local laws, rules and regulations applicable to its operations and has
obtained all licenses necessary to conduct its business. Amendments to existing
statutes and regulations, adoption of new statutes and regulations and the
Company's expansion into new operations and jurisdictions could require the
Company to obtain additional licenses, modify its arrangements with physicians
or otherwise alter methods of operations at costs that could be substantial.
There can be no assurance that the
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Company will be able, for financial or other reasons, to comply with applicable
laws and regulations and licensing requirements. Failure to comply with
applicable laws and regulations and licensing requirements would subject the
Company to civil remedies, including significant fines, penalties, injunctions
and expulsion from participation in Commercial and Medicare programs, as well as
possible criminal sanctions, which would have a material adverse effect on the
Company.
Several proposals have recently been made by federal and state
government officials that may lead to substantial healthcare reforms, including
the implementation of a government-directed national healthcare system and
stringent healthcare cost-containment measures. Adoption of such a system or
cost controls could further limit reimbursement for medical services. Past
congressional actions have resulted in changes in Medicare and Medicaid
reimbursement rates, and the Company believes that it is likely that Congress
will, over the next several years, substantially limit the growth of Medicare
and Medicaid expenditures. Significant uncertainty exists as to the status of
reimbursement and there can be no assurance that healthcare insurers and other
third-party payors will continue to cover certain medical services or reimburse
such services at current levels. Any significant reduction of healthcare
insurance coverage for medical services could have a material adverse effect on
the Company's business and prospects.
NASDAQ LISTING REQUIREMENTS.
The Company's shares of Common Stock which were registered in the IPO
are traded on the Nasdaq SmallCap Market. Continued trading of the Common Stock
on the Nasdaq SmallCap Market is conditioned upon the Company meeting certain
criteria. The National Association of Securities Dealers ("NASD"), which
administers Nasdaq, currently requires, among other things, that for the
continued listing of the Company's Common Stock on the Nasdaq SmallCap Market,
the Company must have: (a) either $2,000,000 in net tangible assets (total
assets, excluding goodwill, minus total liabilities), $35,000,000 market
capitalization or $500,000 net income (in the last fiscal year or two of the
last three fiscal years); (b) a public float of 500,000 shares having a market
value of at least $1,000,000; (c) a minimum bid price of not less than $1 per
share; (d) two market makers; and (e) at least 300 round lot shareholders
(holders of 100 shares or more). As of December 31, 1998, the Company does not
meet the net tangible assets maintenance requirement. Net of commissions and
estimated expenses, the Company will have raised approximately $4,199,000 in the
Offering. The Company currently is assessing whether such amount would bring it
into compliance with the net tangible asset requirement and has scheduled a
hearing with the Nasdaq staff on April 22, 1999. However, there can be no
assurance the Company will meet such requirement and retain its Nasdaq SmallCap
Market listing. As a result, Common Stock could be delisted from trading on the
Nasdaq SmallCap Market, which delisting could adversely affect the trading
market for the Common Stock. In such event, trading in the Common Stock would be
conducted in the over-the-counter market known as the NASD OTC Electronic
Bulletin Board, or the "pink sheets", whereupon trading in the Company's
securities would be subject to the "Penny Stock" regulations. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's Common Stock.
EMPLOYEES.
The Company currently employs 94 persons, including 3 executive
officers, 1 physician and 90 other persons engaged in operations management,
administrative and clerical capacities. None of the Company's employees are
represented by a union or subject to a collective bargaining agreement. The
Company believes that its employee relations are good.
ITEM 2. PROPERTY.
The Company is headquartered in the metropolitan area of
Orlando, Florida, where it leases an aggregate of approximately 10,200 square
feet pursuant to a three year lease. Administrative, customer support and
medical support services are located in this space. Although the Company
believes that its facilities are adequate for its existing operations, the
Company regularly evaluates the adequacy of these facilities in light of its
operations.
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The following table sets forth the location, approximate square
footage, approximate annual rent, use of each location and expiration date of
each lease:
<TABLE>
<CAPTION>
APPROX.
APPROX. ANNUAL LEASE
LOCATION SQ. FEET RENT USE EXPIRATION DATE
- -------------------------- ---------- ----------- ----------------------- ------------------
<S> <C> <C> <C> <C>
Heathrow, FL 10,200 $184,000 Executive Office Oct. 31, 2000
Miami, FL 375 $ 7,600 Provider Relations Mar. 31, 2000
Office
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
There are no pending material legal proceedings to which the Company is
a party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the Company's shareholders for approval
during the period August 1, 1998 to December 31, 1998.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information.
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol "SUNS". The following are the high and low closing bid prices
as provided by Nasdaq in the Nasdaq SmallCap Market:
<TABLE>
<CAPTION>
1997 1998
---------------------------- -----------------------------
Quarter Ended and
Quarter Ended High Low Transition Period High Low
- ------------------------------ ------------ --------------- ------------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
October 31, 1996 5.00 3.25 October 31, 1997 5.25 4.00
January 31, 1997 5.87 3.00 January 31, 1998 5.25 2.75
April 30, 1997 7.25 3.75 April 30, 1998 5.25 3.75
July 31, 1997 6.50 3.75 July 31, 1998 5.25 3.63
Transition Period 5.125 2.94
</TABLE>
The quotations represent prices between dealers in securities; they do
not include retail mark-ups, mark-downs, or commissions, and do not necessarily
represent actual transactions.
Holders.
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The approximate number of holders of record of the Company's Common
Stock at March 15, 1999 was 88. However, the Company estimates that there were
approximately 1,000 beneficial holders of the Company's Common Stock as of that
date.
Dividends.
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No cash dividends have been declared by the Company on the Common Stock
for the past two fiscal years or the transition period. Pursuant to the
Offering, holders of shares of Series A Preferred Stock are entitled to receive
dividends on each share of Series A Preferred Stock held at the annual rate of
10%. Dividends on the Series A Preferred Stock are to be paid in cash quarterly
in arrears, with the first dividend payment due April 1, 1999. This dividend
payment is currently being processed. Upon conversion of the Series A Preferred
Stock, all accumulated but unpaid dividends on the Series A Preferred Stock are
to be extinguished. Dividends are to accumulate with respect to any share of
Series A Preferred Stock from the date of issuance.
Sale of Unregistered Securities.
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On July 16, 1998, the Company completed the Private Placement of
474,330 shares of previously unissued Common Stock, at a per share price of
$3.375, resulting in net proceeds to the Company of $1,355,251. The Common Stock
issued in the Private Placement was not registered with the Securities and
Exchange Commission under the Securities Act and was offered and sold solely to
"accredited investors" in reliance on exemptions from registration provided in
Section 4(2) and Section 4(6) of the Securities Act and Rule 506 of Regulation D
under the Securities Act. The Private Placement was not underwritten. The
Company entered into a Placement Agent Agreement with H.J. Meyers & Co., Inc.
(the "Placement Agent") pursuant to which the Placement Agent received 10% of
the aggregate value of the Common Stock issued in the Private Placement and is
being issued 150,000 warrants to purchase 150,000 shares of Common Stock at
$4.00 per share which expire in 4 years. The Placement Agent also received a
non-accountable expense allowance of 3% of the Private Placement proceeds. Under
the terms of the Private Placement, the Company agreed to use its reasonable
best efforts to file and obtain effectiveness of a registration statement under
the Securities Act covering the resale of the shares issued in the Private
Placement
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no later than 90 days after the closing of the Private Placement. If the
registration statement was not declared effective by the Securities and Exchange
Commission within such 90 day period other than by reason of delay of a selling
shareholder or its counsel or the activity or inactivity of the Securities and
Exchange Commission, then the Company was obligated to pay cash equal to 1% of
the aggregate subscription price of the Private Placement for the first month of
such delay and 2% of such aggregate subscription price for each month of delay
thereafter; provided, however, that in calculating the period of any delay,
there shall be excluded any delays attributable to the failure by a selling
shareholder to review the registration statement in a reasonably prompt manner.
All expenses incurred in any registration of these shares were the
responsibility of the Company, but the Company is not liable for any underwriter
discounts or commissions, brokerage fees or stock transfer taxes incurred with
respect to the shares or for the fees and expenses of counsel for any selling
shareholder. The Company filed a registration statement covering these shares on
February 10, 1999 and as of February 28, 1999, it has accrued approximately
$122,000 for delayed filing obligations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
"FORWARD-LOOKING" INFORMATION.
This report on Form 10-KSB contains certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which represent the Company's
expectations and beliefs, including, but not limited to, statements concerning
the Company's expected growth. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions identify forward-looking
statements, which speak only as of the date such statement was made. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors, including the Company's
ability to forge satisfactory relationships with physician groups and provider
networks and enroll sufficient numbers of HMO members; continued efforts to
control healthcare costs; future membership composition and premium rates for
the commercial business; proposed future efforts to control administrative
costs; the ability of the Company to effectively manage any future outsourcing
provider conversions; the individual and group renewal process; future health
care and administrative costs, future provider network, future provider
utilization rates, future medical-loss ratio levels, future claims payment,
service performance and other operations matters; future government regulation
and relations and the future of the health care industry; the Company's ability
to attract members that are of sufficient underwriting risk; the ability of the
Company to price its products competitively for this assumed underwriting risk;
sources for sufficient additional capital to meet the Company's growth and
operations; the failure to properly manage growth and successfully integrate
additional physician groups and providers; changes in economic conditions;
demand for the Company's products; and changes in the competitive and regulatory
environment. Future events and actual results could differ materially from those
expressed in, contemplated by, or underlying any such forward-looking
statements.
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AS OF
DECEMBER 31, 1998 AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE FIVE MONTHS
ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.
GENERAL.
On February 24, 1997, SHP was awarded its HMO Certificate of Authority
in the State of Florida by the DOI. SHP accepted its first HMO members effective
May 1, 1997 in its initial service area of Brevard County, Florida. During the
fiscal year ended July 31, 1997 ("fiscal 1997"), SHP accelerated its plans to
enter markets that the Company believed were under-served by its managed
healthcare competitors. Thus, SHP has rapidly expanded and been approved by AHCA
to offer its HMO products in 52 counties in central, northern, southwestern and
southeastern Florida, including the metropolitan areas of Tampa, Orlando,
Jacksonville, Sarasota, Naples, Fort Meyers, Miami, Fort Lauderdale and Palm
Beach. As a result of this accelerated growth, development costs were
8
<PAGE>
also accelerated in the areas of advertising, marketing and materials, personnel
and related expenses. SHP intends to complete this expansion throughout the
entire state of Florida over the next twelve months. As of February 1, 1999, the
Company provided coverage to approximately 75,000 members in its current service
areas. The Company has established a growing distribution network of more than
3,000 brokers and 125 general agencies to market its HMO products. The Company
has also established a comprehensive delivery system of contractual providers
numbering approximately 17,000 physicians and 130 hospitals. The net losses for
the five months ended December 31, 1998 and 1997 are consistent with
management's expectations with respect to the costs associated with the
attainment of SHP's HMO license and the related start-up, development and
expansion costs of an HMO.
As originally organized, the Company also provided managed healthcare
services pursuant to contractual arrangements, as well as on a fee-for-service
basis, through its seven primary care Medical Centers in central Florida. On
April 15, 1998, the Company sold substantially all the assets of the Medical
Centers and agreed to assign the existing HCFA contract held by SHP upon
approval by HCFA pursuant to the Asset Purchase Agreement, thereby completing
the Company's transformation from a "provider" of medical services through its
Medical Centers to a "payor" for medical services through its statewide HMO. The
Company's sale of its Medical Centers has permitted it to focus its full
attention and resources on the rapid expansion of SHP. During November 1998,
HCFA determined the existing contract held by SHP was not transferrable pursuant
to the Asset Purchase Agreement. Effective January 1, 1999, SHP obtained HCFA
approval to convert the existing prepaid cost reimbursement contract into a cost
contract and entered into an agreement to exclusively use BMC to provide medical
services under the new plan.
Since accepting its first HMO members in May 1997, the Company's
initial focus had been on the marketing and sale of its HMO product in the
medically underwritten individual market. The majority of the Company's initial
growth came from the sale of its products in the individual market. The
Company's objective has been to establish a sufficient base of customers for its
HMO product in the individual market within a geographic area, and then to
broaden its focus to the marketing and sale of its HMO products to include the
small and large group markets. During the fiscal year ended July 31, 1998, the
Company had begun to broaden its focus in the geographic areas in which the
Company is currently licensed.
On April 20, 1998, the Board of Directors approved a change in the
Company's fiscal year end from July 31 to December 31, to be effective beginning
December 31, 1998.
GENERAL FINANCIAL INFORMATION.
<TABLE>
<CAPTION>
Five Months Ended Five Months Ended
December 31, 1998 December 31, 1997
----------------- ------------------
(Unaudited)
<S> <C> <C>
Total revenues $23,090,682 $2,834,196
Loss from continuing operations (2,158,145) (2,116,952)
Net loss (2,158,145) (2,116,952)
Net loss per common share (.74) (.88)
Total assets 18,420,408 5,917,723
Long term obligations 67,608 123,884
</TABLE>
Results of Operations.
- ---------------------
Five months ended December 31, 1998 ("transition period 1998") compared to the
unaudited five months ended December 31, 1997 ("transition period 1997").
Total revenues increased by approximately $20,257,000 from
approximately $2,834,000 for the transition period 1997 to approximately
$23,091,000 for the transition period 1998. This increase is attributable to a
$21,665,000 increase in revenues generated by the Company's HMO, which commenced
operations in May 1997, approximately $111,000 in additional revenue related to
recommendations from the audit of the HCFA cost report for 1996 and applied to
the 1997 cost report, coupled with a $1,660,000 decrease in primary care
revenues due to the sale of the medical centers during April 1998 and higher
interest income of approximately $140,000.
9
<PAGE>
As a result of the Company obtaining an HMO Certificate of Authority on
February 24, 1997 and commencing the enrollment of its members effective May 1,
1997, the Company realized approximately $1,080,000 and $22,745,000 in HMO
premium revenues for the transition periods 1997 and 1998, respectively. This
HMO premium revenue increase is consistent with 1998 premium rate increases and
with enrolled membership growth to 68,679 at December 31, 1998 from a membership
of 3,842 at December 31, 1997. Member months for the transition period 1998 were
approximately 234,000 as compared to member months for the transition period
1997 of approximately 12,500. The Company anticipates that HMO premium revenues
will continue to increase over the next twelve month period as the Company will
further implement its growth plan. However, there can be no assurance that such
growth will occur or that such growth will occur as the Company expects.
HMO medical costs were approximately $16,859,000 for the transition
period 1998, resulting in a medical loss ratio of approximately 74%. HMO medical
costs include amounts accrued for actual claims reported but not paid and
estimates of medical services incurred but not reported. Total medical payments
for all dates of service, including net reinsurance premiums paid, were
approximately $5,907,000 for the transition period 1998. The Company incurred
HMO medical costs of approximately $1,438,000 for the transition period 1997,
resulting in a medical loss ratio of approximately 133%. This reduction of HMO
medical costs as a percentage of HMO revenues over the periods was directly
attributable to the Company establishing reserves for its small membership in
its new HMO products. The Company has obtained an independent actuarial
certification of its medical claims payable as of December 31, 1998.
Selling, general and administrative expenses increased by approximately
$6,097,000, from approximately $2,252,000 for the transition period 1997 to
approximately $8,349,000 for the transition period 1998, or approximately 80% of
total revenues for the transition period 1997 compared to 36% of total revenues
for the transition period 1998. The increase is primarily the result of an
increase in sales and marketing salaries, benefits and commission expense
related to the HMO products of approximately $3,100,000, an increase in
professional and outsourcing fees of approximately $2,021,000, additional
administrative salaries and related benefits of approximately $512,000, an
increase in printing, postage and other selling costs related to HMO operations
of approximately $432,000, an increase of approximately $95,000 in other general
and administrative expenses including costs related to HMO enrollee medical
records, benefit statements and other miscellaneous office expenses, coupled
with a decrease in occupancy, insurance, general office and related costs of
approximately $63,000. These additional expenses were primarily incurred in
connection with the Company's accelerated expansion into additional Florida
markets, the development of marketing materials and increased infrastructure and
personnel to effect the Company's transformation into an HMO. The Company
expects selling, general and administrative expenses as a percentage of revenues
to decrease as HMO membership and premium revenues grow. However, there can be
no assurance that such membership and revenue growth or a decline in selling,
general and administrative expenses as a percentage of revenues will occur as
the Company anticipates.
As a result of the foregoing, the loss from continuing operations was
approximately $2,158,000 for the transition period 1998 compared to
approximately $2,117,000 for the transition period 1997.
Financial Condition, Liquidity and Capital Resources.
- ----------------------------------------------------
At December 31, 1998, the Company had negative working capital of
approximately $674,000 as compared to positive working capital of approximately
$2,119,000 at December 31, 1997. The decline in working capital is attributable
primarily to the development and marketing costs incurred in order to transform
SHP into an HMO, the costs to maintain those operations and the Company's
expansion of its service areas.
Net cash provided by operating activities was approximately $9,022,000
and net cash used in operating activities was approximately $639,000 for the
transition periods 1998 and 1997, respectively. Net cash provided by operating
activities at December 31, 1998 was primarily attributable to an increase in
medical claims payable and reserves for incurred but not reported claims of
approximately $10,038,000, additional cash received related to unearned and
deferred revenues of approximately $1,888,000, a decrease of approximately
$97,000 in prepaid expenses, depreciation expenses of approximately
10
<PAGE>
$27,000, offset by a net loss of approximately $2,158,000, an increase in
accounts receivable and other assets of approximately $927,000 and a decrease in
accounts payable and accrued expenses of approximately $11,000.
Net cash used by investing activities for the transition period 1998
was approximately $373,000 as a result of a restricted certificate of deposit of
$300,000 and purchases of new capital items of approximately $73,000. Net cash
used in investing activities for the transition period 1997 was approximately
$76,000, primarily as a result of purchases of furniture and equipment
associated with the development of the Company's new administrative offices and
replacement of medical office equipment.
Net cash used in financing activities for the transition period 1998
was approximately $14,000 as compared to net cash used in financing activities
of approximately $3,500 for the transition period 1997. Cash used for financing
activities at December 31, 1998 primarily represented principal payments of
capital lease obligations of approximately $14,000. Cash used in financing
activities at December 31, 1997 related to principal payments under capital
lease obligations of approximately $16,000 and exercise of Common Stock options
of approximately $12,500.
During the next fiscal year, the Company's liquidity will be affected
by continued accelerated HMO development, marketing and operation. Effective
September 30, 1998, SHP is required to maintain a minimum capital surplus in an
amount which is the greater of $800,000 or 10% of total liabilities or 1% of
annualized premium pursuant to Section 641 of the Florida Insurance Code. Based
on this criteria, at December 31, 1998, SHP is required to maintain a minimum
capital surplus of approximately $1,752,000. At December 31, 1998, SHP's audited
statutory financial statements reflect an actual surplus of approximately
$405,000. The Company's cash balances are currently maintained as a cash
equivalent of a Money Market Trust Fund which invests in securities issued or
guaranteed by the U.S. Treasury and repurchase agreements relating to such
securities. However, there can be no assurance that the Company will be able to
comply with the regulatory requirements of the State.
HMO development costs will continue to be incurred by SHP in fiscal
1999 to further establish arrangements with physicians, hospitals, and other
healthcare providers as well as to develop marketing materials and strategies
necessary to operate and maintain HMO operations in accordance with statutory
requirements (which shall include the costs of key employee's salaries and
expenses). In order to support the significant growth of the Company's HMO
operations, additional marketing, development and other personnel were hired
throughout 1998 to augment the Company's efforts to support and manage this
growth. Expenditures for such employees' salaries and related benefits will
continue to be incurred in the future and may increase as additional personnel
are needed to support further HMO membership growth. In addition, the Company
anticipates that it will make additional capital expenditures associated with,
among other things, furniture and equipment necessary due to personnel
increases. There can be no assurance that the foregoing factors will not
adversely affect the Company's future operating results.
As of April 13, 1999, the Company sold 496,425 Units pursuant to the
Offering, resulting in net proceeds to the Company of approximately $4,199,000.
The Series A Preferred Stock issued in the Offering was not registered with the
Securities and Exchange Commission under the Securities Act and was offered and
sold solely to "accredited investors" in reliance on exemptions from
registration provided in Section 4(2) of the Securities Act and Rule 506 of
Regulation D. The Offering was not underwritten. The Placement Agent received a
retail commission of 8% of the aggregate amount of the Offering and an is to
receive five-year warrants (the "Placement Agent Warrants") to purchase up to
100,000 shares of Common Stock at $1.50 per share, on a pro rata basis, up to
the sale of $1,500,000 in the Offering, and up to 500,000 shares of Common Stock
at $4.00 per share, on a pro rata basis, up to the sale of $6,000,000 in the
Offering. The Placement Agent Warrants are not to be exercisable until one year
after the completion of the Offering and thereafter are to be exercisable over a
period of four years. The Placement Agent also received non-accountable expenses
of 3% of the aggregate amount of the Offering and non-accountable marketing
expenses of 2% of the aggregate amount of the Offering. Under the terms of the
Offering, the Company is to file a registration statement on the appropriate
form with the Securities and Exchange Commission not later than 90 days
following the closing of the Offering covering all of the shares of Common Stock
underlying the Series A Preferred Stock and Warrants sold pursuant to the
Offering and the Placement Agent Warrants.
The Company conducted the IPO in May 1996, the Private Placement in
July 1998 and the Offering in April 1999 to provide funds for its growth and
expansion plans. The net proceeds from such offerings,
11
<PAGE>
approximating $11,600,000, have been used to implement such expansion and for
the support of its HMO operations. The Company anticipates, based on currently
proposed plans and assumptions relating to its operations (including the costs
associated with its accelerated expansion), that additional offering proceeds
will be needed to fund ongoing business operations, to satisfy in the future its
net tangible asset requirements as governed by the Nasdaq SmallCap Market and to
comply with other equity requirements as governed by certain regulatory entities
including, without limitation, the Florida DOI, AHCA and HCFA. Management's
plans include consideration of the sale of additional equity securities under
appropriate market conditions, alliances or other partnership agreements with
entities interested in the Company with resources to support the Company's
expansion plans, or other business transactions which would generate sufficient
resources to assure continuation of the Company's operations.
The Company is currently reviewing its options for the possible sale of
additional equity securities as well as potential merger and partnering
opportunities. However, no assurance can be given that the Company will be
successful in raising additional capital or entering into a business alliance.
Further, there can be no assurance, assuming the Company successfully raises
additional funds or enters into a business alliance, that the Company will
achieve profitability or that the funds will be sufficient to sustain the
Company's losses. If the Company is unable to obtain adequate additional
financing or enter into such business alliance, it will not be able to meet
ongoing business operation needs. To the extent that the Company's available
cash resources are insufficient to allow the Company to engage in operations
sufficient to generate meaningful revenues or achieve profitable operations,
the inability to obtain additional financing will have a material adverse
effect on the Company. Additional equity financing may involve substantial
dilution to the interests of the Company's existing stockholders.
Year 2000 Readiness
- -------------------
The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and is
continuing to carry out the implementation plan to resolve the Year 2000 date
issue which it developed as a result of the assessment. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations. The
Company is utilizing internal resources to identify, correct or reprogram, and
test the systems for Year 2000 compliance.
As of December 31, 1998, the Company was 80% complete with its Year
2000 compliance program and anticipates being complete with all phases of the
program by the second quarter of 1999. The Company's Year 2000 compliance
program requires remediation of certain programs and the replacement of certain
hardware within particular time frames in order to avoid disruption of the
Company's operations. Although the Company believes it will complete the
remediation of these programs within the applicable time frames, there can be no
assurance that such remediation will be completed or that the Company's
operations will not be disrupted to some degree.
The Company is communicating with certain material vendors to
determine the extent to which the Company may be vulnerable to such vendors'
failure to resolve their own Year 2000 issues. The Company is attempting to
mitigate its risk with respect to the failure of such vendors to be Year 2000
compliant by, among other things, requesting project plans, status reports and
Year 2000 compliance certifications or written assurances from its material
vendors, including business partners, landlords and suppliers. The effect of
such vendors' noncompliance, if any, is not reasonably estimable at this time.
The Company estimates that the costs in connection with its Year 2000
compliance efforts will be less than $100,000. The cost of this project and the
date on which the Company plans to complete the necessary Year 2000
modifications are based on management's best estimate, which include assumptions
of future events including the continued availability of certain resources.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Filed as part of this report are audited financial statements for the
five months ended December 31, 1998 and the years ended July 31, 1998 and July
31, 1997 commencing at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
13
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning the directors, executive officers and
significant employees of the Company is contained in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the close of the five months ended December
31, 1998. Such information is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information concerning executive compensation is contained in the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the close of the
five months ended December 31, 1998. Such information is hereby incorporated by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the security ownership of certain beneficial
owners and management is contained in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the five months ended December 31, 1998. Such
information is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions
is contained in the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days after the
close of the five months ended December 31, 1998. Such information is hereby
incorporated by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Filed as part of this 10-KSB annual report are audited financial
statements for the five months ended December 31, 1998 and for the year ended
July 31, 1998.
Reports on Form 8-K, none.
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNSTAR HEALTHCARE, INC.
By: /s/ Jack W. Shields
-----------------------------
Jack W. Shields
Vice President and
Chief Financial Officer
Dated: April 15, 1999
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated:
SIGNATURES TITLE
- ---------- -----
/s/ Warren D. Stowell President, Chief Executive Officer,
- --------------------------------
Warren D. Stowell and Chairman (Principal Executive
Officer)
/s/ David A. Jesse Executive Vice President, Chief
- --------------------------------
David A. Jesse Operating Officer, Director
/s/ Jack W. Shields Vice President, Chief Financial Officer
- --------------------------------
Jack W. Shields (Principal Financial and Accounting
Officer)
15
<PAGE>
Exhibits required to be filed by Item 601 of Regulation S-B are
included in Exhibits to this Report as follows:
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION
<S> <C>
2.1 Asset Purchase Agreement, dated April 15, 1998, between Brevard Medical Care, Inc. and SunStar
Healthcare, Inc.****
3.1 Certificate of Incorporation*
3.1 Certificate of Designation******
3.2 By-Laws*
4.1 Specimen Certificate of the Company's Common Stock**
4.2 Form of Warrant Agreement (including Form of Underwriter's Common Stock Purchase Warrant)*
4.2 Form of Warrant Agreement (for Offering)******
4.2 Form of Registration Rights Agreement (for Offering)******
4.3 1996 Stock Option Plan*
4.4 Form of 1996 Stock Option Contract**
10.3 Agreement for Third Party Administrator Services, dated March 7, 1997, between Healthplan Services,
Inc. and SunStar Health Plan, Inc.***
10.3 Agreement for Third Party Administrator Services, dated March 26, 1999, between Companion Information
Management Resources, Inc. and SunStar Health Plan, Inc.******
10.4 Lease, dated November 26, 1997 between the Company and Pizzuti*****
10.4 Agreement for Health Care Prepayment Plan, dated September 30, 1992, between the Health Care Financing
Administration and Boro Medical Corporation*
10.4 Agreement for Health Care Cost-Based Plan, dated January 1, 1999, between the Health Care Financing
Administration and SunStar Health Plan, Inc. ******
10.5 Certificate from State of Florida, Agency for Health Care Administration certifying Boro Medical
Corporation a Healthcare Provider*
11. Statement of Per Share Earnings (included in Consolidated Financial
Statements attached to this report)
16.1 Letter on Change in Certifying Accountant*****
21.1 List of Subsidiaries******
23.1 Consent of KPMG Peat Marwick LLP******
27.1 Financial Data Schedule ******
* Filed as same exhibit reference to Form SB-2 Registration Statement, filed on February 26, 1996, File
No. 333-1650
** Filed as same exhibit reference to Amendment No. 2 to Form SB-2 Registration Statement, filed on May
9, 1996, File No. 333-1650.
*** Filed as Exhibit 10.12 to Form 10-KSB for the fiscal year ended July 31, 1997.
**** Filed as same exhibit reference to Form 10-QSB, for the quarterly period ended April 30, 1998.
***** Filed as same exhibit reference to Form 10-KSB for the fiscal year ended July 31, 1998.
****** Filed herewith.
</TABLE>
16
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
December 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-3
Consolidated Balance Sheet at December 31, 1998 F-4
Consolidated Statements of Operations for the years ended July 31, 1997 and 1998
and the five months ended December 31, 1998 F-5
Consolidated Statement of Changes in Shareholders' Equity for the years
ended July 31, 1997 and 1998 and the five months ended December 31, 1998 F-6
Consolidated Statements of Cash Flows for the years ended July 31, 1997and 1998
and the five months ended December 31, 1998 F-7-8
Notes to Consolidated Financial Statements F-9-24
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SunStar Healthcare, Inc.:
We have audited the accompanying consolidated balance sheet of SunStar
Healthcare, Inc. and Subsidiaries (the Company) as of December 31, 1998, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years ended July 31, 1997 and 1998 and the five months
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SunStar Healthcare,
Inc. and Subsidiaries as of December 31, 1998, and the results of its operations
and its cash flows for the years ended July 31, 1997 and 1998, and the five
months ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 9 to the
financial statements, the Company has experienced significant operating losses
which raise substantial doubt about the Company's ability to continue as a going
concern. The Company is seeking additional financing to enhance its working
capital and fund regulatory capital requirements and future expansion efforts.
Management's plans in regard to these matters are also described in note 9. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Jacksonville, Florida
March 12, 1999, except for
note 9 which is as of April 14, 1999
F-3
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,983,161
Premiums receivable 12,419
Prepaid expenses 255,889
Other current assets (note 1(a)) 1,310,844
-------------------
Total current assets 17,562,313
Furniture and equipment, net (note 4) 381,241
Restricted deposits 300,000
Other assets 76,854
Deferred taxes (note 6) 100,000
-------------------
Total assets $ 18,420,408
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable $ 13,821,187
Unearned premium - HMO 3,525,280
Accounts payable and accrued expenses 752,453
Estimated Medicare settlement 103,175
Capital lease obligations, current (note 5) 34,589
-------------------
Total current liabilities 18,236,684
Capital lease obligations, noncurrent (note 5) 67,608
-------------------
Total liabilities 18,304,292
-------------------
Shareholders' equity (notes 1(i) and 8):
Preferred stock, par value $.001 per share, 1,000,000
shares authorized, no shares outstanding --
Common stock, par value $.001 per share, 10,000,000
shares authorized, 2,919,330 shares issued and outstanding 2,919
Additional paid-in capital 8,531,027
Unearned compensation from stock options (37,978)
Accumulated deficit (8,379,852)
-------------------
Total shareholders' equity 116,116
-------------------
Commitments and contingencies (note 5 and 8)
Total liabilities and shareholders' equity $ 18,420,408
===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended July 31, 1997 and 1998 and the five months ended
December 31, 1998
<TABLE>
<CAPTION>
FIVE
YEAR ENDED YEAR ENDED MONTHS ENDED
JULY 31, JULY 31, DECEMBER 31,
1997 1998 1998
-------------- ------------------ -------------------
<S> <C> <C> <C>
Revenues:
HMO premiums $ 99,529 8,844,775 22,744,870
Investment income 249,407 231,743 234,573
Other 101,112 2,554 111,239
-------------- ------------------ -------------------
Total revenues 450,048 9,079,072 23,090,682
Operating expenses:
HMO medical costs 135,211 7,076,054 16,858,937
Selling, general and administrative
(notes 1(a) and 3) 1,997,042 7,295,065 8,348,829
Option based compensation (note 8(c)) 65,104 65,104 27,127
Amortization of intangibles 9,328 32,611 13,934
-------------- ------------------ -------------------
Total operating expenses 2,206,685 14,468,834 25,248,827
-------------- ------------------ -------------------
Loss before income taxes (1,756,637) (5,389,762) (2,158,145)
Provision for income taxes (note 6) (51,000) -- --
-------------- ------------------ -------------------
Loss from continuing operations (1,705,637) (5,389,762) (2,158,145)
Discontinued operations (note 2):
Income from discontinued operations 74,472 154,472 --
Gain on sale of discontinued operations -- 667,933 --
-------------- ------------------ -------------------
Total discontinued operations 74,472 822,405 --
-------------- ------------------ -------------------
Net loss $(1,631,165) (4,567,357) (2,158,145)
============== ================== ===================
Earnings per share (note 1(k))
Loss from continuing operations $ (0.71) (2.18) (0.74)
Discontinued operations $ 0.03 0.33 0.00
Net loss $ (0.68) (1.85) (0.74)
Weighted average shares outstanding 2,395,000 2,467,959 2,919,330
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
Years ended July 31, 1997 and 1998 and the five months
ended December 31, 1998
<TABLE>
<CAPTION>
UNEARNED
COMPENSATION
ADDITIONAL FROM
COMMON PAID-IN STOCK ACCUMULATED
STOCK CAPITAL OPTIONS DEFICIT TOTAL
---------------- -------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Balance, July 31, 1996 $ 2,395 7,193,852 (195,313) (23,185) 6,977,749
Net loss -- -- -- (1,631,165) (1,631,165)
Stock issuance costs (note 1(i)) -- (30,052) -- -- (30,052)
Amortization of compensatory
stock options (note 8 (c)) -- -- 65,104 -- 65,104
---------------- -------------- ----------------- ---------------- --------------
Balance, July 31, 1997 2,395 7,163,800 (130,209) (1,654,350) 5,381,636
Net loss -- -- -- (4,567,357) (4,567,357)
Stock options exercised (note 1(i)) 50 12,450 -- -- 12,500
Amortization of compensatory
stock options (note 8 (c)) -- -- 65,104 -- 65,104
---------------- -------------- ----------------- ---------------- --------------
2,445 7,176,250 (65,105) (6,221,707) 891,883
Common stock subscriptions
received (note 1(i)) 474 1,354,777 -- -- 1,355,251
---------------- -------------- ----------------- ---------------- --------------
Balance, July 31, 1998 2,919 8,531,027 (65,105) (6,221,707) 2,247,134
Net loss -- -- -- (2,158,145) (2,158,145)
Amortization of compensatory
stock options (note 8 (c)) -- -- 27,127 -- 27,127
---------------- -------------- ----------------- ---------------- --------------
Balance, December 31, 1998 $ 2,919 8,531,027 (37,978) (8,379,852) 116,116
================ ============== ================= ================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Consolidated Statements of Cash Flows
Years ended July 31, 1997 and 1998 and the five months
ended December 31, 1998
<TABLE>
<CAPTION>
FIVE
YEAR ENDED YEAR ENDED MONTHS ENDED
JULY 31, JULY 31, DECEMBER 31,
1997 1998 1998
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,631,165) (4,567,357) (2,158,145)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 163,543 159,955 68,396
Provision for doubtful accounts 15,000 -- --
Deferred (37,400) -- --
taxes
Noncash compensation 65,104 65,104 27,127
Gain on sale of discontinued operations -- (667,933) --
Gain on the sale of furniture and equipment (3,473) (1,224) --
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable 4,871 (51,999) 3,675
(Increase) decrease in prepaid expenses (131,546) (197,504) 97,281
Increase in other current assets (82,554) (216,388) (930,884)
Decrease (increase) in other assets 17,318 33,143 (649)
Increase in medical claims payable 93,858 3,688,857 10,038,471
Increase in unearned premium - HMO 59,213 1,985,072
(Decrease) increase in unearned premium - Medicare (159,521) 97,452 (97,452)
Increase (decrease) in accounts payable and
accrued expenses 230,826 159,093 (10,634)
Increase (decrease) in estimated Medicare settlement 169,483 (27,860) --
---------------- ---------------- ---------------
Net cash (used in) provided by operating activities (1,226,443) (45,666) 9,022,258
---------------- ---------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
FIVE
YEAR ENDED YEAR ENDED MONTHS ENDED
JULY 31, JULY 31, DECEMBER 31,
1997 1998 1998
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sale of discontinued operations $ -- 1,500,000 --
Purchase of furniture and equipment (183,221) (241,585) (73,333)
Proceeds from sale of furniture and equipment 3,473 1,345 --
Proceeds from sale of restricted certificate of deposit -- 280,000 --
Purchase of restricted certificate of deposit -- -- (300,000)
---------------- ---------------- ---------------
Net cash (used in) provided by investing activities (179,748) 1,539,760 (373,333)
---------------- ---------------- ---------------
Cash flows from financing activities:
Principal payments under capital lease obligations (31,689) (39,738) (13,548)
Stock issuance costs (30,052) -- --
Common stock subscribed -- 1,355,251 --
Exercise of common stock options -- 12,500 --
---------------- ---------------- ---------------
Net cash (used in) provided by financing activities (61,741) 1,328,013 (13,548)
---------------- ---------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,467,932) 2,822,107 8,635,377
Cash and cash equivalents, beginning of period 5,993,609 4,525,677 7,347,784
---------------- ---------------- ---------------
Cash and cash equivalents, end of period $ 4,525,677 7,347,784 15,983,161
================ ================ ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,447 18,585 5,026
================ ================ ===============
</TABLE>
Noncash investing and financing activities (notes 1(i), 5 and 8)
F-8
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
SunStar Healthcare, Inc. (SunStar or the Company) was incorporated
in December 1995 and issued 875,000 shares (prior to a stock split
discussed in note 1(i)) of common stock. In January 1996, National
Home Health Care Corp. (NHHC), then the sole shareholder of the
Company, contributed to SunStar 100% of the outstanding capital
stock of its wholly owned subsidiaries, First Health, Inc. (First
Health) and Brevard Medical Center, Inc. (Brevard), which included
100% of the outstanding capital stock of Brevard's wholly owned
subsidiary, SunStar Health Plan, Inc. (SHP). Subsequent thereto,
the Company restructured its subsidiaries such that Brevard, First
Health, and SHP all became direct, wholly-owned subsidiaries of
SunStar.
SunStar is engaged in providing managed healthcare services in the
State of Florida by operating a health maintenance organization
(HMO) through SHP. As originally organized, the Company also
operated seven primary care medical centers through Brevard and
First Health. On April 15, 1998, the Company sold substantially
all the assets of Brevard and First Health, thereby completing its
transformation from a "provider" of medical services through its
primary care medical centers to a "payor" for medical services by
establishing and operating a statewide HMO.
Throughout fiscal 1997, SunStar's management was active in
developing and obtaining certification for its HMO product. On
February 24, 1997, SHP was issued a Certificate of Authority by
the Insurance Department of the State of Florida to operate an HMO
in accordance with the provisions of Chapter 641, Florida
Statutes. Effective May 1, 1997, the Company began accepting its
first HMO members. Through December 31, 1998, the Company has been
approved to operate its HMO in 52 counties in the State of Florida
and has accepted members in all of those counties. Costs
associated with the development of SunStar's HMO, including
management salaries and benefits, administrative and other
indirect costs have been reflected as selling, general and
administrative expense in the accompanying consolidated financial
statements.
The Company has entered into a service agreement with a third
party administrator (TPA) for enrollment and underwriting
administration, claims processing, payment of agent's commissions
and premium billing and collection. Service fees charged to
operations under such contract were $16,078, $904,141 and
$1,949,716 for the years ended July 31, 1997 and 1998 and the five
months ended December 31, 1998, respectively. At December 31,
1998, the Company has a receivable of approximately $1,133,397 for
premiums and collections due from the TPA which is included in
other current assets.
F-9
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(B) CHANGE IN FISCAL YEAR-END
In 1998, the Company changed its fiscal year-end from July 31 to
December 31. Included in the accompanying audited consolidated
financial statements are the results of operations for the
five-month transition period ended December 31, 1998. Unaudited
results of operations for the comparable five-month period ended
December 31, 1997 are summarized below:
Revenue $ 2,834,196
Operating expenses 4,951,148
---------------
Loss from operations (2,116,952)
Provision for income taxes --
---------------
Net loss (2,116,952)
===============
Net loss per common share (.88)
===============
(C) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles (GAAP). These financial statements include the accounts
of SunStar and SHP. All significant intercompany transactions and
balances have been eliminated in consolidation.
As discussed in note 2, effective April 15, 1998, the Company sold
substantially all the assets of Brevard and First Health pursuant
to a single Asset Purchase Agreement. Accordingly, the results of
operations for Brevard and First Health for the year ended July
31, 1998 are reported in the accompanying consolidated statements
of operations under discontinued operations. Pursuant to the Asset
Purchase Agreement, the Company agreed to assign the existing
Health Care Financing Administration (HCFA) contract held by SHP
to the buyer subject to HCFA approval. Thus, related HCFA revenues
and program costs were also included in discontinued operations in
the accompanying consolidated statements of operations for the
year ended July 31, 1998. HCFA did not approve the assignment of
the contract during 1998, prompting SHP to renew the contract for
1999. As a result, HCFA revenues, net of program costs, are
included as other operating revenue in the accompanying statement
of operations for the five-months ended December 31, 1998.
(D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with
original maturities of 90 days or less.
F-10
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(E) FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated over
estimated useful lives of three to ten years on a straight-line
basis.
(F) MEDICAL CLAIMS PAYABLE
Medical claims payable consist of actual claims reported but not
paid and estimates of medical services incurred but not reported.
The medical claims payable is based on historical data, current
enrollment, health service utilization statistics, premium
revenues and other related information. These accruals are
continually monitored and reviewed. Modification in assumptions
for medical costs caused by variances in actual experience could
cause these estimates to change.
(G) REVENUE RECOGNITION
Premium revenue under the Company's HMO is recognized as earned on
a pro rata basis over the contract period. Reimbursement for the
Company's participation under a federal third-party reimbursement
contract is based on cost reimbursement principles and is subject
to audit and retrospective adjustment. The accompanying
consolidated financial statements reflect an estimated settlement
for open-year cost reports under the aforementioned HCFA contract
which are subject to audit. As discussed in note 1(c), the Company
has retained the HCFA contract through 1999.
(H) INCOME TAXES
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Deferred taxes result
primarily from liabilities for medical claims payable and
temporary differences between the tax and financial statement
recognition of option based compensation expense.
F-11
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(I) EQUITY TRANSACTIONS
SunStar is authorized to issue 10,000,000 shares of common stock,
par value $.001 per share, and 1,000,000 shares of preferred
stock, par value $.001 per share. The preferred stock may be
issued in one or more series, the terms of which may be determined
at the time of issuance by the Board of Directors. In April 1996,
the Board of Directors approved a 1.02857 for one stock split. As
a result of the stock split, NHHC holds 900,000 shares of the
Company's common stock representing a 30.8% interest. All share
amounts have been retroactively adjusted for all periods
presented.
On May 15, 1996, the Company completed an initial public offering
(the IPO), pursuant to which the Company sold 1,300,000 shares of
previously unissued common stock, par value $.001. The IPO
resulted in net proceeds to the Company of $5,230,372. On June 7,
1996, the underwriters in the IPO exercised their over-allotment
option to purchase additional shares of common stock, pursuant to
which the Company sold 195,000 shares of common stock, par value
$.001, resulting in additional net proceeds to the Company of
$853,125. During 1997, the Company paid $30,052 of additional
stock issuance costs related to the IPO which has been reflected
as a reduction of paid-in capital in the accompanying financial
statements. In November 1997, a consultant exercised stock options
to purchase 50,000 shares of common stock at $.25 per share.
On July 16, 1998, the Company completed a Regulation D, Rule 506,
Private Placement (the Private Placement) pursuant to which the
Company sold 474,330 shares of previously unissued common stock,
par value $.001, resulting in net proceeds to the Company of
$1,355,251. Common stock sold pursuant to the private placement
was issued on August 31, 1998. Under the terms of the Private
Placement, the Company agreed to effect the registration and sale
of the 474,330 shares issued on behalf of the Private Placement
shareholders within 90 days of the Private Placement, subject to
extensions for various causes. The Company completed the
registration required under the Private Placement on February 10,
1999, which resulted in the Company incurring penalties for
failing to register the shares within 90 days of July 16, 1998. As
of December 31, 1998, the Company had accrued $69,649 as a general
and administrative expense to reflect the recognition of these
penalties.
F-12
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(J) ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-based Compensation" (SFAS 123). SFAS 123 requires the
fair value of stock options and other stock-based compensation
issued to employees to either be recognized as compensation
expense in the income statement, or be disclosed as a pro forma
effect on net income and earnings per share in the footnotes to
the Company's consolidated financial statements. The Company has
elected to adopt SFAS 123 on a disclosure basis only and will
continue to measure stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," using intrinsic values with appropriate
disclosures under the fair value based method as required by SFAS
123.
(K) PER SHARE DATA
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," (SFAS 128) requires specific computations, presentations
and disclosures for earnings per share (EPS) amounts in order to
make EPS amounts more compatible with international accounting
standards. The Company adopted SFAS 128 during the year ended July
31, 1998. Common stock options are not included in the computation
of diluted earnings per share as their effect is antidilutive due
to the Company's net losses attributable to common shares.
(L) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 requires all items that
meet the definition of components of comprehensive income be
reported in the consolidated financial statements for the period
in which they are recognized and is effective for fiscal years
beginning after December 15, 1997. The Company did not have any
items that met the definition of components of comprehensive
income for the years ended July 31, 1997 and 1998 and the five
months ended December 31, 1998.
(M) 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 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. Such
estimates relate primarily to depreciable assets, valuation
reserves for deferred tax assets, and liabilities for incurred but
not reported medical claims.
F-13
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(N) RECLASSIFICATION
Certain amounts presented for July 31, 1998 have been reclassified
to conform with the presentation adopted for December 31, 1998.
(2) DISCONTINUED OPERATIONS
On April 15, 1998, the Company sold substantially all the assets of its
primary care medical centers, Brevard and First Health, pursuant to a
single Asset Purchase Agreement, to Brevard Medical Care, Inc. for
$1,500,000. The assets sold consisted primarily of accounts receivable,
furniture, equipment and leasehold improvements and capital lease
commitments associated with these assets as well as physician and other
payor agreements. Pursuant to the Asset Purchase Agreement, the Company
agreed to assign the existing HCFA contract held by SHP to the buyer
subject to HCFA approval. HCFA, however, did not approve the assignment
of the contract during 1998, prompting SHP to renew the contract for
1999.
Assets excluded from the sale consist of cash and cash equivalents. The
Company retained substantially all obligations and liabilities which
arose from or in connection with operations prior to the sales
transaction, except for those capital lease commitments previously
discussed.
The results of operations for Brevard and First Health and HCFA revenues
and program costs for the year ending July 31, 1998 is reported in the
accompanying consolidated statements of operations under discontinued
operations.
Information with respect to discontinued operations for the year ended
July 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1998
-------------- ---------------
<S> <C> <C>
Revenues $ 4,544,852 3,069,322
Expenses 4,470,380 2,914,850
-------------- ---------------
Income from discontinued operations $ 74,472 154,472
============== ===============
</TABLE>
The Company will utilize previously generated net operating loss
carryforwards to offset the tax effect of the sale and, as such, has not
recognized any tax expense or benefits resulting from the sale.
F-14
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(3) RELATED PARTY TRANSACTION
SunStar is engaged in providing managed healthcare services by operating
an HMO through SHP. The Company has entered into a management contract
with SHP for the provision of administrative and marketing services.
Management fees charged to SHP under such contract were $16,078,
$1,325,660 and $1,535,790 for the years ended July 31, 1997 and 1998 and
the five months ended December 31, 1998, respectively. As discussed in
note 1(a), costs associated with the development of the Company's HMO,
including management salaries and benefits, administrative and other
indirect costs have been reflected as selling, general and administrative
expense in the accompanying consolidated financial statements.
Intercompany management fees between the Company and SHP have been
eliminated in consolidation.
(4) FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 263,277
Computer equipment 278,992
Less accumulated depreciation (161,028)
-------------
Net furniture and equipment $ 381,241
=============
</TABLE>
The net book value of furniture and equipment held under capital leases
was approximately $99,000 at December 31, 1998. Depreciation expense
includes depreciation on assets held under capital leases.
F-15
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(5) CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capitalized lease obligations at
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ----------
<S> <C>
1999 $ 44,940
2000 44,502
2001 26,916
2002 5,187
2003 283
----------
Total minimum lease payments 121,828
Less amounts representing interest (19,631)
Less amounts due within one year (34,589)
----------
Amounts due after one year $ 67,608
==========
</TABLE>
During 1998, the Company acquired equipment under capital leases for
$91,660 of which $29,182 was sold pursuant to the sale of the assets of
Brevard and First Health as discussed in note 2.
(6) INCOME TAXES
The provision for income taxes for the years ended July 31, 1997 and 1998
and the five months ended December 31, 1998 consists of:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED
JULY 31, 1997 JULY 31, 1998 DEC. 31, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ (13,600) -- --
State -- -- --
-------------- -------------- --------------
(13,600) -- --
Deferred tax benefit (37,400) -- --
-------------- -------------- --------------
Total $ (51,000) -- --
============== ============== ==============
</TABLE>
F-16
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
Deferred tax assets at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 280,700
Medical claims payable 2,832,500
Stock option amortization 138,600
HMO start-up costs 10,300
Estimated Medicare settlement 38,800
---------------
3,300,900
Less valuation allowance 3,185,300
---------------
Net deferred tax assets 115,600
---------------
Deferred tax liabilities:
Furniture and equipment 15,600
---------------
Net deferred tax liabilities 15,600
---------------
Net deferred tax asset $ 100,000
===============
</TABLE>
The reconciliation of the statutory tax rate to the effective rate for
the years ended July 31, 1997 and 1998 and the five months ended December
31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED
JULY 31, JULY 31, DECEMBER 31,
1997 1998 1998
--------------- ------------------ ----------------
<S> <C> <C> <C>
Federal statutory rate $ (579,900) (1,832,500) (733,700)
State taxes, net of federal tax benefit (61,900) (195,600) (31,200)
Discontinued operations 27,100 309,500 --
Change in valuation allowance 625,200 1,600,600 697,300
Other (61,500) 118,000 67,600
--------------- ----------------- ----------------
$ (51,000) -- --
=============== ================= ================
</TABLE>
F-17
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
The difference between the tax provision provided for the year ended July
31, 1998 and the five months ended December 31, 1998 and that expected
from applying the U.S. statutory rate to loss from operations before
taxes is primarily attributable to the Company recording a valuation
allowance for deferred tax assets related to net operating loss (NOL)
carryforwards and medical claims payable which are not currently
deductible for income taxes. The realization of the tax benefits related
to these NOL carryforwards and medical claims expenses is dependent on
future earnings and market conditions and have not been recorded.
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize net
deferred tax assets resulting from other temporary differences. NOL
carryforwards against future taxable income were approximately $746,000
at December 31, 1998. Such NOLs are scheduled to expire in years through
2013.
(7) FINANCIAL INSTRUMENTS
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of its cash and cash equivalents and premiums and
other receivables. The Company's cash and cash equivalents are
concentrated in liquid investments. Premiums receivable are
geographically disbursed throughout Central and South Florida. Other
receivables consist primarily of amounts receivable from the Company's
third party administrator which are generally collected by the Company
within the month subsequent to recognition.
Financial instruments, such as cash and cash equivalents, are valued at
cost which approximates fair market value.
(8) COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
(A) LEASES
The Company rents various office facilities and equipment under
terms of several lease agreements which include escalation
clauses.
F-18
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
At December 31, 1998, minimum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999 $ 239,312
2000 188,090
2001 16,518
2002 6,677
2003 5,008
</TABLE>
Rent expense amounted to approximately $389,000, $322,000 and
$102,000 for the years ended July 31, 1997 and 1998 and the five
months ended December 31, 1998, respectively.
(B) REGULATORY REQUIREMENTS
As an HMO licensed in Florida, SHP is required, pursuant to
Section 641 of the Florida Insurance Code, to maintain a minimum
capital surplus in an amount which is the greater of $800,000 or
10% of total statutory liabilities or 1% of annualized premium,
which at December 31, 1998 was approximately $1,753,000. SHP was
not in compliance with this requirement and had an audited
statutory surplus of $405,524 at December 31, 1998. Management's
plans for obtaining capital to meet mandated minimum surplus
requirements are discussed in note 9.
Dividends are restricted to 10% of statutory surplus or the entire
net operating profits and related net capital gains derived during
the immediately preceding fiscal year unless prior approval is
received from the Insurance Department of the State of Florida.
Pursuant to the Florida Administrative Code, the Department may
require an HMO to submit a corrective action plan in the event
that net income before taxes over the past four quarterly
reporting periods is less than 2% of total revenue.
(C) STOCK OPTION AND WARRANT PLANS
In February 1996, the Board of Directors of SunStar adopted and
SunStar's sole shareholder at that time, NHHC, approved the 1996
Stock Option Plan (the Plan) pursuant to which 200,000 shares of
common stock were reserved for issuance upon the exercise of
options designated as either (i) options intended to constitute
incentive stock options (ISOs) under the Internal Revenue Code of
1986, as amended, or (ii) nonqualified options. ISOs may be
granted under the Plan to employees and officers of the Company.
Nonqualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the
Company.
F-19
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
The Plan is intended to qualify under Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the Exchange Act) and
is administered by a committee of the Board of Directors; provided
that the full Board of Directors currently is administering the
Plan.
The Board of Directors or the committee, as the case may be,
within the limitations of the Plan, determines the persons to whom
options will be granted, the number of shares to be covered by
each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the exercise
price per share and the manner of exercise and the time, manner
and form of payment upon exercise of an option. Unless terminated,
the Plan will expire on February 13, 2006.
ISOs granted under the Plan may not be granted at a price less
than the fair market value of the common stock on the date of
grant (or 110% of fair market value in the case of persons holding
10% or more of the voting stock of the Company). The aggregate
fair market value of shares for which ISOs granted to any employee
are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may
not exceed $100,000 and options to purchase no more than 50,000
shares may be granted under the Plan to any single optionee in any
calendar year. Nonqualified options granted under the Plan may not
be granted at a price less than 90% of the fair market value of
the common stock on the date of grant. Options granted under the
Plan will expire not more than ten years from the date of grant
(five years in the case of ISOs granted to persons holding 10% or
more of the voting stock of the Company). All options granted
under the Plan are not transferable during an optionee's lifetime
but are transferable at death by will or by the laws of descent
and distribution. In general, upon termination of employment of an
optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate,
and any options that are exercisable terminate 90 days following
termination of employment.
The Plan contains anti-dilution provisions authorizing appropriate
adjustments in certain circumstances. Shares of common stock
subject to options which expire without being exercised or which
are canceled as a result of cessation of employment are available
for further grants. No shares of common stock may be issued to any
optionee until the full exercise price has been paid. The Board of
Directors or the committee, as the case may be, may grant
individual options under the Plan with more stringent provisions
than those specified in the Plan.
The Plan provides that each nonemployee director automatically
receives, upon first becoming a nonemployee director, a grant of
options to purchase 7,500 shares of the Company's common stock at
an exercise price equal to the fair market value of the Company's
common stock on the date of grant. The Company granted an
aggregate of 37,500 of such options to nonemployee directors on
May 15, 1996 at $5.00 per share. During the year ended July 31,
1998, 7,500 of such options were canceled due to the resignation
of a director. The remaining 30,000 nonemployee director options
will expire five years from the date of grant.
F-20
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
The Company's granting of options with exercise prices below the
market price of the stock on the grant date resulted in charges to
operations of approximately $65,000 for the years ended July 31,
1997 and 1998 and $27,000 for the five months ended December 31,
1998. Unearned compensation at December 31, 1998 amounts to
approximately $38,000 which is presented as a reduction of equity.
Such unearned amounts will be accounted for as an expense during
the periods in which the related services are performed.
The fair value for options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended July 31, 1997 and
1998 and the five months ended December 31, 1998: risk-free
interest rate of 6.5%; dividend yield of 0%; volatility factor of
the expected market price of the Company's common stock of .84,
.82 and .84, respectively; and a weighted-average expected life of
the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The Company's pro forma information for the years ended
July 31, 1997 and 1998 and the five months ended December 31,
1998, follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED
JULY 31, JULY 31, DECEMBER 31,
1997 1998 1998
--------------- ------------- ------------------
<S> <C> <C> <C>
Pro forma net loss $ (1,755,373) (4,704,324) (2,214,004)
Pro forma loss per share $ (0.73) (1.94) (0.76)
</TABLE>
The weighted average fair value of options for the years ended
July 31, 1997 and 1998 and the five months ended December 31, 1998
with exercise prices equal to the market price of the stock on the
date of grant was $2.82, $2.42 and $1.59, respectively.
F-21
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
A summary of the Company's stock option activity, and related
information for the years ended July 31, 1997 and 1998 and the
five months ended December 31, 1998, follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED
JULY 31, JULY 31, DECEMBER 31,
1997 1998 1998
-------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 437,500 $ 1.47 492,500 1.60 417,500 1.59
Granted 130,000 4.00 12,500 3.50 -- --
Exercised -- -- (50,000) .25 -- --
Forfeited/canceled (75,000) 5.00 (37,500) 4.20 -- --
---------- ------------ ------------
Outstanding, end of year 492,500 1.60 417,500 1.59 417,500 1.59
========== ============ ============
Exercisable at end
of year 280,833 $ 1.46 313,333 1.55 334,166 1.69
========== ============ ============
</TABLE>
Exercise prices for options outstanding as of December 31, 1998
ranged from $0.25 to $5.00. Options exercisable at $0.25 per share
totaled 275,000 of which 212,500 were exercisable at December 31,
1998. Options with exercise prices ranging from $3.50 to $5.00
totaled 142,500 of which 121,666 were exercisable at December 31,
1998. The weighted average remaining contractual life of options
exercisable at $0.25 and $3.50 to $5.00 per share was 7.11 and
6.87 years, respectively, at December 31, 1998.
In connection with the IPO, the Company has granted warrants to
the underwriter to purchase an aggregate of 130,000 shares of
common stock at an exercise price equal to $6.00 per share. The
warrants are exercisable on or after April 15, 1997 and expire on
May 15, 2001.
In connection with the Private Placement, the Company has granted
warrants to the placement agent to purchase an aggregate of
150,000 shares of common stock at an exercise price equal to $4.00
per share. The warrants are exercisable on or after July 16, 1998,
and expire four years from that date.
F-22
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
Common stock reserved for future issuance at December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
------
<S> <C>
Options granted under employment and consulting agreements 275,000
Options granted under the Plan 142,500
Reserved for future grants under the Plan 57,500
Warrants granted to underwriters 280,000
--------------
755,000
==============
</TABLE>
(D) PROFESSIONAL LIABILITY
The Company insures its professional liability risks on a
claims-made basis. The Company has secured claims-made coverage
from August 1, 1997 through April 15, 1998, with retroactive
coverage through July 1, 1993 to insure for potential professional
liability claims by patients and others as a result of the
negligence of physicians that occurred prior to the divestment of
the primary care medical centers. The Company could become liable
for the negligent acts of physicians, as well as negligence in
recruiting and selecting physicians. The Company currently
maintains professional liability insurance with limits of
$1,000,000 in the aggregate and $1,000,000 per occurrence and
requires physicians to maintain malpractice liability insurance in
amounts which it deems adequate for the type of medical services
provided. No accrual for possible losses attributable to incidents
which may have occurred and not been identified under the
Company's incident reporting system has been made because
management has not identified any such incidents.
The Company carries "stop-loss" reinsurance to reimburse it for
costs resulting from catastrophic injuries or illnesses to its HMO
members. Premiums for these policies are reported as HMO medical
costs and insurance recoveries, if any, are recorded as a
reduction of HMO medical costs. Under the excess loss reinsurance
policies, recoveries are made for claims of each enrollee or each
covered dependent of each enrollee, on an annual basis, in excess
of the deductible established in the policy subject to certain
limitations. The deductible under the policy for commercial
healthcare claims is $50,000 and the maximum life time reinsurance
indemnity payable under the agreement for any one member is
$2,000,000.
F-23
<PAGE>
SUNSTAR HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(9) SUBSEQUENT EVENTS
In February 1999, the Company verbally notified the TPA of its intention
to terminate the service agreement effective July 1, 1999. Subsequent
thereto, the Company received a written notice of termination from the
TPA. On March 26, 1999, the Company's management finalized an agreement
for similar services with a different TPA and anticipates completion of
the conversion from the existing TPA to the new TPA on July 1, 1999.
The Company's consolidated financial statements for the five months ended
December 31, 1998 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred
net losses of $1,631,165, $4,567,357 and $2,158,145 for the years ended
July 31, 1997 and 1998 and the five months ended December 31, 1998,
respectively, and as of December 31, 1998 had an accumulated deficit of
$8,379,852. The Company expects to incur substantial expenditures to
further its HMO development and to expand its current commercial service
area and enter into the Medicare market. The Company's working capital at
December 31, 1998 will not be sufficient to fund ongoing business
operations. Management recognizes that the Company must generate
additional resources to enable it to continue operations.
In recognition thereof, prior to April 30, 1999, the Company is scheduled
to complete a private offering (the Offering) under Rule 506 of
Regulation D. As Of April 14, 1999, the Company sold 496,425 Units (the
Units, each a Unit), resulting in net proceeds to the Company of
approximately $4,200,000. Each Unit consisted of (i) one share of Series
A Preferred Stock, par value $.001 per share (the Series A Preferred
Stock), of the Company, each share of Series A Preferred Stock
convertible into shares of Common Stock, subject to adjustment, and
accruing dividends at the cumulative rate of 10% per share per annum; and
(ii) one warrant to purchase one share of Common Stock at $5.00 per share
up to 60 months from the date of the Offering. The purchase price per
Unit was $10.00.
F-24
<PAGE>
Exhibit 3.1
___________________________________________
CERTIFICATE OF DESIGNATION
OF
SUNSTAR HEALTHCARE, INC.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
___________________________________________
SERIES A PREFERRED STOCK
SunStar Healthcare, Inc., a Delaware corporation (the "Company"),
hereby certifies that the following resolution has been duly adopted by the
Board of Directors of the Company:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the board of directors of the Company (the "Board") by the provisions
of the certificate of incorporation of the Company (as amended, the "Certificate
of Incorporation"), there hereby is created, out of the 1,000,000 shares of
preferred stock, par value $.001 per share, of the Company authorized by Article
VI of the Certificate of Incorporation (the "Preferred Stock"), a series of the
Preferred Stock consisting of 690,000 shares, which series shall have the
following powers, designations, preferences and relative, participating,
optional and other special rights, and the following qualifications, limitations
and restrictions:
1. Designation. This series of Preferred Stock shall be
-----------
designated "Series A Preferred Stock."
2. Dividends.
---------
(a) Amount. The holders of shares of Series A Preferred Stock
------
shall be entitled to receive dividends on each share of Series A Preferred Stock
held at the annual rate of 10%.
(b) Cash Dividends. Dividends on the Series A Preferred Stock
--------------
shall be paid in cash quarterly in arrears, with the first dividend payment due
April 1, 1999. Upon conversion of any share of Series A Preferred Stock pursuant
to section 4, all accumulated but unpaid dividends thereon shall be
extinguished. Dividends shall accumulate with respect to any share of Series A
Preferred Stock from date of issuance.
(c) Dividends Priority. Unless all dividends shall be declared
------------------
and paid in cash in full on all outstanding shares of Series A Preferred Stock,
no dividends shall be declared or paid on, and no assets shall be distributed or
set apart for, any shares of Junior Stock (as defined below) other than
distributions of dividends in shares of the same class and series of Junior
Stock to the holders of Junior Stock in respect of which such distribution is
made.
(d) Junior Stock. "Junior Stock" shall mean (i) each class of
------------
the Company's common stock, par value $.001 per share ("Common Stock"), and (ii)
each other class or series of the Company's capital stock, whether common,
preferred or otherwise, the terms of which do not provide that shares of such
class or series shall rank senior to or on a parity with shares of the Series A
Preferred Stock as to
1
<PAGE>
distributions of dividends and distributions upon the liquidation, winding-up
and dissolution of the Company.
3. Liquidation Rights. Upon the voluntary or involuntary
------------------
liquidation, winding-up or dissolution of the Company, the holders of shares of
Series A Preferred Stock shall be entitled to receive out of the assets of the
Company, for each share of Series A Preferred Stock, cash in an amount equal to
the sum of $10.00 (the "Liquidation Value") plus an amount equal to all
accumulated but unpaid dividends per share (whether or not declared) before any
payment or distribution shall be made on Junior Stock, but after payment of all
outstanding indebtedness and all amounts due on liquidation, dissolution or
winding-up in respect of all preferred stock of the Company which by its terms
is senior to the Series A Preferred Stock. After the payment in cash to the
holders of shares of Series A Preferred Stock of the full preferential amounts
set forth above, the holders of shares of Series A Preferred Stock as such shall
have no right or claim to any of the remaining assets of the Company. If the
assets of the Company available for distribution to the holders of shares of
Series A Preferred Stock, upon any liquidation, dissolution or winding-up of the
Company, are insufficient to pay the full preferential amount to which the
holders of Series A Preferred Stock are entitled, then the holders of Series A
Preferred Stock shall share ratably in such distribution of assets in accordance
with the amount that would be payable on such distribution if the amounts to
which the holders of outstanding shares of Series A Preferred Stock were
entitled were paid in full.
4. Conversion Rights.
-----------------
(a) Conversion, Per Share Conversion Price. Each share of
--------------------------------------
Series A Preferred Stock shall be convertible, at the option of the holder
thereof upon exercise in accordance with section 4(b), without the payment of
additional consideration, into such number of fully paid and nonassessable
shares of the Company's Common Stock as shall be determined by dividing $10.00
by the amount determined as follows (as such amount may be adjusted from time to
time pursuant to section 5, the "Per Share Conversion Price"):
(i) Beginning 30 days after the date of closing of the
initial sale of Series A Preferred Stock by the Company (the "Private Placement
Closing"), $3.75;
(ii) Upon the second anniversary of the Private
Placement Closing, an amount equal to 75% of the average bid price of the Common
Stock during the 90 days preceding such anniversary;
(iii) Upon the fourth anniversary of the Private
Placement Closing, an amount equal to 75% of the average bid price of the Common
Stock during the 90 days preceding such anniversary; and
(iv) Notwithstanding anything else contained herein, the
Per Share Conversion Price shall not be less than $2.75.
(b) Conversion Procedures. The optional conversion of shares
of Series A Preferred Stock in accordance with section 4(a) may be effected by a
holder of record thereof by making written demand for such conversion (a
"Conversion Demand") upon the Company at its principal executive offices setting
forth therein (i) the number of shares to be converted; (ii) the certificate or
certificates representing such shares; and (iii) the proposed date of such
conversion, which shall be a business day not less than 15 nor more than 30 days
after the date of such Conversion Demand (the "Conversion Date"). Within five
days of receipt of the Conversion Demand, the Company shall give written notice
(a "Conversion Notice") to such holder setting forth therein (i) the address of
the place or places at which the certificate or certificates representing the
shares so to be converted are to be surrendered; and (ii) whether the
certificate or certificates to be surrendered are required to be indorsed for
transfer or accompanied by a duly executed stock power or other appropriate
instrument of assignment and, if so, the form of such indorsement or power or
other instrument of assignment. The Conversion Notice shall be sent by first
class mail, postage
2
<PAGE>
prepaid, to such holder at such holder's address as may be set forth in the
Conversion Demand. On or before the Conversion Date, the holder of Series A
Preferred Stock to be converted shall surrender the certificate or certificates
representing such shares, duly indorsed for transfer or accompanied by a duly
executed stock power or other instrument of assignment, if the Conversion Notice
so provides, to the Company at any place set forth in such notice or, if no such
place is so set forth, at the principal executive offices of the Company. As
soon as practicable after the Conversion Date and the surrender of the
certificate or certificates representing such shares, the Company shall issue
and deliver to such holder, or its nominee, a certificate or certificates for
the number of whole shares of Common Stock issuable upon such conversion in
accordance with the provisions hereof. Upon surrender of certificates of Series
A Preferred Stock to be converted in part, the Company shall issue a balance
certificate representing the number of full shares of Series A Preferred Stock
not so converted.
(c) Reservation of Common Stock. The Company shall at all
---------------------------
times when any shares of Series A Preferred Stock shall be outstanding, reserve
and keep available out of its authorized but unissued stock, such number of
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Preferred Stock.
(d) Effect of Conversion. All outstanding shares of Series A
--------------------
Preferred Stock to be converted pursuant to the Conversion Notice shall, on the
Conversion Date, be converted into Common Stock for all purposes,
notwithstanding the failure of the holder thereof to surrender any certificate
representing such shares on or prior to such date. On and after the Conversion
Date, (i) no such share of Series A Preferred Stock shall be deemed to be
outstanding or be transferrable on the books of the Company or the stock
transfer agent, if any, for the Series A Preferred Stock, and (ii) the holder of
such shares, as such, shall not be entitled to receive any dividends or other
distributions, to receive notices or to vote such shares or to exercise or to
enjoy any other powers, preferences or rights in respect thereof, other than the
right, upon surrender of the certificate or certificates representing such
shares, to receive a certificate or certificates for the number of shares of
Common Stock into which such shares shall have been converted. On the Conversion
Date, all such shares shall be retired and canceled and shall not be reissued.
5. Adjustment of Per Share Conversion Price.
----------------------------------------
(a) Adjustment in the Event of Stock Splits, Dividends,
---------------------------------------------------
Subdivisions, Etc. In case the Company, at any time or from time to time after
- -----------------
the date hereof, shall increase the number of Fully Diluted Shares of Common
Stock (as defined below) by virtue of or in connection with:
(i) any dividend on the Common Stock; or
(ii) any stock split or other subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by reclassification other than by payment of a dividend in Common Stock);
then the Per Share Conversion Price shall be adjusted, concurrently with such
increase, to a Per Share Conversion Price that would entitle the holder of such
share to receive on conversion thereof the same percentage of the Fully Diluted
Shares of Common Stock that such holder would have received on conversion
thereof immediately prior to such increase.
(b) Adjustments for Combinations, etc. If the outstanding
---------------------------------
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock (including, without
limitation, pursuant to a reverse stock split), the Per Share Conversion Price
in effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
(c) "Fully Diluted Shares of Common Stock". The term "Fully
------------------------------------
Diluted Shares of Common Stock" means the number of shares of Common Stock after
giving effect to the issuance of the
3
<PAGE>
shares of Common Stock issuable in respect of the Series A Preferred Stock upon
conversion thereof and all shares of Common Stock issuable in respect of any and
all other shares, warrants, options and other securities that are convertible,
exchangeable or exercisable for shares of Common Stock.
6. Changes in Capital Stock.
------------------------
(a) In case at any time the Company shall be a party to any
transaction (including, without limitation, a merger, consolidation, sale of all
or substantially all of the Company's assets, liquidation or recapitalization)
in which previously outstanding Common Stock shall be changed into or exchanged
for different securities of the Company (other than by subdivision of its
outstanding shares of Common Stock by reason of which an adjustment to the Per
Share Conversion Price is made under section 5(a)) or Common Stock or other
securities of another corporation or interests in a noncorporate entity or other
property (including cash) or any combination of any of the foregoing (each such
transaction being hereinafter referred to as the "Transaction"), then, as a
condition to the consummation of the Transaction, lawful and adequate provisions
shall be made so that each holder of a share of Series A Preferred Stock, upon
the conversion thereof, at any time on or after the consummation of the
Transaction, shall be entitled to receive, and such shares of Series A Preferred
Stock shall thereafter represent the right to receive, in lieu of the Common
Stock or other securities issuable upon such exercise prior to such
consummation, the highest amount of securities, cash or other property to which
such holder would actually have been entitled as a shareholder upon the
consummation of the Transaction if such holder had converted those shares of
Series A Preferred Stock immediately prior thereto.
(b) Notwithstanding anything contained herein to the contrary,
the Company shall not effect any Transaction unless prior to the consummation
thereof each corporation or entity (other than the Company) that may be required
to deliver any securities, cash or other property upon the conversion of shares
of Series A Preferred Stock as provided herein shall assume, by written
instrument delivered to, and reasonably satisfactory to, the holders of a
majority of the outstanding shares of Series A Preferred Stock, the obligation
to deliver to such holder such securities, cash or other property as to which,
in accordance with the foregoing provisions, such holder may be entitled, and
such corporation or entity shall have similarly delivered to the holder of the
shares of Series A Preferred Stock an opinion of counsel for such corporation or
entity, satisfactory to the holders, which opinion shall state that the shares
of Series A Preferred Stock and the provisions of this certificate of
designation, including, without limitation, the conversion provisions, shall
thereafter continue in full force and effect and shall be enforceable against
the Company and such corporation or entity in accordance with the terms hereof
and thereof, together with such other matters as such holder may reasonably
request.
7. Report or Certificate as to Adjustments. In each case of
---------------------------------------
any adjustment or readjustment in the shares of Common Stock (or other
securities) issuable upon the conversion of a share of Series A Preferred Stock,
the Company at its expense will promptly deliver a certificate of the Chief
Financial Officer showing in reasonable detail the computation of such
adjustment or readjustment in accordance with the terms of this certificate of
designation. The Company shall also cause independent certified public
accountants of recognized national standing (which may be the regular auditors
of the Company) selected by the Company to verify such computation and prepare a
report setting forth such adjustment or readjustment and showing in detail the
method of calculation thereof and the facts upon which such adjustment or
readjustment is based. The Company will forthwith (and in any event not later
than 30 days following the occurrence of the event requiring such adjustment)
furnish a copy of each such report to each holder, and will, upon the written
request at any time of a holder, furnish to such holder a like report setting
forth the Per Share Conversion Price at the time in effect and showing how it
was calculated. The Company will also keep copies of all such reports at its
principal office and will cause the same to be available for inspection at such
office during normal business hours by each holder or any prospective purchaser
of shares of Series A Preferred Stock designated by the holder thereof.
8. Notices of Corporate Action. In the event of:
---------------------------
4
<PAGE>
(i) any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, or
(ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
consolidation or merger involving the Company and any other person or any
transfer of all or substantially all the assets of the Company to any other
person, or
(iii) any voluntary or involuntary dissolution,
liquidation or winding-up of the Company, or
(iv) any plan or proposal by the Company to register
shares of the Common Stock with the Securities and Exchange Commission;
the Company will deliver to the holder a notice specifying (x) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right, (y) the date or expected date on which any such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Stock (or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up or (z) the date or
expected date of the filing of the initial registration statement with respect
to such shares of Common Stock. Such notice shall be furnished at least 30 days
prior to the date therein specified; provided, however, if such date is prior to
a public announcement relating to the events set forth and on such date the
Company is either bound by an agreement with a third party of confidentiality
with respect to the corporate action the subject of this section 8, or the
Company's securities are traded or quoted on any recognized national securities
exchange or quotation system, then such notice shall be provided to each holder
of a share of Series A Preferred Stock simultaneously with the notice provided
to the Company's stockholders.
9. Redemption.
----------
(a) The Company may, at its option, redeem all or any portion
of the outstanding shares of Series A Preferred Stock at any time at an amount
equal to $15.00 per share, plus all accrued and unpaid dividends (the
"Redemption Price").
(b) The Series A Preferred Stock must be redeemed in cash by
the Company at the Redemption Price per share if the Company fails to comply
with any of the following covenants and does not cure such failure within 90
days following such failure, unless the Company requests and receives a waiver
from Brookstreet Securities Corporation, Inc. or the holders of a majority of
the issued and outstanding shares of Series A Preferred Stock:
(i) Until the Company surpasses 90,000 enrolled HMO
plan members on a cumulative basis,
(A) the Company will maintain a 3,750 new member
net minimum quarterly growth rate in each calendar quarter, commencing with the
calendar quarter ending March 31, 1999;
5
<PAGE>
(B) the Company's medical expense ratio,
determined on the basis of generally accepted accounting principles, will not
exceed 86% based on the simple mean average as of the end of each calendar
quarter, commencing with the calendar quarter ending March 31, 1999;
(C) the Company will not obtain secured and/or
unsecured financing and/or off balance sheet financing in excess of $2,500,000;
and
(D) the Company will maintain the reporting
requirements of the Securities Exchange Act of 1934, as amended.
(c) Written notice of any redemption of shares of Series A
Preferred Stock (a "Notice of Redemption"), specifying the time and place of
redemption, shall be mailed by certified mail, return receipt requested, at
least 30, and not more than 45, days prior to the date specified for redemption
(the "Redemption Date"), to each registered holder of the shares to be redeemed
at the holder's last address as it appears on the Company's books. On or after
the Redemption Date, each holder of shares of Series A Preferred Stock called
for redemption shall surrender his certificates for the shares to the Company at
the place specified in the notice and then the Company shall pay the holder (or
shall cause such holder to be paid) the Redemption Price in cash.
(d) Receipt of a Notice of Redemption shall not prevent a
holder from exercising the conversion rights granted pursuant to section 4.
Notwithstanding the foregoing, any holder exercising such conversion rights must
make a Conversion Demand (as defined in section 4(b)) not later than 5 days
prior to the Redemption Date.
(e) Unless the Company defaults in the payment in full of the
Redemption Price, dividends on the shares called for redemption shall cease to
accumulate on the Redemption Date, and all rights of the holders of the shares
by reason of their ownership of the shares shall cease on the Redemption Date,
except the right to receive the Redemption Price on surrender to the Company of
the certificates representing the shares. After the Redemption Date, the shares
shall not be deemed to be outstanding and shall not be transferable on the books
of the Company, except to the Company.
(f) Any shares of Series A Preferred Stock redeemed or
purchased by the Company shall be canceled and shall have the status of
authorized and unissued shares of preferred stock, without designation as to
series.
10. Voting Rights. Holders of shares of Series A Preferred
-------------
Stock shall not be entitled to vote on any matter, except as otherwise required
by law or as expressly provided in this certificate. With respect to any matter
on which the holders of shares of Series A Preferred Stock shall be entitled to
vote, holders of shares of Series A Preferred Stock shall be entitled to one
vote for each share held.
11. Consents Required of Holders of Series A Preferred Stock.
--------------------------------------------------------
As long as any shares of Series A Preferred Stock are outstanding, the Company
shall not, by amendment to the Certificate of Incorporation, by resolution of
the Board, by consolidation of the Company with, or merger of the Company into,
another corporation, or in any other manner, without the consent of the holders
of a majority of the outstanding shares of Series A Preferred Stock, either
given by vote in person or by proxy at a meeting called for that purpose or
given in writing, materially and adversely alter any provision of the Series A
Preferred Stock.
Notwithstanding anything to the contrary contained in this
certificate, the Board from time to time without a vote of the holders of the
shares of Series A Preferred Stock, may decrease the number of shares
constituting the Series A Preferred Stock, but not below such number of shares
of Series A Preferred Stock as are actually outstanding at any such time.
6
<PAGE>
12. Restrictions on Transfer. Each certificate representing
------------------------
shares of Series A Preferred Stock and each certificate representing shares of
Common Stock issuable upon conversion of any shares of Series A Preferred Stock
shall be stamped or otherwise imprinted with a legend in substantially the
following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE AND ANY SHARES
ACQUIRED UPON THE CONVERSION OF THE SHARES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SUCH ACT, EXCEPT UNDER CIRCUMSTANCES WHERE NEITHER SUCH
REGISTRATION NOR SUCH AN EXEMPTION IS REQUIRED BY LAW."
IN WITNESS WHEREOF, the Company has caused this certificate of
designation to be signed by its President this 29th day of December, 1998.
SUNSTAR HEALTHCARE, INC.
By: Warren D. Stowell
--------------------
Name: Warren D. Stowell
Title: President
7
<PAGE>
Exhibit 4.2
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "Agreement") is made and entered into as
of _______________, 1999, between SUNSTAR HEALTHCARE, INC., a Delaware
corporation (the "Company") and [INVESTOR] ("Holder").
R E C I T A L S
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WHEREAS, the Company proposes to issue to Holder [ ] warrants (the
"Warrants"), each such Warrant entitling the holder thereof to purchase one
share of Common Stock, $.001 par value, of the Company (the "Exercise Shares,"
"Shares," or the "Common Stock"); and
WHEREAS, the Warrants which are the subject of this Agreement will be
issued by the Company to Holder as part of consideration payable to Holder in
connection with an investment by the Holder pursuant to the concurrent private
offering of the Company (the "Offering").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
A G R E E M E N T
- - - - - - - - -
1. Warrant Certificates. The warrant certificates to be delivered
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pursuant to this Agreement (the "Warrant Certificates") shall be in the form set
forth in Annex A, attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Warrant Agreement.
2. Right to Exercise Warrants. Each Warrant may be exercised from the
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date of this Agreement until 11:59 P.M. (Eastern time) on the date that is five
years after the date of this Agreement (the "Expiration Date"). Each Warrant not
exercised on or before the Expiration Date shall expire.
Each Warrant shall entitle its holder to purchase from the Company one
share of Common Stock at an exercise price of $5.00 per share, subject to
adjustment as set forth below ("Exercise Price").
The Company shall not be required to issue fractional shares of
capital stock upon the exercise of this Warrant or to deliver Warrant
Certificates which evidence fractional shares of capital stock. In the event
that a fraction of an Exercise Share would, except for the provisions of this
paragraph 2, be issuable upon the exercise of this Warrant, the Company shall
pay to the Holder exercising the Warrant an amount in cash equal to such
fraction multiplied by the current market value of the Exercise Share. For
purposes of this Agreement, the current market value shall be determined as
follows:
(a) if the Exercise Shares are traded in the over-the-counter market
and not on any national securities exchange and not in the NASDAQ Reporting
System, the average of the mean between the last bid and asked prices per share,
as reported by the National Quotation Bureau, Inc., or an equivalent generally
accepted reporting service, for the last business day prior to the date on which
this Warrant is exercised, or, if not so reported, the average of the closing
bid and asked prices for an Exercise Share as furnished to the Company by any
member of the National Association of Securities Dealers, Inc., selected by the
Company for that purpose.
(b) if the Exercise Shares are listed or traded on a national
securities exchange or in the NASDAQ Reporting System, the closing price on the
principal national securities exchange on which they are so listed or traded or
in the NASDAQ Reporting System, as the case may be, on the last business day
prior to the date
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of the exercise of this Warrant. The closing price referred to in this Clause
(b) shall be the last reported sales price or, in case no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices, in either case on the national securities exchange on which the Exercise
Shares are then listed or in the NASDAQ Reporting System; or
(c) if no such closing price or closing bid and asked prices are
available, as determined in any reasonable manner as may be prescribed by the
Board of Directors of the Company.
3. Mutilated or Missing Warrant Certificates. In case any of the Warrant
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Certificates shall be mutilated, lost, stolen or destroyed prior to its
expiration date, the Company shall issue and deliver, in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and in substitution for the Warrant Certificate lost, stolen or
destroyed, a new Warrant Certificate of like tenor and representing an
equivalent right or interest.
4. Reservation of Shares. The Company will at all times reserve and keep
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available, free from preemptive rights, out of the aggregate of its authorized
but unissued Shares or its authorized and issued Shares held in its treasury for
the purpose of enabling it to satisfy its obligation to issue Shares upon
exercise of Warrants, the full number of Shares deliverable upon the exercise of
all outstanding Warrants.
The Company covenants that all Shares which may be issued upon
exercise of Warrants will be validly issued, fully paid and nonassessable
outstanding Shares of the Company.
5. Rights of Holder. The Holder shall not, by virtue of anything
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contained in this Warrant Agreement or otherwise, prior to exercise of this
Warrant, be entitled to any right whatsoever, either in law or equity, of a
stockholder of the Company, including without limitation, the right to receive
dividends or to vote or to consent or to receive notice as a shareholder in
respect of the meetings of shareholders or the election of directors of the
Company of any other matter.
6. Investment Intent. Holder represents and warrants to the Company that
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Holder is acquiring the Warrants for investment and with no present intention of
distributing or reselling any of the Warrants.
7. Certificates to Bear Language. The Warrants and the certificate or
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certificates therefor shall bear the following legend by which each holder shall
be bound:
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES
OF COMMON STOCK (OR OTHER SECURITIES) ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN OPINION OF COUNSEL THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE."
The Shares and the certificate or certificates evidencing any
such Shares shall bear the following legend:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE."
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Certificates for Warrants without such legend shall be issued if such
warrants or shares are sold pursuant to an effective registration statement
under the Securities Act of 1933 (the "Act") or if the Company has received an
opinion from counsel reasonably satisfactory to counsel for the Company, that
such legend is no longer required under the Act.
8. Registration Rights. The Company is obligated to register all of the
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Exercise Shares underlying the Warrants in a registration statement on the
appropriate form with the Securities and Exchange Commission (the "Commission")
not later than 90 days following the closing of the Offering, so that all
Warrantholders shall be entitled to sell the Exercise Shares in the public
market immediately upon the expiration of the one-year holding period from date
of initial sale of any such Warrants (the "Mandatory Registration Right").
9. Adjustment of Number of Shares and Class of Capital Stock Purchasable.
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The Number of Shares and Class of Capital Stock purchasable under this Warrant
Agreement are subject to adjustment from time to time as set forth in this
Section 9.
(a) Adjustment for Change in Capital Stock. If the Company:
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(i) pays a dividend or makes a distribution on its Common
Stock, in each case, in shares of its Common Stock;
(ii) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(iii) combines its outstanding shares of Common Stock into a
smaller number of shares;
(iv) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(v) issues by reclassification of its shares of Common Stock
any shares of its capital stock;
then the number and classes of shares purchasable upon exercise of each Warrant
in effect immediately prior to such action shall be adjusted so that the holder
of any Warrant thereafter exercised may receive the number and classes of shares
of capital stock of the Company which such holder would have owned immediately
following such action if such holder had exercised the Warrant immediately prior
to such action.
For a dividend or distribution the adjustment shall become effective
immediately after the record date for the dividend or distribution. For a
subdivision, combination or reclassification, the adjustment shall become
effective immediately after the effective date of the subdivision, combination
or reclassification.
If after an adjustment the holder of a Warrant upon exercise of it may
receive shares of two or more classes of capital stock of the Company, the Board
of Directors of the Company shall in good faith determine the allocation of the
adjusted Exercise Price between or among the classes of capital stock. After
such allocation, that portion of the Exercise Price applicable to each share of
each such class of capital stock shall thereafter be subject to adjustment on
terms comparable to those applicable to Common Stock in this Agreement.
Notwithstanding the allocation of the Exercise Price between or among shares of
capital stock as provided by this Section 9(a), a Warrant may only be exercised
in full by payment of the entire Exercise Price currently in effect.
(b) Consolidation, Merger or Sale of the Company. If the Company is
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a party to a consolidation, merger or transfer of assets which reclassifies or
changes its outstanding Common Stock, the successor corporation (or corporation
controlling the successor corporation or the Company, as the case may be) shall
by operation of law assume the Company's obligations under this Warrant
Agreement. Upon consummation of such transaction the Warrants shall
automatically become exercisable for the kind and amount of securities, cash or
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other assets which the holder of a Warrant would have owned immediately after
the consolidation, merger or transfer if the holder had exercised the Warrant
immediately before the effective date of such transaction. As a condition to the
consummation of such transaction, the Company shall arrange for the person or
entity obligated to issue securities or deliver cash or other assets upon
exercise of the Warrant to, concurrently with the consummation of such
transaction, assume the Company's obligations hereunder by executing an
instrument so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided for in this
Section 9.
10. Successors. All the covenants and provisions of this Agreement by
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or for the benefit of the Company or Holder shall bind and inure to the benefit
of their respective successor and assigns hereunder.
11. Counterparts. This Agreement may be executed in any number of
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counterparts and each of such counterparts shall for all proposes be deemed to
be an original, and such counterparts shall together constitute by one and the
same instrument.
12. Notices. All notices or other communications under this Warrant
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shall be in writing and shall be deemed to have been given if delivered by hand
or mailed by certified mail, postage prepaid, return receipt requested,
addressed as follows: if to the Company: SunStar Healthcare, Inc., 300
International Parkway, Suite 230, Heathrow, Florida, 32746, Attention:
President, and to the Holder: at the address of the Holder appearing on the
books of the Company or the Company's transfer agent, if any.
Either the Company or the Holder may from time to time change
the address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Section 12.
13. Supplements and Amendments. The Company may from time to time
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supplement or amend this Warrant Agreement without the approval of any Holders
of Warrants in order to cure any ambiguity or to be correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision, or to make any other provisions in regard to matters or questions
herein arising hereunder which the Company may deem necessary or desirable and
which shall not materially adversely affect the interest of the Holder.
14. Severability. If for any reason any provision, paragraph or term of
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this Warrant Agreement is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Warrant shall be deemed to be severable.
15. Governing Law and Venue. This Warrant shall be deemed to be a
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contract made under the laws of the State of California and for all purposes
shall be governed and construed in accordance with the laws of said State. Any
proceeding arising under this Warrant Agreement shall be instituted in the State
of California.
16. Headings. Paragraphs and subparagraph headings, used herein are
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included herein for convenience of reference only and shall not affect the
construction of this Warrant Agreement nor constitute a part of this Warrant
Agreement for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, as of the date and year first above written.
SUNSTAR HEALTHCARE, INC. HOLDER
_________________________________
[Name]
_________________________________
By: Warren D. Stowell
Its: President
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ANNEX A
NUMBER __ WARRANT
WARRANT TO PURCHASE
SHARES
SUNSTAR HEALTHCARE, INC. see reverse for
COMMON STOCK PURCHASE WARRANT certain definitions
will be void if not exercised prior to 11:59 P.M. Eastern Time on _______, ____
THIS CERTIFIES THAT FOR VALUE RECEIVED,
THE REGISTERED HOLDER OR ASSIGNS ("HOLDER"),
is entitled to purchase from SunStar Healthcare, Inc., a Delaware corporation
(the "Company") at any time after 9:00 A.M. Eastern Time on __________, ____ at
the purchase price per share of $5.00 (the "Warrant Price"), the number of
shares of Common Stock of the Company set forth above (the "Shares"). The number
of shares purchasable upon exercise of each warrant evidenced hereby and the
Warrant Price per Share shall be subject to adjustment from time to time as set
forth in the Warrant Agreement referred to below. The Warrants expire on
__________, ____. Holders will not have any rights or privileges of shareholders
of the Company prior to exercise of the Warrants. Holders of the Warrants
evidenced hereby and the shares of Common Stock issuable upon exercise hereof
have certain rights with respect to registration with the Securities and
Exchange Commission of the Warrants and Common Stock issuable upon exercise
hereof. These registration rights are set forth in that certain Private
Placement Memorandum dated as of ___________, ____ pursuant to which this
Warrant Certificate has been issued. The Warrant evidenced hereby may be
exercised in whole or in part by presentation of this Warrant certificate with
the Purchase Form on the reverse side hereof fully executed (with a signature
guarantee as provided on the reverse side hereof) and simultaneous payment of
the Warrant Price (subject to adjustment) at the principal office of the
Company. Payment of such price shall be made at the option of the Holder in cash
or by certified check or bank draft. The Warrants evidenced hereby are part of a
duly authorized issue of Common Stock Purchase Warrants with rights to purchase
an aggregate of up to 600,000 shares of Common Stock of the Company. Upon any
partial exercise of the Warrant evidenced hereby, there shall be countersigned
and issued to the Holder a new Warrant Certificate in respect of the Shares as
to which the Warrants evidenced hereby shall not have been exercised. This
Warrant Certificate may be exchanged at the office of the Company by surrender
of this Warrant Certificate properly endorsed with a signature guarantee either
separately or in combination with one or more other Warrants for one or more new
Warrants to purchase the same aggregate number of Shares as evidenced by the
Warrant or Warrants exchanged. No fractional Shares will be issued upon the
exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. The Holder
hereof may be treated by the Company and all other persons dealing with this
Warrant Certificate as the absolute owner hereof for all purposes and as the
person entitled to exercise the rights represented hereby, any notice to the
contrary notwithstanding, and until such transfer is on such books, the Company
may treat the Holder as the owner for all purposes.
Dated: __________, ____ SUNSTAR HEALTHCARE, INC.
Secretary Chief Executive Officer
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
CERTAIN STATES, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE LAWS, (II) TO THE EXTENT
APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (III) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE LAW IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
CERTAIN STATES, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE LAWS, (II) TO THE EXTENT
APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (III) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE LAW IS AVAILABLE.
ELECTION TO PURCHASE
The undersigned hereby elects irrevocably to exercise the within
Warrant and to purchase _______________________ shares of Common Stock of
SunStar Healthcare, Inc. and hereby makes payment of $_________ (at the rate of
$________ per share) in payment of the Exercise Price pursuant hereto. Please
issue the shares as to which this Warrant is exercised in accordance with the
instructions given below.
The undersigned represents and warrants that the exercise of the within
Warrant was solicited by the member firm of the National Association of
Securities Dealers, Inc. ("NASD") listed below. If not solicited by an NASD
member, please write "unsolicited" in the space below.
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(Insert Name of NASD Member or "Unsolicited")
Dated: _________________ Signature: _____________________
INSTRUCTIONS FOR REGISTRATION OF SHARES
Name (print) ______________________________________________________
Address (print) ___________________________________________________
ASSIGNMENT
FOR VALUE RECEIVED,
________________________________________________________ does hereby sell,
assign and transfer unto ___________________________________________________,
the right to purchase ________________shares of Common Stock of SunStar
Healthcare, Inc., evidenced by the within Warrant, and does hereby irrevocably
constitute and appoint __________________________________________ attorney to
transfer such right on the books of SunStar Healthcare, Inc., with full power of
substitution on the premises.
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Dated: ________________, 19______
Signature: _____________________
NOTICE: The signature of Election to Purchase or Assignment must correspond with
the name as written upon the face of the within Warrant in every particular
without alteration or enlargement or any change whatsoever. The signature(s)
must by guaranteed by an eligible guarantor institution (Banks, Stockbrokers,
Savings and Loan Associations and Credit Unions with membership in an approved
signature guarantee Medallion Program), pursuant to SEC Rule 17Ad-15.
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Signature Guarantee
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Exhibit 4.2
REGISTRATION RIGHTS AGREEMENT
, 1999
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The parties to this agreement are SunStar Healthcare, Inc. a
Delaware corporation (the "Company"), and each of the other individuals or
entities that has executed a signature page to this agreement (collectively, the
"Stockholders").
W I T N E S S E T H:
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Simultaneously with the execution and delivery of this agreement,
the Stockholders are acquiring shares of Series A Preferred Stock, par value
$.001 per share (the "Series A Preferred Stock"), which is convertible into
shares of the Company's Common Stock, par value $.001 per share (the "Common
Stock"), and warrants to purchase shares of Common Stock (the "Warrants"). All
of the shares of Common Stock that may be acquired by the Stockholders from time
to time after the date of this agreement pursuant to conversion of the Series A
Preferred Stock and exercise of the Warrants are intended by the parties to be
the only shares of capital stock of the Company subject to all of the terms and
conditions of this agreement, and are collectively referred to herein as the
"Shares."
The Company desires to provide to the Stockholders certain rights
regarding the registration of the Shares, all upon the terms and conditions set
forth below.
It is therefore agreed as follows:
1. Mandatory Registration.
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(1) Within 90 days of the closing of the sale of the Series A
Preferred Stock and Warrants to the Stockholders (the "Private Placement
Closing"), the Company shall prepare and file with the U.S. Securities and
Exchange Commission (the "Commission") a registration statement on an
appropriate form for registering for resale by the Stockholders the Shares for
the Stockholders (or such lesser number as may be required by the Commission),
and such registration statement shall state that it also covers such
indeterminate number of additional shares of Common Stock as may become issuable
to prevent dilution resulting from stock splits or stock dividends.
(2) The Company shall pay all Registration Expenses (as
defined below) in connection with registration of the Registrable Securities (as
defined below) pursuant to this section 1.
(3) As used in this agreement (i) "Registrable Securities"
means the Shares held by the Stockholders; provided that any such Share shall
cease to be a Registrable Security when (A) a registration statement with
respect to their public sale shall have become effective under the Securities
Act, (B) they have been disposed of as permitted by, and in compliance with,
Rule 144 (or successor provision) promulgated under the Securities Act, (C) they
may be disposed of as permitted by, and in compliance with, subsection (k) of
such Rule 144 (or successor provision) or (D) they shall have ceased to be
outstanding, (iii) "Holder" means the Stockholders, and (iv) "Securities Act"
shall mean the Securities Act of 1933, or any subsequent similar federal
statute, and the rules and regulations of the Commission or any other federal
agency at the time administering the Securities Act.
(4) As used in this agreement, "Registration Expenses" means
all expenses incident to the Company's performance of or compliance with the
provisions of sections 1, 2 and 3 including, without limitation, all
registration, filing and National Association of Securities Dealers, Inc. fees,
all listing fees, all fees and expenses of complying with securities or blue sky
laws (including, without limitation, reasonable fees and disbursements of
counsel for the underwriter in connection with blue sky qualifications of the
Registrable Securities), all printing
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expenses, the fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of "comfort" letters
required by or incident to such performance and compliance, and any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities; provided, however, that Registration Expenses shall exclude, and the
Holders shall pay, underwriters fees and underwriting discounts and commissions
and transfer taxes in respect of the Registrable Securities being registered as
well as any fees and expenses of counsel or other advisors to the Holders of the
Registrable Securities.
2. Registration Procedures. In connection with the registration
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of any Registrable Securities under the Securities Act as provided in section 1,
the Company shall, within 90 days of the Private Placement Closing:
(1) prepare and file with the Commission the requisite
registration statement to effect such registration and thereafter use
its best efforts to cause such registration statement to become and
remain effective (subject to clause (ii) below); provided, however, that
the Company may discontinue any registration of its securities that are
not Registrable Securities at any time prior to the effective date of
the registration statement relating thereto;
(2) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Securities
covered by such registration statement for such period as shall be
required for the disposition of all of such Registrable Securities;
(3) furnish to the Holders such number of conformed copies
of such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in conformity
with the requirements of the Securities Act, and such other documents,
as the Holders may reasonably request;
(4) use its best efforts (x) to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such states of
the United States of America where an exemption is not available and as
the Holders shall reasonably request, (y) to keep such registration or
qualification in effect for so long as such registration statement
remains in effect, and (z) to take any other action that may reasonably
be necessary or advisable to enable the Holders to consummate the
disposition in such jurisdictions of the securities to be sold by the
Holders, except that the Company shall not for any such purpose be
required to qualify generally to do business as a foreign corporation in
any jurisdiction wherein it would not, but for the requirements of this
paragraph (iv), be obligated to be so qualified or to consent to general
service of process in any such jurisdiction;
(5) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved
by such other federal or state governmental agencies or authorities as
may be necessary in the opinion of counsel to the Company to consummate
the disposition of such Registrable Securities in accordance with their
intended method of disposition;
(6) furnish to the Holders' underwriters, if any, (x) an
opinion of counsel for the Company, and (y) a "comfort" letter signed by
the independent public accountants who have certified the Company's
financial statements included or incorporated by reference in such
registration statement, each covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of the accountant's comfort letter, with
respect to events subsequent to the date of such financial statements,
as are customarily covered in opinions of issuer's counsel and in
accountant's comfort letters delivered to the underwriters in
underwritten public offerings of securities (and dated the dates such
opinions and comfort letters are customarily dated);
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(7) notify the Holders when a prospectus relating thereto
is required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which, the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, in the light of the circumstances
under which they were made, and at the request of the Holders promptly
prepare and furnish to them a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the
circumstances under which they were made;
(8) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least 12 months, but not more than
18 months, beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement
shall satisfy the provisions of section 11(a) of the Securities Act and
Rule 158 promulgated thereunder, and promptly furnish the same to the
Holders; and
(9) provide and cause to be maintained a transfer agent
and registrar (which, in each case, may be the Company) for all
Registrable Securities covered by such registration statement from and
after a date not later than the effective date of such registration.
The Company may require the Holders to furnish the Company such
information regarding the Holders and the distribution of the Holders'
Registrable Securities as the Company may from time to time reasonably request
in writing.
Upon receipt of any notice from the Company of the happening of
an event of the kind described in item (vii) of this section 2, the Holders will
forthwith discontinue their disposition of Registrable Securities pursuant to
the registration statement relating to such Registrable Securities until the
Holders' receipt of the copies of the supplemented or amended prospectus
contemplated by item (vii) and, if so directed by the Company, the Holders will
deliver to the Company all copies, other than permanent file copies, then in the
Holders' possession, of the prospectus relating to such Registrable Securities
current at the time of receipt of such notice.
3. Indemnification.
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3.1 Indemnification by the Company. In the event of any
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registration statement filed pursuant to section 1, the Company shall, and
hereby does, indemnify and hold harmless each of the Holders and each of their
directors, officers, partners, agents, attorneys, representatives and affiliates
and each other individual, group, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture or other
entity of whatever nature ("Person") who participates as an underwriter in the
offering or sale of such securities and each other Person, if any, who controls
any Holder or any such underwriter within the meaning of the Securities Act
(each of the foregoing, a "Holder Indemnitee"), insofar as actual and reasonable
losses, claims, damages, or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) primarily arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement, any preliminary prospectus, final
prospectus, or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances in which they were made not misleading,
and the Company shall reimburse each Holder Indemnitee for any legal or any
other fees, costs and expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided, that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or omission made in reliance upon and in conformity with information
furnished to the Company by or on behalf of a Holder or such underwriter, as the
case may be, for use in the preparation thereof; and
<PAGE>
provided, further, that the Company shall not be liable to any Holder Indemnitee
- -------- -------
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of such Person's
failure to send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus so long as such
final prospectus, and any amendments or supplements thereto, have been furnished
to such underwriter or any Holder, as applicable.
3.2 Indemnification by the Holders. If any Registrable Securities
------------------------------
are included in any registration statement, the Holders shall, and hereby do,
indemnify and hold harmless (in the same manner and to the same extent as set
forth in section 3.1 above) the Company, and each director and officer of the
Company, and each other Person, if any, who controls the Company within the
meaning of the Securities Act, with respect to any statement contained in, or
omission from, such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by the Holders for use in the preparation
of such registration statement, preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement.
3.3 Notice of Claims, Etc. Promptly after receipt by an
---------------------
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in sections 3.1 or 3.2, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
immediately give written notice to the latter of the commencement of such
action; provided, however, that the failure of any indemnified party to give
-------- -------
notice as provided herein shall not relieve the indemnifying party of its
indemnity obligations, except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. In case any such action is
brought against an indemnified party, unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof other than reasonable costs
related to the indemnified party's cooperation with the indemnifying party,
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties arises in respect of such
claim after the assumption of the defense thereof. No indemnifying party shall
be liable for any settlement of any action or proceeding effected without its
written consent, which consent shall not be unreasonably withheld. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement that does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
3.4 Contribution. If indemnification shall for any reason be held
------------
by a court to be unavailable to an indemnified party under section 3.1 or
section 3.2 in respect of any loss, claim, damage or liability, or any action in
respect thereof, then, in lieu of the amount paid or payable under section 3.1
or section 3.2, as applicable, the indemnified party and the indemnifying party
shall contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating the same), (i) in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and the Holders on the other hand
that resulted in such loss, claim, damage or liability, or action in respect
thereof, with respect to the statements or omissions that resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations or (ii) if the allocation provided by item (i)
above is not permitted by applicable law, in such proportion as shall be
appropriate to reflect the relative benefits received by the Company on the one
hand and the Holders on the other. No Person guilty of fraudulent
misrepresentation (within the meaning of the Securities Act) shall be entitled
to contribution from any Person who was not guilty of such fraudulent
misrepresentation. In addition, no Person shall be obligated to contribute
hereunder any amounts in payment for any
<PAGE>
settlement of any action or claim, effected without such Person's consent, which
consent shall not be unreasonably withheld.
3.5 Other Indemnification. Indemnification and contribution
---------------------
similar to that specified in the preceding provisions of this section 3 (with
appropriate modifications) shall be given by the Company and the Holders with
respect to any required registration or other qualification of securities under
any federal or state law or regulation of any governmental authority other than
the Securities Act.
4. Miscellaneous.
-------------
(a) Notices. All notices, instructions and other communications
-------
in connection with this agreement shall be in writing and may be given by
personal delivery or mailed, certified mail, return receipt requested, postage
prepaid or by a nationally recognized overnight courier to the parties at the
address of the Company as follows, and at the address of the Holders as set
forth on the signature page to this agreement (or at such other address as the
Company or the Holders may specify in a notice to the Company):
If to the Company:
SunStar Healthcare, Inc.
300 International Parkway
Suite 230
Heathrow, Florida 32746
Attn: David A. Jesse, Executive Vice President and Chief
Operating Officer
If to the Stockholders:
To the address set forth on the respective Stockholder
signature page below.
(b) No Waiver. No course of dealing and no delay on the part
---------
of any party hereto in exercising any right, power or remedy conferred by this
agreement shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers and remedies conferred by this agreement or shall preclude any
other or further exercise thereof or the exercise of any other right, power and
remedy.
(c) Binding Effect; Assignability. This agreement shall be
--------------
binding upon and, except as otherwise provided herein, shall inure to the
benefit of the respective parties and their permitted successors and assigns.
This agreement shall not be assignable except as otherwise provided herein.
(d) Severability. Any provision of this agreement that is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereby waive any provision of law which renders
any provisions hereof prohibited or unenforceable in any respect.
(e) Modification. No term or provision of this agreement may
------------
be amended, altered, modified, rescinded or terminated except upon the express
written consent of the party against whom the same is sought to be enforced.
(f) Law Governing. This agreement shall be governed by and
-------------
construed in accordance with the law of the state of California applicable to
agreements made and to be performed entirely in California.
<PAGE>
(g) Headings. All headings and captions in this agreement are for
--------
purposes of reference only and shall not be construed to limit or affect the
substance of this agreement.
<PAGE>
(h) Entire Agreement. This agreement contains, and is intended
----------------
as, a complete statement of all the terms of the arrangements between the
parties with respect to the matters provided for, supersedes any previous
agreements and understandings between the parties with respect to those matters
and cannot be changed or terminated orally.
SUNSTAR HEALTHCARE, INC.
By: _______________________________
Name: Warren D. Stowell
Title: President
Stockholder Signature:
_______________________________
_______________________________
Address
_______________________________
<PAGE>
Exhibit 10.3
INFORMATION MANAGEMENT SERVICES AGREEMENT
BETWEEN
COMPANION INFORMATION MANAGEMENT RESOURCES, INC.
AND
SUNSTAR HEALTH PLAN, INC
DATED
26 MARCH, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS............................................................................... 1
1.1. 14-Day Claims Turnaround......................................................... 1
1.2. 30-Day Claims Turnaround......................................................... 1
1.3. Access Resources................................................................. 1
1.4. Affiliated Provider.............................................................. 1
1.5. Agreement........................................................................ 1
1.6. Availability Periods............................................................. 1
1.7. Benefit Plan..................................................................... 1
1.8. Carve-Out Vendor................................................................. 1
1.9. CICS Availability Percentage..................................................... 1
1.10. CICS Response Time Average....................................................... 1
1.11. CIMR Implementation Representative............................................... 2
1.12. Claim............................................................................ 2
1.13. CLIENT Representative............................................................ 2
1.14. Commencement Date................................................................ 2
1.15. Effective Date................................................................... 2
1.16. External Network Claim........................................................... 2
1.17. Financial Accuracy Percentage.................................................... 2
1.18. Forces Majeure................................................................... 2
1.19. Free Implementation Services..................................................... 2
1.20. Hub Site......................................................................... 2
1.21. Implementation Services.......................................................... 2
1.22. Labor Rate ...................................................................... 2
1.23. Member........................................................................... 3
1.24. Notice........................................................................... 3
1.25. Operating Services............................................................... 3
1.26. Party............................................................................ 3
1.27. Person........................................................................... 3
1.28. Process and Procedure Accuracy................................................... 3
1.29. Provider ........................................................................ 3
1.30. Related Person................................................................... 3
1.31. Resource......................................................................... 3
1.32. Services......................................................................... 3
1.33. System........................................................................... 3
1.34. Term............................................................................. 4
1.35. TMON............................................................................. 4
1.36. Transaction...................................................................... 4
1.37. Voice Response Unit.............................................................. 4
2. OPERATING SERVICES........................................................................ 4
2.1. Generally........................................................................ 4
2.2. License.......................................................................... 4
2.3. Third Party Software............................................................. 4
2.4. Limited Capacity of CIMR......................................................... 4
2.5. Availability..................................................................... 4
3. IMPLEMENTATION............................................................................ 5
3.1. Generally........................................................................ 5
3.2. Planning......................................................................... 5
3.3. Project Management............................................................... 5
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.4. CLIENT Representative............................................................ 5
3.5. Functionality Selection.......................................................... 5
3.6. Status Reports................................................................... 5
3.7. CLIENT Support................................................................... 5
3.8. Other Responsibilities........................................................... 5
3.9. On-Going Implementation.......................................................... 6
3.10. HPS Migration.................................................................... 6
3.11. Compliance with Third Party Rights............................................... 6
4. SUPPORT SERVICES.......................................................................... 6
4.1. Customization.................................................................... 6
4.2. Training......................................................................... 7
4.3. Telephone Support................................................................ 7
4.4. Temporary On-Site Support. ..................................................... 7
4.5 Data mapping to existing data repositories ...................................... 7
5. FEES...................................................................................... 7
5.1. Monthly Fee...................................................................... 7
5.2. The Monthly Minimum Fee.......................................................... 7
5.3. Monthly Rate..................................................................... 7
5.4. Implementation Fees.............................................................. 7
5.5. Hourly Fees...................................................................... 7
5.6. Initial Training Fees............................................................ 8
5.7. Telecommunication Costs. ....................................................... 8
5.8. External Network Claims Administration Fees...................................... 8
5.9. Record Keeping and Audit Rights.................................................. 8
5.10. Expense Reimbursement............................................................ 8
5.11. Taxes Additional................................................................. 8
5.12. CPU Charge....................................................................... 8
6. MUTUAL MARKETING SUPPORT.................................................................. 8
6.1. Reference Account Status......................................................... 8
6.2. Marketing Support of CIMR........................................................ 9
6.3. Promotional Support.............................................................. 9
7. SERVICE LEVEL COMMITMENTS................................................................. 9
7.1. Disaster Recovery Testing........................................................ 9
7.2. Service Level Failure............................................................ 9
7.3. Credits.......................................................................... 9
7.4. Exclusive Remedies for Service Level Failures.................................... 9
8. TERM AND TERMINATION...................................................................... 9
8.1. By CLIENT........................................................................ 9
8.2. By CIMR.......................................................................... 10
8.3. By Either Party.................................................................. 10
8.4 Termination Fee.................................................................. 10
8.5 Transition Services.............................................................. 10
9. LIMITED WARRANTY.......................................................................... 10
10. LIABILITY LIMITATION...................................................................... 11
11. INDEMNIFICATIONS.......................................................................... 11
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
11.1. By CLIENT........................................................................ 11
11.2. By CIMR.......................................................................... 11
12. PROPRIETARY RIGHTS OF CIMR................................................................ 11
13. CONFIDENTIALITY AND NONSOLICITATION....................................................... 12
13.1. Confidentiality.................................................................. 12
13.2. CIMR Use of Aggregate Data....................................................... 13
13.3. Non-solicitation................................................................. 13
14. FORCES MAJEURE............................................................................ 13
15. ATTORNEY'S FEES........................................................................... 13
16. ARBITRATION............................................................................... 13
17. WAIVER.................................................................................... 13
18. LATE PAYMENTS............................................................................. 14
19. EFFECT AND BENEFIT........................................................................ 14
20. ASSIGNMENT................................................................................ 14
21. ENTIRE AGREEMENT.......................................................................... 14
22. AMENDMENT................................................................................. 14
23. RELATIONSHIP OF PARTIES................................................................... 14
24. GOVERNING LAW............................................................................. 14
25. ACCEPTANCE................................................................................ 15
</TABLE>
iii
<PAGE>
SCHEDULES
---------
SCHEDULE 1.1. - ACCESS RESOURCES
SCHEDULE 1.14 - CLIENT SERVICE AREA
SCHEDULE 1.20 - OPERATING SERVICES
iv
<PAGE>
COMPANION INFORMATION MANAGEMENT RESOURCES, INC.
INFORMATION MANAGEMENT SERVICES AGREEMENT
- -----------------------------------------
THIS AGREEMENT is entered into by and between COMPANION INFORMATION MANAGEMENT
RESOURCES, INC., a South Carolina corporation ("CIMR"), and SunStar Health Plan,
Inc. a Florida corporation ("CLIENT"), as of the date immediately preceding the
Parties' signatures hereinbelow.
PREFACE. CIMR is a wholly-owned subsidiary of Blue Cross Blue Shield of South
- -------
Carolina that provides a variety of managed care systems and services to its
clients. CLIENT is a company engaged in the business of providing health care
services, health plan management and administrative services to employers and
patients. CLIENT desires to acquire from CIMR, and CIMR is willing to provide to
CLIENT, the services described in this Agreement subject to and in accordance
with the terms and conditions set forth in this Agreement.
The Parties hereby agree as follows:
1. DEFINITIONS.DEFINITIONS.DEFINITIONS.DEFINITIONS
For purposes of this Agreement, the following terms shall have the following
meanings:
1.1. "14-DAY CLAIMS TURNAROUND" means, for a given period, the percentage
Non-investigated claims adjudicated as paid, denied, or pended within 14 working
days after the date of receipt.
1.2. "30-DAY CLAIMS TURNAROUND" means, for a given period, the Non-investigated
claims adjudicated as paid, denied, or pended within 30 working days after the
date of receipt.
1.3. "ACCESS RESOURCES" means all equipment or other resources required to
electronically link the Hub Site with CIMR'S data center in Columbia, South
Carolina, including without limitation the connecting telecommunication lines
and the routers, multiplexors, network controllers, and similar equipment
required at the Hub Site and CIMR'S data center.
1.4. "AFFILIATED PROVIDER". means any Provider, other than a Carve-Out Vendor,
that is a party to a provider Contract.
1.5. "AGREEMENT. AGREEMENT" means this Information Management Services
Agreement, together with all Schedules and Exhibits hereto, as amended from time
to time.
1.6. "AVAILABILITY PERIODS" means those periods during which the Operating
Services are required to be available to CLIENT under Section 2.5.
1.7. "BENEFIT PLAN" means a health care benefit plan sponsored by an employer or
other payor for the benefit of a defined group of individuals (such as employees
and their dependents) that is (i) administered by CLIENT pursuant to a contract
with the employer, and (ii) approved by CIMR in its sole discretion as
compatible with the System.
1.8. "CARVE-OUT VENDOR" means a Provider that is either (i) under contract with
CLIENT to provide to Members specialty services such as, pharmacy, laboratory,
or mental health, or (ii) otherwise categorized by CIMR in its sole discretion
as a Carve-Out Vendor.
1.9. "CICS AVAILABILITY PERCENTAGE" shall mean the ratio, expressed as a
percentage, of the actual time each of the CLIENT's Production CICS Regions is
available for use by the CLIENT, divided by the total amount of time
1
<PAGE>
between the mutually agreed upon business hours during any monthly period.
Corporate Help Desk Logs will be used to calculate the CICS Availability
Percentage on a monthly basis.
1.10. "CICS RESPONSE TIME AVERAGE" shall mean the ratio, expressed in seconds or
fraction thereof, of the sum of all of the CLIENT's interactive Production CICS
transaction response times for a calendar month divided by the total number of
the CLIENT's interactive Production CICS transactions during that same month.
TMON (or equivalent) software will be used to calculate the CICS Response Time
Average. Response time shall be the time elapsed between the moment a
transaction is received by CIMR from the CLIENT's network controller until the
moment an intended response is presented back to the CLIENT's network controller
by the System.
1.11. "CIMR IMPLEMENTATION REPRESENTATIVE" means the Person designated by CIMR
in a Notice to CLIENT from time to time to perform the services described in
Section 3.3.
1.12. "CLAIM" means any claim for payment or reimbursement submitted by any
Affiliated Provider or Carve-Out Vendor in respect of health care products or
services provided to any Member under a Benefit Plan.
1.13. "CLIENT REPRESENTATIVE" means the individual designated by CLIENT in a
Notice to CIMR from time to time as CLIENT's authorized representative for
implementation planning, System implementation and making requests for
additional Services.
1.14. "COMMENCEMENT DATE" means the date as of which CIMR certifies to CLIENT
that the System is available to administer any Benefit Plan.
1.15. "EFFECTIVE DATE" means the date appearing immediately before the Parties'
signatures hereinbelow.
1.16. "EXTERNAL NETWORK CLAIM" means a claim for payment or reimbursement in
respect of a service or a product provided to a Member by a Provider who either
(i) is neither an Affiliated Provider nor a Carve-Out Vendor, or (ii) is located
outside of the CLIENT service area set forth in Schedule 1.14.
1.17. "FINANCIAL ACCURACY PERCENTAGE" means the percentage equivalent of a
fraction the numeration of which is the total absolute value of claims
overpayments and under payments (expressed in dollars) for the period in
question (and as reflected in an audit sample) and the denominator of which is
the total of all claims (expressed in dollars) for the period in question (as
reflected in such audit sample).
1.18. "FORCES MAJEURE" shall mean and include acts of God, changes in government
regulations, acts of governmental bodies or their employees or agents, weather,
strikes, lockouts, boycotts, and inability to secure labor or any material
specified or reasonably necessary in connection with property through ordinary
business channels, fire, unusual delays in transportation, unavoidable
casualties or any other causes beyond the Parties' control.
1.19. "FREE IMPLEMENTATION SERVICES" means the first $400,000 worth (valued at
the Hourly Fee rates that would otherwise be applicable to such Services under
Section 5.5) of Implementation Services (and no others) performed to enable
CLIENT to access and use the following System functions in the form currently
accessed and used by Companion Health Care: (i) claims processing system and
subsystems, including claims inquiry; (ii) managed care system, including
authorization, referral and case management subsystems; (iii) back-end group
reporting system; (iv) provider information management system, including
provider demographics, certification and pricing; (v) correspondence tracking
system; (vi) claims rebundling software (only those modules licensed to CIMR);
(vii) automated letter generating system used to generate all system letters in
ad hoc or batch mode; (viii) benefit file processing and inquiry system; (x)
premium billing, cash receipts, and income accounting systems; and (xi)
2
<PAGE>
commission system. If CLIENT requires or desires any modification of or
variation from the Companion Health Care implementation of the foregoing
functions, CIMR'S services in connection with implementing any such
modifications or variations shall not constitute Free Implementation Services,
but shall be chargeable to CLIENT pursuant to Section 5.5.
1.20. "HUB SITE" means a CLIENT site mutually agreed upon by CIMR and CLIENT
where certain Access Resources shall be located.
1.21. "IMPLEMENTATION SERVICES" means all services provided by CIMR to or on
behalf of CLIENT on or before the Commencement Date in connection with
implementing (or de-implementing) CLIENT'S access to the System's automated
functions.
1.22. "LABOR RATE" means, for any given calendar year, the annual average hourly
amount actually paid by Blue Cross and Blue Shield of South Carolina ("BCBSSC")
during such calendar year as compensation to its programming personnel,
including contract programmers, who provide implementation services and/or
support services to third party customers of BCBSSC. As used herein,
"compensation" includes all amounts reasonably related to the cost to BCBSSC of
such programming personnel (including contract programmers), such as wages,
bonuses, benefits, payroll taxes, and other wage and employment related taxes
and benefits customarily provided to BCBSSC employees).
1.23. "MEMBER" means any person entitled to health care services or products
under a Benefit Plan.
1.24. "NON-INVESTIGATED CLAIM" means a clean claim that can be adjudicated
without reference to information CLIENT Benefit Plan not resident on the
automated System.
1.25. "NOTICE" means any notice, election, demand, request, or other
communication between the Parties related to this Agreement which is in writing
and sent to the addressee Party by either electronic mail, the United States
Postal Service, or a nationally recognized commercial carrier service such as
United Parcel Service or Federal Express, at the address for Notices designated
by the addressee Party from time to time in a Notice to the other Party. In the
absence of any such designation each Party's Notice address shall be the address
set forth opposite such Party's signature below. For purposes of this Agreement,
a Notice shall be conclusively deemed given and effective as of the date and
time reflected (i) if the Notice is in paper format, on the mailing or shipping
receipt issued by the carrier with respect to such Notice, or (ii) if the Notice
is in electronic mail format, the receipt confirmation issued by the electronic
mail server of the addressee or its internet service provider. In the absence of
such a receipt, a Notice shall not be deemed given and effective unless the
addressee Party acknowledges in writing its receipt of such Notice.
1.26. "OPERATING SERVICES" means the Services (whether automated or manually
performed) and Resource access described in Schedule 1.20, including without
limitation the use by CIMR of automated System functionality in providing
services to CLIENT pursuant to this Agreement.
1.27. "PARTY" means either CIMR or CLIENT.
1.28. "PERSON" means a natural person, or a private or governmental entity of
any kind.
1.29. "PROCESS AND PROCEDURE ACCURACY" means, for a given period, the percentage
equivalent of a fraction the numerator of which is the number of claims
processed in error (according to the group schedule of benefits and all relevant
processing procedures as established by CIMR from time to time) and during such
period the denominatorship of which is the number of all claims processed during
such period.
3
<PAGE>
1.30. "PROVIDER" means any Person independently licensed to perform health care
services or provide health care products to patients, including without
limitation physicians, podiatrists, nurses, nurse practitioners, hospitals,
clinics, outpatient surgical centers, rehabilitative care facilities, nursing
homes, and assisted living facilities means any Person independently licensed to
perform health care services or provide health care products to patients,
including without limitation physicians, podiatrists, nurses, nurse
practitioners, hospitals, clinics, outpatient surgical centers, rehabilitative
care facilities, nursing homes, and assisted living facilities means any Person
independently licensed to perform health care services or provide health care
products to patients, including without limitation physicians, podiatrists,
nurses, nurse practitioners, hospitals, clinics, outpatient surgical centers,
rehabilitative care facilities, nursing homes, and assisted living facilities
means any Person independently licensed to perform health care services or
provide health care products to patients, including without limitation
physicians, podiatrists, nurses, nurse practitioners, hospitals, clinics,
outpatient surgical centers, rehabilitative care facilities, nursing homes, and
assisted living facilities.
1.31. "RELATED PERSON" means, with respect to a particular Person, any other
Person that, either (i) controls a majority of the equity and voting interests
in the first Person, or (ii) has a majority of its equity and voting interests
controlled by either the first Person or another Person which controls a
majority of the equity and voting interests in the first Person.
1.32. "RESOURCE" means any item of property (tangible or intangible) the use of
which is made available to CLIENT by CIMR pursuant to this Agreement.
1.33. "SERVICES" means any and all of the services performed and the Resources
provided by CIMR to CLIENT pursuant to this Agreement, including without
limitation the Implementation Services and the Operating Services.
1.34. "SYSTEM" means that combination of automated and manual processes by which
CIMR makes the Operating Services available to CLIENT. The System includes
computer hardware and software (including without limitation System, interface
and application software), other equipment, and certain processes, methodologies
and procedures for manually performing certain Operating Services. The System
also includes engineering, design, and other know-how related to the foregoing,
and all manuals, documentation, or other graphical or textual information
(whether intangible or electronic form) related to such hardware, software,
know-how, processes, procedures or methodologies, all as constituted and
implemented by CIMR from time to time in its sole discretion. The elements and
mix of automation and manual processes comprising the System shall be as
determined by CIMR from time to time in its sole discretion so long as in all
events the System shall have the capability to make available to CLIENT all of
the Operating Services. The System does not include the Access Resources or any
of the other items for which CLIENT is responsible under Section 3.8.
1.35. "TERM" means the period from and after the Effective Date to and including
the date as of which the Agreement is terminated pursuant to Section 8 below.
1.36. "TMON" ("the monitor for CICS") means a product used to capture
statistical information concerning the execution of CICS transactions and their
use of CICS resources.
1.37. "TRANSACTION" means a discreet electronic exchange of information between
CIMR's Columbia data center mainframe computer and a computer System of CLIENT,
or the striking of the enter key on the System for electronic input or retrieval
of information from CIMR's Columbia data center mainframe computer.
1.38. "VOICE RESPONSE UNIT" means an automated service accessed through a toll
free telephone number by Affiliated Providers and Members to receive Member
eligibility/benefits status information and/or claims status information. All
calls are tracked on the inquiry tracking System for audit purposes.
2. OPERATING SERVICES.
4
<PAGE>
2.1. GENERALLY. During the Term, CIMR shall provide, and CLIENT shall use, the
Operating Services for (and only for) CLIENT's administration of Benefit Plans.
CIMR reserves the right to use Related Persons, employees of Related Persons,
and independent contractors to perform any or all of the Services.
2.2. LICENSE. CIMR grants CLIENT and its Affiliated Providers a non-exclusive
and non-transferable right to access and use the System during the Term as (and
only as) contemplated by Schedule 1.20 for (and only for) the purposes set forth
in Section 2.1 above. This license does not permit access to or use of the
System, in whole or in part, by any other Person, nor does it permit CLIENT to
possess, copy, reproduce in any form, modify, or exercise any other right of
control over any System component (whether hardware, software, know-how, or
other), in whole or in part. This license does not grant CLIENT access to, use
of, or any other rights with respect to, any other products or services of CIMR,
its Related Persons, or any other Person.
2.3. THIRD PARTY SOFTWARE. Future additions to, or modifications or enhancements
of, the Operating Services requested by CLIENT may require CLIENT to obtain
licenses of certain software from third party vendors. The effort and expense of
obtaining such licenses are solely CLIENT's responsibility. If third party
software is licensed solely by CLIENT for use on the System, CIMR shall prohibit
other System users from using Client's copy of such software residing on the
System server.
2.4. LIMITED CAPACITY OF CIMR. CIMR shall perform all Operating Services solely
in a ministerial capacity as agent for CLIENT. CIMR shall have no power or
responsibility to interpret provisions of any Benefit Plan, Provider agreement
or other contract to which it is not a party or resolve ambiguities or conflicts
in respect thereof. CIMR shall have no power or responsibility to make decisions
with respect to medical diagnosis or treatment, including without limitation the
adequacy or application of medical protocols or guidelines related to diagnosis
or treatment. In all events all medical diagnosis and treatment advice and
decisions concerning a patient shall be solely the responsibility of the
patient's physician. CIMR assumes no liability or responsibility for obligations
of CLIENT to any other Person in respect of any Benefit Plan or otherwise. In
performing all Services CIMR shall be entitled to rely solely and absolutely on
any and all information, data or instructions received from CLIENT, and CIMR
shall have no responsibility or obligation whatsoever to investigate, verify or
confirm the same.
2.5. AVAILABILITY. Subject to normal adjustments due to personnel turnover,
equipment maintenance requirements, Forces Majeure, and similar considerations:
(i) Operating Services shall be available to Client during CIMR's customary
business hours in effect from time to time, and (ii) Operating Services
involving electronic information access only without participation of CIMR
personnel shall be available at all times other than (1) 5:00 p.m. every Sunday
to 7:00 a.m. the following Monday, (2) 3:00 a.m. to 7:00 a.m. every day, and (3)
maintenance downtime scheduled in advance upon at least fourteen (14) days prior
Notice to CLIENT. Maintenance downtime shall not be scheduled during the hours
of 7:00 a.m. to 9:00 p.m. on Monday through Friday, or 8:00 a.m. to 2:00 p.m. on
Saturday.
3. IMPLEMENTATION.
3.1. GENERALLY. CIMR and CLIENT shall cooperate in good faith and in a timely
manner to make available to CLIENT the Operating Services substantially in
accordance with the time tables and work plans developed from time to time in
accordance with Section 3.2 below. CLIENT shall cause its personnel (and the
personnel of its Affiliated Providers and Carve-Out Vendors) to cooperate fully
and promptly in the implementation and operation of the System for this purpose.
CLIENT acknowledges that CIMR'S ability to perform its obligations in respect of
implementation is dependent upon the timely and successful performance of the
tasks assigned to CLIENT pursuant to the implementation planning process
referred to in Section 3.2.
3.2. PLANNING. CIMR and CLIENT shall jointly conduct a project planning session
to identify the functions CLIENT chooses to perform on the System and CLIENT's
other plans for System utilization. CIMR and CLIENT shall jointly develop and
agree upon a written project plan as part of the
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implementation planning process. The Parties shall endeavor to complete the
preparation of such Plan within thirty (30) days after the Effective Date. Such
project plan will include assignment to CIMR and CLIENT of responsibilities for
completion of project tasks, establishment of schedules for the completion of
such tasks, establishment of an education and training plan, and establishment
of project coordination and communications procedures. CLIENT shall provide CIMR
full cooperation and all reasonable assistance in the joint development and
implementation of such plan, including without limitation allowing CIMR
reasonable access to CLIENT'S key employees to conduct planning interviews.
3.3. PROJECT MANAGEMENT. The CIMR Implementation Representative shall organize,
manage, direct and facilitate the implementation of the Operating Services and
other Services requested by CLIENT. The CIMR Implementation Representative shall
participate and assist in all of the phases of the implementation by
coordinating resources within CIMR and providing guidance to CLIENT. The CIMR
Implementation Representative shall be responsible for maintaining the project
plan (including any updates mutually agreed by the Parties), providing status
reports, defining the current status and any appropriate issues and scheduling
meetings between CLIENT and CIMR. Additionally, the CIMR Implementation
Representative shall assist in the implementation by acting as a resource to
perform various tasks such as requirement study interviews and document
preparation, customization planning, System testing, and consulting with CLIENT
on specific project tasks.
3.4. CLIENT REPRESENTATIVE. CLIENT shall designate one of its managers as its
full-time representative to work with the CIMR Implementation Representative on
all aspects of implementation. Such designee shall have the experience and
authority required for assisting the successful implementation of the Operating
Services. CLIENT shall direct the CLIENT Representative to cooperate fully with
the CIMR Implementation Representative and, shall require substantially all of
the CLIENT Representative's working time to be devoted to implementation of the
Operating Services.
3.5. FUNCTIONALITY SELECTION. Adding or deleting functionality to or from the
Operating Services shall be done only by a written amendment to this Agreement
duly executed by both Parties which modifies Schedule 1.20 accordingly. CIMR
reserves the right to adjust the fees payable hereunder in respect of any such
amendment provided such fee adjustment is reflected in such amendment.
3.6. STATUS REPORTS. Throughout the implementation phase, CIMR shall provide
CLIENT with regular monthly status reports as to CIMR's assessment of progress
on the project.
3.7. CLIENT SUPPORT. further agrees to make available, at no cost to CIMR,
access to all equipment and management, supervisory and other CLIENT personnel
as CIMR may reasonably require to perform its implementation duties hereunder in
a timely fashion. CLIENT agrees to provide CIMR's personnel, at no cost to CIMR,
reasonably adequate office space, furniture and telephones at CLIENT's location
for the performance by CIMR's employees of such of their assigned implementation
tasks as are required to be performed at CLIENT's location.
3.8. OTHER RESPONSIBILITIES.
(A) CLIENT shall be solely responsible for providing and maintaining the Access
Resources and all computer and/or telecommunications equipment, hardware
(including, without limitation, if required, servers, workstations,
printers, modems, cablings, and interface cards), and software required at
CLIENT site to establish and maintain a dedicated dial or lease line
circuit connecting the CLIENT Site, and otherwise fully implement the
Operating Services. All such hardware and software shall be in conformity
with all CIMR specifications as may be applicable thereto.
(B) Within thirty (30) days after the Effective Date CLIENT shall fully and
accurately complete and return to CIMR a System Input Questionnaire ("SIQ")
with respect to (i) each Benefit Plan, and (ii) each Provider
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Contract. CIMR shall provide CLIENT with the blank generic form of SIQ and
use the completed SIQs to prepare a System Input Form ("SIF") for each
Benefit Plan and Provider Contract. CIMR shall provide a copy of all such
SIFs to CLIENT. Unless and until CLIENT gives CIMR a Notice identifying
with particularity any inaccuracy in a SIF, CIMR shall be entitled to
treat all SIF data as accurate. CIMR shall correct inaccurate System data
within thirty (30) days after receipt of a Notice identifying such
inaccuracy with particularity.
(C) Each party shall be responsible for those tasks and services assigned to
it in Schedule 1.20.
(D) CLIENT shall be solely responsible for establishing and maintaining all
accounts and records, and complying with all federal and state regulatory
requirements, required in connection with its operations generally and the
administration of the Benefit Plan in particular.
3.9. ON-GOING IMPLEMENTATION. CLIENT may request from time to time that (i) SIF
data for additional Benefit Plans and /or Provider Contracts be installed on and
supported by the System, and (ii) amendments be made to Benefit Plans and/or
Provider Contracts already installed on and supported by the System. The
installation and support of an additional Benefit Plan, and the amendment of an
already installed and supported Benefit Plan, are subject to the reasonable
approval of CIMR. CIMR shall complete each such on-going implementation project
within a reasonable time after an SIQ and all other required information is
received from CLIENT.
3.10. HPS MIGRATION. As part of the Implementation Services, CIMR will provide
assistance as requested by CLIENT and approved by CIMR from time to time related
to CLIENT'S migration from its HPS system. CLIENT shall be solely responsible
for obtaining all required cooperation of HPS in connection with such migration,
including without limitation causing HPS to provide CIMR with copies (and
related format information) of all CLIENT electronic data files for providers,
networks, pricing, enrollment and membership, claims history, managed care data,
and other CLIENT information resident on CLIENT'S HPS system.
3.11. COMPLIANCE WITH THIRD PARTY RIGHTS. CLIENT shall be solely responsible for
ensuring that its requests of and directions to CIMR related to implementation
(including, without limitation, the HPS migration) comply in all respects with
the rights of third parties. CLIENT hereby agrees to indemnify, defend and hold
harmless CIMR and its directors, officers, employees, agents and other
representatives from and against any loss, expense, or other liability
(including without limitation damages payments and settlement payments) arising
out of or resulting from any claim, action or proceeding by any third party
(including, without limitation, HPS) related, directly or indirectly, to
implemenation of the System and attributable, in whole or in part, to a
negligent or otherwise wrongful act or omission of CLIENT.
4. SUPPORT SERVICES.
4.1. CUSTOMIZATION. Modifications of the System to satisfy customization
requests by CLIENT shall be performed only at CIMR's sole discretion and in
accordance with a written work plan mutually agreed to by CLIENT and CIMR
setting forth the scope of work, an estimated completion date and the fees to be
paid by CLIENT to CIMR for such services. CIMR reserves the right in its sole
discretion to decline to make any requested modification. CLIENT agrees that all
work product (including without limitation software coding documentation, and
design and methodology know-how) arising out of customizations, enhancements or
other modifications of the System developed by CIMR pursuant to this Agreement
or otherwise shall be the exclusive property of CIMR, regardless of whether
developed in conjunction with the use of the System by CLIENT, or jointly by
CLIENT and CIMR, or at CLIENT's expense in whole or in part. CIMR agrees that
access to and use of all such customizations, enhancements and modifications
shall be included in the license granted in Section 2.2 above.
4.2. TRAINING. Any training other than that referred to in Section 5.6 shall be
provided only by mutual written agreement between the Parties.
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4.3. TELEPHONE SUPPORT. During the times and in accordance with the procedures
and policies established by CIMR from time to time, CIMR personnel located at a
CIMR (or other) site shall be available to respond to questions from CLIENT (and
only CLIENT) related to System software operation. Only CLIENT personnel with
CIMR approved security access (and not Providers, Members or employers) shall be
entitled to receive such telephone support. CIMR shall not charge CLIENT any fee
for such telephone support. CIMR shall provide a toll-free telephone line for
CLIENT to receive support pursuant to this Section. CLIENT shall not use such
toll-free telephone line for any other purpose.
4.4. TEMPORARY ON-SITE SUPPORT. CIMR shall assign one of its CLIENT support
representatives to CLIENT's principal office in Heathrow, Florida for a period
of two weeks immediately following System implementation to answer questions
about using the System. No fee shall be charged for such services, but CLIENT
shall reimburse CIMR for the reasonable travel expenses (air fare, lodging,
meals, ground transportation, etc.) of the CIMR representative..
4.5 DATA MAPPING TO EXISTING DATA REPOSITORIES. CIMR shall provide up to 400
programming hours to map data to Client's existing data repositories on a one
time basis without charge.
5. FEES.
5.1. MONTHLY FEE. During the Term, CLIENT shall pay CIMR a monthly fee (the"
Monthly Fee") equal to the greater of (i) the "Minimum Monthly Fee" as defined
below, or (ii) an amount equal to the number of Members multiplied by the
applicable "Monthly Rate" set forth in Section 5.3. The number of Members and
the amount of the Monthly Fee for each calendar month shall be determined by
CIMR as of the fifteenth (15th) day of such month. The Monthly Fee for a
calendar month shall be due and payable on or before the last day of such month,
regardless of whether CLIENT is invoiced for such fee. Fee adjustments to reduce
the Monthly Fee for retroactive disenrollments shall be limited to one month,
even if the adjustment is greater than one month. Fee adjustments to increase
the Monthly Fee for retroactive enrollments shall include the entire enrollment
period without limitation of length.
5.2. MINIMUM MONTHLY FEE. The "Minimum Monthly Fee" for any month is determined
as follows:
(a) If the total number of Members for the month is equal to or greater
than 45,000, the Minimum Monthly Fee is zero.
(b) If the total number of Members for the month is less than 45,000
and the total number of Medicare Members for the month is 20,000 or less, the
Minimum Monthly Fee is $320,000.
(c) In all other cases, the Monthly Minimum Fee is an amount equal to
$320,000, plus $15.00 for each Medicare Member for the month in excess of
20,000.
5.3. MONTHLY RATE. The Monthly Rate shall be as set forth in the table below
for each enrollment level indicated.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Number of Members Commercial PMPM Cost Medicare PMPM Cost
----------------------------------------------------------------------------------------------------
<S> <C> <C>
under 45,000 $9.60 $17.70
----------------------------------------------------------------------------------------------------
45,000 - 75,000 $9.08 $16.15
----------------------------------------------------------------------------------------------------
75,001 - 125,000 $7.32 $14.07
----------------------------------------------------------------------------------------------------
125,000+ $6.80 $13.59
----------------------------------------------------------------------------------------------------
</TABLE>
5.4 IMPLEMENTATION FEES. CLIENT shall not be charged by CIMR for Free
Implementation Services. All other Implementation Services shall be chargeable
to CLIENT under Section 5.5.
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5.5. HOURLY FEES. Hourly fees (the "Hourly Fees") are payable by CLIENT in
respect of all Services pursuant to a prior written request or other
authorization of CLIENT, other than Free Implementation Services, Operating
Services and Services pursuant to Sections 4.3, 4.4 and 5.6. Hourly Fees shall
be invoiced monthly and shall be due and payable twenty (20) days after the
invoice is received by CLIENT. "Programming Services" and "Consulting Services"
(as defined below) shall be charged at the rates of $150 and $115 per hour,
respectively. All other services for which Hourly Fees are payable shall be are
charged at the rate of $75.00 per hour. The Hourly Fee rate shall be
automatically adjusted as of each anniversary of the Effective Date by the
percentage by which the Labor Rate for the calendar year just ended is greater
or less than the Labor Rate for the previous calendar year. "Programming
Services" and "Consulting Services" are those Services designated as such from
time to time by CIMR in its sole discretion.
5.6. INITIAL TRAINING FEES. During implementation cimr will conduct training
for a period (as requested by CLIENT) of up to three weeks for one to five
CLIENT personnel at a suitable CLIENT site to be mutually agreed upon. CLIENT
shall pay CIMR a fee of $1,000 per day for such training, and in addition, shall
reimburse CIMR for all expenses of CIMR'S training personnel in accordance with
Section 5.11. CLIENT shall be solely responsible for all travel, meals, and
lodging expenses incurred by CLIENT personnel in attending this training.
5.7. TELECOMMUNICATION COSTS. Client is responsible for all telecommunication
costs above $5,000 per month associated with System connectivity and
communication between any and all CIMR, CLIENT, Affiliated Provider or Carve-Out
Vendor sites. Communication costs incurred by CIMR on Client's behalf shall be
invoiced monthly and shall be due and payable thirty (30) days after the invoice
date
5.8. EXTERNAL NETWORK CLAIMS ADMINISTRATION FEES. If External Network Claims
exceed 15% of the total Claims volume for any given month, there shall be a
$5.00 per claim charge for each additional External Network Claim processed for
that month.
5.9. RECORD KEEPING AND AUDIT RIGHTS. All CIMR personnel shall keep written
daily time logs in respect of Hourly Fee Services performed. Each time log entry
shall briefly describe the Hourly Fee Services performed, and reflect in one-
hour increments the time expended in performing the Hourly Fee Services.
Invoices for Hourly Fee Services shall be accompanied by documentation
summarizing the hours worked. CLIENT shall have the right (exercisable no more
than twice during each calendar year), at its sole cost and expense, and at a
mutually agreeable time, to inspect and audit, through a mutually-selected
nationally recognized certified public accounting firm, CIMR's billing and time
log records and Hourly Fee computations.
5.10. EXPENSE REIMBURSEMENT. In addition to all other amounts or payments of
any kind due hereunder, CLIENT shall promptly reimburse upon demand all
reasonable out-of-pocket travel and living expenses incurred by CIMR personnel
in providing services under this Agreement so long as such expenses were
previously approved by CLIENT (which approval shall not be unreasonably
withheld), and in compliance with CIMR's internal expense reimbursement
policies.
5.11. TAXES ADDITIONAL. CLIENT shall pay all tariffs and taxes assessed or
levied by any governmental entity that are now or may become applicable to this
Agreement or measured by payments made under it or are required to be collected
by CIMR or paid by CIMR to tax authorities including interest assessments
thereon if such assessments are due to CLIENT's actions or inactions. This
provision includes, but is not limited to, sales, use, excise, gross receipt and
similar taxes, but does not include taxes based upon the net income of CIMR, nor
does it include ad valorem taxes in respect of property owned by CIMR, its
Related Persons, or its agents.
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5.12. CPU CHARGE. Where the use of the System by CLIENT or (on CLIENT's behalf)
pursuant to this Agreement exceeds two hours of mainframe CPU time per month,
such excess shall be charged to CLIENT at the rate of $10.00 per CPU minute. For
this purpose, CIMR shall measure CLIENT's mainframe CPU time usage in the same
manner as CIMR measures such usage for other CLIENTs and its own internal
purposes.
6. MUTUAL MARKETING SUPPORT.
6.1. REFERENCE ACCOUNT STATUS. CLIENT acknowledges and agrees that it has
received significant pricing and other concessions from CIMR in return for which
CLIENT agrees to act as a "reference account" for CIMR during the Term.
6.2. MARKETING SUPPORT OF CIMR. If contacted by a prospective customer of
CIMR, CLIENT agrees to communicate to such prospective customer the benefits of
the System and CIMR's Services promptly and in a manner favorable to CIMR. At
CIMR's written request with reasonable advance notice, CLIENT will allow
prospective CIMR customers to visit CLIENT's facilities to see live
demonstrations of the System and Services.
6.3. PROMOTIONAL SUPPORT. At least twice a year each Party will, if requested
by the other Party, provide one of its senior executives as a promotional
speaker at marketing seminars or other public relations events. The requesting
party shall reimburse the other Party for the reasonable travel, meals and
lodging expenses of the senior executive in questions consistent with the
expense reimbursement policies of the requesting Party.
7. SERVICE LEVEL COMMITMENTS.
7.1. DISASTER RECOVERY TESTING. CIMR shall provide disaster recovery services
and hotsite capabilities and shall test such capabilities at least on an annual
basis.
7.2. SERVICE LEVEL FAILURE. Commencing six months after the Commencement
Date, each occurrence of the following shall constitute a "Service Level
Failure": (1) the CICS Availability Percentage is less than 98% for two
consecutive months; (2) the CICS Response Time Average is more than two seconds
for two consecutive calendar months; (3) host disaster recovery testing is
unsuccessful in any twelve-month calendar period and re-testing within ninety
(90) days thereafter is also unsuccessful; (4) Process and Procedure Accuracy is
less than 97%; (5) Financial Accuracy is less than 99%; (6) 14-Day Claims
Turnaround is less than 90%; or (7) 30-Day Claims Turnaround is less than 99%.
Commencing six months after the Commencement Date, any occurrence of the
following shall constitute a "Major Service Level Failure": (1) the CICS
Availability Percentage is less than 98% for either (a) four consecutive
calendar months, or (b) eight calendar months in any twelve calendar month
period; or (2) the CICS Response Time Average is more than two seconds for
either (a) four consecutive calendar months, or (b) eight calendar months in any
twelve calendar month period. Notwithstanding the foregoing, neither a Service
Level Failure nor a Major Service Level Failure shall be deemed to occur in any
month in which CLIENT fails to fully and timely perform its responsibilities in
respect of the Operating Services in whole or in part.
7.3. CREDITS. For each Service Level Failure (as defined above), CIMR shall
pay to CLIENT $5,000.00. If any Failure continues to the next consecutive month,
CIMR shall pay to CLIENT $10,000 for such month, and $15,000 for each
consecutive month thereafter until the Service Level Failure has been cured.
Notwithstanding the foregoing, (A) CIMR's liability to the CLIENT during any
given month shall not exceed $15,000.00 regardless of the number of Service
Level Failures occurring in such month; and (B) CIMR's aggregate liability to
CLIENT under this Section 7.3 during the Term shall not exceed $250,000.00.
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7.4. EXCLUSIVE REMEDIES FOR SERVICE LEVEL FAILURES. The remedies set forth
in this Section 7 shall be Client's exclusive remedies for Service Level
Failures.
8. TERM AND TERMINATION.
8.1. BY CLIENT.
(a) Within (but not more than) thirty (30) days after a Major Service
Level Failure, CLIENT shall have the right to terminate this
Agreement immediately upon Notice and receive from CIMR
reimbursement of the lesser of (i) $500,000, or (ii) one-half the
reasonable direct out-of-pocket costs (i.e., costs reflecting
payments to independent vendors for goods or services directly
related to such transition, and not any allocation of general,
administrative, or overhead expense, or other indirect cost)
incurred by CLIENT to convert to an alternate System.
(b) CLIENT shall have the right to terminate this Agreement at any time
for any or no reason in its sole discretion upon one hundred eighty
(180) days Notice to CIMR.
8.2. BY CIMR
(a) If CIMR's legal counsel advises CIMR that there is a material risk
that the existence, continuance or performance under this Agreement
violates or conflicts with any applicable law or regulation
(including without limitation state or federal licensing
requirements), and such violation or conflict cannot be cured by a
modification or amendment of the Agreement that is mutually
agreeable to the Parties, or by a unilateral act of CIMR consistent
with the Agreement and acceptable in all respects to CIMR in its
sole discretion, CIMR shall have the right to terminate this
Agreement immediately by written notice to CLIENT, and CIMR shall
have no further obligations whatsoever under this Agreement.
(b) If the number of Members falls below one-half of the applicable
benchmark set forth in Section 5.3 for a period of three consecutive
months, CIMR has the right to terminate this Agreement in its sole
discretion upon thirty (30) days Notice.
(c) CIMR shall have the right to terminate this Agreement at any time
for any or no reason in its sole discretion upon one hundred eighty
(180) days Notice to CLIENT.
8.3. BY EITHER PARTY. Either Party shall have the right to terminate this
Agreement at its option upon Notice to the other Party if either Party is in
material breach of this Agreement, and has failed to cure such breach within a
reasonable time after having been given Notice of such breach (provided, that in
no event shall a period of less than ninety (90) days be deemed a "reasonable
time" for this purpose).
8.4 TERMINATION FEE. In the event CLIENT terminates this Agreement pursuant
to this Section 8.1(b), or CIMR terminates this Agreement pursuant to Section
8.2(b) or 8.3, CLIENT shall pay CIMR a termination fee in the amount of $500,000
if such termination occurs prior to the first anniversary of the Effective Date,
$400,000 if such termination occurs prior to the second anniversary of the
Effective Date, $300,000 if such termination occurs prior to the third
anniversary of the Effective Date, $200,000 if such termination occurs prior to
the fourth anniversary of the Effective Date, $100,000 if such termination
occurs prior to the fifth anniversary of the Effective Date, and no fee shall be
owed if such termination occurs thereafter. CLIENT agrees that this termination
fee is not a penalty, but represents a reasonable quid pro quo in respect of
such termination in light of the substantial investment made by CIMR of money,
key personnel time, lost business opportunities, and other resources in order to
fulfill its obligations under this Agreement.
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8.5 TRANSITION SERVICES. Upon termination of this Agreement for any reason
other than termination by CIMR due to CLIENT'S breach of any of its obligations
under Section 12, at CLIENT'S written request, CIMR shall provide reasonable
transition assistance chargeable as Hourly Fee Services under Section 5.5 during
(i) the period (if any) from the Notice of termination through the date of
termination, and (ii) the six-month period following the date of termination;
provided, however, CIMR shall not be obligated to perform transition Services at
any time during which any amount owed CIMR by CLIENT is past due. The scope and
timing of such transition Services shall be subject to the reasonable
availability of CIMR'S personnel during the period in question.
9. LIMITED WARRANTY. UPON TERMINATION OF THIS AGREEMENT FOR ANY REASON OTHER
THAN TERMINATION BY CIMR DUE TO CLIENTIS BREACH OF ANY OF ITS OBLIGATIONS UNDER
SECTION 12, AT CLIENTIS WRITTEN REQUEST, CIMR SHALL PROVIDE REASONABLE
TRANSITION ASSISTANCE CHARGEABLE AS HOURLY FEE SERVICES UNDER SECTION 5.5 DURING
(I) THE PERIOD (IF ANY) FROM THE NOTICE OF TERMINATION THROUGH THE DATE OF
TERMINATION, AND (II) THE PERIOD FOLLOWING THE DATE OF TERMINATION; PROVIDED,
HOWEVER, CIMR SHALL NOT BE OB___*. UPON TERMINATION OF THIS AGREEMENT FOR ANY
REASON OTHER THAN TERMINATION BY CIMR DUE TO CLIENTIS BREACH OF ANY OF ITS
OBLIGATIONS UNDER SECTION 12, AT CLIENTIS WRITTEN REQUEST, CIMR SHALL PROVIDE
REASONABLE TRANSITION ASSISTANCE CHARGEABLE AS HOURLY FEE SERVICES UNDER SECTION
5.5 DURING (I) THE PERIOD (IF ANY) FROM THE NOTICE OF TERMINATION THROUGH THE
DATE OF TERMINATION, AND (II) THE SIXMONTH PERIOD FOLLOWING THE DATE OF
TERMINATION; PROVIDED, HOWEVER, CIMR SHALL NOT BE OB___*. UPON TERMINATION OF
THIS AGREEMENT FOR ANY REASON OTHER THAN TERMINATION BY CIMR DUE TO CLIENTIS
BREACH OF ANY OF ITS OBLIGATIONS UNDER SECTION 12, AT CLIENTIS WRITTEN REQUEST,
CIMR SHALL PROVIDE REASONABLE TRANSITION ASSISTANCE CHARGEABLE AS HOURLY FEE
SERVICES UNDER SECTION 5.5 DURING (I) THE PERIOD (IF ANY) FROM THE NOTICE OF
TERMINATION THROUGH THE DATE OF TERMINATION, AND (II) THE SIXMONTH PERIOD
FOLLOWING THE DATE OF TERMINATION; PROVIDED, HOWEVER, CIMR SHALL NOT BE OB___*
CIMR warrants that the Services and products provided to CLIENT pursuant to this
Agreement shall not infringe the rights of any third party. CIMR MAKES NO OTHER
WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED, AS TO ANY PRODUCT OR SERVICE
PROVIDED BY CIMR TO CLIENT, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
10. LIABILITY LIMITATION.
IN THE EVENT OF ANY CLAIM AGAINST CIMR ARISING OUT OF OR RELATED TO THIS
AGREEMENT, OR ANY BREACH OF THIS AGREEMENT BY CIMR, REGARDLESS OF WHETHER SUCH
CLAIM IS BASED UPON TORT, NEGLIGENCE, CONTRACT, OR ANY OTHER LEGAL PRINCIPLE,
UNDER NO CIRCUMSTANCES SHALL CIMR BE LIABLE FOR (A) ANY INCIDENTAL, SPECIAL, OR
CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOST PROFITS),
OR (B) ANY DAMAGES RELATED TO OR IN RESPECT OF LOST OR CORRUPTED DATA OR DELAYS
IN PERFORMANCE. NOTWITHSTANDING ANY OTHER PROVISION OF THIS OR ANY OTHER
--------------------------------------------------------
AGREEMENT, IN NO EVENT SHALL CIMR'S AGGREGATE LIABILITY IN RESPECT OF ANY AND
- -----------------------------------------------------------------------------
ALL CLAIMS ARISING OUT OF OR OTHERWISE RELATED TO THIS AGREEMENT EXCEED AN
- --------------------------------------------------------------------------
AMOUNT EQUAL TO $500,000.00. The Parties acknowledge and agree that the warranty
- ---------------------------
and liability limitation provisions of this Agreement have been thoroughly
negotiated and reflect the Parties' mutual agreement concerning the allocation
of risks related to System performance failures or deficiencies. CLIENT further
acknowledges and agrees that these provisions are fair and reasonable and
constitute an essential inducement to CIMR to enter into the Agreement at the
fees and charges provided for herein, and that without such warranty and
liability limitation provisions CIMR would not have entered into this Agreement.
11. INDEMNIFICATIONS.
11.1. BY CLIENT. CLIENT shall indemnify, defend, and hold harmless CIMR and its
directors, officers, employees, agents and other representatives from and
against any damage, loss, expense or liability arising out of, or resulting
from, any third party claim, action or proceeding (including without limitation
12
<PAGE>
any claim or action alleging medical malpractice or false claim for
reimbursement) involving, directly or indirectly, the performance, quality,
characteristics, or CLIENT's use of, the System, the Services, or any other
product or service provided by CIMR hereunder. This indemnification shall apply
regardless of any wrongful act or omission or other fault attributable to CIMR
or any director, officer, employee, agent or other representative of CIMR.
CLIENT shall at all times maintain liability insurance reasonably satisfactory
to CIMR.
11.2. BY CIMR. CIMR shall indemnify, defend and hold harmless CLIENT from and
against any claim arising from the alleged infringement by the System of any
registered United States copyright, patent, or trademark, or the trade secret
rights of a third party, provided CLIENT promptly notifies CIMR in writing of
the suit or any claim of infringement and that CIMR is permitted to control
fully the defense and settlement of any claim or suit which defense or
settlement shall not adversely affect the rights or interests of CLIENT. CLIENT
shall have the right, at its own expense, to appear through counsel of its own
choosing. CIMR shall have the right to settle any such claim or suit on a basis
requiring CIMR to substitute alternative substantially equivalent computer
programs and supporting documentation, and CLIENT shall permit CIMR to replace
or modify any affected System component so as to avoid infringement, or to
procure the right for CLIENT to continue to use such items; provided, however,
that any such modifications or substitution shall neither impair in any manner
CLIENT's rights under this Agreement nor result in any additional costs to
CLIENT. CIMR shall have no obligation hereunder for or with respect to claims,
actions, or demands alleging infringement which arise solely by reason of
combination of non-infringing items with any items which are not System
components unless such combination was provided by or on behalf of CIMR.
12. PROPRIETARY RIGHTS OF CIMR.
CLIENT acknowledges and agrees as follows:
(A) CIMR shall possess and retain all right, title, and interest (including
without limitation all trade secret rights, copyrights and patent
rights) in and to the System and its component parts, including without
limitation (i) all software code and documentation, (ii) all manuals or
user information, (iii) the design and format of the input and output
screens, graphical user interface, and printable forms, reports and
other hard copy output incorporated in or generated by the System, and
(iv) all additions, enhancements, revisions, updates or other
modifications to the System or any part thereof, regardless of any fee
or charge paid by CLIENT to CIMR in respect of the design, creation or
use thereof. CLIENT shall not cause or permit removal or alteration in
any way of any Notice, legend or symbol denoting any copyright,
trademark, patent or other proprietary right or interest of CIMR
appearing on (i) any input or output screen or hard copy output
incorporated in or generated by the System, or (ii) any documentation,
manuals, brochures, or other written or printed materials of any kind.
(B) The System and its component parts, including without limitation the
process methodologies, design elements and other know-how related
thereto, constitute valuable proprietary information and trade secrets
of CIMR. CLIENT shall not disclose (nor permit any employee,
independent contractor, agent, or other person under its authority or
control, to disclose) to any person or entity, or allow any Person
access to, any such proprietary information or trade secrets in whole
or in part; provided, however, use of the System in accordance with the
terms and conditions of this Agreement shall be permitted for employees
of CLIENT and its Affiliated Providers in the ordinary course and scope
of their employment. CLIENT shall not cause or permit any part of the
System's software components to be reverse engineered, decompiled, or
disassembled. CLIENT shall not cause or permit the software,
documentation, or other information related to the System to be copied
or reproduced in any form or medium, in whole or in part. CLIENT shall
take such actions to preserve and protect CIMR's proprietary rights and
interest of confidentiality in and with respect to the System which
are, at a minimum, commensurate with those actions taken by CLIENT to
preserve and protect their most valuable trade secrets or other
proprietary or confidential information.
(C) CLIENT's confidentiality obligations to CIMR under this Agreement do
not apply to any information which (i) was lawfully and rightfully in
CLIENT's possession at the time of disclosure by CIMR and was not
acquired directly or indirectly from CIMR, (ii) was lawfully and
rightfully acquired by CLIENT from others who
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acquired it by proper means and had no confidentiality obligation to
CIMR with respect to same, or (iii) is now, or hereafter becomes,
through no fault of Client, part of the public domain by publication or
otherwise.
(D) CLIENT has no right to use the System or any part thereof except as
specifically granted under the license referred to in Section 2.2.
CLIENT shall not, directly or indirectly, take any action in derogation
of, or in conflict with, CIMR's rights in the System as set forth
above.
(E) CLIENT shall at all times cooperate fully in good faith and using its
best efforts to comply (and cause every employee or other agent of
CLIENT or any Provider Affiliate to comply) with CIMR's security
procedures for controlling access to cimr's electronic data Systems and
any and all data stored within such Systems. Without limiting the
generality of the foregoing, CLIENT shall Notify CIMR within
twenty-four hours after the termination of employment of any employee
of CLIENT or an Affiliated Provider who had any level of security
access to CIMR's electronic data Systems.
13. CONFIDENTIALITY AND NONSOLICITATION.
13.1. CONFIDENTIALITY. In addition to CLIENT's confidentiality obligations
under Section 12, each Party shall maintain in strict confidence each of the
following: (1) all terms and conditions of this Agreement; and (2) information
identified by one Party in a writing given to the other Party as "confidential"
where such information is not in the public domain, and is not otherwise
obtained or obtainable by the other Party through lawful means. For purposes of
this Section, a Party (the "Recipient") receiving information from the other
Party (the "Disclosing Party") shall have no confidentiality obligation with
respect to any information that documentary evidence shows:
(a) was in the public domain at the time the Disclosing Party
communicated such information to the Recipient;
(b) entered the public domain through no fault of the Recipient
subsequent to the time of the Disclosing Party's communication
thereof to the Recipient;
(c) was in the Recipient's possession free of any known obligation of
confidence at the time of the Disclosing Party's communication
thereof to the Recipient;
(d) was rightfully communicated to the Recipient by a third party free
of any known obligation of confidence subsequent to the time of
the Disclosing Party's communication thereof to the Recipient; or
(e) was developed by employees or agents of the Recipient
independently of and without any reference to any information
which the Disclosing Party disclosed hereunder.
13.2. CIMR USE OF AGGREGATE DATA. CIMR shall have the right to amass, retain
and use for any lawful purpose physician and patient data of CLIENT so long as
(i) the identification of CLIENT and individuals is removed from such
accumulation, and (ii) all such use is in full compliance with applicable
regulatory requirements.
13.3. NON-SOLICITATION. During the term of this Agreement and for a period of
one year following termination hereof, both Parties agree not to contract for or
retain, or offer to contract for or retain, whether as an employee, an
independent contractor, or otherwise, directly or indirectly, the services of
any individual who was an employee of the other Party (or a Related Person of
the other Party) at any time during the term of this Agreement.
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14. FORCES MAJEURE.
All periods of time specified for performance of obligations (other than
monetary payment obligations) by either Party hereunder shall be extended for a
period of time equal to any delay caused by a Force Majeure so long as the Party
claiming the benefit of such extension uses good faith and diligent efforts to
minimize the delay to the extent practicable.
15. ATTORNEY'S FEES.
If either Party shall commence an arbitration proceeding in respect of this
Agreement, or bring an action to enforce either (i) an arbitration award
hereunder, or (ii) this Agreement, the prevailing Party shall be entitled to
reasonable attorney's fees and costs.
16. ARBITRATION.
CIMR shall have the right to bring an action in any court of competent
jurisdiction and proper venue to enforce any right of CIMR under Sections 12 and
13. In connection with any such action CLIENT consents to the jurisdiction of
the United States district court for the District of South Carolina, agrees that
venue shall be proper in any division thereof, and agrees that service of
process upon CLIENT may be by United States mail. Any other controversy or claim
arising out of or related to this Agreement or the breach thereof, shall be
settled by binding arbitration by submission to three (3) arbitrators in
accordance with Commercial Arbitration Rules of the American Arbitration
Association (the "Rules"). If CLIENT commences the arbitration proceeding the
site of the arbitration proceeding shall be in Columbia, South Carolina. If CIMR
commences the arbitration proceeding the site of the arbitration proceeding
shall be Heathrow, Florida. Judgment upon the award rendered by the arbitrators
may be entered in any court of competent jurisdiction. The arbitrators may grant
any remedy or relief within the scope of the Agreement that they deem just and
equitable; provided however, the arbitrators shall have no authority to grant
punitive or exemplary damages.
17. WAIVER.
The failure of either Party hereto to insist upon strict performance of any of
the terms or conditions of this Agreement shall not be deemed to be a waiver of
any rights or remedies of such Party in respect of any other provision hereof or
in respect of any subsequent breach or default under such term or condition.
18. LATE PAYMENTS.
All delinquencies in amounts due under this Agreement shall accrue interest at
the per diem rate of one and one-half percent (1.5%) per month (or, if less, the
highest rate permitted by applicable law). All such accrued interest shall be
due and payable upon demand of CIMR, and in the absence of demand, on the first
day of each calendar month. In the event of any delinquency of sixty (60) days
or more, CIMR shall have the right, in its sole discretion, to interrupt
CLIENT's access to or use of any or all of the Operating Services and other
services hereunder. Notwithstanding any such interruption of service, CLIENT
shall remain liable for all amounts coming due hereunder without regard to such
interruption of service. CIMR's exercise of its rights under this Section 18 are
in addition to, and not in derogation of, all other rights and remedies
available to CIMR under this Agreement or at law or equity in respect of the
delinquency.
19. EFFECT AND BENEFIT.
This Agreement shall be binding upon, and inure to the benefit of, the Parties
hereto and their successors and permitted assigns. There are no third party
beneficiaries of this Agreement. Without limiting the generality of the
foregoing, it is expressly acknowledged and agreed by the Parties that neither
this Agreement, nor any act or omission of CIMR pursuant to this Agreement, is
intended to create any liability or responsibility of CIMR (whether pecuniary or
otherwise) to any employer, Member, Provider, or other Person.
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20. ASSIGNMENT
The Agreement may not be assigned (in whole or in part) by either Party without
the prior written consent of the other Party; provided, however, either Party
shall have the right to assign the Agreement to a Related Person without the
other Party's consent; provided further, however, any such assignment to a
Related Person shall not relieve the assignor of any obligation or duty provided
for in this Agreement.
21. ENTIRE AGREEMENT
This Agreement (including all Schedules and Exhibits hereto) constitute the
entire agreement between the Parties hereto respecting the subject matter hereof
and supersede and replace any and all prior agreements or arrangements between
the Parties whether written or oral.
22. AMENDMENT
This Agreement may not be amended or modified, in whole or in part, except
pursuant to a writing duly executed by both Parties.
23. RELATIONSHIP OF PARTIES
Nothing in this Agreement shall be construed to make either Party a partner,
joint venturer or employee of the other Party. Nothing in this Agreement shall
be construed to make CIMR responsible for complying with any disclosure,
reporting or other requirement of the Employee Retirement Income Security Act of
1974 (P.L. 93-406) or any regulation or rule thereunder in respect of any health
care plan or other employee benefit plan of any kind. CLIENT retains all final
authority and responsibility for its operations, the fulfillment of its
obligations to all employers and Members, its administration of all Benefit
Plans, and its relationships with all Providers and other contractors. CLIENT
acknowledges and agrees that CIMR is acting merely as a ministerial agent for
CLIENT in performing any Services under this Agreement affecting employers,
Members, Providers, or other third parties.
24. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of South Carolina.
25. ACCEPTANCE
This Agreement shall not be binding upon CIMR unless and until the Agreement is
first signed by CLIENT, returned to CIMR'S principal office in Columbia, South
Carolina, and then signed on behalf of CIMR by CIMR'S Chief Executive Officer or
Chief Operating Officer.
[SIGNATURE PAGE ATTACHED]
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IN WITNESS WHEREOF, the Parties have duly executed, sealed and delivered
this Agreement as of the 26/th/ day of March, 1999.
Notice Address: COMPANION INFORMATION MANAGEMENT
- --------------
RESOURCES, INC.
Companion Information
Management Resources,
Inc. By:_________________ (SEAL)
P. O. Box 100115 Title:_______________________
Columbia, SC 29202
Attn: John Tempesco
e-mail: [email protected]
with copy to (which copy shall not itself
constitute adequate notice):
Duncan S. McIntosh, Esquire
Senior Deputy General Counsel
Blue Cross and Blue Shield of South Carolina
I-20 at Alpine Road
Columbia, South Carolina 29219
e-mail: [email protected]
Notice Address: SUNSTAR HEALTHPLAN, INC.
- --------------
Sunstar Health Plan, Inc.
300 Internation Parkway, Suite 230 By: ________________________ (SEAL)
Heathrow, FL 32746 Title:_____________________
Attn: Jack Shields
------------
with copy to (which copy shall not itself
constitute adequate notice):
_______________________
_______________________
_______________________
[e-mail]
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SCHEDULE 1.1: ACCESS RESOURCES
------------------------------
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SCHEDULE 1.20: OPERATING SERVICES
----------------------------------
CONTENTS
1.0 DEFINITIONS ..................................... 1
2.0 PROVIDER RELATIONS .............................. 5
3.0 MEMBER SERVICES AND ENROLLMENT .................. 9
4.0 CUSTOMER SERVICE ................................ 13
5.0 REIMBURSEMENT MANAGEMENT ........................ 14
6.0 REPORTING........................................ 17
7.0 MEDICAL MANAGEMENT............................... 19
8.0 FINANCE.......................................... 20
9.0 SECURITY......................................... 21
10.0 UNDERWRITING..................................... 22
EXHIBIT A - DELIVERABLE TIME FRAMES.................... 22
EXHIBIT B - REPORT NAMES............................... 23
This Schedule is a summary description of the Standard Operating Services and
the related System functionality available to Client under the Agreement. It is
not a comprehensive or definitive statement of System functionality or
capability. cimr reserves the right to modify the System as and when cimr deems
appropriate. Client must provide certain information to cimr or complete certain
other tasks (collectively, the "Deliverables") before many System functions can
be implemented. Similarly, Client must provide certain Deliverables to cimr on
an on-going basis in order for the System to reflect up-to-date information.
Exhibit A lists some (but not all) important Deliverables, and the time by which
cimr must receive the Deliverable to initially implement or on an on-going basis
update - the System ("Time Frames").
1.0 DEFINITIONS
For purposes of this Schedule, the following terms shall have the following
meanings:
"APPROPRIATE SETTING" means the level and location of care clinically necessary
to produce a quality outcome. Examples of appropriate settings include emergency
rooms, acute care centers, primary care centers, self care, nurse directed home
care, inpatient hospitalization, ambulatory surgical centers, nursing homes, and
rehabilitation centers.
"AUDITABLE" means the ability to track data entry, edit, and update functional
processes to the individual user based on sign on security.
"AUTHORIZED" means possessing authority and system access to act on behalf of
Client. The authority can be granted by Client or by cimr on behalf of Client.
"CASE MANAGEMENT" means monitoring, planning and coordinating treatment rendered
to Patients with conditions requiring high cost or extensive services. Case
management is intended to facilitate the most appropriate and cost effective
course of treatment in an appropriate setting.
"CASE MANAGER" means the person assigned to provide case management, usually a
registered nurse.
"CLINICAL PROTOCOLS" means a scientifically tested and medical staff approved
method of treatment for diagnostic conditions based on severity of illness,
co-morbid circumstances, and symptomatic assessment and evaluation.
"CONCURRENT REVIEW" means a third party review of the medical necessity, level
of care, length of stay, appropriateness of services and discharge planning for
Patients in health care facilities. As opposed to prospective and retrospective
reviews, concurrent reviews are conducted at the time the Patient is being
treated.
"DATA ENTRY" means the functional process of creating a new data base record
within the System.
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"DATA EDITING" means the functional process of changing data in an existing data
base record within the System.
"DATA UPDATING" means the functional process of updating information already
contained in a data base within the System that results in the creation of a new
record and may result in storage of existing data as history.
"DEMAND MANAGEMENT" means any mechanism put into place by the Payor, Client, or
cimr which reduces the inappropriate use of health care services by those
seeking health care, increases compliance with a medical regimen by Patients
with chronic diseases, or increases Patient satisfaction without a Provider
encounter.
"DEMOGRAPHIC INFORMATION" means a statistical description of life, health,
and/or social factors of population such as age, gender, income, birth, death,
marital status, and employment.
"DIAGNOSIS" means the identification of a disease, medical condition or injury
from its signs and symptoms.
"DME" means durable medical equipment.
"ELECTRONIC INTERFACE" means the ability of the System to transfer data between
it and a computer System of Client or Carve-Out Vendor without human
manipulation.
"ENCOUNTER" means any Patient to Provider interaction for which a medical record
entry is made.
"ENCOUNTER FORM" means an itemized statement of services provided by a health
care Provider for an enrollee, usually for a set of services within a specific
time period such as a hospitalization, course of physical therapy treatment, or
outpatient office visit. It is submitted to a Health Care Plan as a means of
utilization measurement.
"ENROLLEE" means a Patient who has health care coverage which requires the
selection of a PCP, typically in a Health Maintenance Organization (HMO).
"ENROLLMENT" means entering the enrollee to PCP affiliation into the System.
"GLOBAL FEE" means a negotiated agreement between a Payor and Provider to
include all charges for an episode of care into a single reimbursable expense.
Examples of a global fee include an all inclusive rate for institutional and
professional fees associated with a cardiac catheterization or maternity
services. This fee can include inpatient and outpatient charges.
"GROUP PRACTICE" means the organization of a group of licensed health care
Providers as a partnership, a professional corporation or a not-for-profit
corporation in order to share facilities and personnel as well as earnings from
their practice. The Providers comprising the practice may represent either a
single specialty or a range of medical and surgical specialties.
"HEALTH CARE INSURANCE COVERAGE" means a risk management program offering an
opportunity to share the costs of possible economic loss from illness, injury,
and/or health maintenance through a legal document or contract which contains
all the conditions, limitations, and terms of liability. This term includes
insurance policies which pay before any other insurance (primary), insurance
policies which pay only after other policies (secondary), insurance policies
which pay a set rate per day of hospitalization regardless of other policies
(hospital confinement indemnity), and policies designed to pay after all other
policies are exhausted (supplemental).
"HEALTH SCREENING" means any application of diagnostic technology applied over a
segment of a Patient population determined to be at risk, to detect diseases or
the propensity to contract diseases.
"INTEGRITY OF DATA" means the state in which data is complete and uncorrupted.
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"MEDICAL NECESSITY" means health care treatment that is appropriate and rendered
in accordance with generally accepted standards of clinical practice.
"MEDICAL OVERSIGHT COMMITTEE" means an appointed or elected subset of physicians
within a network or panel of physicians which reviews health care provided by
its Members and provides counsel, approves guidelines, and recommends
disciplinary action.
"NETWORK" means a group of Providers that mutually contract with Payors to
provide health care services to Patients of a specific Health Care Plan. The
contract determines the payment method(s) and rates, utilization review controls
and target utilization rates by Health Care Plan Patients.
"OUTCOME" means the health status of a patient as a result of health care
intervention, including both clinical findings and patient perceived lifestyle
changes.
"PARA-PROFESSIONAL" means those persons trained in the medical profession
without a license to practice independent of a licensed professional, such as
physician assistants.
"PASSWORD PROTECTED" means System data whose access from a workstation is
limited by the sign on code and password combination. If the sign on code and
password are not entered correctly, access to the data or function is not
allowed. Enter, edit, and view functions can be password protected at various
levels. Assignment of sign on and passwords is controlled by Client and cimr
personnel.
"PATIENT" means any person presenting to a health care Provider for health care.
"PATIENT IDENTIFICATION NUMBER" means the unique number assigned to the Patient
within the System which identifies the person as entitled to health care
coverage.
"PAYOR" means the party who pays or promises to pay on behalf of the Patient for
health care benefits received. Examples of Payors include Patients, insurers,
third party Payors, third party administrators, self insured employer
coalitions, self insured businesses, primary care Provider (under capitated
agreements), and government agencies (Medicare, Medicaid, CHAMPUS).
"PCP" means a primary care physician under the relevant Health Care Plan who
serves as an enrollee's entry way into the health care System.
"PERCENT OF PREMIUM" means a method of paying and charging for health services
in which a Provider is paid a fixed amount as a percent of the contract rate for
each primary recipient of a health care insurance contract, usually monthly. The
payment covers all services provided regardless of the extent or value of those
services.
"POLICYHOLDER" means the owner of the health insurance policy. In the context of
group insurance, the policyholder is the legal entity (employer, union, trustee,
creditor) to whom an insurer issues a contract.
"PRE-CERTIFICATION" means the procedures to determine the medical necessity of
non-emergency health care procedures and admissions. The Patient and/or Provider
must notify the review entity about the planned procedures before they are
performed or before a planned admission for hospitalization.
"PREVENTIVE HEALTH CARE PROGRAMS" means any program covered by the Health Care
Plan designed to (I) increase the compliance rate of immunizations or preventive
programs such as, prenatal care, or (II) health screenings, Patient education,
fitness programs, or wellness programs designed to improve the health status of
Patients.
"PRIVACY OF INFORMATION" means the restriction of personal information to those
with a need to know in compliance with the Privacy Act of 1974 and all other
applicable law.
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"REFERRAL MANAGEMENT" means steering Patients to the most economically
advantageous level and source of care within the guidelines of the Payor and/or
Client. Payor rules always take precedence in this subfunction to increase the
probability of reimbursement.
"REGISTRATION" means the entry of Patient identification data into the System.
"SPECIALTY/SPECIALIST" means a physician having advanced training and education
in the form of a residency or fellowship in a particular disease or organ
System.
"TRANSACTION" means an exchange of information from the System and a computer
System of Client or the Payor or Carve-Out Vendor, or the striking of the enter
key on the System for input or retrieval of information within the System.
"THIRD PARTY LIABILITY" means liability under an insurance policy other than the
patient's primary health insurance policy (e.g. liability for accidental or
work-related injury or illness under a general liability insurance policy or
workers compensation insurance policy.)
"UNINSURED" means a Patient without health care insurance coverage.
"UTILIZATION MANAGEMENT" means the mechanisms put into place by Client, the
Payor, or cimr to manage the consumption of health care to appropriate levels
based on the use of clinically validated health care protocols, guidelines,
and/or standards. Functions include preliminary evaluation, concurrent review,
and discharge planning for inpatient care and pre-authorization, protocol
compliance reviews, retrospective reviews, and referral algorithms.
"WITHHOLDS" means a portion of any prepaid amount (usually a capitated rate or
percent of premium) held back to insure Client against unforeseen medical risk
within the population being served.
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2.0 PROVIDER RELATIONS
These processes deal with development, management, and monitoring of the CLIENT
network of Affiliated Providers. All activities will be linked together by a
unique Affiliated Provider identification number. The functional processes of
viewing and editing/updating within this function are password protected to
maintain the privacy of information and the integrity of the data. Affiliated
Providers for which information will be stored includes, but is not limited to:
physicians, para-professionals, hospitals, durable medical equipment suppliers,
pharmacies, outpatient facilities, long term care facilities, etc. The
information includes the multiplicity of medical management and financial
relationships of the Affiliated Providers to each other, CLIENT, payors and
patients, as well as the medical management and financial relationships of
CLIENT with payors, patients, and other Providers.
SERVICES:
CIMR shall:
. enter Affiliated Provider information into the System once and update as
necessary for each Affiliated Provider.
. provide the CLIENT with the Affiliated Provider information needed to be
collected for claims processing. This includes information for the
Affiliated Provider information sheet and credentialing data.
. be available to assist with training Affiliated Provider personnel on CIMR
Systems upon mutually agreeable terms.
. enter, update and/or edit the information gathered and provided by the
CLIENT.
CLIENT shall:
. be responsible for developing (with CIMR's assistance) Affiliated Provider
information sheets.
. designate a person to complete the Affiliated Provider information
sheet and to authorize changes to Affiliated Provider data.
. be responsible for network development. This includes recruiting,
contracting, and Affiliated Provider education.
. be responsible for distributing and collecting Affiliated Provider
information sheets to record the information needed by CIMR to enter
Affiliated Provider information into the CIMR System. This also includes
providing CIMR with credentialing information to the extent needed for
claims processing. All requested information will be provided to CIMR 30
days prior to the effective date of the addition of the Affiliated Provider
to the network.
SYSTEM: the automated System has the ability to store information on every
Affiliated Provider.
Items entered in this subfunction are:
. Demographics
- Affiliated Provider name
- Provider type (hospital, physician, group practice, etc.)
- Practice address(es)
- Billing address(es)
- Correspondence address(es)
- Electronic mail address(es)
- Telephone numbers (office, business office, facsimile, etc.)
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- Point(s) of contact
- Social Security Number
- Employer Identification Number(s)
- Medicare billing number
- Electronic Fund Transfer (EFT) information
- Unique Provider Identification Number (UPIN)
- Category (institution, professional, supplier, etc.)
- Business structure (public, for profit, etc.)
- Gender
- Language
- Professional association(s)
. Information (including dates of affiliation, active flag, history) related
to the affiliation arrangement between CLIENT and the Affiliated Provider.
- Network affiliation(s)
- On call/covering relationship(s)
- Group affiliation(s)
- Hospital to physician affiliation(s)
- CLIENT to Affiliated Provider relationships
- CLIENT to payor affiliation(s)
- Affiliated Provider to payor affiliation(s)
- Network to network affiliation(s)
. Information (including dates of agreement / contract, history) related to
reimbursement arrangements for agreements can include
- Fee for service
- Fee schedule
- Discount off of charges
- Per diems
- Diagnostic Related Groups (DRGs)
- Relative Value Units/Resource Based Relative Values
- Provider withholds
- Pay provider direct
- Pay CLIENT
- Medicare assignment/accepting
- CHAMPUS assignment/accepting
The automated System has look-up capabilities by name, phonetic name, Provider
identification number, zip code, location, provider type, specialty, and
network. The look-up can be restricted with the same variables and may include
sex and language restrictions as well. Individual provider displays include:
- Provider summary
- Demographics detail
- Affiliations summary and detail
- Pricing summary and detail
- Credentials/licensure summary and detail
2.1 ENROLLMENT CAPACITIES The process of identifying Affiliated Providers
---------------------
serving as PCPs and entering information pertinent to their status.
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SERVICES:
CIMR shall:
. enter, update and/or edit enrollment information gathered from the
Affiliated Providers payors, contracts, or other sources.
CLIENT shall:
. designate a person to complete the enrollment capacity information and to
authorize changes to the same.
. provide all necessary information to CIMR to establish enrollment targets.
SYSTEM:
The automated System has the ability to store information associated with the
Affiliated Provider's designation as a PCP. The information will include but not
be limited to:
- PCP identification flag
- Accepting new patient flag
- Location restrictions
- Gender restrictions
- Age restrictions
- Language of preference
2.2 ELECTRONIC COMMUNICATIONS CIMR is capable of receiving claims electronically
-------------------------
in national standard formats. Additionally there are communication requirements
for the CLIENT to connect with CIMR. The CLIENT is responsible for
communications expenses incurred as a result of interfacing with CIMR Systems.
CLIENT shall reimburse CIMR for all expenses associated with communicating with
Providers.
2.3 INQUIRY TRACKING - The functional process of entering any interaction with a
----------------
Provider, patient, payor, CLIENT, or other customer.
SERVICES:
CIMR shall:
. use the System to track interactions between CIMR and Members, patients,
Providers and the CLIENT.
CLIENT shall:
. use the System to track interactions between CLIENT and Members, patients,
Providers and CIMR.
. CLIENT's staff Member answers the phone, records the information and closes
the inquiry after the issue is resolved.
SYSTEM:
The automated System has the ability to store inquiry information and associate
it with every patient served by CLIENT. Information can be entered at the time
the interaction occurred (usually a telephone call). The System tracks
outstanding inquiries from onset to resolution, age them by color coded displays
and stores the results in history. The System can also identify key customers
for which CLIENT desires to expedite resolutions.
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Items entered in this subfunction are:
- Source of inquiry
- Employee receiving, responding, and responsible for inquiry
- Date and time of inquiry, status changes and follow-up due date
- Reason for inquiry
- Synopsis of transaction
- Status
- Priority
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3.0 MEMBER SERVICES AND ENROLLMENT
These functions deal with interactions between CLIENT/Client Affiliates and
Patients covered under this contract.
SERVICES:
CIMR shall:
. enter Member information based on applications provided by the CLIENT.
. produce membership lists for PCPs.
. produce ID cards, stuff envelopes with desired materials and mail to
Members.
. maintain and update benefits on the System to include detailed rules
for processing claims.
CLIENT shall:
. provide membership applications to CIMR at least 30 days prior to the
effective date of membership
. designate a person to complete the Member enrollment information and to
authorize changes to the same.
. provide all necessary information to maintain the membership in a
current manner within the System.
. design and produce all materials for Member mailings. These will be
dropped shipped to CIMR for distribution.
. provide all information required by CIMR on benefit structure,
effective dates, billing rates and benefit information. This
information is needed at least 90 days before the effective benefit
date.
SYSTEM:
All subfunctions and functional processes within this function will be linked
together by Member identification number and the person designated by the
employer as the primary recipient of health insurance policy proceeds (typically
the employee). The information entered will have auditable view and/or edit
capabilities by every authorized representative of CLIENT and the Affiliated
Providers. Therefore, all Member services information will be entered once and
updated as necessary. The functional processes of viewing and editing/updating
will be password protected to enhance the privacy of information and the
integrity of the data.
3.1 REGISTRATION - The process of entering, storing and accessing patient
identification and demographic information for the population served by CLIENT.
SERVICES:
CIMR shall:
. enter and/or verify the information provided by CLIENT.
CLIENT shall:
. provide CIMR with all patient population information the CLIENT wishes
to have entered and stored in the automated System.
9
<PAGE>
SYSTEM:
The automated System has the ability to load, update and store patient
identification information on every patient.
Such information may include, without limitation:
- Patient name (first, last, middle initial, and generation)
- Insurance identification number
- employer telephone numbers
- Subscriber address and telephone numbers
- Gender
- Date of birth
- Age
- Relationship to subscriber
- Dates of coverage
3.2 ENROLLMENT - The process of entering, storing and accessing patient
----------
identification information for the sub-set of the population selecting coverage
from a health care plan that requires the selection of a Primary Care Physician.
SERVICES:
CIMR shall:
. enter update and/or edit the information gathered from the patients,
CLIENT, payor, or other sources. During patient inquiries or any other
CIMR-patient interaction, CIMR personnel may verify the on-line data
and update it as necessary.
The primary source of calls to CIMR will be from the CLIENT.
CLIENT shall:
. during patient inquiries or any other CLIENT-patient interaction,
CLIENT personnel will verify the on-line data and update within their
capabilities. The CLIENT will receive the preponderance of calls as the
first level of customer support.
System: In addition to the registration information collected for the entire
patient population, the System will load, update and store specific patient
information relevant to their health care plan in an on-line or batch mode.
Items entered in this subfunction include but are not limited to:
- Primary Care Physician identification
- Effective dates
- PCP history
3.3 ELIGIBILITY VERIFICATION - The process of determining the health care
------------------------
insurance coverage eligibility of the patient presenting for care.
SERVICES:
CIMR shall:
. maintain eligibility status within the automated System based on
information provided by the CLIENT.
10
<PAGE>
CLIENT shall:
. verify patient eligibility using the System as needed.
SYSTEM:
The System will search existing registration and enrollment data to determine
the status of the patient's eligibility on-line, real time at the time of care
delivery. The System will respond with demographic information and then display
payor information, coverage, enrollment, and Patient co-payment and co-insurance
information.
3.4 INSURANCE COVERAGE INFORMATION - The process of entering information related
------------------------------
to any patient insurance coverage which would pay for health care. The Operating
Services support standard HMO and point-of-service managed care products.
Support for additional products (ie., indemnity or open access products) must be
agreed upon in advance by CIMR.
SERVICES:
CIMR shall:
. provide the benefit check list to the CLIENT.
. maintain files that have benefit coverages for each Member.
CLIENT shall:
. provide CIMR with employer group information needed to process claims.
. provide CIMR with benefit contract coverage information on the
prescribed benefit check list.
SYSTEM:
The System will store summary health care plan benefits, co-payments,
utilization management requirements, and third party liability data for each
patient.
. The System maintains information for student dependent and coordination
of benefits information. This information is used in the claims
processing function.
. Items entered in this subfunction include but are not limited to:
. Benefits Information
- Summary of covered benefits
- Non-covered benefits
- Benefit limitations (life time benefit maximums, procedure
limitations, mental health maximums, etc.)
. Cost Sharing Information
- Inpatient and outpatient deductible amounts
- Co-insurance
- Co-payments
- Out of pocket limits
11
<PAGE>
. Utilization Management Requirements
- Pre-approval requirements
- Provider network restrictions
- Clinical protocols for medical necessity
. Third Party Coverage
- Patient identification
- Patient status (i.e., self, subscriber or family Member)
- Relationship to primary insurance
- Related insurance information (group identification, plan
coverage, etc.)
- Dates of coverage
- Points of contact if available
. Procedure coding and diagnostic terminology with annual updates from
appropriate governing body.
3.5 HEALTH CARE FINDER - The process of searching for Providers within and
------------------
outside of the CLIENT networks based on geographic location, specialty,
subspecialty, network affiliation, name, and/or other factors in response to
requests from CLIENT, Members, or Affiliated Providers. The information entered
will have view only capabilities by every authorized representative of CLIENT
and the Affiliated Providers.
SERVICES:
CIMR shall:
. maintain the Provider information in a current status from information
provided by the CLIENT.
CLIENT shall:
. use the System for Health Care Finder functions and will provide the
needed Provider information to keep the data current.
SYSTEM:
The System will search stored Provider information and display:
- Provider name
- Provider number
- Specialty
- Provider type (i.e. hospital, ambulatory surgery center,
independent practice, group practice)
- Primary Care Provider indicator
- Network affiliation
- Address
- Phone number
- New patient acceptance indicator
- Language indicator
- Age restrictions
- Effective dates of affiliation
The System will provide a link between the patient and Provider files to display
only Providers the patient is eligible to use based on their Benefit Plan
coverage. The System will also have the ability to display the Providers meeting
the search criteria in random order (to equally distribute referrals) or based
on CLIENT developed algorithms (to steer referrals to specific providers).
12
<PAGE>
4.0 CUSTOMER SERVICE
The processes of receiving inquires, both telephonic and written from Members
and Providers. The inquiries will cover a full range from claim status, entitled
benefits, payment status, co-payments and deductible amounts, special rules for
referrals and provider contract issues. Technical support issues are not
considered to be customer service questions.
SERVICES:
CIMR shall:
. provide support to CLIENT by answering technical questions or problems
dealing solely with connectivity or System availability and not respond
as advisor on System functional questions.
. provide the System which CIMR will use to track inquiries and research
questions to provide answers to Affiliated Providers and Members. This
will include automated letter generating capability, inquiry tracking,
tracking of appeals and referral to Affiliated Providers.
. provide access to a Voice Response Unit (VRU), once the number of
Members exceeds 10,000, via a CIMR funded toll free line to the CLIENT,
Affiliated Providers, and Members.
. provide outbound calling to newly enrolled beneficiaries to review
fulfillment information and answer questions.
. adjust claims based on appeal outcomes reported to CIMR by CLIENT.
. perform appeals research and provide CLIENT's medical review staff
information for appeal determination.
. produce templates for automated System generated letters according to
design specifications provided by CLIENT.
. staff to provide customer service to Affiliated Providers and Members.
This includes having staff to use the System to track inquiries and
research questions to provide answers to Affiliated Providers and
Members. Staff will use the automated letter generating capability,
inquiry tracking, tracking of appeals and referral to Affiliated
Providers.
CLIENT shall:
. design and administer an appeals process and inform CIMR appeal
outcomes requiring claims adjustments.
. design formatted letters which CIMR will enter into the System for the
CLIENT's use.
SYSTEM:
The Customer Service function utilizes several components of the System.,
including, but not limited to the following:
the claims System
the automated letter generating System
the Member System
the inquiry tracking System
the provider System
benefit files Systems
13
<PAGE>
the managed care System
5.0 REIMBURSEMENT MANAGEMENT
These functions deal with CLIENT's collecting and storing CLIENT's
claims/encounter form data and claims payment operations. Processing of this
data will be based on the payment arrangement between CLIENT and the Provider
within the confines of the Payor contract. Deductibles, lifetime maximums, etc.
which are directly related to the Payor contract associated with each patient
will be applied to the payment calculation. The Provider will collect any
co-payment, thus the co-payments are taken into consideration when originally
setting and loading the specified payment rates to the Provider's agreement
table.
5.1 - CLAIMS/ENCOUNTER FORM DATA ENTRY - The processes of collecting, editing
--------------------------------
and entering claims/encounter related data for tracking patient utilization for
billing and payment purposes, as well as reporting. In addition, this data can
be used to identify possible case management candidates. cimr can accept claims
submission data electronically or hardcopy, from the Affiliated Providers.
Transaction formats currently accepted by CIMR are Institutional UB92 and
professional HCFA 1500 claim formats. CIMR will edit the claims data for
accuracy and completeness prior to passing the claims to the claims adjudication
System. The functional processes of viewing and editing/updating are password
protected to maintain the privacy of information and the integrity of the data.
CIMR will provide a mechanism for viewing claims/encounter form data for all
patients. The inquiry screens display claim header and line item information for
institutional and professional claims. As a claim/encounter form is received,
the System performs a series of edits to validate completeness and search for
detectable errors before processing the claim.
SERVICES:
CIMR shall:
. prescribe the format for transmission of EMC claims
. receive EMC claims in the prescribed formats
. receive hardcopy claims and enter them into the System for payment
. assign a Document Control number to allow tracking of the claim
throughout the claims adjudication process.
. perform edits and subfunctions described in Section 5.3.
. adjudicate claims through resolution and payment, including the
issuance of an Explanation of Benefits and check imaging.
. conduct coordination of benefits, and perform certain fraud detection
checks.
. provide subrogation services through a third party.
CLIENT shall:
. pay subrogation costs incurred by CIMR on behalf of the CLIENT.
. conduct Quality Assurance activities.
. self funded accounts used by CIMR to pay claims shall be bonded.
. establish procedures to detect and reduce fraud
14
<PAGE>
. establish procedures for Affiliated Providers to electronically
transmit claims in the prescribed format to CIMR.
. establish procedures for CLIENT Affiliates to transmit hardcopy claims
to cimr.
. provide CIMR life time benefit limitations as of the determination date
for covered individuals to be used in processing claims.
. provide CIMR information required by CIMR to process claims under
special programs such as case management.
SYSTEM:
The System has the ability to capture patient utilization information on every
patient, either electronically from CLIENT/Client Affiliates office automation
System or by hardcopy. Items collected are:
- Patient and subscriber identification and demographic
information
- Provider identification number
- Dates of service
- Billed charges
- Diagnosis codes
- Procedure codes
- Medicare/other insurance coverage information, if applicable
5.2 - CARVE-OUT VENDOR SERVICES - This includes the process of receiving and
-------------------------
passing information to and from Carve-Out Vendors to adjudicate and track
claims.
SERVICES:
CIMR shall:
. load contract agreements and pricing schedules for the Carve-Out Vendor
and process claims in accordance with the agreement.
. provide Carve-Out Vendor enrollment information in CIMR's electronic
format.
. receive Carve-Out Vendor claims in CIMR's electronic format.
CLIENT shall:
. provide CIMR with agreements, pricing schedules and other information
necessary to process Carve-Out Vendor claims in accordance with the
agreements.
. relay CIMR electronic format information to the Carve-Out Vendors for
use within the contract between the Carve-Out Vendor and CLIENT.
SYSTEM:
The claims edit subfunction will have the following functional processes
associated with it:
. Validity - Values are checked to discover if data is valid for
the specific field being edited.
15
<PAGE>
. Consistency - Inter-field relationship (consistency) edits.
The failure of a consistency edit will result in posting of a
consistency edit error status code to the header or line item
in which the error is detected.
. Provider Validation - Provider data is edited against the
System database and provider information is posted on
individual line items.
. Procedure Validation - Determination of whether the procedure
codes on the claim/encounter form are valid for the type and
place of service being performed.
. Eligibility/Co-pays - The enrollment System will be accessed
to determine if the patient is covered for the specific time
periods and services on the claim.
. Authorization Matching - The System will determine if an
authorization is required for a specified service. If an
authorization is required, the System will attempt to match
the claim/encounter form to an authorization on file for the
dates of service and provider specified on the claim. If an
authorization is not present. the claim/encounter form will be
deferred or denied.
. Pricing - Provider agreement information will be accessed to
price each claim/encounter form according to the contract for
a specified Provider, network, and procedure. Certain pricing
data from the group contract will also be used in pricing the
line item service. The System will also look for special
pricing negotiated and entered into the System by the Case
Management staff.
16
<PAGE>
6.0 REPORTING
The System stores data in sequential files or informational databases as a
result of the processes performed within each function.
6.1 ACCESSING DATA - The CLIENT will have access to the data stream resulting
--------------
from the operations outlined in this Schedule. This provides the ability to
drill into the data to monitor key indicators and evaluate stratifications
involving the following areas:
- Membership
- Utilization
- Reimbursement
- Quality
- Operational
SERVICES:
CIMR shall:
. Provide the standard reports whose names are listed in Exhibit B.
CLIENT shall:
- - Be solely responsible for any wrongful or unlawful use of confidential
health care information provided in any medium by CIMR to CLIENT.
SYSTEM:
The automated System will produce and maintain the data sources for CLIENT to
use to produce the data files CLIENT will distribute to employer members.
17
<PAGE>
7.0 MEDICAL MANAGEMENT
Included in Medical Management are several functions. Referral management and
authorization, nurse triage and assessment, patient education, disease
management, and case management. CIMR services and Systems are capable of
conducting each of the above functions.
SERVICES:
CIMR shall:
. provide the training for CLIENT personnel on using the System as described
in the Section 5.6.
CLIENT shall:
. select medical management protocols which will be applied by CLIENT
manually.
. conduct all activities associated with medical management using CIMR
automated functions.
. be responsible for conducting surveys of Members and Affiliated Providers.
. fund travel expenses for their personnel to receive the training to operate
the System's medical management functions.
. Design and conduct the appeals and retro-authorization processes.
SYSTEMS:
The System has automated tools to assist CLIENT in conducting case management,
referral authorizations, precertifications, quality improvement initiatives, and
appeals management.
18
<PAGE>
8.0 FINANCE Billing, premium collection and reconciliation are functions which
must occur.
SERVICES:
CIMR shall:
. produce and distribute 1099 forms for the CLIENT.
. report to the CLIENT monthly listing and the amount of claims paid for the
prior month.
CLIENT shall:
. provide information on each employer group the CLIENT contracts with to
allow CIMR to establish the accounting mechanism to track deposits and
drafts upon the employer's funds.
. establish mutually agreeable procedures to insure funds are deposited
to the employer's accounts to cover checks written to pay claims.
. maintain all corporate financials and general ledger accounts.
. provide security satisfactory to CIMR to insure that all self funded
accounts from which CIMR pays claims are not overdrawn.
SYSTEM:
The automated System has the ability track premiums collected by employer
groups, reconcile amount due based upon eligible Members for that employer and
produce reports.
19
<PAGE>
9.0 SECURITY
The processes associated with not allowing access to data withing the System to
unauthorized users.
SERVICES:
CIMR shall:
. process all security actions received from the CLIENT's designated
individual.
. Provide the CLIENT with information needed
CLIENT shall:
. design procedures for granting access to the System.
. designate an individual to notify CIMR of changes in System security for
the CLIENT or CLIENT Affiliates.
SYSTEM:
The automated System has the capability to require all CLIENT staff desiring
access to the System to enter uniquely defined user IDs and password. The
password must be changed by the user every 30 days.
20
<PAGE>
10. UNDERWRITING
The process of analyzing a group to determine rates and benefits or to determine
whether a group should be offered health care coverage.
SERVICES:
CIMR SHALL:
- - perform medical underwriting based on CLIENT'S criteria which are
reasonably acceptable to CIMR
- - recommend forms and rating requirements as requested by CLIENT from time to
time to facilitate the underwriting process (provided, however, CLIENT
shall be solely responsible for deciding whether to follow any such
recommendations and for all consequences of such decision)
- - maintain a sufficient number of trained staff to process requests for new
quotes and renewal ratings in accordance with mutually agreed upon
turnaround time targets
CLIENT SHALL:
- - provide all information required to perform underwriting services
provide in PC spreadsheet format the rating methodology CLIENT wishes CIMR
to use, or permit CIMR to use CIMR'S current HMO specific rating
methodology
- - provide all required census data, claims experience data, geographic
factors, industry factors, etc. that are required to complete the
underwriting process
- - provide detailed benefit definitions acceptable to CIMR to use in the
underwriting calculations.
- - complete all responses to requests for proposals (RFPs) to groups
- - communicate rating information/changes/requirements to each group as
necessary
21
<PAGE>
EXHIBIT A
---------
DELIVERABLE TIME FRAMES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DELIVERABLE START-UP OF CONTRACT DELIVERABLE TIME FRAMES ON-GOING DELIVERABLE TIME FRAMES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NEW MEMBER APPLICATIONS INCLUDING PCP 90 DAYS PRIOR TO EFFECTIVE DATE OF MEMBER 30 DAYS PRIOR TO EFFECTIVE DATE
INFORMATION OF MEMBER
ENROLLMENT MATERIAL
90 DAYS PRIOR TO EFFECTIVE DATE OF GROUP
30 DAYS PRIOR TO THE EFFECTIVE DATE
OF GROUP
- ------------------------------------------------------------------------------------------------------------------------------------
EMPLOYER GROUP SETUP
GROUP DATA FORM 90 DAYS PRIOR TO EFFECTIVE DATE OF GROUP 45 DAYS PRIOR TO THE EFFECTIVE DATE
DETAIL BENEFIT INFO/SCHEDULE OF BENEFITS 90 DAYS PRIOR TO EFFECTIVE DATE OF GROUP OF GROUP
45 DAYS PRIOR TO THE EFFECTIVE DATE
OF GROU
- ------------------------------------------------------------------------------------------------------------------------------------
PROVIDER SETUP
DEMOGRAPHIC INFORMATION 90 DAYS PRIOR TO IMPLEMENTATION 30 DAYS PRIOR TO PROVIDER EFFECTIVE
NETWORK INFORMATION 90 DAYS PRIOR TO IMPLEMENTATION DATE
CONTRACT DATA 90 DAYS PRIOR TO IMPLEMENTATION 30 DAYS PRIOR TO PROVIDER EFFECTIVE
DATE
30 DAYS PRIOR TO PROVIDER EFFECTIVE
DATE
- ------------------------------------------------------------------------------------------------------------------------------------
PRICING
FEE SCHEDULES 90 DAYS PRIOR TO IMPLEMENTATION 90 DAYS PRIOR TO IMPLEMENTING NEW
PROVIDER SPECIFIC PRICING ARRANGEMENTS FEE SCHEDULES OR UPDATING EXISTING
90 DAYS PRIOR TO IMPLEMENTATION FEE SCHEDULES
30 DAYS PRIOR TO EFFECTIVE DATE OF
CONTRACT
- ------------------------------------------------------------------------------------------------------------------------------------
ALGS LETTER DRAFTS
COPIES OF ALGS LETTERS 60 DAYS PRIOR TO IMPLEMENTATION 30 DAYS PRIOR TO USE OF NEW/MODIFIED
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
DELIVERABLE INITIAL IMPLEMENTATION ON-GOING OPERATIONS TIME FRAMES
- ------------------------------------------------------------------------------------------------------------------------------------
VENDOR ARRANGEMENTS
DETAILED INFORMATION ON VENDOR ARRANGEMENTS 90 DAYS PRIOR TO IMPLEMENTATION 90 DAYS PRIOR TO CONTRACT EFFECTIVE
DATE
- ------------------------------------------------------------------------------------------------------------------------------------
CLAIMS PROCESSING
MEDICAL POLICIES/PROCEDURES 60 DAYS PRIOR TO IMPLEMENTATION 30 DAYS PRIOR TO EFFECTIVE DATE OF
CHANGES
- ------------------------------------------------------------------------------------------------------------------------------------
TRAINING
FOR ENTRUSTED CUSTOMER SERVICE 60 DAYS PRIOR TO IMPLEMENTATION
REPRESENTATIVES
FOR CHC PERSONNEL ON BEECH STREET PRICING
MODULE
30 DAYS PRIOR TO IMPLEMENTATION
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY
COMPLETE INFORMATION REGARDING INDIVIDUAL 60 DAYS PRIOR TO IMPLEMENTATION 30 DAYS PRIOR TO EFFECTIVE DATE OF
ACCESS TO SYSTEMS ADDITION/CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
EXHIBIT B
---------
NAMES OF STANDARD REPORTS
Cost Management Savings Report
Monthly Plan Savings Report
PPO Savings and Utilization
Type Service Claims Experience
Claims or Stop Loss Performance Report (Medical)
Claims or Stop Loss Performance Report (Dental)
Medical Claims Projection
Medical Claims Over $X
Medical Charges and Net Claims Paid
By Age Category and Claimant Type Reports
Hospital Inpatient Top 5 Type Service Graphs
Inpatient Hospital Stats Admissions By Day of Week
Inpatient Hospital Stat By Day of Week
International Classification of Diseases - Inpatient Hospital
Hospital Inpatient Statistics for Top 30 Diagnostic Groups By Payment
Hospital Inpatient Statistics for Top 30 Diagnostic Groups By Length of Stay
Medical Savings Paid Claim Detail
Hospital Outpatient Top 5 Service Graphs
Medical Savings Paid Claims Detail
Top Ten Hospitals
Claims Analysis by Provider Specialty
Top Ten Surgical Procedures
Top Twenty Professional Providers
Paid Claims Summary Report
Prescription Drug Utilization
Medical Charges by Age Category & Claimant Type
Medical Payments by Age Category & Claimant Type
PPO Medical Savings & Network Utilization Report
Medical Savings Paid Claims Detail - Hospital Inpatient
Medical Savings Paid Claims Detail - Hospital Outpatient
Medical Claims Over $X
Claims Analysis By Provider Specialty
Prescription Utilization (Claimant Age/Sex Breakdown)
Hospital Admissions by Day of Week (Graph)
Hospital Admissions by Day of Week
Type Service Report - Summary
Type Service Report - Hospital Inpatient
Hospital Inpatient Payment & Admissions - Top 5 (Graph)
Hospital Outpatient SVCS - Current & Prior - Top 5 (Graph)
Hospital Inpatient Payment & Admissions - Top 5 (Graph)
Hospital Outpatient SVCS - Current & Prior - Top 5 (Graph)
Cost Management Savings Report
Monthly Plan Savings Report
Top Ten Hospitals Ranked By Total Payment
Top Twenty Professional
Providers Ranked By Total Payment
Top Ten Surgical Procedures Ranked By Frequency
ICD-9 Diagnosis Category Inpatient Hospital Statistics
Hospital Inpatients Stats For Top 30 Diag Grps By Payment
Hospital Inpatients Stats For Top 30 Diag Groups By Los
Standard Operational Reports available to Companion HealthCare
23
<PAGE>
Exhibit 10.4
(Contract Period 01/01/99 - 12/31/99)
HEALTH INSURANCE BENEFITS FOR THE AGED AND DISABLED
(Contract With Eligible Organization Pursuant to
section 1876 of the Social Security Act)
CONTRACT (No. H1031)
Between
The Secretary of the Department of Health and Human Services,
who has delegated authority to the Administrator of the
Health Care Financing Administration, hereinafter referred to as HCFA
and
SunStar Health Plan, Inc.
(hereinafter referred to as the Organization)
The Secretary and the Organization, a health maintenance organization or
competitive medical plan which has been determined to be an eligible
organization by the Administrator of the Health Care Financing Administration
under CFR 417.406, agree to the following for the purposes of section 1876 of
the Social Security Act:
<PAGE>
(Contract # H1031) (Contract Period 01/01/99 - 12/31/99)
Article I
Term of Contract
The contract shall begin on January 1, 199 and end on December 31, 1999. The
contract will be automatically renewed for successive periods of one year unless
the Organization or HCFA gives written notice of intention not to renew the
contract at least 90 days before the end of the current period. (Additional
requirements concerning nonrenewal of contracts, binding on both HCFA and the
Organization, may be found at 42 CFR 417.492) This contract supersedes any
previous contract under sections 1833 or 1876 of the Social Security Act (the
Act).
ARTICLE II
Election of Payment Method
Under section 1876(a) of the Act of the Organization may elect a method of
payment for which it is eligible and qualified and will be accordingly governed
by the statute and regulations which pertain to that method. The Organization
agrees to receive payment:
(initial one selection below)
______ 1. On a risk basis under section 1876(g) of the Act, subject to the
provisions of the Article V;
X 2. On a reasonable cost basis under section 1876 (h) of the Act,
- ------
subject to the provisions of
ARTICLE VI AND ITS IMPLEMENTING REGULATIONS AT
42 CFR 417.530-417.576.
Select one option (see 42 CFR 417.532(c)):
_____ 1. (direct payment of Organization's
providers by HCFA)
_____ 2. (direct payment of Organization's
providers by the Organization
If option 2, lists names of providers to be
paid by the Organization:
------------------------
------------------------
(list others separately)
______ 3. On a risk basis under section 1876(g) for new Medicare enrollees
and payment on a reasonable cost basis for
unconverted, current non-risk Medicare enrollees,
subject to the provisions of Articles V and VI.
<PAGE>
Article III
GEOGRAPHIC AREA
The Organization agrees that the contract shall be effective for the geographic
area described in the attachment to this contract. (Modifications to the
geographic area during the period of the contract are governed by Article VII.)
Article IV
General Conditions
A. The Organization agrees to comply with the law, regulations, and general
instructions of the Health Care Financing Administration (HCFA) which
concern the participation of health maintenance organizations (HMOs) and
competitive medical plans (CMPs) in the Medicare program.
B. As part of its ongoing quality assurance program:
1. The Organization agrees to comply with the requirements for Peer
Review Organization (PRO) review of services furnished to Medicare
enrollees as set forth in Subchapter D of Chapter IV, Title 42, Code
of Federal Regulations 417.478(a).
2. The Organization shall furnish to the Peer Review Organization (PRO)
requested on-site access to or copies of patient area records and
other pertinent data, and permit the PRO of its subcontractor to
examine its operations and records as necessary for the PRO to carry
out its functions under the Act.
3. Each organization receiving payment on a risk basis will maintain a
written agreement with a utilization and quality control Peer Review
Organization with which HCFA has a contract under Part B of Title XI
of the Act for the area in which the Organization is located. In
accordance with sections 1154 (a)(4)(B) and (a)(14) of the Act, the
agreement must provide for the review of services (including both
impatient and outpatient services) provided by the organization
pursuant to this contract for the purpose of determining whether such
services meet professionally recognized standards of health care,
including whether appropriate services have not been provided or have
been provided in inappropriate settings. The agreement must also
provide for review by the PRO of all written complaints filed by
Medicare beneficiaries or their representatives about ht equality of
services provided by the Organization. The cost of such agreement will
be paid by HCFA directly to the PRO on behalf of the Organization.
<PAGE>
4. Each Organization receiving payment on a risk basis must ensure that
all hospitalization data required on HCFA Form 1450(UB-82) for
Medicate enrollees discharged between April 1, 1987 and July 31, 1988
is submitted to the fiscal intermediary or other HCFA designated
entity.
5. Each Organization receiving payment on a risk basis must provide the
hospital with any information necessary for the completion of HCFA
Form 1450(UB-82) which the hospital must submit to the intermediary
for any discharges after July 31, 1988.
For purposes of this section, Peer Review Organization (PRO) is also deemed
reference to other appropriate entitles with which HCFA has contracted pursuant
to Section 1154(a)(4)(c) of the Act.
C. The Organization agrees to comply with:
1. Sections 1318(a) and (c) of the Public Health Service Act which
pertain to disclosure of certain financial information;
2. Sections 1301(c)(1) and (c)(8) of the Public Health Service Act, which
relate to fiscal, administrative, and management requirements and
liability arrangements to protect all members of the organization; and
to notify HCFA 60 days prior to any changes in its insolvency
arrangements; and
3. The reporting requirements in 42 CFR 417.107(j)(1) which pertain to
the monitoring of an organization's continued compliance. For purposes
of this paragraph, references in that section to an "HMO" are also
deemed references to a "CMP."
D. The Organization agrees to comply with Title VI of the Civil Rights Act of
1964 (and pertinent regulations at 45 CFR Part 80), section 504 of the
Rehabilitation Act of 1973 (and pertinent regulations at 45 CFR Part 84),
and the Age Discrimination Act of 1975 (and pertinent regulations at 45 CFR
Part 91).
E. The Organization agrees to the following:
1. HCFA may evaluate, through inspection or other means, the quality,
appropriateness, and timeliness of services furnished under the
contract to the Organization's Medicare enrollees;
2. HCFA may evaluate, through inspection or other means, the facilities
of the organization when there is reasonable evidence of some need for
that inspection;
<PAGE>
3. HCFA, the Comptroller General, or their designees may audit or inspect
any books and records of the organization or its transferee that
pertain to any aspect of services performed, reconciliation of benefit
liabilities, and determination of amounts payable under the contract;
4. HCFA may evaluate, through inspection or other means, the enrollment
and disenrollment records for the current contract period and three
prior periods, when there is reasonable evidence of some need for that
inspection;
5. The right to inspect, evaluate, and audit, will extend through three
years from the date of the final settlement for any contract period
unless-
a. HCFA determines there is a special need to retain a particular
record or group of records for a longer period and notifies the
Organization at least 30 days before the normal disposition date;
b. There has been a termination, dispute, fraud, or similar fault by
the Organization, in which case the retention may be extended to
three years from the date of any resulting final settlement; or
c. HCFA determines that there is a reasonable possibility of fraud,
in which case it may reopen a final settlement at any time.
F. The Organization shall submit to HCFA (in such form and detail as the HCFA
shall prescribe in regulations and general instructions), the following
reports:
1. Data pertaining to health insurance claim numbers from beneficiaries,
which shall be transmitted initially and on a continuing basis, as
required to annotate the health insurance master file;
2. Statistical data on provider services and on medical and other
services;
3. Enrollment and actuarial data; and
4. Any other reports or data that HCFA may require.
G. The Organization agrees to report all enrollment, disenrollment, and other
beneficiary characteristic records according to HCFA program instructions.
All records must be transmitted 1) through an approved HCFA systems
contractor, or 2) over data transmission lines directly to HCFA. All
electronic transmissions and tapes must be totally compatible and
consistent with the relevant HCFA computer record systems.
<PAGE>
H. The Organization shall furnish to organizations serving as carriers and
intermediaries under Title XVIII, information necessary to allow the
carriers or intermediaries to make proper payment under Title XVIII for
Medicare beneficiaries enrolled in the Organization.
I. The Organization agrees to require all entities related to the
Organization, as determined under 42 CFR 417.484 (a), to agree that-
1. HCFA, the Comptroller General, or their designees have the right to
inspect, evaluate, and audit any pertinent books, documents, papers,
and records of the subcontractor involving transactions related to the
subcontractor; and
2. The right under this section to information for any particular
contract period will exist for a period equivalent to that specified
in section E(5) of this Article.
J. The Organization agrees-
1. To submit to HCFA-
a. All financial information required under 42 CFR 417.530 through
Section 417.576 and for final settlement; and
b. Any other information necessary for the administration or
evaluation of the Medicare program.
2. To comply with the requirements set forth in 42 CFR Part 420, Subpart
C, pertaining to the disclosure of ownership and control information;
3. To comply with the requirements of the Privacy Act, as implemented by
45 CFR Part 5b and Subpart B or Part 401 of 42 CFR, with respect to
any system of records developed in performing carrier or intermediary
functions under 42 CFR 417.532 and section 417.533; and
4. To meet the confidentiality requirement of 42 CFR 482.24 for medical
records and for all other information on enrollees, not covered under
item 3 above, that is contained in its records or obtained from HCFA
or others.
5. To provide prompt payment (consistent with the provisions of section
1816(c)(2) and 1842 (c)(2) of claims submitted for services and items
furnished to individuals pursuant to this contract, if the services or
items are not furnished under a contract between the Organization and
the provider or supplier.
K. Pursuant to 42 CFR 417.476 conditions of qualification set forth at 42 CFR
417.410 through section 417.418 may be waived by HCFA. However, for each of
such qualifying conditions waived, this contract must contain-
1. The specific terms of the waiver;
2. The expiration date of the waiver;
3. Any other information required by HCFA.
L. The Organization shall provide and supply (1) full and complete information
as to ownership of a subcontractor with whom such organization has had
during the previous twelve months, business transactions in an aggregate
amount in excess of $25,000, and (2) full and complete information as to
any significant business transactions during the five year period ending on
the date of HCFA's request, between the Organization and any wholly-owned
supplier or between the Organization
<PAGE>
and any subcontractor. The required information must be provided in the
manner required under section 1866(b)(2)(c)(ii) of the Act.
M. The Organization shall notify HCFA of loans and other special financial
arrangements which are made between the Organization and subcontractors,
affiliates and related parties.
N. The Organization agrees-
1. That for the duration of the contract, the Organization shall have an
enrolled membership at least one-half of which consists of individuals
who are not entitled to benefits under Medicare or Medicaid. HCFA may
suspend enrollment or payment to the Organization or terminate this
contract if this requirement is not met.
2. To submit quarterly reports of its commercial enrollment, Medicaid
enrollment and Medicare enrollment in the geographic are defined by
Article III of this contract.
O. The Organization agrees that no marketing material may be distributed by an
organization to (or for the use of) individuals eligible to enroll or
enrolled in the organization under this contract unless at least 45 days
before the distribution, the Organization has submitted the material to
HCFA for review, and HCFA has not disapproved the distribution of the
material.
P. The Organization agrees to allow eligible beneficiaries to enroll under
this contract during any open enrollment period required by HCFA through
regulations. The Organization agrees to accept beneficiaries up to the
limit of its capacity as approved by the HCFA.
Q. Upon termination of this contract, the Organization agrees:
1. To give its Medicare enrollees a written notice of the termination at
least 60 days before the termination date;
2. To be responsible for the cost of the notice;
3. To submit a copy of the notice to HCFA for review;
4. If the Organization is a risk contractor, to include with the required
notice a written description of alternatives available for obtaining
Medicare services after termination.
R. The Organization hereby provides assurances to HCFA that in the event the
Organization ceases to provide items and services under this contract, the
Organization shall provide or arrange for supplemental coverage of benefits
under Title XVIII of the Act related to a pre-existing condition with
respect to any exclusion period, to all individuals enrolled with the
entity who receive benefits under Title XVIII, for the lesser of six months
or the duration of such period.
S. The Organization agrees to review and act upon requests for reconsideration
from its Medicare enrollees within 60 days of receipt of the
reconsideration request for the provision or payment of services or items
which were initially denied. In those cases where the Organization will
continue to deny services or items received, the Organization must pay for
or provide those services to the beneficiary within 60 days of the receipt
of HCFA's or its contractor's determination.
Services previously denied will be arranged by the Organization in a manner
consistent with services normally provided by the Organization.
T. If any Medicare beneficiaries residing in the Organization's service area
are members of another risk-based contracting organization which nonrenews
or terminates its contract, your Organization (if under a risk-based
contract) agrees to hold a special 30-day terminations open enrollment
<PAGE>
period to enroll those Medicare beneficiaries enrolled in the other risk-
contracting organization at the time of termination or nonrenewal of the
other organization's contract.
This requirement will apply only to those Medicare beneficiaries enrolled
in the other risk-sharing contracting organization who reside in your
Organization's service area. The terminations open enrollment period must
be conducted during the period designated by HCFA. You will be given notice
30 days before the start of the open enrollment period.
This does not preclude an organization from requesting a capacity waiver as
described at 12 CFR 417.426(b)(1).
U. As part of advance directives requirements, the Organization agrees:
V. To inform all Medicare enrollees at the time of enrollment of their right
(under State law whether statutory or recognized by the courts of the
State) to accept or refuse treatment and to execute an advance directive,
such as living wills or durable powers of attorney, and of the
Organization's written policies on implementation of that right;
1. To document in the individual's medical records whether or not an
individual has executed an advance directive;
2. To not condition treatment or otherwise discriminate on the basis of
whether an individual has executed an advance directive;
3. To comply with State law (whether statutory or recognized by the
courts of the State) on advance directives; and
4. To provide (individually or with others) for education for staff and
community on advance directives.
W. The Organization, if it has a risk contract, agrees no to employee or
contract with, directly or indirectly, entities or individuals excluded
from participation in Medicare or Medicaid under sections 1128 or 1128A of
the Act, for the provision of health care, utilization review, medical
social work, or administrative services.
Article V
Conditions For Payment on a Risk Basis
The following conditions apply to the Organization if it selected, in Article II
of this contract, to be paid on a risk basis method under section 1876(g) of the
Act, or if it selected to be paid on a risk basis and paid on a reasonable cost
basis for unconverted, current non-risk Medicare enrollees:
A. Except as provided for in Article V.(D)., HCFA shall make payment under
this contract for services rendered to Medicare enrollees on a risk basis
as provided in regulations.
B. The Organization agrees to maintain, and make available to HCFA upon
request, books, records, documents, and other evidence of accounting
procedures and practices that-
1. Are sufficient to-
a. Establish component rates of the adjusted community rate (ACR)
for determining additional and supplementary benefits; and
b. Determine the rates utilized in setting premiums for State
insurance agency purposes.
<PAGE>
2. Include at least any records or financial reports filed with other
Federal agencies or State authorities.
C. The Organization has the right to appeal a determination that the
Organization's ACR computation is not acceptable, pursuant to the
provisions of 42 CFR 417.594(e)(2).
D. To the extent that the Organization's members are unconverted, current non-
risk Medicare enrollees, the Organization agrees to fully comply with the
conditions in Article VI.
E. The Organization agrees, as required by section 1876(g)(2) of the Act, that
if the ACR (as reduced for the actuarial value of the coinsurance and
deductibles) is less than the average of the per capita rates of payment to
be made under section 1876(a)(1) for Medicare members enrolled under the
risk basis method of payment, the Organization shall provide its Medicare
members with additional benefits described at section 1876(g)(3), selected
by the Organization, and which HCFA finds are at lease equal in value to
the difference between the average per capita payment and the adjusted
community rate (as so reduced). This condition shall not apply to an
organization which agrees to accept a lesser payment to the extent that
there is no longer a difference between the average per capita payment and
the adjusted community rate (as so reduced.)
F. The Organization agrees-
1. To publicly offer and provide at least the level of Medicare covered
benefits approved in the ACR. The Organization may chose to offer more
services or to impose lower premiums or other charges (in the form of
deductibles or coinsurance) than approved in the ACR.
However, such complimentary services or waived premiums or other
charges must be approved in advance by HCFA and remain effect
throughout the contract period.
The only mid-year changes that are permitted are those which are
entirely advantageous to Medicare enrollees. Premiums and co-payments
may be reduced at any time during the year, but once they are reduced,
they cannot be increased later on during the same contract period.
HCFA should be advised of any expanded benefits or decreases in
premiums or co-payments arising in the middle of a contract period.
Waived premiums and complimentary services provide solely to members
of an employer group are governed by the Organization's contract with
the employer.
2. Nothing in this article may be interpreted as a waiver or compromise
or any appeal rights to which the Organization may be entitled under
Title XVIII of the Act and implementing regulations.
<PAGE>
Article VI
Conditions of the Reasonable Cost Method of Payment
The following conditions apply to the Organization if it selected in Article II
of this contract to be paid on the Reasonable Cost Method under section 1876(h)
of the Act, or if it selected to be paid on a risk basis and paid on a
reasonable cost basis for unconverted, current non-risk Medicare enrollees:
A. HCFA shall make payment under this contract for services rendered to
Medicare enrollees on a reasonable basis as provided in regulations.
B. The Organization agrees to maintain books, records, documents, and other
evidence of accounting procedures and practices that -
1. Are sufficient to -
a. Ensure an audit trail; and
b. Properly reflect all direct and indirect costs claimed to have
been incurred under the contract; and
2. Include at least records of the following:
a. Ownership, organization, and operation of the Organization's
financial, medical and other recordkeeping systems
b. Financial statements for the current contract period and three
prior periods;
c. Federal income tax or information returns for the current
contract period and three periods;
d. Assets acquisition, lease, sale, or other action;
e. Agreements, contracts and subcontracts;
f. Franchise, marketing, and management agreements;
g. Schedules of charges for the Organization's fee-for-service
patients;
h. Matters pertaining to costs of operations;
i. Amounts of income received, by source and payment;
j. Cash flow statements;
k. Any financial reports filed with other Federal programs or State
authorities.
C. The Organization has the right to appeal any final determination of costs
pursuant to the reimbursement appeals procedures contained in the
regulations at 42 CFR Part 405, Subpart R.
D. The Organization shall make available for the purposes specified in
paragraphs 1-4 of section D of Article IV, its premises, physical
facilities, and equipment, its records relating to its Medicare enrollees,
the records specified in 42 CFR 417.480, and any additional relevant
information that HCFA may require.
E. The Organization agrees that -
<PAGE>
1. Upon HCFA's request it will provide, subsequent to an accounting
period, an independently certified financial statement of its per
capita incurred cost, based on the types of components of expenses
otherwise reimbursable under Title XVIII, for providing services
described in section 1876(a)(1), including its method of allocating
costs between individuals enrolled under this section and other
individuals enrolled with the Organization, such statements to be
provided in accordance with accounting procedures prescribed by HCFA.
2. Failure to report such information may be deemed evidence of likely
overpayment upon which basis collection action may be taken;
3. The required financial statements will consolidated to include an
accounting for the costs of entities related to the Organization by
common ownership or control;
4. Allowable costs for a related organization may not include costs for
the types of expense otherwise reimbursable under Title XVIII, in
excess of an amount which would be determined to be reasonable in
accordance with regulations;
5. In any case in which compensation is paid substantially in excess of
what is normally paid for similar services by similar practitioners,
such compensation may, as appropriate, be considered a distribution of
profits.
F. The Organization agrees to comply with the requirements of section
1833(a)(1)(A) of the Act and its implementing regulations, 42 CFR 417.800
through 42 CFR 417.810, for members who have not been converted from any
previous Health Care Prepayment Plan (HCPP) contract(s) or arrangements(s).
Article VII
Modification, Termination or Non-renewal
This contract may be modified at any time by written consent of both parties
(the Organization and HCFA). If the contract is modified, the Organization must
modify its Medicare enrollees of
<PAGE>
any changes that HCFA determines are appropriate for notification. It may be
terminated by either party in accordance with the provisions of 42 CFR 417.494
or a decision by either party not to renew the contract may be made in
accordance with the provisions of 42 CFR 417.492.
ARTICLE VIII
Any revisions to applicable provisions of Title XI or Title XVIII of the Act,
Title XIII of the Public Health Service Act, implementing regulations, policy
issuances and instructions apply as of their effective date.
Article IX
General Contracting Requirements
A. FACILITIES NONDISCRIMINATION CLAUSE
The following provisions are applicable to and shall be included in all
leases of real estate entered into for the administration of this
agreement:
"As used in this clause, the term `Facility' means stores, shops,
restaurants, cafeterias, restrooms, and any other facility of a public
nature in the building in which the space covered by this lease is located.
"The lessor agrees that he will not discriminate by segregation or
otherwise against any person or persons because of race, color, religion,
sex, or national origin in furnishing or by refusing to furnish, to such
person or persons, the use of any facility including any or all services,
privileges, accommodations, and activities provided thereby. Nothing herein
shall require the furnishing to the general public of the use of any
facility customarily furnished by the lessor solely to tenants, their
employees, customers, patients, clients, guests and invitees.
"It is agreed that the lessor's noncompliance with the provisions of this
clause shall constitute a material breach of this lease. In the event of
such noncompliance, the lessee may take appropriate action to enforce
compliance, may terminate this lease or may pursue such other remedies as
may be provided by law. In the event of termination, the lessor shall be
liable for all excess costs of the lessee in acquiring substitute space.
Substitute space will be obtained in as close proximity to the lessor's
building as is feasible and moving costs will be limited to the actual
expenses thereof as incurred.
"The lessor agrees to include, or to require the inclusion of the foregoing
provisions of this clause (with the terms "lessor" and "lessee"
appropriately modified) in every agreement or concession pursuant to which
any person other that the lessor operates or has the right to operate any
facility. Nothing herein contained, however, shall be deemed to require the
lessor to include or require the inclusion of the foregoing provisions of
this clause in any existing agreement or concession arrangement or one in
which the contracting party other than the lessor has the unilateral right
to renew or extend the agreement of arrangement, until the expiration of
the existing agreement or arrangement and the unilateral right to renew or
extend. The lessor also agrees that it will take any and all lawful actions
as expeditiously as possible with respect to any such agreement as the
contracting agency may direct to enforce this clause, including but not
limited to termination of the agreement or concessions and institution of
court action."
B. DISCLOSURE OF INFORMATION
The following clause shall be include in all subcontracts entered into
either for the performance of functions required for the administration of
this agreement or where a subcontractor, his agents, officers or employees
might reasonable be expected to have access to information within the
purview of section 1106 of the Social Security Act and regulations
prescribed pursuant thereto:
<PAGE>
"The contractor agrees to establish and maintain procedures and controls so
that no information contained in its records or obtained form HCFA or from
others in carrying out the terms of this subcontract shall be used by or
disclosed by it, its agents, officers, or employees except as provided in
said section 1106 of the Social Security Act and regulations prescribed
thereunder."
C. AUTOMATIC TERMINATION OF SUBCONTRACT CLAUSE
The following provision are applicable to and shall be include in all
subcontracts entered into hereafter (except for the purchase of items and
equipment), including leases of real property which exceed the term of this
agreement except where HCFA agrees to its omission. Failure of the
Contractor to include the clause in such subcontract without the written
agreement of HCFA to its omission, shall make the related costs incurred
after the effective date of the nonrenewal or termination, unallowable.
Notwithstanding the following, if the Contractor wishes to continue the
subcontract relative to its own business after the contract between HCFA
and the Contractor has been terminated or nonrenewed, it may do so provided
it assures HCFA in writing that HCFA's obligations will terminate at the
time the Medicare contract terminates or is nonrenewed subject to the
termination cost provisions provide for in the contract.
The clause is as follows: "In the event the Medicare contract between HCFA
and (Name of Contractor) is terminated or nonrenewed, the contract between
(Name of Contractor) and (Name of Firm) will be terminated unless HCFA and
(Name of Contractor) agree to the contrary. Such termination shall be
accomplished by delivery of written notice of (Name of Firm) of the date
upon which said termination will become effective."
D. PROHIBITION AGAINST USE OF HCFA FUNDS TO INFLUENCE LEGISLATION OR
APPROPRIATIONS
The following provision is applicable to this agreement:
No part of any funds under this agreement shall be used to pay the salaries
of expenses of any Contractor, or any agent acting for the Contractor, to
engage in any activity designed to influence legislation or appropriations
pending before Congress.
Lobbying costs are defined in and are unallowable in accordance with
Federal Acquisition Regulation 31-205-22.
E. LIQUIDATED DAMAGES IN SUBCONTRACTS
The following provisions are applicable to and shall be included in any
subcontract entered into or renewed under this agreement containing a
liquidated damages provision which related solely to Medicare:
The Health Care Financing Administration (HCFA), after consultation with
the Contractor, shall have the right to determine that the specified levels
of performance have not been attained by the subcontractor. In such event,
HCFA may direct the Contractor to notify the subcontractor of HCFA's
determination that liquidated damages apply and to set-off the liquidated
damages against the subcontractor. HCFA shall reimburse the Contractor for
all reasonable costs relating to this activity and shall honor any
judgement or award rendered against the Contractor directly resulting form
the enforcement of such provision as directed by HCFA. Failure of the
Contractor to timely comply with such direction, shall constitute cause for
the application of any and all administrative, statutory, and judicial
remedies which may be available to HCFA pursuant to this agreement,
including but not limited to, offsetting an amount equivalent to the amount
of such unenforced
<PAGE>
liquidated damages. In the event that such offset is made, the Contractor
shall be obligated to continue to perform all terms and conditions of this
agreement without additional payment form HCFA attributable to such offset
amounts.
F. FEDERAL ACQUISITION REGULATIONS INCORPORATED BY REFERENCE
This agreement incorporates the following clauses by reference with the
same force and effect as if they were given full text. Upon request, HCFA
will make their full text available:
FEDERAL ACQUISITION REGULATION
(48 CFR CHAPTER 1) CLAUSES
52.222-26 Equal Opportunity (April 1984)
52.203-1 Officials Not to Benefit (April 1984)
52.203-5 Covenant Against Contingent Fees (April 1984)
52.219-8 Utilization of Small Business Concerns and Small Disadvantaged
Business Concerns (April 1984)
52.219-9 Small Business and Small Disadvantaged Business Subcontracting
Plan (April 1984)
52.220-3 Utilization of Labor Surplus Area Concerns (April 1984)
52.220-4 Labor Surplus Area Subcontracting Program (April 1984)
52.222-3 Convict Labor (April 1984)
52.222-21 Certification of Nonsegregated Facilities
52.222-35 Affirmative Action for Special Disable and Vietnam Era Veterans
(April 1984)
52.222-36 Affirmative Action for Handicapped Workers (April 1984)
52.203-6 Fees or Kick-Backs by Subcontractors (Anti-Kickback Act (41
U.S.C. 51-54) (April 1984)
52.219-13 Utilization of Women-Owned Small Businesses (April 1984)
52.245-5 Government Property (April 1984) Applicable only to Contractors
that have been furnished Government property.
<PAGE>
(Contract #H1031) Contract Period, 010199 - 123199)
Signature of the official authorized to request a change in the banking
information needed for HCFA payment to your Organization.
JACK SHIELDS CFO
- ---------------------------------- --------------------------------
Printed Name Title
JACK SHIELDS 11/5/98
- ---------------------------------- ---------------------------------
Signature Date
In Witness whereof, the parties execute this contract
FOR THE ORGANIZATION:
EXECUTIVE VICE PRESIDENT AND
DAVID A. JESSE COO
- ---------------------------------- ---------------------------------
Printed Name Title
DAVID A. JESSE 11/5/98
- ---------------------------------- ---------------------------------
Signature Date
300 INTERNATIONAL PKWY
SUITE 230
SUNSTAR HEALTHPLAN, INC. HEATHROW, FL
- ---------------------------------- ---------------------------------
Organization Address
FOR THE HEALTH CARE FINANCING ADMINISTRATION:
JAN D LEMASURIER for 11/6/98
- -------------------------------------------- ---------------------------------
Director, Health Plan Purchasing and Administration Date
Group Center for Health Plans and Providers
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
---------------------
SunStar Health Plan, Inc.
(formerly known as Boro Medical Corporation)
Florida Corporation
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM SUNSTAR HEALTHCARE,
INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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