AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1996
REGISTRATION NO. 333-4497
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
UTILIMED, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ILLINOIS 8099 363692630
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
-------------------
40 SKOKIE BOULEVARD
NORTHBROOK, ILLINOIS 60062-1618
(847) 564-8500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-------------------
LAWRENCE RUBINSTEIN, ESQ.
GENERAL COUNSEL
UTILIMED, INC.
40 SKOKIE BOULEVARD
NORTHBROOK, ILLINOIS 60062-1618
(847) 564-8500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
COPIES TO:
RICHARD S. BORISOFF, ESQ. JOHN J. HUBER, ESQ.
BRUCE A. GUTENPLAN, ESQ. LATHAM & WATKINS
PAUL, WEISS, RIFKIND, WHARTON & GARRISON SUITE 1300
1285 AVENUE OF THE AMERICAS 1001 PENNSYLVANIA AVENUE
NEW YORK, NEW YORK 10019-6064 WASHINGTON, D.C. 20004
(212) 373-3000 (202) 637-2200
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement
becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
-------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
UTILIMED, INC.
FORM S-1
REGISTRATION STATEMENT
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE><CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
- ---------------------------------------------------- -----------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus......... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front Cover and Outside Back Cover
Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...................... Outside Front Cover Page; Prospectus
Summary; The Company; Risk Factors
4. Use of Proceeds................................ Use of Proceeds
5. Determination of Offering Price................ Outside Front Cover Page; Risk Factors;
Underwriters
6. Dilution....................................... Risk Factors; Dilution
7. Selling Security Holders....................... Not Applicable
8. Plan of Distribution........................... Outside Front Cover Page; Prospectus
Summary; Underwriters
9. Description of Securities to be Registered..... Outside Front Cover Page; Description of
Capital Stock
10. Interests of Named Experts and Counsel......... Not Applicable
11. Information with Respect to the Registrant
(a) Description of Business.................. Prospectus Summary; The Company;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business
(b) Description of Property.................. Business--Property
(c) Legal Proceedings........................ Business--Legal Proceedings
(d) Common Equity Securities................. Dividend Policy; Shares Eligible for
Future Sale; Description of Capital Stock
(e) Financial Statements..................... Index to Financial Statements
(f) Selected Financial Data.................. Prospectus Summary; Selected Consolidated
Financial Data
(g) Supplementary Financial Information...... Not Applicable
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure............................... Additional Information
(j) Directors and Executive Officers......... Management
(k) Executive Compensation................... Management
(l) Security Ownership of Certain Beneficial
Owners and Management.................... Principal Shareholders
(m) Certain Relationships and Related
Transactions............................. Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act Not Applicable
Liabilities....................................
</TABLE>
<PAGE>
PROSPECTUS (Subject to Completion)
Issued , 1996
2,500,000 Shares
[LOGO]
COMMON STOCK
-------------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF
THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
PER SHARE WILL BE BETWEEN $ AND $ . SEE "UNDERWRITERS" FOR A DISCUSSION OF
THE FACTORS CONSIDERED IN DETERMINING THE INITIAL OFFERING PRICE.
-------------------
Application has been made for listing of the Common Stock on the American Stock
Exchange under the symbol "MED."
-------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
<TABLE><CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total (3).......................... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 375,000
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriters."
-------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Latham & Watkins, counsel for the Underwriters. It is expected that delivery
of the Shares will be made on or about , 1996 at the office of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
-------------------
MORGAN STANLEY & CO.
Incorporated
SMITH BARNEY INC.
VOLPE, WELTY & COMPANY
, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
COVERED LIVES UNDER UTILIMED CONTRACTS
The shaded areas of the map of the United States are the states where
members of payor plans reside or receive diagnostic imaging services managed by
Company contracts.
[MAP]
"UTILIMED(R)" is a service mark of the Company for which an application is
pending. This Prospectus also includes tradenames and service marks of the
Company's clients.
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
-------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..................................................... 4
Risk Factors........................................................... 8
The Company............................................................ 14
Dividend Policy........................................................ 14
Use of Proceeds........................................................ 15
Capitalization......................................................... 16
Dilution............................................................... 17
Selected Consolidated Financial Data................................... 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 19
Business............................................................... 31
Management............................................................. 46
Principal Shareholders................................................. 56
Certain Transactions................................................... 58
Shares Eligible for Future Sale........................................ 61
Description of Capital Stock........................................... 63
Underwriters........................................................... 66
Additional Information................................................. 67
Legal Matters.......................................................... 68
Experts................................................................ 68
Index to Consolidated Financial Statements............................. F-1
-------------------
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus assumes (i) the conversion immediately prior to
the consummation of this offering of all of the shares of Series A Preferred
Stock (as defined herein) and Class B Stock (as defined herein) of the Company
into shares of Common Stock, (ii) no exercise of the Stock Purchase Warrants (as
defined herein), (iii) a 5.361849-for-one reverse stock split of the Common
Stock immediately prior to the consummation of this offering and (iv) no
exercise of the Underwriters' over-allotment option. See "Capitalization" and
"Certain Transactions." Unless the context indicates otherwise, all references
in this Prospectus to the "Company" or "UtiliMed" include UtiliMed, Inc., its
predecessors and its wholly-owned subsidiaries, UtiliMed C I, Inc. and UtiliMed
P II, Inc.
THE COMPANY
UtiliMed is the nation's leading manager of diagnostic imaging services,
based on its own market research. The Company contracts with large healthcare
payors to manage the provision of diagnostic imaging services to members of
payors' healthcare plans with the goal of reducing the costs and improving the
quality and utilization of diagnostic imaging services. Current clients include
payors such as Blue Cross Blue Shield, Cigna Healthcare, Inc. and United
Healthcare, Inc. At March 31, 1996, the Company managed diagnostic imaging
services for 16 clients representing over 2.5 million lives in 13 states. In
addition, the Company signed a new contract in March 1996 covering approximately
88,000 lives which was implemented in June 1996. Founded in December 1989, the
Company has achieved rapid growth, with revenues growing from approximately $2.6
million in 1991 to $96.4 million in 1995 and covered lives increasing from
102,000 at December 31, 1991 to over 2.5 million at March 31, 1996.
The Company estimates that approximately eight to ten percent of payors'
medical expenditures are for diagnostic imaging services. Accordingly, the
Company believes a significant opportunity exists for payors to reduce costs
while maintaining quality through more effective management of diagnostic
imaging services. As the leading manager of diagnostic imaging services, the
Company believes that it is well positioned to take advantage of what Company
data indicates is the relatively unpenetrated market for outsourced management
of such services.
The Company has two core products, CDIP and RMP (defined below), which are
designed to meet its clients' objectives of reducing the cost and improving the
quality of diagnostic imaging services. UtiliMed does not provide diagnostic
imaging services. Rather, it utilizes CDIP and RMP to manage the provision of
such services to payors' members by radiologists, physicians and other
specialists. The core elements of the Company's two products include:
(i) Assessment. UtiliMed provides a systematic review of the facility or
office of each provider affiliated with a client, assessing the integrity of
the provider's equipment, the quality and training of its personnel, and its
policies and procedures pertaining to quality and patient safety.
(ii) Privileging. The Company uses its expertise to recommend to its
clients that certain diagnostic imaging procedures be performed by specific
providers.
(iii) Precertification. Precertification is a process whereby referring
physicians are required to certify diagnostic imaging procedures with
UtiliMed before they are performed by providers. The Company's
precertification process aims to maintain or enhance the quality of care
while reducing overutilization of diagnostic imaging services. UtiliMed
emphasizes precertification for more expensive procedures such as MRI, CT
and nuclear medicine, which according to UtiliMed's data, account for
approximately 11.0 percent of the volume of diagnostic imaging performed but
approximately 42.2 percent of the cost of diagnostic imaging.
(iv) Retrospective Utilization Reporting. The Company maintains an
extensive database of both clinical information and claims data. Using the
information in its database, the Company produces a series of utilization
management reports in which it analyzes (a) the diagnostic imaging services
that referring physicians order and the frequency with which particular
services are ordered and (b) the practice patterns of providers. The Company
focuses its utilization management reporting and analysis on optimizing the
use of diagnostic imaging procedures by allowing
4
<PAGE>
clients to evaluate affiliated providers and enabling such providers to
benchmark themselves against their peer physicians.
(v) Physician Education. UtiliMed uses its expertise in diagnostic
imaging and information derived from its database to educate physicians
affiliated with its clients concerning developments in diagnostic imaging
and procedures that enhance the efficient delivery of diagnostic imaging
services.
UtiliMed offers its clients an at risk or capitated product, Capitated
Diagnostic Imaging Program ("CDIP") and a non-capitated product, Resource
Management Program ("RMP"). Both products incorporate the core elements
described above. In its CDIP product, UtiliMed contracts with its clients to
establish and maintain networks of diagnostic imaging providers. The client pays
the Company a network management fee and a per member per month ("pmpm") fee and
the Company assumes the responsibility for processing the claims and paying the
costs of diagnostic imaging services provided to the client's members by
diagnostic imaging providers. In its recently introduced RMP product, in return
for a fee, the Company manages the diagnostic imaging services provided to a
client's members by diagnostic imaging providers but does not assume the
responsibility for processing the claims and paying the costs of services
provided. Use of UtiliMed's CDIP product can result in cost savings of
approximately 20 percent to clients within the first year and the Company
anticipates its RMP product will result in comparable savings to its clients in
the first year.
A core element of the Company's products is its database of claims data,
clinical reports, and assessment information which is an important tool for
network and utilization management. At March 31, 1996, the database contained
claims data for over eight million lives, assessment data for over 10,000
imaging sites and over one million clinical reports. The number of monthly
clinical reports added to the database has grown from approximately 35,000 in
March 1995 to approximately 54,000 in March 1996. The database enables the
Company to develop protocols, produce outcomes and benchmarking analyses (both
provider-specific and diagnosis-specific) and to create educational programs for
physicians and other providers. The Company believes that its database and
analytical reports give it a competitive advantage in providing a comprehensive
approach to managing the cost, quality and utilization of diagnostic imaging
services.
UtiliMed's objective is to enhance its leading position in diagnostic
imaging managed care services and continue its growth by pursuing a wide range
of significant new opportunities. The Company sees opportunities for growth both
in establishing new client relationships and expanding relationships with
existing clients--by extending coverage to additional local health plans of
regional and national payors and by serving additional membership populations of
existing clients, such as members covered under Medicare and Medicaid programs.
The Company will also seek to market RMP to payors other than HMOs, such as
self-funded employers and indemnity insurers, and to market its products
directly to large employer groups, benefits administrators, and benefits
consulting groups. The Company believes its ability to combine utilization
management, quality management, outcomes management and network management
provides an attractive alternative for payors in managing diagnostic imaging
services.
5
<PAGE>
COMPANY DEVELOPMENT
Since November 1994, the Company has experienced significant change in its
capitalization, operations and management. In November 1994, the Company
redeemed shares of capital stock from the founders of the Company who were also
management. To finance this transaction, the Company issued debt and equity,
including convertible preferred stock, to certain private equity investors. The
redemption and investment (together, the "Recapitalization") were intended to
provide limited liquidity for the founders, and to provide organizational and
structural benefits to the Company as a private company. While the Company's
revenues continued to grow, the operating results contemplated by the
Recapitalization for 1994 and the first half of 1995 were not realized and the
Company continued to experience negative cash flow. Consequently, the
capitalization, management and operating plan contemplated by the
Recapitalization were changed in a transaction in September 1995 (the "1995
Transaction") between the founders and the private equity investors. In
connection with the 1995 Transaction, a new management team was assembled which
is implementing business initiatives designed to improve financial condition and
results of operations. The Company believes that, while no assurance can be
given, the implementation of these initiatives together with this offering will
position the Company for improved operating and financial performance. See "Risk
Factors," "The Company" and "Certain Transactions."
THE OFFERING
<TABLE><CAPTION>
<S> <C>
Common Stock offered......................... 2,500,000 shares
Common Stock to be outstanding after this
offering(1).................................. 6,762,147 shares
Use of Proceeds.............................. $17.6 million to repay indebtedness, $1
million for computer hardware enhancements,
and $
to achieve a positive working capital
position to support the Company's growth
strategy. See "Use of Proceeds" and "Certain
Transactions."
Proposed American Stock Exchange Symbol...... MED
</TABLE>
- ------------
(1) Excludes 57,745 shares of Common Stock issuable upon exercise of outstanding
employee stock options under the Company's Time Accelerated Restricted Stock
Option Plan for Certain Employees ("TARSOP"), 55,108 shares of Common Stock
issuable upon exercise of outstanding stock options, shares of
Common Stock reserved for issuance under the Company's 1996 Employee Stock
Option Plan (the "1996 Option Plan") and shares of Common Stock
reserved for issuance under the Company's 1996 Employee Stock Purchase Plan
(the "Employee Plan"). See "Management--Executive Compensation,"
"Management--TARSOP," "Management--1996 Option Plan" and
"Management--Employee Stock Purchase Plan." Also excludes 112,770 shares of
Common Stock issuable upon the exercise of the Stock Purchase Warrants,
which are exercisable in limited circumstances, including (i) the
consummation of this offering if the initial offering price is at least
$24.90 per share and (ii) on or prior to June 30, 1997 (or, under certain
conditions, September 30, 1997), a sale of the capital stock of the Company
in a merger, consolidation or other business combination in which certain
shareholders of the Company receive proceeds in excess of $75 million (the
"Stock Purchase Warrants"). See "Risk Factors-- Dilution" and "Certain
Transactions--1995 Transaction" and "Certain Transactions--Stock Purchase
Warrants."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE><CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Contract revenues:
Continuing contracts....... $ 2,573 $ 8,063 $ 19,308 $ 50,882 $ 76,457 $ 18,130 $ 24,055
Terminated contracts(1).... -- 2,285 7,079 15,697 19,960 8,626 --
------- ------- --------- --------- --------- --------- ---------
Total contract
revenues.................... $ 2,573 $10,348 $ 26,387 $ 66,579 $ 96,417 $ 26,756 $ 24,055
------- ------- --------- --------- --------- --------- ---------
------- ------- --------- --------- --------- --------- ---------
Cost of services:
Continuing contracts....... $ 2,138 $ 6,883 $ 16,916 $ 49,792 $ 72,365 $ 17,859 $ 20,628
Terminated contracts(1).... -- 1,753 5,781 16,696 18,437 8,975 --
------- ------- --------- --------- --------- --------- ---------
Total cost of services... $ 2,138 $ 8,636 $ 22,697 $ 66,488 $ 90,802 $ 26,834 $ 20,628
------- ------- --------- --------- --------- --------- ---------
------- ------- --------- --------- --------- --------- ---------
Net loss.................... $ (354) $ (106) $ (2,608) $ (13,879) $ (18,774) $ (5,390) $ (1,440)(2)
------- ------- --------- --------- --------- --------- ---------
------- ------- --------- --------- --------- --------- ---------
Pro forma net loss per
share(3).................... $ (0.57) $ (3.05) $ (4.37) $ (1.25) $ (0.33)
Number of shares used in pro
forma per share
computations(3)............. 4,568,824 4,547,914 4,296,439 4,303,522 4,375,823
<CAPTION>
MARCH 31, 1996
--------------------------
DECEMBER 31, 1995 ACTUAL AS ADJUSTED(4)
----------------------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................... $ (18,644) $(19,766) $ 5,330
Total assets.................................... 10,090 16,768
Payables to plans and providers................. 20,552 22,304 22,304
Total debt...................................... 10,499 17,775 506
Shareholders' equity (deficit).................. (61,267) (62,865)
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA:(5)
Covered lives:
CDIP.......................... 102,000 202,000 485,000 1,035,000 1,152,000 1,098,000 1,380,000
RMP........................... -- -- -- -- 1,111,000 -- 1,166,000
Number of contracts:
CDIP.......................... 4 5 9 12 12 12 13
RMP........................... -- -- -- -- 3 -- 3
Medical loss
ratio-capitated(6)............. 83.1% 85.4% 87.6% 97.9% 96.9% 98.5% 94.0%
</TABLE>
- ------------
(1) Represents seven CDIP contracts that were terminated in the third and fourth
quarters of 1995 (the "Terminated Contracts"). Five of the Terminated
Contracts were unprofitable contracts terminated by the Company's new
management team as part of the initiatives being implemented subsequent to
the 1995 Transaction (as defined herein). These unprofitable contracts were
entered into without establishment of appropriate provider networks, thereby
placing the Company at significant financial risk. The other two Terminated
Contracts were terminated prior to their completion by mutual agreement of
the Company and the clients. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Clients;
Capitation Contracts and Provider Contracts; RMP Contracts."
(2) Net loss includes $593,000 for stock based compensation expense which is a
non-cash charge. Of this amount $527,000 is non-recurring. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Three Months Ended March 31, 1996 and 1995."
(3) Net loss per share is computed by dividing net loss by the number of common
and common equivalent shares outstanding during the periods in accordance
with the applicable rules of the Securities and Exchange Commission (the
"Commission"). All stock options and restricted common stock issued have
been considered as outstanding common stock equivalents for all periods
presented, even if anti-dilutive, under the treasury stock method (based on
initial public offering price). Shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and Class B Stock are assumed to
be common stock equivalents for all periods presented.
(4) Adjusted to reflect the sale by the Company of 2,500,000 shares of Common
Stock offered hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds."
(5) The information set forth in Statistical Data reflects only continuing CDIP
and RMP contracts. Including the Terminated Contracts, the number of
capitated lives were 102,000, 314,000, 625,000, 1,514,000 and 1,152,000 and
the number of CDIP contracts were 4, 6, 11, 17 and 12 at December 31, 1991,
1992, 1993, 1994 and 1995, respectively, and the number of RMP contracts at
December 31, 1995 was three. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(6) Calculated as cost of services divided by continuing contract revenue,
excluding RMP revenue, for the years ended December 31, 1991, 1992, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996.
7
<PAGE>
RISK FACTORS
HEALTH CARE AND REGULATORY ENVIRONMENT
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation thus far in 1996,
the Company anticipates that Congress and state legislatures will continue to
review and assess alternative health care delivery and payment systems. The
number of health care proposals considered by state legislatures has increased
in recent years. Potential approaches that have been considered include mandated
basic health care benefits, controls on health care spending through limitations
on the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, the formation of
regional delivery markets and other fundamental changes to the health care
delivery system. Private sector providers and payors have embraced certain
elements of reform, resulting in increased consolidation of medical groups and
competition among managers of medical practice groups as these providers and
payors seek to form alliances in order to provide cost-effective, quality care.
The Company cannot predict whether federal or state health care reform will be
adopted and, if so, what effect any such measures or any private sector reform
may have on its business.
In addition to the possibility of comprehensive health care reform, the
health care industry and physicians' medical practices are highly regulated at
the state and federal levels. The Company believes its operations are in
compliance with applicable law. Nevertheless, because of the rapidly evolving
structure of existing and potential relationships between the Company and
insurers, self-funded employers, health plans and government-sponsored and other
health care cost payors, including health maintenance organizations ("HMOs") and
preferred provider organizations ("PPOs"), many aspects of these relationships
have not been the subject of regulatory interpretation. There can be no
assurance that the review of the Company's business by state or federal courts
or health care and other regulatory authorities will not result in
determinations that could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Regulation."
INSURANCE REGULATION
The laws of many states regulate the sharing of risk through capitation. In
many cases, placing providers of diagnostic imaging services at risk outside the
context of a licensed HMO will be deemed to require the obtaining of an
insurance license. In the states in which the Company currently operates,
licensed HMOs can enter into capitation agreements with networks established by
the Company that are comprised of (i) individual providers or (ii) a group of
providers who are linked through certain contractual arrangements ("provider
networks") without the possibility that the associated compensation mechanisms
will require the Company to obtain an insurance license. Due to state insurance
regulations, the Company only offers its CDIP product to HMOs. While the Company
believes that its participation in a capitated provider network does not require
insurance licensure in the states in which it does business, there are a number
of states which may require such licensure which in turn may restrict the
Company's ability to expand its business in such jurisdictions. There can be no
assurance that any state in which the Company does business or may do business
in the future will not impose insurance licensing requirements on all capitated
arrangements and, if it does, there can be no assurance that such insurance
licensing requirements will not have a material adverse effect on the Company's
business, operating results and financial condition. See
"Business--Regulation--State Regulation-- Insurance Regulation."
PREFERRED PROVIDER ORGANIZATION
A preferred provider organization ("PPO") is generally a legal entity which
has established a provider network by entering into contractual arrangements
with a variety of health care providers. PPOs can also be established via a
contractual relationship among providers. In states which have enacted laws
regulating PPOs, PPOs may be required to register with or seek licensure from
state agencies. While the Company believes it is not currently subject to
regulation under PPO statutes in certain states, it has commenced the
application process for registration or licensure in other states in
8
<PAGE>
which its provider network activities may be within the scope of such PPO
statutes. There can be no assurance that any state in which the Company does
business or may do business in the future will not seek to further regulate the
activities of the Company under such statutes and, if it does, that such
regulation will not have a material adverse effect on the Company's business,
operating results and financial condition.
THIRD PARTY ADMINISTRATOR
Many states regulate third party administrators ("TPAs") or organizations
that provide certain administrative services, such as claims adjustment, claims
processing and premium collection. The administrative services provided by a TPA
include services normally provided by insurers. A TPA that provides services to
group benefit plans and self-insured employers may be subject to state
regulation. The Company believes it is not subject to regulation as a TPA as it
is not engaged in providing services which define a TPA in the states in which
the Company does business. However, there can be no assurance that any state in
which the Company does business or may do business in the future will not seek
to regulate the activities of the Company as a TPA and, if it does, that such
regulations will not have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Regulation--State
Regulation--Third Party Administrator."
PRIVATE UTILIZATION REVIEW
Some state laws regulate provider network organizations that perform
prospective, concurrent or retrospective reviews of the health care services
provided through the network. Such regulations typically require application and
licensure as a prerequisite to performing utilization review services on
residents of the state and may place restrictions on the types of personnel that
may conduct utilization review. While the Company believes that it is not
currently subject to regulation under utilization review statutes in certain
states, the Company has commenced the application process for licensure in other
states in which its review procedures fall within the scope of such utilization
review statutes. There can be no assurance that any state in which the Company
does business or may do business in the future will not seek to further regulate
the activities of the Company under such statutes and, if it does, that such
regulation will not have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Regulation--State
Regulation--Private Utilization Review Agent."
MEDICARE FRAUD AND ABUSE PROVISIONS; THE "STARK LAW"
Federal laws prohibit the offer, payment, solicitation or receipt of any
form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the purchase,
lease or order of items or services that are covered by Medicare or state health
programs. Violations of these laws are felonies punishable by fines and
imprisonment for up to five years. The United States Department of Health and
Human Services ("HHS") or state health departments may also impose civil
penalties excluding violators from participation in Medicare or state health
programs. Some state laws include similar prohibitions which apply to private
pay patients as well. In addition, the "Stark Law" prohibits the referral of
Medicare and Medicaid patients by a physician for certain designated health
services, including radiology services, to an entity in which the physician has
an ownership or other financial relationship. Civil monetary penalties may be
imposed for certain prohibited referrals. Some state laws also have similiar
provisions. Although the Company believes that its operations do not violate or
are not subject to these laws, commonly known as the "anti-kickback statutes,"
there can be no assurance that its activities will not be challenged by
regulatory authorities. See "Business--Regulation--Federal Regulation--Medicare
Fraud and Abuse Provisions" and "Business--Regulation--Federal
Regulation--Prohibitions on Certain Referrals--The 'Stark Law.' "
CORPORATE PRACTICE OF MEDICINE AND FEE SPLITTING
The laws of many states prohibit non-physician entities (such as the
Company) from practicing medicine or physicians from splitting fees with
non-physicians. The Company, through its utilization
9
<PAGE>
management services, makes recommendations concerning procedures to be performed
by providers throughout the United States. The Company does not believe that it
engages in the practice of medicine or the delivery of medical services.
However, these laws and their interpretations vary from state to state and are
enforced by regulatory authorities with broad discretion. There can be no
assurance that the Company's existing or future agreements will not be
successfully challenged as constituting the unlicensed practice of medicine or
prohibited splitting of fees with non-physicians. In addition, there can be no
assurance that the Company will not be subject to allegations that the Company
engages in the practice of medicine or the delivery of medical services or
subject to claims or litigation related to the grant or denial of claims for
payment of benefits. A successful challenge with respect to the Company's
activities or claims or litigation related to the grant or denial of claims
could have a material adverse effect on the Company's business, operating
results and financial conditions. See "Business-- Regulation--State
Regulation--Corporate Practice of Medicine and Fee Splitting."
REGULATORY COMPLIANCE
Health care regulations affecting the Company will continue to change and
vary on a state by state basis. The Company believes it will be able to continue
to structure its agreements and operations in accordance with applicable law or,
if necessary, modify its agreements and operations to comply with changing
regulations. However, there can be no assurance that regulatory changes will not
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Regulation--Regulatory Compliance."
DEPENDENCE ON AND CONTRACT RISKS WITH CLIENTS
The Company's revenues depend entirely on fees and payments received from
the clients with which it contracts. Any material loss of revenue from such
clients could have a material adverse effect on the Company's business,
operating results and financial condition. The Company does not control the
marketing or administration of health care services by its clients or their
compliance with regulatory requirements directly applicable to them. In
addition, fees earned pursuant to contracts with ChoiceCare Health Plans, Inc.,
United HealthCare of Ohio, Inc-Western Region and CIGNA HealthCare of Northern
New Jersey, Inc. accounted for approximately 20.2%, 14.1% and 13.7%,
respectively, of the Company's total revenues in 1995, and approximately 20.0%,
14.6% and 16.0%, respectively, of the Company's total revenues for the first
quarter of 1996. Similarly, although the Company's contracts with clients
affiliated with CIGNA Healthcare, Inc. ("CIGNA") are independently negotiated
and operated, the Company had five such contracts in 1995 that represented, in
the aggregate, 29.3% of total revenues for the year ended December 31, 1995 and,
with the commencement of a sixth contract with a CIGNA affiliated client in
1996, such contracts represented, in the aggregate, 40.7% of the Company's total
revenues for the first quarter of 1996. The Company expects that a majority of
its revenues will continue to be attributable to a limited number of clients.
See "Business--Clients; Capitation Contracts and Provider Contracts; RMP
Contracts."
UtiliMed offers two products to payors: CDIP, a capitated product; and RMP,
a fee-based product. Under CDIP contracts, the Company receives a monthly
payment from its clients comprised of compensation for the assumption of
responsibility for medical costs and claims processing, and a fee for the
provision of network management services. By taking responsibility for the
payment of fees to physicians, the Company must fund any losses that arise in
the event the revenues it receives from clients do not exceed the amounts
payable by the Company to providers. Under RMP contracts, the Company provides
network management services in return for a fee from participating clients. A
portion or all of the Company's RMP fee may have to be refunded if the client
does not realize agreed upon cost savings. Under RMP, the Company makes an
appropriate accrual depending upon whether or not it believes it is meeting the
utilization and cost reduction levels in a particular contract. There can be no
assurance that under CDIP contracts revenues from a particular contract will
exceed the Company's payment requirements to providers under such contract, or
that under RMP contracts there will not be negative adjustments in revenues for
future periods. See "Business--Company Products."
10
<PAGE>
SHAREHOLDERS' DEFICIT
While the Company had an accumulated deficit of $78.4 million and a net
deficit in shareholders' equity of $62.9 million at March 31, 1996, the Company
will have positive shareholders' equity following the consummation of this
offering. See "Capitalization." There can be no assurance that the Company will
maintain positive shareholders' equity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
HISTORY OF OPERATING LOSSES
The Company has incurred operating losses in each of the last five fiscal
years. While the Company believes it is positioning itself for profitability,
there can be no assurance that the Company will achieve profitability or
maintain working capital sufficient to support operating cash requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
UNCERTAIN ACCEPTANCE OF NEW PRODUCT
The Company expects to derive an increasing amount of revenue from RMP. To
date, there is insufficient experience with this product to determine its
acceptance in the marketplace. Failure of RMP to achieve market acceptance would
have a material adverse effect on the Company's business, operating results and
financial condition.
NEW MANAGEMENT TEAM; KEY MANAGEMENT
The Company assembled a new executive management team during the second half
of 1995. Although each member of this new management team has experience in the
managed care industry, they have not worked together as a team for a significant
period of time and there can be no assurance that they will continue to perform
or contribute to the business of the Company. The Company is dependent upon its
key management, and the loss of their services, coupled with any inability to
attract and retain qualified replacements could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Management."
COMPETITION
The Company faces current and potential competition from a number of diverse
sources and in differing degrees with respect to its two products. There can be
no assurance that other companies will not expand the scope or geographical
range of their services in the future, or that payors will not increasingly
internalize functions similar to those provided by the Company. Many of the
Company's potential competitors are significantly larger and have greater
financial, personnel and marketing resources than those of the Company, and
there can be no assurance that the Company will continue to maintain its
existing performance with respect to either product or be successful in any new
geographical markets it may enter. See "Business--Competition."
POSSIBLE LITIGATION AND INSURANCE
The Company does not believe that it engages in the practice of medicine or
the delivery of medical services. There can be no assurance, however, that the
Company will not be subject to claims or litigation related to the provision of
medical services, or that, in the future, certain states or courts will not seek
to assign liability to the Company in connection with its activities that would
subject the Company to the attendant risk of substantial damage awards. In
addition, there can be no assurance that the Company will not be subject to
other litigation that could have a material adverse effect on the Company's
business, operating results and financial condition. The Company maintains
professional liability insurance in the amount of $10 million in the aggregate.
While the Company believes it has adequate professional liability insurance
coverage, there can be no assurance that a future claim or claims will not be
deemed applicable to the Company and successful, or if successful, will not
exceed the
11
<PAGE>
limits of available insurance coverage or that such coverage will continue to be
available at acceptable costs and on favorable terms. See "Business--Insurance."
MATERIAL BENEFIT TO INSIDERS; CONTROL BY PRIVATE EQUITY INVESTORS
Of the proceeds to be received by the Company from the sale of the shares of
Common Stock offered hereby, approximately $7 million will be used to repay the
Company's Senior Promissory Notes due March 6, 1997 (the "Senior Notes") issued
to Chase Capital Partners ("CCP") and J.H. Whitney & Co. ("Whitney") and to pay
certain associated deferred fees to CCP and Whitney and approximately $10
million will be used to repay the Company's Senior Subordinated Promissory Notes
due November 3, 2001 (the "Senior Subordinated Notes") issued to CCP and the
Whitney Subordinated Debt Fund, L.P. ("Whitney Debt Fund"). See "Use of
Proceeds" and "Certain Transactions." Two directors of the Board, Jeffrey R.
Jay, M.D. and Peter M. Castleman, are general partners of the Whitney Debt Fund
and Whitney. Two other directors, Mitchell J. Blutt, M.D. and Jonas L. Steinman,
are executive partner and principal, respectively, of CCP. See "Management."
Upon the completion of this offering, CCP, Whitney, Whitney Debt Fund and
the Whitney 1990 Equity Fund, L.P. (collectively, the "Private Equity
Investors") together will beneficially own approximately 47.0% of the
outstanding shares of Common Stock. See "Principal Shareholders." In addition,
as noted above, four of the six members of the Board are also employees of the
Private Equity Investors. Accordingly, the Private Equity Investors and their
affiliates will be able to determine the outcome of all corporate actions
requiring approval by the members of the Board or shareholders and will be able
to control the election of the members of the Board and the determination of the
Company's policies. Such control may have the effect of delaying or preventing a
change in control of the Company.
DILUTION
The Company has a net deficit in shareholders' equity and a net tangible
deficit. Purchasers of Common Stock in this offering will experience immediate
and substantial dilution in the net tangible book value of $ per share
based upon an assumed initial public offering price of $ per share. See
"Dilution."
In addition, on September 6, 1995 the Company issued the Stock Purchase
Warrants to certain shareholders. Although the majority of the Stock Purchase
Warrants have been surrendered to the Company for cancellation (see "Certain
Transactions--Stock Purchase Warrants"), Stock Purchase Warrants for the
purchase of an aggregate of 112,770 shares of Common Stock at an exercise price
of $.05 per share remain outstanding. Although the Stock Purchase Warrants will
not become exercisable upon the completion of this offering, they will become
exercisable if, on or prior to June 30, 1997 (or, under certain conditions,
prior to September 30, 1997), there occurs a sale of the capital stock of the
Company held by the Private Equity Investors or a merger, consolidation or other
business combination, such that the Private Equity Investors receive cash
proceeds (net of certain expenses and fees) that exceed $75 million for their
shares of Common Stock. See "Certain Transactions--1995 Transaction" and
"Capitalization." If the Stock Purchase Warrants are exercised, all shareholders
purchasing in this offering would experience further additional dilution as up
to 112,770 shares of Common Stock would become outstanding.
NO PRIOR MARKET; POTENTIAL VOLATILITY
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering. The initial public offering price will be
determined by negotiation among the Company and the Representative of the
Underwriters and may not be indicative of prices that will prevail in the
trading market. Consequently, there can be no assurance that the market price
for the Common Stock will not fall below the public offering price. See
"Underwriters" for a discussion of the factors to be considered in determining
the initial public offering price. Although application has been made to have
the Common Stock listed
12
<PAGE>
on the American Stock Exchange, there can be no assurance that an active public
market will develop or, if developed, will be sustained following this offering.
There has been significant volatility in the market price of securities of
companies involved in the health care industry that often has been unrelated to
the operating performance of such companies. The Company believes that certain
factors, such as legislative and regulatory developments, lower revenues or
earnings than those anticipated by securities analysts, the overall economy and
the financial markets, could cause the price of the Common Stock to fluctuate
substantially.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE
4,262,147 shares representing 63% of the number of shares of Common Stock
outstanding after the completion of this offering are or will be eligible for
future sale in the public market at prescribed times pursuant to Rule 144 or
Rule 701 under the Securities Act of 1933, as amended (the "Securities Act"), or
pursuant to the exercise of registration rights. Sales of such shares in the
public market, or the perception that such sales may occur, could adversely
affect the market price of the Common Stock or impair the Company's ability to
raise additional capital in the future through the sale of equity securities.
See "--Dilution," "Shares Eligible for Future Sale," "Underwriters" and
"Description of Capital Stock--Registration Rights."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws and
the Illinois Business Corporation Act of 1983 ("IBCA") could, together or
separately, discourage potential acquisition proposals or delay or prevent a
change in control of the Company, even when shareholders, other than the Private
Equity Investors, consider such a transaction to be in their best interest.
Accordingly, such provisions may limit the price that certain investors might be
willing to pay in the future for shares of the Common Stock. See "--Material
Benefit to Insiders; Control by Private Equity Investors," "Description of
Capital Stock--Preferred Stock" and "Description of Capital Stock--Illinois
Takeover Statute." In addition, the equity ownership position of, and control of
the Board by, the Private Equity Investors may have the effect of delaying or
preventing a change in control of the Company. See "-- Material Benefit to
Insiders; Control by Private Equity Investors."
13
<PAGE>
THE COMPANY
UtiliMed is the nation's leading manager of diagnostic imaging services,
providing a comprehensive approach to managing cost, quality and utilization for
payors with large memberships. The Company's products aim to manage the delivery
of quality necessary diagnostic imaging services by qualified physicians to
patients on a cost effective basis. UtiliMed's products manage costs by
decreasing the volume and increasing the quality of imaging services. Quality
improvement can decrease costs through fewer repeat or extra exams necessitated
by poor quality initial exams. The Company offers its clients a capitated
product and a fee-based product, each of which is designed to reduce excess or
improper utilization and improve the quality of service. The core program
elements of the Company's two products include diagnostic imaging assessment and
privileging, diagnostic imaging pre-certification processes, clinical- and
claims-based retrospective utilization database tools and structured physician
education.
In November 1994, the Company redeemed outstanding shares of capital stock
from then existing management. To finance this transaction, the Company issued
debt in the principal amount of $10 million and shares of Common Stock and
instruments convertible into Common Stock to the Private Equity Investors. The
redemption and investment (together, the "Recapitalization") were undertaken to
provide limited liquidity for certain of the Company's founders, to align the
organizational and capital structure of the Company with that of other private
companies that have professional investors, to attract experienced and qualified
directors, to access the financial and managerial advice and experience of the
Private Equity Investors and to facilitate capital investment by other
professional investors that would not ordinarily invest in a closely-held
company. See "Certain Transactions-- Recapitalization."
Following the Recapitalization, the Company grew rapidly in terms of
revenues derived from new CDIP contracts. While the Company's revenues continued
to grow following the Recapitalization, the operating results contemplated by
the Recapitalization for 1994 and the first half of 1995 were not realized and
the Company continued to experience negative cash flow. Consequently, the
Private Equity Investors and the founders completed the 1995 Transaction that
resulted in changes to the capitalization, management and business of the
Company. In connection with the 1995 Transaction, a new management team, led by
Dr. Carl Adkins, the former CEO of United HealthCare of Ohio-Western Region (a
subsidiary of United HealthCare, Inc.), was asssembled. Since the new management
team was assembled, the Company has improved its operating condition through the
implementation of certain initiatives: implementation of the RMP product, the
Terminated Contracts, the renegotiation of six continuing CDIP contracts, and
the recruitment of new professional leadership in finance, operations, claims
management and professional relations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business-Strategy" and
"Certain Transactions-- 1995 Transaction."
The Company was incorporated in Illinois in December 1989. On May 22, 1996,
the Company changed its name from Medicon, Inc. to UtiliMed, Inc. The principal
executive offices of the Company are located at 40 Skokie Boulevard, Northbrook,
Illinois 60062-1618 and its telephone number is (847) 564-8500.
DIVIDEND POLICY
The Company has never declared or paid any dividend on its Common Stock
since its incorporation and does not expect to pay cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to retain all of
its earnings for the operation and expansion of its business. Payment of any
future dividends will depend on the profitability, future earnings and working
capital requirements of the Company and other factors that the Board considers
appropriate. See "Risk Factors--Shareholders' Deficit; History of Operating
Losses" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby, based on an assumed initial public offering price of
$ per share, are estimated to be approximately $ million (or
approximately $ million if the Underwriters' over-allotment option is
exercised in full). Approximately $17.6 million of the net proceeds will be used
to repay indebtedness, approximately $1 million will be used for certain
computer hardware enhancements (including the upgrade and purchase of
equipment), and the balance will be used for working capital. Of the net
proceeds to be used to repay indebtedness, approximately $6.1 million will be
used to repay the principal of and accrued interest on the Senior Notes due
March 6, 1997 which have a variable interest rate and currently bear interest at
14% per annum issued to CCP and Whitney; $1 million to pay certain associated
deferred fees to CCP and Whitney incurred in connection with the issuance of the
Senior Notes; approximately $10.1 million to repay the principal of and accrued
interest on the Senior Subordinated Notes due November 3, 2001 issued to CCP and
Whitney Debt Fund and bearing interest at 10.101% per annum (see "Certain
Transactions" and "Risk Factors--Material Benefit to Insiders; Control by
Private Equity Investors"); and approximately $416,000 to repay the principal of
and accrued interest on a promissory note issued by the Company to Jack M.
Korsower, M.D. (the "Korsower Note") that matures by its terms upon the
consummation of this offering and bears interest at 8.5% per annum. See "Certain
Transactions--1995 Transaction." Approximately $ million of the net proceeds
will be used to achieve positive working capital to support the implementation
of the Company's growth strategy. These funds are expected to remain invested in
short-term investment grade interest bearing securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the (i) the capitalization of the Company at
March 31, 1996 (as if the 5.361849 for-one-reverse stock split declared by the
Board and the conversion of the $10.6 million principal amount Junior
Subordinated Promissory Notes (the "Junior Subordinated Notes") issued in
connection with the Recapitalization into 94,039 shares of Common Stock in
accordance with the terms thereof had occurred prior to March 31, 1996); (ii)
the pro forma capitalization as of such date, after giving effect to (a) the
conversion of the Series A Preferred Stock, no par value (the "Series A
Preferred Stock") and the Class B Stock, no par value (the "Class B Stock") into
3,231,507 shares of Common Stock and (b) the authorization by the Board on July
, 1996 of a new class of preferred stock (see "Certain Transactions" and
"Description of Capital Stock"); and (iii) as adjusted to give effect to the
issuance of 2,500,000 shares of Common Stock offered hereby and the application
of the net proceeds therefrom as described under "Use of Proceeds." This table
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto, included elsewhere in this
Prospectus.
<TABLE><CAPTION>
MARCH 31, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Short-term debt:
Due to shareholders...................................... $ 7,046 $ 7,046 $ 46
Current maturities of long-term debt..................... 378 378 378
-------- --------- -----------
Total short-term debt.................................. $ 7,424 $ 7,424 $ 424
-------- --------- -----------
-------- --------- -----------
Long-term debt due to shareholders......................... $ 9,869 $ 9,869 $ --
Long-term debt............................................. 528 528 128
-------- --------- -----------
Total long-term debt..................................... 10,397 10,397 128
-------- --------- -----------
Series A Preferred Stock (no par value), 1,354,004 shares
authorized; 1,354,004 shares issued and outstanding
actual; none authorized, issued or outstanding pro forma
or pro forma, as adjusted................................ 28,460 -- --
Class B Stock (no par value), 458,480 shares authorized;
458,480 shares issued and outstanding actual; none
authorized, issued or outstanding pro forma or pro forma,
as adjusted.............................................. 8,047 -- --
Shareholders' equity (deficit):
Common Stock (no par value), 5,065,057 shares authorized
and 1,030,641 shares issued and outstanding, actual;
5,065,057 shares authorized and 4,262,147 shares issued
and outstanding, pro forma; 7,940,057 shares authorized
and 6,762,147 shares issued and outstanding, pro forma,
as adjusted(1)......................................... 16,704 53,211
Preferred Stock (no par value) shares authorized;
no shares issued and outstanding....................... -- --
Unearned compensation.................................... (1,212) (1,212)
Accumulated deficit...................................... (78,357) (78,357)
-------- --------- -----------
Total shareholders' equity (deficit)................... (62,865) (26,358)
-------- --------- -----------
Total capitalization................................. $(15,961) $ (15,961) $
-------- --------- -----------
-------- --------- -----------
</TABLE>
- ------------
(1) Excludes 57,745 shares of Common Stock issuable upon exercise of outstanding
employee stock options, 55,108 shares of Common Stock issuable upon exercise
of outstanding stock options, shares of Common Stock reserved for
issuance under the 1996 Option Plan and shares of Common Stock
reserved for issuance under the Employee Plan. See "Management-- Executive
Compensation", "Management--1996 Option Plan", "Management--TARSOP",
"Management--1996 Option Plan" and "Management--Employee Stock Purchase
Plan." Also excludes 112,770 shares of Common Stock issuable upon the
exercise of the Stock Purchase Warrants. Such Stock Purchase Warrants are
exercisable in limited circumstances, including (i) the consummation of this
offering if the price is at least $24.90 per share and (ii) on or prior to
June 30, 1997 (or, under certain circumstances, September 30, 1997), a sale
of the capital stock of the Company in a merger, consolidation or other
business combination in which certain shareholders of the Company receive
proceeds in excess of $75 million. See "Risk Factors--Dilution" and "Certain
Transactions--1995 Transaction" and "Certain Transactions--Stock Purchase
Warrants."
16
<PAGE>
DILUTION
The deficit in net tangible book value of the Company at March 31, 1996, was
approximately $62.9 million or $14.75 per share, as determined by dividing the
Company's total tangible assets less total liabilities by the number of shares
of Common Stock outstanding at that date (assuming conversion of the Company's
Series A Convertible Preferred Stock and Class B Stock into shares of Common
Stock). The pro forma net tangible book value of the Company at March 31, 1996,
would have been approximately $ million or $ per share after giving
effect to this offering (at an assumed initial public offering price of
$ per share) and the application of the estimated net proceeds to the
Company therefrom as set forth in "Use of Proceeds." This represents an
immediate increase of $ per share in the net tangible book value to
existing holders of the Common Stock and an immediate dilution in net tangible
book value of $ per share to new investors purchasing shares of Common
Stock in this offering. "Dilution in net tangible book value" means the
difference between the price per share paid by investors purchasing shares of
Common Stock in this offering and the deficit in pro forma net tangible book
value per share at March 31, 1996. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
Deficit in net tangible book value per share at March 31,
1996..................................................... $(14.75)
Increase in net tangible book value per share attributable
to this offering and the other transactions described
above...................................................
-------
Pro forma net tangible book value per share at March 31,
1996.................................................... ()
---
Dilution in net tangible book value per share to new
investors................................................... $
---
---
</TABLE>
The following table summarizes, as of the consummation of this offering at
an assumed initial public offering price of $ per share, the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share paid by the existing holders of the Common Stock
and by the new investors purchasing shares of Common Stock in this offering.
<TABLE><CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ----------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............................
New investors.....................................
Total.........................................
</TABLE>
The foregoing tables exclude (i) 57,745 shares of Common Stock issuable upon
the exercise of outstanding employee stock options at an exercise price of $0.05
per share, (ii) 55,108 shares of Common Stock issuable upon the exercise of
outstanding stock options at an exercise price of $0.05 per share, (iii)
shares of Common Stock reserved for issuance under the 1996 Option Plan, (iv)
shares of Common Stock reserved for issuance under the Employee Plan and
(v) 112,770 shares of Common Stock issuable upon the exercise of the Stock
Purchase Warrants. See "Management--Executive Compensation,"
"Management--TARSOP," "Management--1996 Option Plan" and "Management--Employee
Stock Purchase Plan." If these outstanding options and warrants were exercised,
new investors purchasing shares of Common Stock in this offering would incur a
decrease in dilution in net tangible book value per share of $ per
share.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1994 and 1995
for the three years ended December 31, 1995 are derived from consolidated
financial statements of UtiliMed which have been audited by Ernst & Young LLP,
independent auditors. The selected consolidated financial data as of December
31, 1993 and as of and for the year ended December 31, 1992 have been audited by
the Company's former independent auditors. The selected consolidated financial
data for the year ended December 31, 1991 have been compiled by an independent
accountant and the financial data for the three month periods ended March 31,
1996 and 1995 have been derived from unaudited consolidated financial
statements, each of which, in the opinion of UtiliMed, include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position and the results of operations for these periods.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the entire year ended
December 31, 1996. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this Prospectus.
<TABLE><CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenues:
Continuing contracts...................... $2,573 $8,063 $19,308 $50,882 $76,457 $18,130 $24,055
Terminated contracts(1)................... -- 2,285 7,079 15,697 19,960 8,626 --
------ ------ --------- --------- --------- --------- ---------
Total contract revenues................. 2,573 10,348 26,387 66,579 96,417 26,756 24,055
Operating Expenses:
Cost of services:
Continuing contracts...................... 2,138 6,883 16,916 49,792 72,365 17,859 20,628
Terminated contracts(1)................... -- 1,753 5,781 16,696 18,437 8,975 --
------ ------ --------- --------- --------- --------- ---------
Total cost of services.................. 2,138 8,636 22,697 66,488 90,802 26,834 20,628
Selling, general and administrative........ 790 1,728 6,107 13,224 22,016 4,815 3,785
Depreciation and amortization.............. -- 76 209 493 740 163 210
Stock based compensation expense........... -- -- -- -- -- -- 593
Provision for loss on employee notes....... -- -- -- -- 287 -- --
------ ------ --------- --------- --------- --------- ---------
Total operating expenses.................. 2,928 10,440 29,013 80,205 113,845 31,812 25,216
------ ------ --------- --------- --------- --------- ---------
Loss from operations....................... (355) (92) (2,626) (13,626) (17,428) (5,056) (1,161)
Other income (expense):
Interest expense.......................... -- (19) (41) (572) (2,053) (592) (419)
Interest income........................... 1 5 58 311 700 258 144
Other income (expense).................... -- -- 1 8 7 -- (4)
------ ------ --------- --------- --------- --------- ---------
Total other income (expense)............ 1 (14) 18 (253) (1,346) (334) (279)
------ ------ --------- --------- --------- --------- ---------
Net loss................................... $(354) $(106) $(2,608) $(13,879) $(18,774) $(5,390) $(1,440)
------ ------ --------- --------- --------- --------- ---------
------ ------ --------- --------- --------- --------- ---------
Pro forma net loss per share(2)............ $(0.57) $(3.05) $(4.37) $(1.25) $(0.33)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of shares used in pro forma net loss
per share computations(2)................. 4,568,824 4,547,914 4,296,439 4,303,522 4,375,823
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
----------------------------------------------- ---------
1991 1992 1993 1994 1995 1996
------ ------ ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................. $(351) $(985) $(4,289) $(6,080) $(18,644) $(19,766 )
Total assets(3)........................................ 265 1,277 3,416 23,933 10,090 16,768
Payables to plans and providers........................ -- 948 4,996 18,360 20,552 22,304
Total debt............................................. 344 616 783 24,667 10,499 17,775
Shareholders' equity (deficit)......................... (348) (470) (3,234) (54,382) (61,267) (62,865 )
</TABLE>
- ------------
(1) Represents seven CDIP contracts that were terminated in 1995 (the
"Terminated Contracts"). Five of the Terminated Contracts were unprofitable
contracts terminated by the Company's new management team as part of the
initiatives being implemented subsequent to the 1995 Transaction (as defined
herein). These unprofitable contracts were entered into without
establishment of appropriate provider networks, thereby placing the Company
at significant financial risk. The other two Terminated Contracts were
terminated prior to their completion by mutual agreement of the Company and
the client. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business-- Clients; Capitation Contracts and
Provider Contracts; RMP Contracts."
(2) Net loss per share is computed by dividing net loss by the number of common
and common equivalent shares outstanding during the periods in accordance
with the applicable rules of the Commission. All stock options and
restricted common stock issued have been considered as outstanding common
stock equivalents for all periods presented, even if anti-dilutive, under
the treasury stock method (based on initial public offering price). Shares
of common stock issuable upon conversion of the Series A Preferred Stock and
Class B Stock are assumed to be common share equivalents for all periods
presented.
(3) The December 31, 1992 total assets include $157,000 of deferred contract
development costs.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives its revenue and operating income from service contracts
with clients for the management of diagnostic imaging services. The Company
offers a capitated product, CDIP, as well as a fee-based product, RMP. Under
each of these products, the Company receives a fixed per member per month
("pmpm") payment in return for the provision of services. In connection with the
1995 Transaction, five unprofitable contracts with unfavorable terms were
terminated by the Company in the third and fourth quarters of 1995. In addition,
two other CDIP contracts were terminated during 1995. All seven of such
contracts are referred to herein as the "Terminated Contracts." See "Selected
Consolidated Financial Information." The following table sets forth the number
of covered lives and contracts managed by the Company as of the dates indicated:
<TABLE><CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
--------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Covered lives:(1)
Continuing CDIP................. 102,000 202,000 485,000 1,035,000 1,152,000 1,098,000 1,380,000
RMP............................. -- -- -- -- 1,111,000 -- 1,166,000(2)
------- ------- ------- --------- --------- --------- ---------
Total continuing lives........ 102,000 202,000 485,000 1,035,000 2,263,000 1,098,000 2,546,000
Terminated CDIP................. -- 112,000 140,000 479,000 -- 524,000 --
------- ------- ------- --------- --------- --------- ---------
Total lives...................... 102,000 314,000 625,000 1,514,000 2,263,000 1,622,000 2,546,000
------- ------- ------- --------- --------- --------- ---------
------- ------- ------- --------- --------- --------- ---------
Number of contracts:
Continuing CDIP................. 4 5 9 12 12 12 13
RMP............................. -- -- -- -- 3 -- 3(2)
------- ------- ------- --------- --------- --------- ---------
Total continuing contracts.... 4 5 9 12 15 12 16
Terminated CDIP................. -- 1 2 5 -- 6 --
------- ------- ------- --------- --------- --------- ---------
Total contracts.................. 4 6 11 17 15 18 16
------- ------- ------- --------- --------- --------- ---------
------- ------- ------- --------- --------- --------- ---------
</TABLE>
- ------------
(1) Represents covered lives as of the date indicated. Unless otherwise
indicated, covered lives in this table and this Prospectus are rounded to
the nearest thousand.
(2) In addition, the Company signed a new RMP contract in March 1996 covering
approximately 88,000 lives which will be implemented in June 1996.
During the third quarter of 1995, the then existing management and the
Private Equity Investors recognized that there were significant problems
managing the rapid growth of the business and that the financial condition of
the Company had deteriorated during 1995 as evidenced by substantial operating
losses. As a result of the rapid growth of the Company, inadequate financial
performance and limited experience of the then existing management, the Company
began implementing the following business initiatives in the third quarter of
1995:
. A new Chief Executive Officer was hired.
. New, more experienced professionals were recruited in operations, claims
management, finance and client relations and a new management team was
assembled.
. A new operating strategy was developed that focused on (i) introducing the
new RMP product; (ii) expanding the CDIP product; (iii) evaluating the
current and future profitability of all existing contracts; (iv) reducing
operating costs and (v) improving financial controls.
. Five unprofitable contracts which had unfavorable terms were terminated.
. The Company initiated discussions to renegotiate six other contracts in an
effort to improve the profitability of such contracts. Three of such
contract renegotiations were completed on favorable terms, one additional
renegotiation is substantially completed, and two are in process.
19
<PAGE>
. General and administrative expenses were reduced through a 15.6% reduction
in the workforce from 224 full-time employees at June 30, 1995 to 189
full-time employees at March 31, 1996. In addition, expense controls were
implemented in other areas such as travel, legal, consulting, printing and
temporary services. As a result, the Company reduced its selling, general
and administrative expenses by 27.3% for the quarter ended March 31, 1996
compared to the quarter ended June 30, 1995.
. The Company developed and implemented an activity-based cost model for
evaluating potential business opportunities and improving financial
forecasting.
As a result of the ongoing implementation of these initiatives, the Company
has positioned itself for improved financial results. However, there can be no
assurance that the Company will be successful in continuing to improve its
financial performance.
REVENUE
The Company receives revenue in the form of pmpm payments from clients
pursuant to CDIP and RMP contracts with terms of one to five years. The pmpm
payment received under CDIP contracts includes an administrative fee associated
with the Company's management services and compensation for assuming the
responsibility for medical costs and claims processing related to the provision
of diagnostic imaging services. Eight of the CDIP contracts allow for annual
changes of the pmpm payment tied to changes in the Consumer Price Index ("CPI").
The pmpm received under RMP contracts consists solely of an administrative fee
associated with the Company's management services. Consequently, pmpm revenue
from the CDIP contracts is significantly greater than pmpm revenue from RMP
contracts.
Under RMP, the Company does not process claims for payments to providers
and, consequently, the RMP pmpm payment consists solely of an administrative fee
associated with the Company's management services. The Company includes an
incentive arrangement in its RMP contracts, whereby the Company and the client
set mutually agreed upon goals for achieving cost savings for the covered
population as a whole after the implementation of certain operational changes by
the client. In the event cost savings for the client exceed specified levels,
the Company and the client share in the savings. If the cost savings are not
achieved after the client has implemented certain operational changes, the
Company may be required to refund a portion, or in two RMP contracts, up to all
of the monthly pmpm payment. Under two RMP contracts, performance settlement is
made on an annual basis. A third RMP contract requires performance settlement at
the end of the three year term of the contract, with an interim settlement on or
about the second anniversary date of the contract. The fourth RMP contract does
not include an incentive arrangement nor is the pmpm payment subject to
reduction or refund. The Company's policy with RMP contracts is to accrue for
estimated incentive payments to the Company or refunds by the Company which may
be received or incurred, respectively, in accordance with the terms of each
contract. Because the RMP contracts are new, no such accruals have yet been
recognized. The Company intends to accrue for each RMP contract, if required,
once the client implements certain operational changes and experience patterns
are developed and identified. Adjustments relating to the accruals may be
material to the operating results of the Company.
Growth in revenue is expected to be achieved primarily through securing and
implementing new RMP and CDIP contracts. The Company believes that growth in
revenue will also be achieved through membership growth of its existing client
base, expanding relationships with current clients and by expanding program
offerings with health plans for additional population segments. In addition, the
Company is planning to market one or more components of RMP as separate
products. The Company has held discussions with certain payors and anticipates
that payors will be interested in contracting with the Company to provide
assessment, privileging, precertification or retrospective utilization reporting
as separate products to the payor's plans. The Company expects that the pmpm
fees paid for such products will be less than the pmpm for RMP. See
"Business--Strategy."
20
<PAGE>
EXPENSES
As a result of different program designs and financial risks, CDIP and RMP
have different expense levels. Under the CDIP contracts, the Company assumes the
responsibility for the processing and payment of claims for the provision of
diagnostic imaging services. These payments, which are cost of services, are
generally made to providers on a monthly basis in accordance with the provider
contracts and payment methodologies. Under certain payment methodologies,
providers receive additional reimbursement on a quarterly or annual basis. See
"Business--Clients; Capitation Contracts and Provider Contracts; RMP Contracts."
Payables to plans and providers under CDIP contracts include estimates of
unpaid reported and unreported services provided, accrued capitation fees and
adjustments. These estimates of payables are based on statistical information
and revised as additional information becomes available. Actual results
inevitably will differ from these estimates and such differences may have a
material effect on the Company's business, financial condition and results of
operations for a particular period. See Notes 1 and 3 to the Consolidated
Financial Statements. The Company's medical loss ratio (which is calculated as
cost of services divided by contract revenue, excluding RMP revenue) includes
both the actual payments made to providers and the estimate of amounts which
have been earned by providers but are either unpaid by or not yet reported to
the Company. Accordingly, while the Company's CDIP revenues are primarily fixed,
the cost of services will vary based upon the services rendered, the estimates
of payables and the contractual relationship with the provider.
Selling, general and administrative expenses include the costs of client
relations, clinical coding, claims processing, precertification, assessment,
provider services, utilization analysis and fixed costs such as information
systems, finance, marketing, administration, human resources and legal expenses.
Generally, CDIP contract expenses are higher than RMP expenses because of the
additional costs associated with claims processing and payment and provider
network management.
The Company incurs start-up costs before implementation of contracts, which
are expensed as incurred. Such costs, which include contracting provider
networks, interfacing of information systems and provider assessment and
training of new employees, are typically expensed beginning at least three
months prior to the initial recognition of revenue under a new contract. See
Note 1 to the Consolidated Financial Statements. Although RMP contracts do not
involve the cost of contracting provider networks, the cost of interfacing
information systems tends to be greater for RMP than for CDIP. Certain start-up
costs of CDIP and RMP contracts vary as a function of the size of the membership
of the client.
NET OPERATING LOSS CARRYFORWARDS
The Company's net operating loss carryforwards of $13.7 million, which will
expire in the years 2009 and 2010, are available to offset future taxable
income. See Note 5 to the Consolidated Financial Statements.
21
<PAGE>
RESULTS OF OPERATIONS
The following table presents selected financial data expressed as a
percentage of revenue for the periods indicated and should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this Prospectus:
<TABLE><CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total contract revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of services.............................. 86.0 99.9 94.2 100.3 85.8
Selling, general and administrative................. 23.2 19.9 22.8 18.0 15.7
Depreciation and amortization....................... 0.8 0.7 0.8 0.6 0.9
Stock based compensation expense.................... -- -- -- -- 2.5
Provision for loss on employee notes................ -- -- 0.3 -- --
----- ----- ----- ----- -----
Total operating expenses............................ 110.0 120.5 118.1 118.9 104.9
----- ----- ----- ----- -----
Loss from operations................................ (10.0) (20.5) (18.1) (18.9) (4.9)
Other income (expense):
Interest expense.................................. (0.1) (0.8) (2.1) (2.2) (1.7)
Interest income................................... 0.2 0.5 0.7 1.0 0.6
Other income...................................... -- -- -- -- --
----- ----- ----- ----- -----
Total other income (expense), net............... 0.1 (0.3) (1.4) (1.2) (1.1)
----- ----- ----- ----- -----
Net loss............................................ (9.9)% (20.8)% (19.5)% (20.1)% (6.0)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The following table presents the Company's medical loss ratio (calculated as
cost of services divided by contract revenue, excluding RMP revenue) for the
periods indicated:
<TABLE><CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1993 1994 1995 1995 1996
---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Continuing contracts............................ 87.6% 97.9% 96.9% 98.5% 94.0%
Terminated contracts(1)......................... 81.7% 106.4% 92.4% 104.0% --
</TABLE>
- ------------
(1) Total 1994 cost of services includes a charge of $3.2 million related to the
estimated cost of services in excess of revenues for four contracts, two of
which are Terminated Contracts, one of which has been renegotiated and the
other is being renegotiated. Total 1995 cost of services includes a $1.7
million reduction in cost of services related to the change in estimate
arising from the early termination of the two Terminated Contracts.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUE
Revenue from continuing contracts increased from $18.1 million in the
quarter ended March 31, 1995 to $24.1 million in the quarter ended March 31,
1996, an increase of $6.0 million or 33.1%. Of this increase, $1.7 million was
attributable to the addition of one CDIP contract in the first quarter of 1996.
The introduction of the RMP product resulted in the implementation of three RMP
contracts in the third and fourth quarters of 1995 which generated revenue of
$2.1 million in the first quarter of 1996. The remainder relates to increases in
the number of covered lives under continuing contracts. The total number of
covered lives managed under CDIP contracts increased by 25.7% from March 31,
1995 to 1,380,000 at March 31, 1996. The covered lives under RMP contracts
aggregated 1,166,000 at March 31, 1996.
Revenue from Terminated Contracts decreased from $8.6 million in the quarter
ended March 31, 1995 to $0 in the quarter ended March 31, 1996 because revenues
from these contracts ended in 1995.
22
<PAGE>
COST OF SERVICES
Cost of services for continuing contracts was $20.6 million, or 85.8% of
continuing contract revenue, in the first quarter of 1996 compared to $17.9
million, or 98.5%, in the first quarter of 1995. The decrease in cost of
services as a percentage of continuing contract revenue resulted from the
addition of three RMP contracts in the third and fourth quarters of 1995, which
do not have the cost of services component of CDIP, and an improved medical loss
ratio. The medical loss ratio improved to 94.0% in the first quarter of 1996
compared to 98.5% for the comparable quarter in 1995 primarily due to cost
reductions on three contracts.
Cost of services for Terminated Contracts was $0 in the first quarter of
1996 compared to $9.0 million in the first quarter of 1995. No cost of services
for Terminated Contracts was incurred in the first quarter of 1996 because these
contracts were terminated in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses decreased to $3.8 million, or
15.7% of total contract revenue, in the first quarter of 1996 compared to $4.8
million, or 18.0%, in the first quarter of 1995.
Salaries, wages and related employee expenses were $2.9 million, or 12.1% of
total revenue, in the first quarter of 1996 compared to $3.1 million, or 11.6%,
in the first quarter of 1995. The decrease of $.2 million resulted primarily
from a decrease in hiring expenses. The Company also did not incur the level of
expenses related to severance that was incurred in the second half of 1995.
Outside services expense, which consists primarily of management consulting,
information systems consulting, temporary labor and legal, audit and tax costs
was $187,000, or 0.8% of total revenue, in the first quarter of 1996 compared to
$555,000, or 2.1%, in the first quarter of 1995. The decrease of $368,000
resulted primarily from temporary labor and management consulting costs. The
Company does not anticipate that the levels of temporary labor and management
consulting costs incurred in 1995 will be representative of expenditures for
such items in 1996.
Other selling, general and administrative expenses, which primarily consist
of travel, rent, printing, communications and marketing were $678,000, or 2.8%
of total revenue, in the first quarter of 1996 compared to $1.1 million, or
4.3%, in the first quarter of 1995. The decrease in the first quarter of 1996
resulted primarily from continued implementation of the new business
initiatives.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $210,000 or 0.9% of total revenue,
in the first quarter of 1996 compared to $163,000, or 0.6%, in the first quarter
of 1995. Depreciation and amortization expense increased primarily due to
capital expenditures relating to office equipment, computer hardware and
software, and leasehold improvements.
STOCK BASED COMPENSATION EXPENSE
Stock based compensation expense was $593,000, or 2.5% of total contract
revenue, in the first quarter of 1996 compared to $0 in the first quarter of
1995. This increase resulted from the Company recognizing the compensation
expense associated with certain stock options and restricted share grants
awarded or amended during the first quarter of 1996. The Company did not incur
significant stock based compensation charges in prior periods. Of the total
$593,000, $527,000 is non-recurring.
INTEREST EXPENSE
Interest expense decreased to $419,000, or 1.7% of total revenue, in the
first quarter of 1996 compared to $592,000, or 2.2%, in the first quarter of
1995. The decrease in interest expense resulted primarily from the conversion of
the Junior Subordinated Notes into Common Stock. See "Certain Transactions--1995
Transaction."
23
<PAGE>
INTEREST INCOME
Interest income decreased to $144,000, or 0.6% of total revenue, in the
first quarter of 1996 compared to $258,000, or 1.0%, in the first quarter of
1995. This decrease resulted primarily from decreased interest from short-term
investments.
NET LOSS
As a result of the foregoing, the Company incurred a net loss for the first
quarter of 1996 of $1.4 million compared to a net loss of $5.4 million for the
first quarter of 1995. The first quarter of 1996 represented an improvement in
financial performance which resulted from several factors that the Company
expects to continue. These factors include improvement in the medical loss ratio
due to decreased payments for out-of-network costs and improved management of
in-network costs, new RMP and CDIP contracts and realization of the effects of
the cost reduction initiative. Since the effect of these factors is ongoing,
there can be no assurance that such improvements will continue or that the
Company will become profitable.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE
Revenue from continuing contracts increased from $50.9 million in 1994 to
$76.5 million in 1995, an increase of $25.6 million or 50.3%. Of this increase,
$21.3 million was related to services provided for a full year under CDIP
contracts entered into with three clients during 1994. The introduction of RMP
in the third quarter of 1995 resulted in three new RMP contracts which generated
revenue of $1.8 million. The remaining $2.5 million resulted from increases in
revenue from existing CDIP contracts related to increases in the number of
covered lives under clients' plans and, to a lesser extent, annual CPI-based
increases in pmpm rates in CDIP contracts. The number of lives managed under
continuing CDIP contracts increased by 11.3%, from 1,035,000 at December 31,
1994 to 1,152,000 at December 31, 1995. Covered lives under three RMP contracts
aggregated 1,111,000 at December 31, 1995.
Revenue from Terminated Contracts increased from $15.7 million in 1994 to
$20.0 million in 1995, an increase of $4.3 million or 27.4%. This increase
resulted primarily from two contracts which commenced operations in the fourth
quarter of 1994 and were in effect for the first three quarters of 1995 and two
contracts which commenced and were terminated in 1995. Such increase was offset
in part by a decline in revenue from a contract which was terminated in 1995,
but was in effect for all of 1994.
COST OF SERVICES
Cost of services for continuing contracts was $72.4 million, or 94.6% of
continuing contract revenue, in 1995 compared to $49.8 million, or 97.9%, in
1994. This increase was primarily attributable to services provided for a full
year under those CDIP contracts implemented in 1994. The decrease in cost of
services as a percentage of total revenue in 1995 resulted from the addition of
three RMP contracts during 1995 which do not have the cost of services component
of CDIP and an improved medical loss ratio. The medical loss ratio for CDIP
contracts improved from 97.9% during 1994 to 96.9% during 1995 primarily due to
cost reductions on two such contracts. In the fourth quarter of 1994, the
Company recognized cost of services in excess of revenue of $1.7 million for
such contracts through an estimated termination date. One of these contracts was
successfully renegotiated in 1996 and the Company is renegotiating the other
contract.
Cost of services for Terminated Contracts was $18.4 million, or 92.4% of
Terminated Contract revenue, in 1995 compared to $16.7 million, or 106.4%, in
1994. In the fourth quarter of 1994, the Company recognized (i) cost of services
in excess of revenue on two CDIP contracts of $961,000 and (ii) estimated cost
of services in excess of revenues of $1.5 million for these two contracts
through estimated termination dates. As a result of the initiatives which the
Company began implementing in the third quarter of 1995, the two contracts were
terminated earlier than originally estimated. Consequently, the Company incurred
$1.7 million less costs of services than originally estimated. Excluding the
impact of these adjustments, cost of services was 100.8% of Terminated Contract
revenue in 1995 compared to 90.5% for 1994. This increase as a percentage of
revenue resulted primarily from cost overruns associated with one Terminated
Contract which commenced operations in 1995.
24
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $22.0 million, or
22.8% of total revenue, in 1995 compared to $13.2 million, or 19.9% of total
revenue, in 1994.
Salaries, wages and related employee benefits and expenses were $14.1
million, or 14.7% of total revenue, in 1995 compared to $9.1 million, or 13.7%,
in 1994. This increase was attributable to the addition of personnel to support
the Company's revenue growth. Also, as a result of the initiatives the Company
began implementing in the third quarter of 1995, salaries, wages and benefits
costs increased in 1995 as a result of severance and hiring expenses, each of
which represented $1.1 million, or 1.1% of total revenue, in 1995. The Company
considers the amount of these expenses to be non-recurring.
Outside services expense, which primarily consists of management consulting,
information systems consulting, temporary labor and legal, audit and tax costs
was $3.5 million, or 3.7% of total revenue, in 1995 compared to $1.4 million, or
2.1%, in 1994. The increase in outside services expense resulted primarily from
information systems consulting and costs associated with implementing the
Company's new business initiatives.
Other selling, general and administrative expenses, which primarily consist
of travel, rent, bad debts, printing, communications and marketing were $4.4
million, or 4.4%, in 1995 compared to $2.7 million, or 4.1%, in 1994. The
increase in other selling, general and administrative expenses resulted
primarily from greater support costs associated with the Company's revenue
growth. In addition, the Company expensed a $482,000 account receivable related
to a joint venture established in connection with one of the Terminated
Contracts.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $740,000, or 0.8% of total
revenue, in 1995 compared to $493,000, or 0.7%, in 1994. Depreciation and
amortization expense increased due to the expansion of office facilities and
related leasehold improvements, as well as increased capital expenditures for
computer equipment and software.
INTEREST EXPENSE
Interest expense increased to $2.1 million, or 2.1% of total revenue, in
1995 compared to $572,000, or 0.8%, in 1994. The increase resulted from
additional long-term debt, including the Senior Subordinated Notes and the
Junior Subordinated Notes issued in November 1994 and capitalized lease
obligations. At December 31, 1995, long-term debt, including the Senior
Subordinated Notes and the Junior Subordinated Notes and capitalized lease
obligations, decreased $14.2 million, of which $10.6 million was attributable to
the conversion of Junior Subordinated Notes into Common Stock. See "Certain
Transactions--1995 Transaction" and Note 4 to the Consolidated Financial
Statements.
INTEREST INCOME
Interest income increased to $700,000, or 0.7% of total revenue, in 1995
compared to $311,000, or 0.5%, in 1994. This increase resulted from additional
interest from short-term investments.
NET LOSS
As a result of the foregoing, the net loss for 1995 was $18.8 million
compared to $13.9 million for 1994.
YEARS ENDED DECEMBER 31, 1994 AND 1993
REVENUE
Revenue from continuing contracts increased from $19.3 million in 1993 to
$50.9 million in 1994, an increase of $31.6 million or 163.7%. Of this increase,
$18.4 million was attributable to the addition of three CDIP contracts in 1994
and $11.7 million was related to services provided for a full year under CDIP
contracts entered into with four clients during 1993. The remaining $1.5 million
was the result of
25
<PAGE>
increases in revenue from existing contracts related to increases in the number
of covered lives under clients' plans and, to a lesser extent, increases in
capitated rates received by the Company. The number of lives managed under CDIP
agreements increased by 113.4% from 485,000 at December 31, 1993 to 1,035,000 at
December 31, 1994.
Revenue from Terminated Contracts increased from $7.1 million in 1993 to
$15.7 million in 1994, an increase of $8.6 million or 121.1%. This increase
resulted primarily from three contracts which commenced operations in 1994.
COST OF SERVICES
Cost of services for continuing contracts was $49.8 million, or 97.9% of
continuing contract revenue, in 1994 compared to $16.9 million, or 87.6%, in
1993. This increase was primarily attributable to services provided for a full
year under four CDIP contracts implemented in 1993. The increase in cost of
services as a percentage of continuing contract revenue in 1994 was primarily
attributable to cost of services in excess of revenue of $1.7 million, of which
one contract has subsequently been renegotiated. The remaining increase resulted
primarily from two contracts which had significantly higher medical loss ratios
than other continuing contracts, one of which commenced operations during 1994
and a second contract that commenced operations during the fourth quarter of
1993.
Cost of services for Terminated Contracts was $16.7 million, or 106.4% of
Terminated Contract revenue, in 1994 compared to $5.8 million, or 81.7%, in
1993. In the fourth quarter of 1994, the Company recognized (i) cost of services
in excess of revenues on two CDIP contracts of $961,000 and (ii) estimated cost
of services in excess of revenues of $1.5 million for these two contracts
through estimated termination dates. Excluding the impact of these adjustments,
cost of services was 90.5% of Terminated Contract revenue in 1994 compared to
81.7% in 1993. This increase resulted primarily from an increase in the medical
loss ratio for one Terminated Contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $13.2 million,
19.9% of total revenue, in 1994 compared to $6.1 million, or 23.2% of total
revenue, in 1993.
Salaries, wages and related employee benefits and expenses remained
relatively consistent as a percentage of total revenue from 1993 to 1994. These
expenses were $9.1 million, or 13.7% of total revenue, in 1994 compared to $3.8
million, or 14.4%, in 1993. This increase of $5.3 million is primarily
attributable to an increase in the number of employees from 110 at December 31,
1993 to 172 at December 31, 1994.
Outside services expense, which primarily consists of temporary labor,
management consulting, information systems consulting, and legal, audit and tax
costs was $1.4 million, or 2.1% of total revenue, in 1994 compared to $692,000,
or 2.6%, in 1993. The increase in outside services expense resulted primarily
from management consulting and information systems consulting to support the
Company's revenue growth.
Other selling, general and administrative expenses, which primarily consist
of travel, rent, printing, communications and marketing, were $2.7 million, or
4.1% of total revenue, in 1994 compared to $1.6 million, or 6.1%, in 1993. The
decrease as a percentage of total revenue resulted from operating efficiencies
achieved through revenue growth.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $493,000, or 0.7% of total
revenue, in 1994 compared to $209,000, or 0.8%, in 1993. The increase in
depreciation and amortization expense resulted from the expansion of office
facilities and related leasehold improvements, as well as increased capital
expenditures for computer equipment and software.
26
<PAGE>
INTEREST EXPENSE
Interest expense increased to $572,000, or 0.8% of total revenue, in 1994
compared to $41,000, or 0.1%, in 1993. The increase in interest expense resulted
from additional long-term debt, including the Senior Subordinated Notes and the
Junior Subordinated Notes issued in November 1994 and capitalized lease
obligations. Long-term debt increased from $.7 million at December 31, 1993 to
$24.7 million at December 31, 1994. See "Certain
Transactions--Recapitalization."
INTEREST INCOME
Interest income increased to $311,000, or 0.5% of total revenue, in 1994
compared to $58,000, or 0.2%, in 1993. This increase resulted from additional
interest from short-term investments.
NET LOSS
As a result of the foregoing, the net loss was $13.9 million in 1994
compared to $2.6 million for 1993.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had a working capital deficit of $19.8
million and a total shareholders' deficit of $62.9 million. Of the net proceeds
of this offering, approximately $17.6 million will be used to repay
indebtedness, approximately $1 million will be used for certain computer
hardware and software enhancements (including the upgrade and purchase of
equipment), and the balance will be used for working capital. Of the net
proceeds to be used to repay indebtedness, approximately $6.1 million will be
used to repay the principal of and accrued interest on the Senior Notes; $1
million to pay certain associated deferred fees to CCP and Whitney incurred in
connection with the issuance of the Senior Notes; approximately $10.1 million to
repay the principal of and accrued interest on the Senior Subordinated Notes;
approximately $416,000 to repay the principal of and accrued interest on the
Korsower Note; and the remainder will be used to achieve positive working
capital to support the implementation of the Company's growth strategy. These
funds are expected to remain invested in short-term, investment grade, interest
bearing securities. See "Use of Proceeds."
Immediately prior to consummation of this offering, the outstanding shares
of Series A Preferred Stock and Class B Stock will be converted into shares of
Common Stock. On a pro forma as adjusted basis at March 31, 1996, assuming such
conversion and application of the proceeds from this offering, the Company would
have had positive working capital, total indebtedness would have been reduced
from $17.8 million to approximately $507,000 and shareholders' equity would have
increased from a deficit of $62.9 million to positive shareholders' equity of
approximately $ million. See "Capitalization"
In June 1996 the Company and the Private Equity Investors entered into
agreements with the holders of 82.4% of the Stock Purchase Warrants (potentially
exercisable for 528,466 shares of Common Stock) pursuant to which such Stock
Purchase Warrants were surrendered for cancellation in exchange for, among other
things, a commitment by the Private Equity Investors to transfer an aggregate of
59,740 shares of Common Stock held by Private Equity Investors to such persons
upon consummation of this offering. In connection with these Agreements, the
Company recorded a non-cash charge and a contribution of capital of
approximately $1.0 million during the second quarter of 1996.
The Company's historical operating cash requirements have been met through a
combination of cash provided by operating activities, financing from
shareholders and a bank line of credit which was discontinued in 1995. See
"Certain Transactions". Net cash provided from operating activities was $2.0
million and $2.9 million for the years ended December 31, 1993 and 1994,
respectively, compared to $13.9 million of cash used in operating activities for
the year ended December 31, 1995. Although the Company had a net loss of $13.9
million in 1994, the increase in payables to providers of $16.7 million
contributed to the overall increase in cash flow from operations. The negative
cash flow for 1995 was primarily related to the Company's net loss of $18.8
million. As a result of the negative cash flow and the inability to realize the
operating results contemplated by the Recapitalization, the Company
27
<PAGE>
completed the 1995 Transaction which resulted in changes to the capitalization,
management and operations of the Company. See "Certain Transactions--1995
Transaction."
The Company's primary cash need is to pay provider diagnostic imaging claims
under CDIP agreements. The total amount due to providers was $20.6 million at
December 31, 1995, compared to $18.4 million at December 31, 1994 and $22.3
million at March 31, 1996. As the number of CDIP contracts increases, these
obligations will increase. In addition, the Company has been required to service
outstanding debt due to the Private Equity Investors, which aggregated $10.0
million at December 31, 1995 and $17.0 million at March 31, 1996, including a
$1.0 million transaction fee. A portion of the net proceeds of this offering
will be used to repay this indebtedness.
Certain of the Company's RMP contracts include various performance criteria.
If these performance criteria are not met, the Company may be obligated to
refund a portion or all of the administrative fees received. Failure to achieve
contractual performance criteria could have a material adverse effect on the
Company's cash flows.
Capital expenditures for 1995, 1994 and 1993 were $1.4 million, $1.3 million
and $1.3 million, respectively. Such expenditures primarily consisted of office
equipment, leasehold improvements and computer hardware and software. Other than
the $1 million for planned computer hardware and software expenditures in 1996,
which will be funded by a portion of the net proceeds from this offering, the
Company does not expect to incur any significant capital expenditure in 1996.
The Company believes that cash flow from operating activities will be
sufficient to fund the Company's working capital needs through the end of 1996.
In addition, should additional financial support become necessary, the Private
Equity Investors committed to provide up to $3 million in 1996. Such commitment
will expire upon consummation of this offering. The Company believes it has
positioned itself for further improvement in financial performance as a result
of the business initiatives being implemented since the 1995 Transaction. The
Company's long-term liquidity needs consist of working capital and capital
expenditure requirements, repayment of outstanding debt due to the Private
Equity Investors and implementation of new contracts with payors. In addition,
the Company's future capital requirements will depend on many factors, including
the acceptance of its products, success in entering into new contracts with
payors, the costs associated with new product development, and its ability to
manage its contracts. The Company intends to fund these long-term liquidity
needs with cash generated from operations and the application of the net
proceeds from the consummation of this offering. In the event the Company's long
term liquidity needs exceed the cash generated from operations and any remaining
net proceeds from this offering, the Company will be required to seek financing
from other sources such as bank loans and public or private debt or equity
placements. No assurance can be given that any such financing will be available
or, if available, that the terms will be favorable to the Company.
In addition to the Terminated Contracts, the Company has, in an effort to
improve profitability, engaged in renegotiations regarding six other CDIP
contracts. This effort has resulted in three contracts being renegotiated,
negotiations with respect to one additional contract being substantially
completed and two others in process. As part of the renegotiations with respect
to one contract that is substantially completed, the Company agreed to deposit
with the client the amount of the estimated payable to providers affiliated with
such client. The amount of the deposit is adjusted quarterly based upon the
estimated payables due to the client and providers under the client contract
arrangement. Upon the Company achieving a quick ratio (the ratio of cash and
cash equivalents to current liabilities) of 1:1 for two consecutive fiscal
quarters, the deposit will be returned to the Company. Until the return to the
Company of the deposit, such funds are not available to the Company for working
capital or other purposes. As a result, the Company recorded a $6.2 million
deposit as of March 31, 1996. See "Business--Clients; Capitation Contracts and
Provider Contracts; RMP Contracts" and "Certain Transactions--Senior Notes." The
Company believes that the terms of the business agreement with such client,
which are subject to definitive documentation, will improve the profitability
and cash flow
28
<PAGE>
from the contract and will facilitate implementation of the initiatives to
position the Company for improved financial results.
From 1993 to 1995, the Company maintained a credit line providing for
maximum borrowings of $700,000. This credit line was not extended by the Company
in January 1995 following the Recapitalization. While the Company anticipates
that it will obtain a credit facility following the consummation of this
offering, the Company has not engaged in negotiations and no assurance can be
given that a credit facility will be obtained on terms acceptable to the
Company.
In connection with the funding of the deposit, the Company issued $6.0
million of Senior Notes to the Private Equity Investors. As part of the issuance
of this debt, the Company incurred a $1.0 million transaction fee which has been
recorded as deferred debt issuance costs. These costs are being amortized over
one year. See "Certain Transactions--Senior Notes." The Senior Notes will be
repaid and the transaction fee will be paid with a portion of the net proceeds
of this offering. See "Use of Proceeds."
Based upon its analysis of individual contracts, the Company establishes a
loss contract accrual for the excess of estimated future cost of services over
estimated future contract revenue for the remaining contract period. Loss
contract accruals are charged to earnings when probable and reasonably estimable
and are amortized over the remaining current term of the specific contracts. As
of December 31, 1995 and March 31, 1996, the Company identified one contract
that required such accrual and, through March 31, 1996, has amortized $150,000
of the $755,000 recorded charge. See Note 1 to the Consolidated Financial
Statements.
The Company's net operating loss carryforwards of $13.7 million, which
expire in the years 2009 and 2010, are available to offset future taxable
income. See Note 5 to the Consolidated Financial Statements. Upon the
consummation of this offering, the Company will incur non-recurring, non-cash
charges of $793,000 offset in part by a reversal of approximately $137,000 of
the valuation allowance of $287,000 for loss on employee notes. See "Certain
Transactions--1995 Transaction."
SUMMARY OF OPERATIONS BY QUARTER
The following table presents unaudited quarterly operating results for the
periods indicated. The Company believes all necessary adjustments, consisting
only of normal, recurring adjustments, have been included in the amounts stated
below to present fairly the quarterly results when read in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus. Future quarterly results may fluctuate depending on the timing
and number of new contracts and start-up costs associated therewith, adjustments
relating to the accruals for incentive payments under RMP contracts and
adjustments resulting from changes to estimates of cost of services attributable
to fees due to providers. Results of operations for any particular quarter are
not necessarily indicative of results of operations for a full year or
predictive of future periods.
29
<PAGE>
<TABLE><CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994 1995 1995 1995 1995
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract revenues:
Continuing contracts...... $ 8,679 $ 12,607 $13,404 $ 16,192 $18,130 $ 18,427 $19,497 $ 20,403
Terminated contracts...... 2,013 2,196 3,587 7,901 8,626 6,328 3,836 1,170
--------- -------- ------ ------ --------- -------- ------ ------
Total contract
revenues................... 10,692 14,803 16,991 24,093 26,756 24,755 23,333 21,573
Operating expenses:
Cost of services:
Continuing contracts.... 7,915 11,699 12,501 17,677 17,859 18,196 18,281 18,029
Terminated contracts.... 1,858 1,936 3,298 9,604 8,975 6,012 2,634 816
--------- -------- ------ ------ --------- -------- ------ ------
Total cost of
services................... 9,773 13,635 15,799 27,281 26,834 24,208 20,915 18,845
Selling, general and
administrative............. 2,742 2,985 3,326 4,171 4,815 5,204 6,551 5,446
Depreciation and
amortization............... 101 125 127 140 163 177 193 207
Stock based compensation
expense.................... -- -- -- -- -- -- -- --
Provision for loss on
employee notes.......... -- -- -- -- -- 150 -- 137
--------- -------- ------ ------ --------- -------- ------ ------
Total operating
expenses................... 12,616 16,745 19,252 31,592 31,812 29,739 27,659 24,635
--------- -------- ------ ------ --------- -------- ------ ------
Loss from operations....... (1,924) (1,942) (2,261) (7,499) (5,056) (4,984) (4,326) (3,062)
Total other income
(expense), net............. (11) (34) (23) (185) (334) (456) (141) (415)
--------- -------- ------ ------ --------- -------- ------ ------
Net loss................... $(1,935) $ (1,976) $(2,284) $ (7,684) $(5,390) $ (5,440) $(4,467) $ (3,477)
--------- -------- ------ ------ --------- -------- ------ ------
--------- -------- ------ ------ --------- -------- ------ ------
<CAPTION>
<S> <C>
MARCH 31,
1996
---------
<S> <C>
Contract revenues:
Continuing contracts...... $24,055
Terminated contracts...... --
---------
Total contract
revenues................... 24,055
Operating expenses:
Cost of services:
Continuing contracts.... 20,628
Terminated contracts.... --
---------
Total cost of
services................... 20,628
Selling, general and
administrative............. 3,785
Depreciation and
amortization............... 210
Stock based compensation
expense.................... 593
Provision for loss on
employee notes.......... --
---------
Total operating
expenses................... 25,216
---------
Loss from operations....... (1,161)
Total other income
(expense), net............. (279)
---------
Net loss................... $(1,440)
---------
---------
</TABLE>
The fourth quarter of 1994 includes charges aggregating $3.2 million
relating to the estimated loss for four contracts through the estimated
termination dates. Two of the contracts were terminated in connection with the
1995 Transaction. One of the four contracts has been renegotiated and the fourth
contract is being renegotiated.
The third quarter and fourth quarter of 1995 include an adjustment to the
estimated loss accrual recorded in the fourth quarter of 1994 of $1.5 million
and $258,000, respectively. These adjustments were recognized as a reduction in
cost of services.
During the third quarter of 1995, the Company began implementing certain
business initiatives and as a result, incurred severance expense of $481,000 and
$620,000 and hiring expenses of $440,000 and $181,000, all in the third and
fourth quarters, respectively.
30
<PAGE>
BUSINESS
INDUSTRY OVERVIEW
Diagnostic imaging services include, among other techniques, ultrasound,
diagnostic radiology (including mammography), magnetic resonance imaging
("MRI"), computed tomography ("CT") and nuclear medicine. Diagnostic imaging in
many instances enables physicians to provide early diagnostic capability to aid
in effective treatment. The Company believes that a significant amount of
diagnostic imaging utilization and associated cost is unnecessary and can be
reduced through comprehensive management (including utilization, quality,
outcomes and network management), physician education, and data analysis that
generate significant cost savings and improve the quality and utilization of
diagnostic imaging services for payors. Historically, however, utilization and
cost levels of diagnostic imaging services have increased and been largely
unmanaged, with minimal outsourcing to diagnostic imaging managed care
companies.
It is estimated that health care spending in the United States in 1994
amounted to approximately $1.06 trillion dollars, $604 billion of which was
attributable to payments to physicians and hospitals. Based on its analysis of
industry data, the Company believes that total expenditures on radiology
services (which include both therapeutic radiology and diagnostic imaging) in
1993 amounted to approximately $52.0 billion. In 1994, total expenditures on
radiology services, broken down by type of payor, consisted of $6.1 billion by
HMOs, $9.1 billion by PPOs, $16.8 billion for Medicare, $17.5 billion by
indemnity insurers and $2.5 billion for Medicaid. The Company believes that
diagnostic imaging accounted for more than $47.8 billion, or 90.0%, of
expenditures on radiology services.
The Company, based on an analysis of its own data, estimates that in the
period from 1993 to 1995, per capita utilization of diagnostic imaging
procedures rose approximately 19.0%. Increases in utilization and expenditures
are expected to continue as the average age of the population of the United
States and the demand for diagnostic imaging services increases. Advances in
medical technology resulting in additional diagnostic imaging services and
increasing patient awareness of the variety of such services are also expected
to contribute to increased utilization and expenditures. The Company estimates
that radiology services can account for 8 to 10% of payors' medical costs.
The rapidly evolving managed health care environment has created substantial
economic pressures on payors and providers, leading to an increased focus on the
management of medical costs. In areas such as worker's compensation, dental
care, eye care and oncology, payors look to outsource to specialized third party
health care managers that provide expertise to generate cost savings through
increasing utilization efficiency. This expertise, coupled with access to a
broad base of regional and national data, enables such specialized health care
managers to control costs more effectively and provide payors and affiliated
physicians with reports that benchmark performance against the best practices in
a given industry. In addition, certain payors seek to transfer the financial
risk for changes in utilization levels and associated costs to such third party
managers, which are better able to manage risk because of the information and
expertise available to them.
Diagnostic imaging represents a complex segment of the health care industry.
The Company believes that the provision of such services has proven difficult
for payors to manage or fit into a management system that comprehensively
addresses quality, utilization and cost control. The cost management challenge
is related to: (i) the diversity of providers performing diagnostic imaging
services (including radiologists, primary care physicians, pediatricians and
orthopedists); (ii) the varied settings for these services (e.g., hospitals,
outpatient facilities, physician offices); and (iii) the diversity of symptoms
and disease states. For instance, the Company estimates that approximately 50%
of the volume of outpatient diagnostic imaging services (other than mammography)
are performed in-office by non-radiologists such as primary care physicians and
medical, surgical and pediatrics specialists. In the complex and highly
fragmented diagnostic imaging environment, there are few companies that have the
expertise, data resources and ability to provide an integrated, comprehensive
approach to managing cost, quality and utilization.
31
<PAGE>
THE COMPANY
UtiliMed is the nation's leading manager of diagnostic imaging services,
based on its own market research. The Company contracts with large healthcare
payors to manage the provision of diagnostic imaging services to members of
payors' healthcare plans with the goal of reducing the costs and improving the
quality and utilization of diagnostic imaging services. Current clients include
payors such as Blue Cross Blue Shield, Cigna Healthcare, Inc. and United
Healthcare, Inc. At March 31, 1996, the Company managed diagnostic imaging
services for 16 clients representing over 2.5 million lives in 13 states. In
addition, the Company signed a new contract in March 1996 covering approximately
88,000 lives which was implemented in June 1996. Founded in December 1989, the
Company has achieved rapid growth, with revenues growing from approximately $2.6
million in 1991 to $96.4 million in 1995 and covered lives increasing from
102,000 at December 31, 1991 to over 2.5 million at March 31, 1996.
The Company estimates that approximately eight to ten percent of payors'
medical expenditures are for diagnostic imaging services. Accordingly, the
Company believes a significant opportunity exists for payors to reduce costs
while maintaining quality through more effective management of diagnostic
imaging services. As the leading manager of diagnostic imaging services, the
Company believes that it is well positioned to take advantage of what Company
data indicates is the relatively unpenetrated market for outsourced management
of such services.
The Company has two core products, CDIP and RMP, which are designed to meet
its clients' objectives of reducing the cost and improving the quality of
diagnostic imaging services. UtiliMed does not provide diagnostic imaging
services. Rather, it utilizes CDIP and RMP to manage the provision of such
services to payors' members by radiologists, physicians and other specialists.
The core elements of the Company's two products include:
(i) Assessment. UtiliMed provides a systematic review of the facility or
office of each provider affiliated with a client, assessing the integrity of
the provider's equipment, the quality and training of its personnel, and its
policies and procedures pertaining to quality and patient safety.
(ii) Privileging. The Company uses its expertise to recommend to its
clients that certain diagnostic imaging procedures be performed by specific
providers.
(iii) Precertification. Precertification is a process whereby referring
physicians are required to certify diagnostic imaging procedures with
UtiliMed before they are performed by providers. The Company's
precertification process aims to maintain or enhance the quality of care
while reducing overutilization of diagnostic imaging services. UtiliMed
emphasizes precertification for more expensive procedures such as MRI, CT
and nuclear medicine, which according to UtiliMed's data, account for
approximately 11.0 percent of the volume of diagnostic imaging performed but
approximately 42.2 percent of the cost of diagnostic imaging.
(iv) Retrospective Utilization Reporting. The Company maintains an
extensive database of both clinical information and claims data. Using the
information in its database, the Company produces a series of utilization
management reports in which it analyzes (a) the diagnostic imaging services
that referring physicians order and the frequency with which particular
services are ordered and (b) the practice patterns of providers. The Company
focuses its utilization management reporting and analysis on optimizing the
use of diagnostic imaging procedures by allowing clients to evaluate
affiliated providers and enabling such providers to benchmark themselves
against their peer physicians.
(v) Physician Education. UtiliMed uses its expertise in diagnostic
imaging and information derived from its database to educate physicians
affiliated with its clients concerning developments in diagnostic imaging
and procedures that enhance the efficient delivery of diagnostic imaging
services.
32
<PAGE>
UtiliMed offers its clients an at risk or capitated product, CDIP, and a
non-capitated product, RMP. Both products incorporate the core elements
described above. In its CDIP product, UtiliMed contracts with its clients to
establish and maintain networks of diagnostic imaging providers. The client pays
the Company a network management fee and a pmpm fee and the Company assumes the
responsibility for processing the claims and paying the costs of diagnostic
imaging services provided to the client's members by diagnostic imaging
providers. In its recently introduced RMP product, in return for a fee, the
Company manages the diagnostic imaging services provided to a client's members
by diagnostic imaging providers but does not assume the responsibility for
processing the claims and paying the costs of services provided. Use of
UtiliMed's CDIP product can result in cost savings of approximately 20 percent
to clients within the first year and the Company anticipates its RMP product
will result in comparable savings to its clients in the first year.
A core element of the Company's products is its database of claims data,
clinical reports, and assessment information which is an important tool for
network and utilization management. At March 31, 1996, the database contained
claims data for over eight million lives, assessment data for over 10,000
imaging sites and over one million clinical reports. The number of monthly
clinical reports added to the database has grown from approximately 35,000 in
March 1995 to approximately 54,000 in March 1996. The database enables the
Company to develop protocols, produce outcomes and benchmarking analyses (both
provider-specific and diagnosis-specific) and to create educational programs for
physicians and other providers. The Company believes that its database and
analytical reports give it a competitive advantage in providing a comprehensive
approach to managing the cost, quality and utilization of diagnostic imaging
services.
STRATEGY
UtiliMed's objective is to enhance its leading position in diagnostic
imaging managed care services and continue its growth by pursuing a wide range
of significant new opportunities. The Company believes its ability to combine
utilization management, quality management, outcomes management and network
management provides an attractive alternative for payors in managing diagnostic
imaging services. The Company sees opportunities for growth both in establishing
new client relationships and expanding relationships with existing clients--by
extending coverage to additional local health plans of regional and national
payors, such as CIGNA and United HealthCare, Inc. and by serving additional
membership populations of existing clients, such as members covered under
Medicare and Medicaid programs. The Company will also seek to market RMP to
payors other than HMOs, such as self-funded employers and indemnity insurers,
and to market its products directly to large employer groups, benefits
administrators, and benefits consulting groups.
The key elements of the Company's strategy are to:
Increase Penetration of RMP. Through the development of RMP, the Company has
targeted a substantially broader market opportunity. RMP focuses on the
management of utilization and quality of client networks without accepting
capitation risk. As a result, the Company is not restricted by insurance
licensing requirements in connection with the provision of RMP and is able to
pursue contracts to provide RMP to payors, other than HMOs. In addition, the
Company believes that payors are receptive to RMP as it allows them to maintain
established payment relationships and associated claims processing and payment
with their provider networks. The Company is aggressively marketing RMP to a
wide variety of payors, including managed care organizations, traditional
indemnity plans, PPOs and self-funded employers, which the Company believes
represented an additional market of approximately $26.6 billion in radiology
health care costs in 1994. At March 31, 1996, the Company had implemented three
RMP contracts covering approximately 1.2 million lives. The Company is planning
to market one or more components of RMP as separate products. The Company has
held discussions with certain payors and anticipates that payors will be
interested in contracting with the Company to provide assessment, privileging,
precertification or retrospective utilization reporting as separate products to
the payor's plans. The Company expects that the pmpm fees paid for such products
will be less than the pmpm for RMP.
33
<PAGE>
Expand CDIP. The Company believes a significant opportunity exists for
capitated arrangements and will continue to aggressively market CDIP, targeting
those payors that seek to control costs and manage utilization through
capitation for large membership populations. The Company believes there is a
trend among HMOs to outsource management of diagnostic imaging services on a
capitated basis to fix their costs and reduce the internal burden of cost
management for these services. The limited penetration of capitated arrangements
in diagnostic imaging managed care to date will, in the Company's view, provide
the opportunity for increased implementation of CDIP. As of January 1, 1995,
total enrollment in HMOs is estimated to have been over 50 million lives. At
March 31, 1996, the Company had implemented 13 CDIP contracts covering
approximately 1.4 million lives.
Leverage Existing Client Relationships. The Company's existing client base
provides a significant opportunity for additional RMP and CDIP contracts. For
example, the Company believes it can expand geographic coverage by building on
existing contracts with national and regional payors. As RMP and CDIP are
marketed to local and regional health plan executives, the Company's expertise
and reputation will enable it to pursue arrangements with other local plans of
geographically diverse payors or with such payors on a regional or national
basis. In addition, the Company intends to expand its product offerings by
contracting with clients for additional member segments, such as commercial
Medicare and Medicaid plans. In the event the Company enters into arrangements
involving Medicare or Medicaid, certain provisions of federal law with respect
to referrals will become applicable to the Company's business activities. See
"--Regulation--Federal Regulation."
UtiliMed believes this strategy will enable it to remain the leading
provider of physician network management services in the diagnostic imaging
sector because of the advantages it offers to both providers and payors. Rather
than seeking to generate savings through discounted fees, the Company focuses on
utilization management, quality management, the education of physicians
regarding cost-effective protocols and the precertification of costly
procedures. The Company's products encourage consultation between the
radiologist and the referring physician in the clinical decision-making process
to reduce unnecessary utilization and ensure that the most appropriate
procedures are performed to meet the needs of the patient. By building
relationships with and providing educational resources to network physicians,
the Company seeks to ensure that its clients obtain efficient and cost-effective
diagnostic imaging services.
COMPANY PRODUCTS
CDIP AND RMP
The Company offers two products to payors, CDIP, its capitated product,
through which the Company manages provider networks and accepts capitation risk,
and RMP, its fee-based product, through which the Company provides network
management services to control costs and enhance the quality and service
rendered by providers. CDIP and RMP, which share certain core elements, are both
designed to reduce excess utilization of diagnostic imaging and to improve the
quality of care for those patients who require diagnostic imaging services in an
effort to reduce costs. Under both CDIP and RMP, the Company receives a pmpm
payment from clients. The pmpm payment under CDIP is larger because the Company
is compensated for assuming the financial risk for variations in utilization
levels and associated medical costs, while under RMP the Company does not alter
the pre-existing payment relationship between the client and its providers.
Under CDIP, the Company receives a fixed pmpm payment from its client. The
Company, in turn, negotiates with providers to arrange for the provision of
diagnostic imaging services to the client's membership population. For each CDIP
client, the Company negotiates agreements with (i) individual providers or (ii)
a group of providers who are linked through certain contractual arrangements, in
the region served by the client and arrange payment structures with such
providers and provider networks. Depending upon the specific physician practices
and clinical entities involved, the Company uses variations of four provider
payment methods in its CDIP networks to manage capitation risk and appropriately
incentivize physicians to provide efficient utilization and quality care:
capitation, fee-for-service, fee-per-visit and episode-of-care. Under the
capitation method, providers receive a pmpm
34
<PAGE>
payment from the Company related to the number of members under that provider's
care. In the fee-for-service method, providers receive a fee for each diagnostic
imaging service rendered to a member. In contrast, when the Company pays a
provider through a fee-per-visit method, the provider receives a fee for a
member's visit, which may or may not include the provision of diagnostic imaging
services. The episode-of-care method combines incentives to perform the most
appropriate tests, while taking into account the possibility of wide variations
in the services required by individual members. Under the episode-of-care
methodology, the Company sets aside a pool of funds each month based upon the
capitation rate. Monthly payments to the providers or distributions from the
pool are based on the number of appropriate and necessary procedures performed
by the provider each month. Such payments are modified according to the
complexity of the diagnostic imaging services performed in order to account for
differences in patient illness severity. In general, the Company employs
capitation and episode-of-care payment arrangements for payments to radiologists
and for the use of their associated diagnostic imaging facilities, and
fee-for-service and fee-per-visit for non-radiologists, such as podiatrists,
orthopedic specialists and urologists. In the event a client realizes
significant savings in diagnostic imaging expenditures under certain CDIP
contracts, the client may receive a portion of the pool of funds established by
the Company to fund provider payments.
Under RMP, the Company also receives a pmpm fee, but payments to providers
continue to be made directly by the clients. The Company works with RMP clients
to manage the quality and utilization of existing provider networks, but does
not organize or establish networks of providers. The Company and its RMP clients
agree upon annual utilization cost reductions to be realized by the client
following adoption by the client of certain operational changes and
implementation of RMP. In two of the three RMP contracts, the Company will
receive additional revenue if the client realizes cost savings that exceed the
specified levels for utilization cost reductions. In one contract, a portion of,
and in another contract, up to all of the total fees received by the Company
under such agreements are dependent upon the realization by the client of the
specified savings levels. See "--Clients; Capitation Contracts and Provider
Contracts; RMP Contracts."
CORE PRODUCT ELEMENTS
The following chart describes the product elements of CDIP and RMP:
PRODUCT ELEMENTS CDIP RMP
Assessment X X
Network Development X
Privileging X X
Precertification X X
Retrospective Utilization
Reporting X X
Provider Payments X
Physician Education X X
The core product elements shared by CDIP and RMP are:
Assessment. The Company provides a systematic review of the facility or
office of each provider affiliated with a client, assessing the integrity of the
provider's equipment, the quality and training of its personnel, and its
policies and procedures pertaining to quality and patient safety. The standards
for the Company's assessment are developed from the Company's own expertise, the
Occupational Health and Safety Act and applicable state guidelines, and are
finalized in consultation with the Company's clients. The Company's assessment
database enables it to identify imaging sites that do not conform to the quality
and safety standards determined by the Company through its analysis of
assessment data and in consultation with its client.
35
<PAGE>
Privileging. The Company uses its expertise in diagnostic imaging service
management to recommend to its clients that certain procedures be performed by
specific participating network providers, such as primary care physicians and
specialists. These recommendations are based on physician specialty and patient
needs. Using the Company's recommendations, a participating client determines
the final privileging decisions based on the incentives best suited for its
health plan.
Precertification. Precertification is a process whereby referring physicians
are required to certify diagnostic imaging procedures with UtiliMed before they
are performed by providers. The Company's precertification process aims to
maintain or enhance the quality of care while reducing overutilization of
diagnostic imaging services. UtiliMed emphasizes precertification for more
expensive procedures such as MRI, CT and nuclear medicine, which according to
UtiliMed's data, account for approximately 11.0 percent of the volume of
diagnostic imaging performed but approximately 42.2 percent of the cost of
diagnostic imaging.
By using the Company's precertification process, providers can be
compensated solely for procedures that are medically necessary. For
participating clients, the Company's precertification service works together
with the Company's assessment and privileging services to enhance the cost
efficiency and the appropriate use of diagnostic imaging. The Company provides a
toll free number for referring physicians affiliated with its clients to
precertify certain diagnostic imaging exams. In general, when it is determined
by a referring physician that a patient may need to undergo a diagnostic imaging
procedure, the physician calls the toll free number and is connected with a
trained referral associate. Using the Company's database and information
concerning the specific plan and membership, the referral associate may certify
the procedure. If the referral associate is unable to certify the procedure,
then the request is referred to a nurse, who is permitted to exercise more
discretion in providing precertification. If the nurse cannot certify the
proposed procedure, then the request must be referred to one of the Company's
five medical directors (or, under one RMP contract, the physician who is to
perform the exam) to discuss the decision to approve or deny the
precertification request with the referring physician. Each of the Company's
medical directors is a licensed physician. Only a qualified physician may deny a
precertification request. A denial by a Company medical director (or, under one
RMP contract, the physician who is to perform the exam) may be appealed by the
referring physician to the client health plan.
Retrospective Utilization Reporting. The Company maintains an extensive
database of both clinical information and claims data. The Company collects
clinical information from reports made by imaging providers whenever diagnostic
imaging services are rendered. Claims data is collected from clients and
potential clients in the process of assessing utilization levels and in the
Company's determination of appropriate product pricing. See "--Regulation--State
Regulation--Private Utilization Review Agent."
Using the information in its database, the Company produces a series of
utilization management reports in which the Company analyzes (i) the diagnostic
imaging services that referring physicians order and the frequency with which
particular services are ordered and (ii) the practice patterns of providers.
These reports are distributed to clients as well as individual providers and
referring physicians. The Company focuses its utilization management reporting
and analysis on optimizing the use of diagnostic imaging procedures by allowing
clients to evaluate affiliated providers and enabling such providers to
benchmark themselves against their peer physicians. Utilization management
reports include the following:
. Quarterly Client Reports;
. Quarterly Radiologist Reports;
. Semi-annual Referring Physician Reports;
. Semi-annual In-office Provider Reports; and
. Specialty Reports, with respect to specific symptom complexes or disease
entities.
36
<PAGE>
Physician Education. The Company uses its expertise in diagnostic imaging
and information derived from its database to educate physicians affiliated with
its clients concerning developments in diagnostic imaging and procedures that
enhance the efficient delivery of diagnostic imaging services. For each client
with which the Company contracts, the Company can establish Local Imaging
Advisory Councils (the "Councils") comprised of Company staff, employees of the
participating clients and physicians located in the contract area. Of its 16
contracts at March 31, 1996, the Company established Councils for eight of the
last nine contracts.
The Company uses its database to provide physician-specific education and
diagnosis-specific information, allowing clients and the Councils to work with
particular physicians to refine their diagnostic imaging procedures and also to
work with all physicians with whom the clients are affiliated to ensure that
particular procedures are utilized in cost-effective and appropriate ways. To
this end, the Company, after consultations with its clients and the Councils,
assembles educational materials with respect to common clinical indications,
which materials are delivered to specific referring physicians within a given
client's network. Each set of materials typically includes a report describing
the clinical entity and appropriate practice patterns, care algorithms and
relevant medical literature. The Company makes available to the referring
physician a toll free number to provide feedback to the Company following
receipt of the materials. The Company typically undertakes an analysis of the
referring physician's practice pattern approximately six months after delivery
of the materials. This subsequent analysis is provided to the relevant client
and Council.
INFORMATION SYSTEMS
The Company makes use of a database consisting of three integrated
components: claims information covering radiology services performed on over
eight million lives since 1991; assessment data recorded since 1993 on over
10,000 imaging sites in the United States; and clinical data from over one
million imaging exams collected since 1992. The number of monthly clinical
reports added to the database has grown from approximately 35,000 in March 1995
to approximately 54,000 in March 1996. These components interact to provide the
Company with detailed information on the reasons for ordering imaging exams, the
clinical results of such exams, the demographics of the populations involved and
the quality of the delivery sites and examinations actually performed. The
Company collects data through the performance of core elements of each program
and interactions with potential clients. This process results in the
accumulation and updating of information. A portion of the net proceeds of this
offering will be used to upgrade the UtiliMed computer system from a limited
file server environment to an integrated server Unix platform environment
through the purchase of systems hardware and software. See "Use of Proceeds" and
"Management's Discussion and Analysis of Results of Operations--Liquidity and
Capital Resources."
Access to the database is limited to certain employees of the Company. The
data is backed up daily, with a full copy kept off-site in a secure location.
CLIENTS; CAPITATION CONTRACTS AND PROVIDER CONTRACTS; RMP CONTRACTS
At March 31, 1996, the Company had agreements with 16 clients, comprised of
13 CDIP contracts and three RMP contracts. Fees earned pursuant to contracts
with ChoiceCare Health Plans, Inc., United HealthCare of Ohio, Inc.--Western
Region and CIGNA HealthCare of Northern New Jersey, Inc. accounted for
approximately 20.2%, 14.1% and 13.7%, respectively, of the Company's total
revenues in 1995, and approximately 20.0%, 14.6% and 16.0%, respectively, of the
Company's total revenues for the first quarter of 1996. Similarly, although the
Company's contracts with affiliates of CIGNA are independently negotiated and
operated, the Company had five such contracts in 1995 that represented, in the
aggregate, approximately 29.3% of total revenues for the year ended December 31,
1995 and, with the commencement of a sixth contract with a CIGNA affiliated
client in 1996, such contracts represented, in the aggregate, 40.7% of the
Company's total revenues for the first quarter of 1996. The Company expects that
a majority of its revenues will continue to be attributable to a limited number
of clients.
37
<PAGE>
During the second half of 1995, the Company entered into discussions with a
client with respect to the renegotiation of a CDIP contract. Although willing to
consider proposed contract modifications, the client first required assurances
with respect to the Company's working capital position because of the Company's
financial condition at that time. On March 12, 1996, the Company and the client
executed a letter agreement (the "Letter Agreement"), requiring the Company to
deposit $6,200,000 with the client (the "Deposit"), which amount represented the
estimated amount of the payables to providers affiliated with the client. The
amount of the Deposit is subject to quarterly adjustment. At March 31, 1996, the
amount of the Deposit was adjusted by the Company to $5.6 million. The client is
required to return the Deposit when the Company's ratio of cash and cash
equivalents to current liabilities has exceeded 1:1 for two consecutive fiscal
quarters. Following execution of the Letter Agreement, the Company and the
client reached a business agreement with respect to the renegotiation of the
CDIP contract, subject to completion of documentation. Until the return of the
Deposit to the Company, the Company is a general creditor of the client for the
amount of the Deposit. The Letter Agreement provides for the client to be paid
interest on the Deposit at short-term rates.
CDIP CONTRACTS
A CDIP contract is tailored to the particular structure and needs of a
specific client. Under these contracts, the Company arranges for providers to
render services to participating clients and their members, and maintains
networks to ensure that physicians provide timely service to client members. In
these contracts, UtiliMed warrants the due licensing and certification of the
physicians, and the client may cause the Company to exclude providers from a
given network or terminate agreements with such providers. The client pays the
Company on a capitated basis pursuant to a schedule agreed upon by UtiliMed and
the client, which normally allows for annual changes based upon changes in the
CPI. Payments to providers are the sole responsibility of UtiliMed, except for
services not covered by the patient's benefit contract, co-payments or
deductibles. Neither the Company nor the providers has any right to payment from
the client for services rendered by the providers, other than the Company's
right to receive its pmpm. The CDIP contracts require UtiliMed to maintain
liability insurance, and the physician providers with which the Company
contracts, to maintain malpractice insurance. UtiliMed is required to keep
confidential information gained from clients and network physicians under CDIP.
CDIP contracts have an initial term of one to five years, with automatic renewal
for terms of one to five years. CDIP contracts can generally be terminated by
either the Company or the client upon a material breach and notice, after giving
the breaching party a period to cure. Several of the CDIP contracts may be
assigned by the client without UtiliMed's consent.
PROVIDER CONTRACTS
For CDIP, UtiliMed also enters into contracts with networks established by
the Company that are comprised of (i) individual providers or (ii) groups of
providers who are linked through certain contractual arrangements, to arrange
for the delivery of services to the members of client plans. Under these
contracts, providers perform and interpret diagnostic imaging tests in
consultation with the referring physicians of the client and are generally
obligated to make reasonable efforts to respond within 24 hours of a referral
request and deliver to the referring physician all preliminary reports within 24
hours of the examination. Providers warrant to UtiliMed that they hold all
licenses necessary for the provision of services for the term of the provider
contract. UtiliMed may terminate the contract or exclude the services of a
provider or any employee of a provider in the event of a revocation or
suspension of licenses or any disciplinary action taken against such persons.
The provider contracts generally provide that all patient files, examination
reports and images be made available to the Company on request, which
information is kept confidential by UtiliMed. The provider is paid by the
Company pursuant to one of the four primary payment methods employed by the
Company to incentivize such physicians. See "--Company Products--CDIP and RMP."
Under these contracts, physicians agree that in no event shall they have any
recourse against the client, members of the client plan or persons other than
the Company for services provided. However, the physician is generally permitted
to collect co-payments in accordance with the client's agreement with its plan
members, or for services not covered under the provider contract. In the first
quarter of 1996, the Company began to require submission by providers of all
claims for payment within 90 days of rendering services as a
38
<PAGE>
prerequisite to receiving payment. As the Company's existing provider contracts
are renewed or the Company enters into new provider contracts, the Company
intends to implement similar provisions in such contracts. Under the provider
contracts, physicians are required to maintain malpractice insurance and submit
proof of such insurance to the Company prior to the delivery of services.
Provider contracts generally have a one year term, which is automatically
renewable for additional one year terms. If a provider ceases to participate in
a particular client plan subject to a CDIP contract, then the related provider
agreement may be terminated at the Company's discretion.
RMP CONTRACTS
Under RMP, the Company agrees to provide management services to a client's
existing provider network. The Company and the client determine RMP
pre-implementation baselines for utilization costs, and mutually agree on
specified savings levels with respect to such utilization costs over the term of
the contract. The pmpm fee is paid at a flat monthly rate, with provision for
settlement after more extended periods (annually or at the end of term) that
varies from contract to contract. In two of the three RMP contracts, the Company
will receive additional revenue if the client realizes cost savings that exceed
the specified levels for utilization cost reductions. In one contract, a portion
of, and in another contract, up to all of the total fees received by the Company
are dependent upon the realization by the client of the specified savings
levels. Under RMP, the Company is obligated to maintain professional liability
insurance. RMP contracts generally have an initial term of up to five years,
allowing for renewal. The Company is planning to market one or more components
of RMP as separate products. The Company has held discussions with certain
payors and anticipates that payors will be interested in contracting with the
Company to provide assessment, privileging, precertification or retrospective
utilization reporting as separate products to the payor's plans. The Company
expects that the pmpm fees paid for such products will be less than the pmpm for
RMP.
SALES AND MARKETING
The Company seeks to contract with large, sophisticated health care payors,
such as HMOs, PPOs, managed indemnity organizations and other health care payors
generally with enrollments in excess of 100,000 members. The Company markets
directly to key decision makers of both existing and potential clients. UtiliMed
has begun marketing its products to consulting organizations and large national
employers, which bring the Company and its products to the attention of benefits
administrators and managed care companies. As relationships are established,
UtiliMed typically obtains data enabling it to assess the product and pricing
that is most suitable for the payor, and demonstrate the value of the services
the Company offers. The Company and its personnel also participate in national
and regional health care conferences, which the Company considers a valuable way
to describe UtiliMed's products to the managed care market. The Company
continues to develop additional business by building upon existing client
relationships within national health care organizations, including United
HealthCare, Inc., CIGNA and Blue Cross Blue Shield plans, and marketing to
regional health care payors.
COMPETITION
The Company faces current and potential competition from a number of diverse
sources and in differing degrees with respect to its two products. For CDIP,
certain health care providers have organized themselves into capitated networks,
while other companies have specialized in the capitation of radiology networks
on a more limited scale than the Company. In addition, certain companies have
established capitation programs with respect to disciplines outside of
radiology, which companies could expand the scope of services offered to include
diagnostic imaging. Finally, certain health care payors have chosen to establish
capitation programs on their own. For RMP, certain companies are attempting to
offer some of the same services as the Company in more limited geographical
areas, or with respect to certain components of the Company's business,
particularly for certification and utilization review. In addition, payors may
choose to reduce diagnostic imaging costs through the internal development of
aspects of the products offered by the Company. Other companies offer
utilization review of data analysis and reporting services (two of the Company's
core product elements) with respect to other
39
<PAGE>
health care specialties and services. The Company competes on the basis of its
specialized knowledge and expertise in diagnostic imaging managed care, the
effectiveness of its services, its ability to offer a range of services in
multiple markets, its database management capability and pricing.
REGULATION
GENERAL
The Company's business is conducted within a highly regulated environment.
There are both state and federal regulatory programs relating to the provision
of health care services, access to health care, the cost of health care and the
manner in which health care providers are reimbursed for their services. The
state and federal health care and insurance laws and regulations to which the
Company may be subject in connection with its operations are summarized below.
As described herein, the regulatory obligations associated with the Company's
CDIP product are more extensive than under the RMP product. The Company believes
that it is in compliance with all regulatory requirements applicable to its
business.
STATE REGULATION
The Company's activities are regulated principally at the state level, so
that the Company must comply with regulatory requirements that vary from state
to state. The Company currently offers its CDIP and RMP products in the states
of Colorado, Connecticut, Florida, Illinois, Indiana, Kentucky, Missouri, New
Jersey, New York, Ohio and Oklahoma. In the states of Massachusetts and
Michigan, only the RMP product is offered.
Insurance Regulation. There are significant state law obstacles to third
party payors sharing risk through capitation with provider networks like those
that the Company organizes in connection with its CDIP program. The evaluation
of the regulatory obligations imposed upon provider networks which assume risk
must be conducted on a state-by-state basis as the positions taken on this
subject by state regulators are not uniform. In most states, insurance risk is
regulated primarily through two distinct insurance statutes: the state insurance
code (as a health insurer) and the state health maintenance organization act.
Under each of these types of statutes, any person who engages in the business of
insurance risk on an indemnified or prepaid basis must typically secure a
certificate of authority from the state department of insurance ("DOI"). These
statutory provisions could be interpreted such that contractual arrangements for
the sharing of risk among providers could be deemed by the state DOI as
constituting a contract of insurance which may be issued only by a
state-licensed insurance company or HMO.
On August 10, 1995, a working group of the National Association of Insurance
Commissioners ("NAIC") issued to state insurance commissioners a suggested
insurance bulletin which addressed the state regulation of risk-bearing provider
networks. Provider networks were described as groups of health care providers,
including integrated provider organizations, integrated provider arrangements,
physician hospital organizations and provider sponsored networks. The working
group's recommendations permitted provider networks to accept risk from licensed
insurance entities. The acceptance of risk directly from employers or
individuals, however, would require the provider network to obtain some form of
insurance license. The actions of the NAIC are not binding upon state insurance
commissioners, but, historically, the regulatory positions taken by the NAIC
have been adopted in many states.
In the states in which the Company currently operates, state insurance
regulators have permitted HMOs to contract with provider networks on a capitated
basis. The rationale for this conclusion varies from state to state. Some states
view capitation arrangements between HMOs and provider networks as acceptable
without further licensure on the grounds that the HMO is properly structured to
monitor and oversee such arrangements and would ultimately be liable for any
losses. This is similar to traditional treatment of HMO contracts with physician
individual practice associations ("IPAs"). In other states, state insurance
regulators have concluded that the HMO licensure statute expressly authorizes
HMOs to enter into risk sharing arrangements with groups of providers. In still
other states, insurance regulators have concluded that HMO licensure is not
appropriate because provider networks do not market directly to the public, but
serve merely as subcontractors of health care services that comply with the
policies and procedures established by the HMO.
40
<PAGE>
The ability of traditional indemnity insurers and self-insured employers to
share risk with groups of providers is more constrained. Consequently, the
Company only offers the CDIP product to HMOs, and not other types of payors. In
addition, the Company has established two wholly-owned subsidiaries which
operate in the state of New York and which are certified as IPAs under special
regulations governing provider risk sharing arrangements with HMOs.
In most states, HMOs are permitted by statute to capitate individual
providers or professional corporations established by providers. However, the
capitation of provider networks in which payors shift risk to organizations
providing healthcare services by unrelated providers may be interpreted in some
states as constituting the unlicensed business of insurance. Many states,
including states where the Company does business, currently are reviewing their
position on the issues described above relating to HMOs and insurance licensure.
The Company believes that in the states where it currently operates, HMOs
can enter into capitation arrangements with provider networks without the
possibility that the associated compensation mechanisms will require the Company
to obtain an insurance license. The Company believes that its participation in a
capitated provider network does not require insurance licensure.
Preferred Provider Organizations. Although the definition of a PPO may vary
from state to state, a PPO is generally a legal entity which has established a
provider network by entering into contractual arrangements with a variety of
health care providers. PPOs can also be established via a contractual
relationship among providers. The PPO, in turn, contracts with HMOs, health
insurers or self-insured employers to arrange for the provision of health care
services through the PPO's provider network. PPOs are typically organized under
state law as for-profit or not-for-profit corporations.
In states which have enacted a PPO law, the establishment of a provider
network under CDIP may subject the Company to compliance with the PPO law. The
Company's RMP product is unaffected by PPO laws. Generally, state PPO laws are
not onerous. Such laws usually require the submission to regulators of provider
contracts and guarantees of patient accessibility to providers in a geographic
area. In some states which regulate PPOs sponsored by insurance companies, the
PPO laws (and in some states, HMO laws) include an "any willing provider"
provision, which requires the PPO (or HMO) to include any provider in the panel
who is willing to accept the financial terms offered to the panel provider.
However, the independent provider networks in which the Company participates are
not usually subject to these "any willing provider" requirements.
While the Company believes it is not currently subject to regulation under
PPO statutes in certain states, it has commenced the application process for
registration or licensure in other states in which its provider network
activities fall within the scope of such PPO statutes. See "Risk
Factors--Preferred Provider Organization."
Third Party Administrator. A TPA is an organization that provides
administrative services, such as claims adjustment, case management and premium
collection, that are normally provided by an insurer. When a TPA that is not an
insurer provides these services to group benefit plans and the self-insured,
they are often regulated by the state. States require that the TPA act in a
fiduciary capacity, maintain financial reserves and keep records confidential.
Moreover, many states prohibit a TPA from being compensated on the basis of
claims experience. As such regulations are currently interpreted in the states
where the Company presently operates or intends in the near term to operate, the
Company believes it is not subject to regulation as a TPA because the Company is
not engaged in providing any of the administrative services described above
pursuant to either RMP or CDIP. In the event the Company provides services in
states where it would be subject to regulation as a TPA, the Company intends to
comply with such regulations.
Private Utilization Review Agent. Provider network organizations that
perform prospective, concurrent or retrospective review of the health care
services provided through a provider network may be subject to state licensure
as "private utilization review agents." Typically, licensure as a private
41
<PAGE>
utilization review agent requires the submission of an application to the state
and prior approval before performing utilization review services ("UR Services")
on residents of the state. The application typically requires the submission of
information about the types of personnel performing UR Services, policies on
confidentiality of medical records, access (5 or 7 days a week, business hours
or 24 hours, or a toll-free telephone number) and appeals procedures. In
addition, some states require the submission of the actual criteria used in
conducting UR Services; other states may only request a copy of the process by
which the criteria were developed.
Potential limitations on the types of personnel who may perform UR Services
are emerging as an important regulatory concern for private utilization review
agents. For instance, some states mandate that only physicians and not nurses or
therapists may render denials to certification of health care service proposed
to be rendered by physicians. In addition, some states require that any denial
be made or any appeal be conducted only by a physician with board certification
in the same specialty as the physician requesting the health care services that
is the subject of the review. For example, in the Company's case, a radiologist
would be required to conduct appeals from denials of requests by radiologists.
Although the Company does (i) precertify the use of certain diagnostic imaging
techniques and (ii) perform certain retrospective utilization reviews under both
CDIP and RMP, these activities have generally not implicated the private
utilization review statutes of the states in which the Company operates; in
those states where such statutes are applicable to the Company's activities, the
Company has commenced the application process for licensure. See "Risk
Factors--Private Utilization Review."
Corporate Practice of Medicine and Fee Splitting. In some states, physician
licensure provisions are construed to prohibit physicians from practicing
medicine through business corporations. This prohibition, known as the
"corporate practice of medicine" doctrine is sometimes expressly stated in the
state's medical practice act and corresponding regulations. In other states, the
corporate practice of medicine doctrine exists only as a product of the
development of common law. The corporate practice of medicine doctrine is
generally grounded upon concerns over the ability of a physician to exercise his
or her independent medical judgment and to preserve doctor-patient
confidentiality when non-physicians have a pecuniary interest in the physician's
practice. The corporate practice of medicine doctrine is usually used to prevent
the employment of physicians by a corporation other than a professional
corporation. Contractual relationships, depending upon the level of control
exerted over the physician through the contract and the level of enforcement of
the doctrine in the state, may trigger corporate practice concerns. Many states
provide for the suspension or revocation of a physician's license if the
physician enters into fee-splitting or referral arrangements with a third party.
An arrangement in which a provider network receives a capitation payment from an
HMO or from the Company pursuant to the CDIP program for health care services
provided by the participating physician's of such network could be perceived as
a split-fee arrangement. However, no state in which the Company currently
operates has adopted this position with regard to participation in a capitated
provider network.
The Company believes that its contractual relationships with providers
pursuant under CDIP are not violative of the "corporate practice of medicine" or
"fee splitting" prohibitions. These regulatory prohibitions are not applicable
in the context of RMP.
Self-Referral. Many states have adopted their own versions of the federal
physician self-referral statute described below which apply to all patients
irrespective of whether payment for health care services is provided by the
Medicare or Medicaid programs. In such states, physicians are prohibited from
referring patients to certain health care services in which they have a
financial relationship. In those states that have enacted physician
self-referral prohibitions, an applicable statutory exception may permit certain
financial relationships with physicians. Alternatively, in other states the
physician's referral is not prohibited; provided, however, the physician must
provide the patient with a written disclosure that specifies the physician's
financial relationship or investment interest in an entity in which he or she
refers patients.
Anti-kickback. Many states have promulgated anti-kickback provisions similar
to the federal anti-kickback statute described below, that broadly prohibit the
offer, payment, solicitation or remuneration
42
<PAGE>
to a physician in return for referring patients. Moreover, in some states, these
kickback provisions apply to all health care payors, not merely the Medicare or
Medicaid programs. Further, while some states provide certain exceptions to the
anti-kickback statutes similar to the safe harbor regulations promulgated
pursuant to the federal anti-kickback law, other states do not incorporate the
federal safe harbor regulations nor do these states provide similar guidance.
The Company believes the financial relationships between the Company and its
providers through the CDIP product are not violative of applicable state self
referral or anti-kickback laws.
FEDERAL REGULATION
The Company does not presently contract directly with the Medicare or
Medicaid programs. However, some of the entities with which the Company
contracts do provide services to beneficiaries of the Medicare and Medicaid
programs. Set forth below is a description of the federal laws and regulations
to which the Company may be subject through its contracts with clients providing
services to Medicare and Medicaid beneficiaries. See "--Strategy."
Medicare Fraud and Abuse Provisions. The Medicare and Medicaid anti-kickback
amendments (the "Anti-Kickback Amendments") prohibit the knowing and willful
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare or state health program patients or patient care
opportunities, or in return for the purchase, lease or order of any item or
service that is covered by Medicare or a state health program. In addition to
federal criminal penalties, the Anti-Kickback Amendments also establish the
intermediate sanction of excluding violators from participation in the Medicare
or Medicaid programs.
Pursuant to this law and in an effort to reduce potential fraud and abuse
relating to Medicare costs, the federal government has announced a policy of
increased scrutiny of various transactions among health care providers.
Nevertheless, the applicability of these provisions to many business practices
in the health care industry, including the Company's agreements with physician
groups and its agreements with HMOs, has not been subject to any enforcement
actions or judicial interpretation. In 1991, the Inspector General of HHS
adopted regulations defining safe harbors for certain arrangements that do not
violate the Anti-Kickback Amendments. On January 25, 1996, the HHS Office of
Inspector General issued the final managed care safe harbor regulations defining
certain managed care relationships that will not constitute a violation of the
anti-kickback amendments. The safe harbors address provider discounts to health
plans, incentives offered to enrollees to choose network providers, as well as
certain waivers of coinsurance amounts in connection with Medicare SELECT
policies. The safe harbors do not provide explicit protection for financial
arrangements engaged in by intermediary managed care organizations such as the
Company. However, the preamble to the safe harbors does address such financial
relationships with intermediary organizations in the context of fees charged to
participating providers. In addressing such relationships with providers, the
preamble states that PPOs can cover their marketing and administrative costs "in
fees charged to insurers or employers where the PPO administers the plan for
such entities", implying that such arrangements would not implicate the
anti-kickback statute in the first instance. The Company therefore believes that
the management fees payable to it by payors should not be viewed as remuneration
for referring or influencing referrals of Medicare or state health care program
patients as prohibited by the Anti-Kickback Amendments, as the Company is not
referring any patients to the payor which is paying the Company the management
fees. Rather, the only referrals the Company could be viewed as potentially
making is the referral of patients to its network providers.
In any event, the safe harbor regulations are clear that failure to conform
to the terms of a particular safe harbor does not mean that the arrangement is
illegal. The preamble also states that compliance with the safe harbor
regulations is "purely voluntary."
The Company receives compensation under its CDIP and RMP agreements with
payors for management services. The Company believes that the management fees
payable to it should not be
43
<PAGE>
viewed as remuneration for referring or influencing referrals of patients or
services covered by such programs as prohibited by the Anti-Kickback Amendments
as the Company is not referring patients to the payor which is paying the
Company the management fees. The Company is not presently a provider or supplier
of services or items reimbursed by Medicare or state health programs.
Prohibitions on Certain Referrals--The "Stark Law". The Omnibus Budget
Reconciliation Act of 1993 ("OBRA") includes a provision that significantly
expanded the scope of the Ethics in Patient Referral Act, also known as the
"Stark Law." The Stark Law originally prohibited a physician from referring a
Medicare or Medicaid patient to any entity for the provision of clinical
laboratory services if the physician or a family member of the physician had an
ownership interest or compensation relationship with the entity. The revisions
to the Stark Law included in OBRA prohibit a physician from referring Medicare
and Medicaid patients to an entity in which the physician or a family member has
an ownership interest or compensation relationship if the referral is for any of
a list of "designated health services." The list of designated health services
includes radiology services and radiation therapy. Under CDIP, the Company does
not currently contract with providers of therapeutic radiation services, only
diagnostic radiology services. As the Company is not owned by physicians, the
only financial relationship potentially relevant to the Stark Law between the
Company and its network physicians is the physicians' provider agreement. While
this agreement does constitute a financial relationship within the meaning of
the Stark Law, such a financial relationship only means that the physician
cannot refer Medicare and Medicaid patients to the Company for the furnishing of
designated health services, including radiology services. However, the Company
does not furnish designated health services; the Company merely contracts for
the provision of designated health services. Accordingly, the Company believes
that its contractual relationships with physicians do not implicate the Stark
Law. The Health Care Financing Administration has issued final regulations
regarding the Stark I clinical laboratory self-referral ban, but no final
regulations have yet been issued regarding the application of the Stark Law to
designated health services. The preamble to the Stark I regulations address
generally the issue of indirect financial relationships in the form of
compensation arrangements, but the regulations do not expressly address this
issue. In the event the Stark II regulations take the position that the
Company's contractual arrangements for the provision of radiology services do
implicate the Stark Law, then the Stark Law includes an exception for personal
services contracts, with which the Company should be able to conform its network
physician provider agreements.
Physician Incentive Law--Managed Care Organizations. By statute, HMOs and
competitive medical plans ("CMPs") which have a risk-sharing agreement with the
Medicare program and certain HMOs and health insuring organizations ("HIOs")
which contract with the Medicaid program cannot operate a physician incentive
plan unless that physician incentive plan meets certain specified criteria.
Under the Medicare and Medicaid programs, there are three requirements that a
managed care organization must meet with regard to any physician incentive plan
if the managed care organization has a Medicare or Medicaid contract. First, the
plan cannot, directly or indirectly, make payments to physicians as an
inducement to limit or reduce medically necessary services provided to a
specific enrollee. Second, the plan cannot place a physician at substantial
financial risk for services the physician does not provide without adequate
stop-loss protection and periodic enrollee surveys. Third, the organization must
disclose the nature of its plan to the Secretary of HHS. Failure to comply with
these requirements could subject the organization, by statute, to sanctions and
civil monetary penalties. The Company has not entered into a risk contract with
the Medicare or Medicaid programs. To the extent the Company contracts with HMOs
that have a Medicare or Medicaid risk contract, the Company may be indirectly
affected by the physician incentive law. On March 28, 1996, the Health Care
Financing Administration issued final regulations regarding this law. The
Company believes that its capitation and episode-of-care compensation
arrangements with providers do not violate the requirements of the physician
incentive laws and, if necessary, can be restructured in a manner to comply with
the final physician incentive regulations. Such compensation arrangements have
been developed by the Company on the basis of the levels of Medicare
reimbursement and utilization by physicians prior to the implementation of the
Company's products. Therefore, these arrangements should not contain improper
financial incentives to reduce the utilization of health care services.
44
<PAGE>
REGULATORY COMPLIANCE
The Company believes that health care regulations affecting the Company will
continue to change and, as a result, regularly monitors developments in health
care law. The Company believes it will be able to continue to structure all its
agreements and operations in accordance with applicable law or, if necessary,
modify its agreements and operations as regulations applicable to its business
undergo change. However, there can be no assurance that current or future
operations will not require compliance with additional governmental regulatory
schemes or be adversely affected by changes in regulatory requirements
applicable to the Company's business.
EMPLOYEES
At March 31, 1996, the Company had 189 full-time employees, and two
part-time employees. The Company also has consulting arrangements with six
additional persons, four of whom are full-time. None of the Company's employees
is represented by a labor union or subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and believes that its employee
relations are good.
PROPERTY
The Company's principal executive offices, located at 40 Skokie Boulevard,
Northbrook, Illinois, 60062-1618 are leased. The Company occupies approximately
40,364 square feet under several leases, expiring at various times from August
31, 1996 to August 31, 1999. In addition, the Company leases storage space in
the same facility under a short term lease and is negotiating to lease
additional office space in the same facility, which it believes will be
sufficient for its operations in the future. See Note 7 to the Consolidated
Financial Statements.
LEGAL PROCEEDINGS
No litigation is currently pending against the Company or its property, and
the Company is not aware of any outstanding claims against any participating
payors or providers, in either case, that would have a material adverse effect
on the Company's business, operating results or financial condition. The Company
expects its clients to be involved in legal proceedings incident to their
business, some of which may involve claims related to the practices of
affiliated health care providers. See "Risk Factors-- Possible Litigation and
Insurance."
INSURANCE
The Company's agreements with clients generally require the Company to
maintain professional liability insurance in the amounts of $1 million per
occurrence and $3 million in the aggregate. However, the Company maintains at
its own expense professional liability insurance in the amounts of $10 million
per occurrence and $10 million in the aggregate. Separately, the Company
generally requires each physician with which it contracts under CDIP to maintain
professional liability insurance coverage of $1 million per occurrence and $3
million in the aggregate, except where state law allows lesser amounts.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their respective
ages and positions are as follows:
NAME AGE POSITION
- -------------------------------- --- -------------------------------------
Carl R. Adkins, M.D. ........... 51 Chairman of the Board, President and
Chief Executive Officer
Mark T. Richards................ 37 Chief Financial Officer
Alan H. Spiro, M.D. ............ 43 Director, Chief Medical Officer
Bradford W. Keller.............. 35 Vice-President of Client Services
James E. Zechman................ 46 Principal Marketing Officer
Lawrence Rubinstein, Esq. ...... 63 General Counsel, Secretary
Peter M. Castleman.............. 39 Director
Jeffrey R. Jay, M.D.(1)(2) ..... 37 Director
Mitchell J. Blutt, M.D.(1) ..... 39 Director
Jonas L. Steinman(2)............ 31 Director
- ------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Carl R. Adkins, M.D., Chairman of the Board since January 1996, has been
President and Chief Executive Officer of the Company since September 1995. From
1992 to 1995, he served in various positions with United HealthCare, including
CEO for United HealthCare of Ohio--Western Region. From 1986 to 1992, Dr. Adkins
was employed by US Healthcare where he served in various positions including
Senior Vice President of the New York Region. He holds an M.B.A. from Wake
Forest University.
Mark T. Richards, CPA, has been Chief Financial Officer of the Company since
January 1996. From 1988 to 1995, Mr. Richards was with H.M.S.S., Inc., a home
healthcare provider where he held positions of increasing responsibility in the
Finance Department, including Vice-President of Finance. From 1982 to 1988, he
was with Price Waterhouse LLP, most recently as an audit manager.
Alan H. Spiro, M.D., a director since 1994, has been Chief Medical Officer
of the Company since 1991. From 1989 to 1991, he was Senior Vice President and
Medical Director of Connecticare, Inc. Since 1991 Dr. Spiro has been active in
many national organizations, serving on major committees for the American
Gastroenterologic Association, American College of Physician Executives and the
American Society for G.I. Endoscopy. From 1982 to 1989, Dr. Spiro was in a
private practice of gastroenterology and was also Vice President and Medical
Director of Celtic Life Insurance Company. He holds an M.B.A. from the Kellogg
School of Management of Northwestern University.
Bradford W. Keller has been Vice President of Client Services of the Company
since 1995. From 1992 to 1995, Mr. Keller held several management positions at
United HealthCare of Ohio--Western Region, including Vice President, Network
Development. From 1989 to 1992, he was employed by the Harvard Community Health
Plan in its Marketing Department, most recently as Marketing Manager for small
group products. He holds an M.B.A. from the Harvard Business School.
James E. Zechman has been Principal Marketing Officer of the Company since
1992. Upon consummation of this offering, it is anticipated that Mr. Zechman
will assume responsibility for investor relations. From 1989 through 1992, Mr.
Zechman was the President of APWEL, Inc., a sales, marketing, international
trade and financial consulting company which he founded. From 1976 to 1988, Mr.
Zechman was employed by the Capital Markets Division of Merrill Lynch Company,
most recently as Vice President and Manager of the Proprietary Trading,
Financial Futures and Options Group.
46
<PAGE>
Lawrence Rubinstein has been associated with the Company since 1989 and has
acted as General Counsel since 1991. Mr. Rubinstein co-founded Robbins,
Rubinstein, Salomon & Greenblatt, Ltd. of Chicago, Illinois, where he remained a
Senior Partner until 1990.
Peter M. Castleman has been a Director since November 1994. Mr. Castleman
joined Whitney in 1987, where he is a Managing Partner. Mr. Castleman is a
director of Advance ParadigM, Inc., The North Face, Inc., Brothers Gourmet
Coffees, Inc. and a number of private companies. He holds an M.B.A. from the
Harvard Business School.
Jeffrey R. Jay, M.D., has been a Director since November 1994. Since 1993,
he has been a General Partner of Whitney. From 1988 to 1993, Dr. Jay was
employed by Canaan Partners, a venture capital firm. Dr. Jay currently is a
national advisory member of the American Medical Association's Physician Capital
Source Committee and is on the Board of CRA Managed Care, Inc., a workers
compensation managed care company and Advance ParadigM, Inc., a health benefits
manager. He holds an M.B.A. from the Harvard Business School.
Mitchell J. Blutt, M.D., has been a Director since November 1994. Since
1990, he has been the Executive Partner at Chase Capital Partners (formerly
Chemical Venture Partners). Dr. Blutt is Adjunct Assistant Professor at the New
York Hospital/Cornell Medical Center and Professor at Cornell University
Graduate Program in Health Services where he continues to provide patient care.
Dr. Blutt serves on the Boards of The Hanger Orthopedic Group, General Medical
Corp., Landec Corp., Innotech Corporation, UroHealth, Inc., several private
companies and he is also on the Board of the New York Venture Capital Forum. He
is a Fellow of the New York Academy of Medicine, a member of the American
College of Physicians and American Medical Association and is an Advisory Board
Member of the Center on Addiction and Substance Abuse at Columbia University.
Dr. Blutt holds an M.B.A. from the Wharton School of the University of
Pennsylvania.
Jonas L. Steinman has been a Director since January 1996. He is currently a
Principal of Chase Capital Partners (formerly Chemical Venture Partners). Prior
to joining Chase Capital Partners, Mr. Steinman was employed by Anthem Partners,
Booz, Allen & Hamilton and Drexel Burnham Lambert, Inc. Mr. Steinman serves on
the Board of several private companies. Mr. Steinman holds an M.B.A. from the
Harvard Business School.
47
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE><CAPTION>
LONG-TERM COMPENSATION AWARDS
-----------------------------
ANNUAL SECURITIES
COMPENSATION RESTRICTED UNDERLYING
NAME AND ------------ STOCK AWARD(S) OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) ($)(2) SARS (3) COMPENSATION(4)
- --------------------------------------- ---- ------------ -------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Carl R. Adkins, M.D.,(5)............... 1995 $ 98,509 -- 33,429 $83,086
President, Chief Executive Officer
Bradford W. Keller (6)................. 1995 26,172 -- -- 12,360
Vice-President Client Services
Alan H. Spiro, M.D..................... 1995 197,421 -- -- --
Chief Medical Officer
James E. Zechman....................... 1995 165,189 -- 79,842 --
Principal Marketing Officer
Lawrence Rubinstein.................... 1995 144,129 -- -- --
General Counsel, Secretary
Alan P. Mintz, M.D.(7)................. 1995 326,165 -- -- --
Cheryl E. Lippert(7)(8)................ 1995 147,954 -- 29,251 37,940
</TABLE>
- ------------
(1) The salaries for Dr. Spiro and Messrs. Zechman and Rubinstein reflect
short-term reductions in connection with the 1995 Transaction. The amounts
of salaries for Dr. Spiro and Messrs. Zechman and Rubinstein will be
increased to $200,000, $175,000 and $150,000, respectively, at such time as
the net income of the Company is positive for any fiscal quarter. For the
period prior to these reductions, the annual salaries for Dr. Spiro and
Messrs. Zechman and Rubinstein were $200,000, $150,000 and $175,000,
respectively. See "Certain Transactions--1995 Transaction."
(2) Dr. Adkins was awarded 245,149 restricted shares of Common Stock at $0.05
per share pursuant to a restricted shares agreement dated as of November 17,
1995 with the Company (and amended as of January 26, 1996). Of the
restricted stock held by Dr. Adkins, 88,254 shares have already vested; the
remaining 156,895 shares will vest pro rata on December 31, 1996, 1997, 1998
and 1999, or earlier upon the occurrence of certain circumstances specified
in Dr. Adkins' restricted shares agreement. Mr. Keller, Dr. Spiro and Mr.
Zechman purchased 33,429, 25,995 and 109,434 restricted shares,
respectively, of Common Stock at $0.05 per share pursuant to restricted
shares agreements dated as of January 15, 1996, September 6, 1995 and
September 6, 1995, respectively, with the Company. The restricted stock held
by Mr. Keller, Dr. Spiro and Mr. Zechman will vest pro rata on December 31,
1996, 1997, 1998, 1999, and 2000, or earlier upon the occurrence of certain
circumstances specified in the respective restricted shares agreements.
(3) On September 6, 1995, the Company issued Stock Purchase Warrants to Dr.
Adkins, Dr. Spiro, Messrs. Zechman and Rubinstein, Dr. Mintz and Ms. Lippert
for the purchase of 33,429, 81,070, 79,842, 128,852, 184,059 and 29,251
shares of Common Stock, respectively, which warrants become exercisable, if
at all, on or prior to June 30, 1997 (or, under certain conditions, prior to
September 30, 1997) if (i) the Company consummates an initial public
offering of the Common Stock such that (a) the net cash proceeds to the
Company from such offering exceed $30 million and (b) the price per share of
Common Stock sold in such offering is at least $24.90 or (ii) there occurs a
sale of the capital stock of the Company held by the Private Equity
Investors or a merger, consolidation or other business combination, and in
each case, (x) the Senior Subordinated Notes are repaid in full and (y) the
Private Equity Investors receive cash proceeds (net of certain expenses and
fees) that exceed $75 million for the Common Stock held by the Private
Equity Investors. See "Risk Factors--Dilution" and "Certain
Transactions--1995 Transaction." The Stock Purchase Warrants held by Drs.
Adkins, Spiro and Mintz and Mr. Rubinstein were surrendered to the Company
for cancellation in June 1996. See "Certain Transactions--Stock Purchase
Warrants." An option was also issued to Dr. Mintz to purchase 4,457 shares
of Common Stock in 1996 which will vest pro rata at August 15, 1996, 1997
and 1998.
(4) Represent amounts paid by the Company in 1995 for expenses incurred by Dr.
Adkins, Mr. Keller and Ms. Lippert when they relocated to join the Company.
Dr. Adkins and Mr. Keller also received
(Footnotes continued on following page)
48
<PAGE>
(Footnotes continued from preceding page)
$40,426 and $17,165, respectively, in 1996 for additional expenses incurred
by them in connection with their relocation.
(5) Dr. Adkins was hired pursuant to an employment agreement effective as of
September 5, 1995 which provides for a base salary of $275,000 per annum.
His salary compensation for the period from September 5, 1995 through
December 31, 1995 was paid as a pro rata portion of the annual salary
specified in Dr. Adkins' employment agreement. See also footnotes 2, 3 and 4
above.
(6) Mr. Keller was hired in October 1995 at a salary of $150,000 per year and
his salary for the period from October 30, 1995 through December 31, 1995
was paid as a pro rata portion of such amount. See also footnotes 2 and 4
above.
(7) Dr. Mintz served as President and Chief Executive Officer until September
1995, and as Chairman of the Board until December 31, 1995. Dr. Mintz's
annual salary was $350,000 until October 1, and was $250,000 for the
remainder of the year. Ms. Lippert is no longer employed by the Company, but
from May 4, 1995 through the end of the year she served as the Company's
Chief Financial Officer and the table reflects Ms. Lippert's salary for such
period. See "Certain Transactions--1995 Transaction." See also footnotes 3
and 4 above.
(8) Mr. Richards, the Company's Chief Financial Officer, was hired in January
1996 at a salary of $150,000 per year. He received a sign-on bonus of
$50,000, $25,000 of which was paid on January 31, 1996 and the remaining
$25,000 of which was paid on May 31, 1996. Mr. Richards also received an
option to purchase 50,651 shares of Common Stock in April 1996 which will
vest pro rata on January 15, 1997, 1998, 1999, 2000, and 2001.
Option Grants. The following table provides information with respect to the
stock option grants made to each person named below during the fiscal year 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE><CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------------ ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS/SARS FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ----------------------- ------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Carl R. Adkins, M.D.... 33,429 5.10% $0.05 9/30/97 $ 882,667 $ 935,623
Bradford W. Keller..... -- -- -- -- -- --
Alan H. Spiro, M.D..... -- -- -- -- -- --
James E. Zechman....... 79,842 12.19 0.05 9/30/97 2,108,153 2,234,632
Lawrence Rubinstein.... -- -- -- -- -- --
Alan P. Mintz,
M.D.(3)(4)............. -- -- -- -- -- --
Cheryl E.
Lippert(3)(5).......... 29,251 4.47 0.05 9/30/97 772,336 818,672
</TABLE>
- ------------
(1) This table reflects the Stock Purchase Warrants held by Dr. Adkins, Mr.
Zechman and Ms. Lippert for the purchase of 33,429, 79,842 and 29,251 shares
of Common Stock, respectively. This table does not, however, reflect the
Stock Purchase Warrants held by Drs. Spiro and Mintz and Mr. Rubinstein for
the purchase of 81,070, 184,059 and 128,852 shares of Common Stock,
respectively, as such warrants were issued in connection with the capital
transaction portion of the 1995 Transaction and are not, therefore,
reflected as compensation. In June 1996 the Stock Purchase Warrants held by
Dr. Adkins, Dr. Spiro, Dr. Mintz and Mr. Rubinstein were surrendered to the
Company for cancellation. See "Certain Transactions--Stock Purchase
Warrants."
(2) Represents amounts that would be realizable if the price per share in this
offering is at least $24.90 or, if the price per share is not at least
$24.90, there occurs, on or before June 30, 1997 (or, under certain
conditions, September 30, 1997), a sale of the common stock of the Company
in a merger, consolidation or other business combination in which certain
shareholders of the Company receive proceeds in excess of $75 million. See
"Risk Factors--Dilution" and "Certain Transactions--1995 Transaction."
(3) Dr. Mintz is no longer employed by the Company, but during a portion of 1995
he served as the Company's President and Chief Executive Officer. Ms.
Lippert is no longer employed by the Company, but during a portion of 1995
she served as the Company's Chief Financial Officer.
(Footnotes continued on following page)
49
<PAGE>
(Footnotes continued from preceding page)
(4) Dr. Mintz received an option in 1996 to purchase 4,457 shares of Common
Stock.
(5) Mr. Richards, the Company's Chief Financial Officer, received an option to
purchase 50,651 shares of Common Stock in April 1996 which will vest pro
rata on January 15, 1997, 1998, 1999, 2000 and 2001.
Option Exercises and Value. None of the persons named below exercised
options during the fiscal year 1995. The following table summarizes the number
of securities underlying unexercised options and the value of such options on an
aggregated basis held by the persons named below at December 31, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE><CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
--------------------------------- ---------------------------------
NAME EXERCISABLE/ UNEXERCISABLE(1) EXERCISABLE/ UNEXERCISABLE(2)
- ---------------------------------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Carl R. Adkins, M.D. ................... -- 33,429 $-- $--
Bradford W. Keller...................... -- -- -- --
Alan H. Spiro, M.D. .................... -- -- -- --
James E. Zechman........................ -- 79,842
Lawrence Rubinstein..................... -- -- -- --
Alan P. Mintz, M.D.(3).................. -- -- -- --
Cheryl E. Lippert(3)(4)................. -- 29,251
</TABLE>
- ------------
(1) This table reflects the Stock Purchase Warrants held by Dr. Adkins, Mr.
Zechman and Ms. Lippert for the purchase of 33,429, 79,842 and 29,251 shares
of Common Stock, respectively. This table does not, however, reflect the
Stock Purchase Warrants held by Drs. Spiro and Mintz and Mr. Rubinstein for
the purchase of 81,070, 184,057 and 128,852 shares of Common Stock,
respectively, as such warrants were issued in connection with the capital
transaction portion of the 1995 Transaction and are not, therefore,
reflected as compensation. In June 1996 the Stock Purchase Warrants held by
Drs. Adkins, Spiro and Mintz and Mr. Rubinstein were surrendered to the
Company for cancellation. See "Certain Transactions--Stock Purchase
Warrants." None of the Stock Purchase Warrants still held by Mr. Zechman and
Ms. Lippert are exercisable upon the consummation of this offering but may
become exercisable in the future for a limited period of time and under
limited circumstances. See "Risk Factors--Dilution" and "Certain
Transactions--1995 Transaction."
(2) This table does not reflect any values as the Stock Purchase Warrants were
not in-the-money at December 31, 1995 because the conditions to
exercisability specified in the Stock Purchase Warrants had not been met.
(3) Dr. Mintz is no longer employed by the Company, but during a portion of 1995
he served as the Company's President and Chief Executive Officer. Ms.
Lippert is no longer employed by the Company, but during a portion of 1995
she served as the Company's Chief Financial Officer.
(4) Mr. Richards, the Company's Chief Financial Officer, received an option to
purchase 50,651 shares of Common Stock in April 1996 which will vest pro
rata on January 15, 1997, 1998, 1999, 2000 and 2001.
EMPLOYMENT AGREEMENTS
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Carl R. Adkins, M.D.
effective as of September 5, 1995 (the "CEO Employment Agreement"). The CEO
Employment Agreement provides for Dr. Adkins to be paid a base salary of
$275,000. Under the CEO Employment Agreement, Dr. Adkins will also be paid an
annual bonus of up to 100% of the base salary if the Company achieves certain
annual performance targets to be established by the Compensation Committee of
the Board. The CEO Employment Agreement provides for the initial term of
employment to end December 31,
50
<PAGE>
1996, which term will automatically be renewed for one-year extension periods
unless the renewal is canceled by the Company upon at least 90, but no more than
120, days prior notice.
The CEO Employment Agreement also provides for the Company to issue 245,149
shares of Common Stock to Dr. Adkins pursuant to a restricted stock agreement
(See "--Restricted Shares Agreements"), and for the payment of certain fringe
benefits, relocation expenses and vacations of not less than four weeks per year
with pay. Dr. Adkins has agreed to be bound by certain confidentiality,
non-competition and non-solicitation restrictions set forth in the CEO
Employment Agreement.
OTHER EXECUTIVE EMPLOYMENT CONTRACTS
The Company entered into employment contracts with Alan Spiro, M.D. and
Lawrence Rubinstein on January 1, 1994, and with James E. Zechman on June 10,
1994. Each such employment contract was amended in connection with the
Recapitalization and again in connection with the 1995 Transaction
(collectively, such employment contracts, as amended, the "Executive Employment
Contracts"). Each Executive Employment Contract provides for a term that ends on
December 31, 1996.
As amended in connection with the 1995 Transaction, Dr. Spiro's Executive
Employment Contract provides for an annual salary of $160,000; Mr. Zechman's
Executive Employment Contract provides for an annual salary of $140,000; Mr.
Rubinstein's Executive Employment Contract provides for an annual salary of
$120,000. If the net income of the Company is positive for any fiscal quarter,
the Executive Employment Contracts provide for the annual salaries of Dr. Spiro
and Messrs. Zechman and Rubinstein to be increased to $200,000, $175,000 and
$150,000, respectively.
The Executive Employment Contracts provide for Dr. Spiro and Messrs. Zechman
and Rubinstein to be paid discretionary bonuses at the times and in the amounts
as are declared by the Board. Each of Dr. Spiro and Messrs. Zechman and
Rubinstein receive four weeks paid vacation.
OTHER AGREEMENTS
Alan P. Mintz, M.D. served as the President and Chief Executive Officer of
the Company from its incorporation until September 1995, and as Chairman of the
Board until December 31, 1995. In connection with the 1995 Transaction and the
addition of Dr. Adkins, Dr. Mintz reduced his role solely to that of Chairman of
the Board and Dr. Mintz and the Company entered into a severance agreement
effective December 31, 1995. See "Certain Transactions--1995 Transaction."
Cheryl E. Lippert served as the Company's Chief Financial Officer from April
1995 to January 1996 and, following the termination of her employment, the
Company and Ms. Lippert entered into a severance agreement. See "Certain
Transactions--1995 Transaction."
See Note 2 of Summary Compensation Table for a description of restricted
stock awards made to certain executive officers.
DIRECTORS OPTION PLAN
Effective November 3, 1994, the Board and shareholders of the Company
approved the Company Stock Option Plan for Non-Employee Directors (the
"Directors Option Plan"). No options to purchase shares of Common Stock have
been granted under the Directors Option Plan which will be terminated prior to
the consummation of this offering.
TARSOP
Effective October 28, 1994, the Board and shareholders of the Company
approved the TARSOP. The TARSOP permits the Compensation Committee of the Board
(the "Compensation Committee") to grant options to purchase up to 57,745 shares
of Common Stock (subject to adjustment as described in the TARSOP) to such key
employees and key consultants as it, in its sole discretion, may determine.
51
<PAGE>
Options may be "incentive stock options" ("ISOs") described in section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified"
stock options ("NQSOs") subject to the provisions of Code section 83.
Options granted under the TARSOP shall contain such terms and conditions as
the Compensation Committee may determine, provided that (i) the amount payable
by the grantee on exercise of an option may not be less than fair market value
(as defined in the TARSOP) of the shares purchasable thereunder; (ii) options
granted under the TARSOP become exercisable on the completion of nine years
following the date of grant, or, if the Company meets certain performance
targets set forth in the TARSOP, on earlier dates specified in the TARSOP, (iii)
each option shall terminate on the tenth anniversary of the date of grant, (iv)
payment of the option exercise price may be made by certified or official bank
check, the equivalent thereof, personal check (subject to collection and with
the Compensation Committee's consent) or by delivery of previously-acquired
shares of Common Stock held by the grantee for at least six months (if provided
in an applicable award agreement) and (v) no option shall be exercisable
following the grantee's termination of employment, except as described in the
next sentence. A grantee's options that are exercisable immediately before his
termination of employment (i) may not be exercised after his termination of
employment for cause (as defined in the TARSOP), (ii) may be exercised for 90
days after his termination other than for cause, death or disability and (iii)
may be exercised for one year after his termination on account of his death or
disability. Shares acquired on exercise may be put to, or called by, the Company
following the grantee's termination of employment, as described in the TARSOP.
The TARSOP may be amended by the Compensation Committee, subject to shareholder
approval in certain cases as described in the TARSOP. All options are
non-transferable other than by will or the laws of descent and distribution. The
Compensation Committee may require all options to be terminated unless exercised
within 30 days (or such longer period as determined by the Compensation
Committee), or provide that all or some of the restrictions on options may
lapse, in either case upon (i) a merger or consolidation of the Company with
another corporation such that there is a change in the shares of the Common
Stock by reason of such merger or consolidation, (ii) a sale or conveyance of
all or substantially all of the assets of the Company, (iii) a reorganization or
liquidation of the Company, or (iv) a change in control of the Company, which
includes, among other events, any person becoming the beneficial owner of
securities representing 50.0% or more of the combined voting power of the then
outstanding securities of the Company ordinarily having the right to vote for
the election of directors. As of March 31, 1996, options to purchase 57,745
shares of Common Stock at an exercise price of $.05 per share had been granted
under the TARSOP, all of which were outstanding and no options had vested.
1996 OPTION PLAN
The 1996 Option Plan is expected to be adopted prior to the consummation of
this offering. Of the shares of Common Stock (subject to adjustment
upon certain changes in capitalization) reserved for issuance under the 1996
Option Plan, it is expected that options for shares will be granted
concurrently with the consummation of this offering, which options will be
exercisable at the initial public offering price. It is expected that options
for , , and shares of Common Stock will be granted to
Carl R. Adkins, M.D., Alan H. Spiro, M.D., Bradford W. Keller and Mark T.
Richards, respectively, prior to or concurrently with the consummation of this
offering.
The 1996 Option Plan is administered by a committee of the Board (the "Plan
Committee"), the composition of which is intended to satisfy the provisions of
Rule 16b-3 (as in effect on August 15, 1996) under Section 16 of the Securities
Exchange Act of 1934, as amended, and Code section 162(m). If no Plan Committee
is appointed, the 1996 Option Plan shall be administered by the Company's Board.
During a 10-year period ending in 2006, the Committee will have authority,
subject to the terms of the 1996 Option Plan, (i) to exercise all powers granted
to it under the 1996 Option Plan, (ii) to construe, interpret and implement the
1996 Option Plan and any agreements executed pursuant thereto,
52
<PAGE>
(iii) to prescribe, amend and rescind rules and regulations relating to the 1996
Option Plan, (iv) to make all necessary or advisable administrative
determinations, and (v) to correct any defect, supply any omission and reconcile
any inconsistency in the 1996 Option Plan.
Under the terms of the 1996 Option Plan, ISOs within the meaning of Code
section 422 and NQSOs subject to the provisions of Code section 83 may be
granted to officers, directors, and executive, managerial or professional
employees of the Company and any of its affiliates (as defined in the 1996
Option Plan), except that ISOs may be granted only to employees of the Company
and its subsidiaries. In any year, a person eligible to receive options under
the 1996 Option Plan may not be granted options covering a total of more than
shares. Approximately persons are eligible to participate in the
plan.
To the extent that the aggregate fair market value (as defined in the 1996
Option Plan) of Common Stock with respect to which ISOs granted under the 1996
Option Plan and all other option plans of the Company or it subsidiaries
(determined as of the date of grant) exercisable for the first time by an
individual during any calendar year exceeds $100,000, such options shall be
treated as NQSOs.
Options may be exercisable during the term of the option at such times, in
such amounts, in accordance with such terms and conditions, and subject to such
restrictions, as may be determined by the Plan Committee; provided, that no ISO
or NQSO may be exercisable over a period greater than ten years from the date of
grant (five years in the case of an ISO granted to an individual who, at the
time of grant, owns shares possessing 10% or more of the total combined voting
power of all classes of stock of the Company and its subsidiary corporations (a
"10% Stockholder"). The Plan Committee may, with the grantee's consent, cancel
any award and issue a new award in substitution therefor, provided that the
substituted award satisfied all applicable 1996 Option Plan requirements as of
the date made.
The exercise price of an ISO or an NQSO (the "Option Price") may not be less
than 100% of the fair market value of the Common Stock for which it will be
exercisable on the date of grant (110% in the case of an ISO granted to a 10%
Stockholder).
Common Stock purchased upon the exercise of an option is to be paid for by
certified or official bank check (or the equivalent thereof acceptable to the
Plan Committee), by personal check (subject to collection), if provided in an
applicable option agreement, by the delivery of previously acquired shares of
Common Stock held by the grantee for the period necessary to avoid a charge to
the Company's earnings for financial reporting purposes and/or, if provided in
an applicable option agreement, by the optionee's promissory note and agreement
providing for payment with interest (as specified in the plan) upon such terms
terms and conditions as the Plan Committee may determine. Payment may be deemed
to be satisfied, if provided in an applicable option agreement, by delivery to
the Company of an assignment of a sufficient amount of the proceeds from the
sale of Common Stock acquired upon exercise to pay for the Common Stock acquired
upon exercise and an authorization to the selling agent to pay such purchase
price to the Company.
Options may be transferred by a grantee only by will or by the laws of
descent and distribution, and may be exercised during the grantee's lifetime
only by the grantee. Unless an applicable plan agreement provides otherwise, all
of a grantee's outstanding awards terminate upon his termination of employment
or service for any reason.
The Company's Board may amend, suspend or discontinue the 1996 Option Plan
at any time except that no amendment shall impair any rights under any
outstanding option without the grantee's consent and, no amendment shall,
without shareholder approval (i) materially increase the maximum number of
shares as to which awards may be granted under the 1996 Option Plan or the
number of shares in respect of which options may be granted to a participant in
any year, (ii) materially increase the benefits accruing to 1996 Option Plan
participants, (iii) materially change the designation of the class of persons
eligible for participation in the 1996 Option Plan, (iv) provide for the grant
of options having an exercise price less than the fair market value of Common
Stock on the grant date, (v) permit
53
<PAGE>
an award to be exercisable more than 10 years after grant or (vi) extend the
term of the 1996 Option Plan beyond 10 years.
Effective upon the closing of the Offering, [ISOs] [NQSOs] to purchase an
aggregate of shares of Common Stock have been granted to the following
participants:
<TABLE><CAPTION>
NAME/GROUP OF OPTIONEES: NUMBER OF OPTIONS GRANTED EXERCISE PRICE
- --------------------------------------------- ---------------------------------------------
<S> <C>
Carl R. Adkins, M.D.
Alan H. Spiro, M.D.
Bradford W. Keller
Mark T. Richards
Executive Group
Non-Executive Director Group
Non-Executive Officer Employee Group
Each Nominee for Director
Each "Associate" of any of the above
Each 5% grantee
All other employees as a group
</TABLE>
An optionee who holds the stock received on exercise of an ISO for at least
two years from the date the option was granted and at least one year from the
receipt of the stock on exercise, generally pays no tax until the stock is sold,
at which time any profit or loss realized is long-term capital gain or loss, as
the case may be; the Company gets no tax deduction at any time. The spread at
exercise of an ISO is effectively treated as tax preference item in the exercise
year, for purposes of calculating the grantee's alternative minimum tax.
A grantee who sells the stock received on exercise of an ISO within two
years after the option grant or within one year of receipt of shares on exercise
is taxed on the profit up to the date of exercise (which is ordinary income) and
the Company is entitled to a corresponding tax deduction; the income and
deduction items are recognized by the grantee and the Company, respectively, in
the year the stock is sold. Appreciation or depreciation after the date of
exercise is taxable to the grantee as capital gain or loss, respectively, and is
nondeductible by the Company.
Generally, on exercise of an NQSO, the amount by which the fair market value
of the shares of the Common Stock on the date of exercise exceeds the exercise
price of such shares will be taxable to the grantee as ordinary income, and will
be deductible for tax purposes by the Company in the year in which the grantee
recognizes income. If, in any year after 1993, an affected grantee's total
compensation (including compensation related to options) from the Company and
its affiliates exceeds $1 million, such compensation in excess of $1 million may
not be tax deductible by the Company under Code section 162(m). Affected
grantees are generally the Company's chief executive officer and the four most
highly compensated employees of the Company (other than the chief executive
officer) at the end of the Company's taxable year. Excluded from the calculation
of total compensation for this purpose is compensation that is
"performance-based" within the meaning of Code section 162(m). It is expected
that compensation realized upon the exercise of options will be
"performance-based" and, therefore, that such compensation will be deductible
without regard to the limits of Code section 162(m).
The Company may be required to withhold tax on the amount of the income
recognized by the grantee upon exercise of an NQSO and upon transfer of stock
received on exercise of an ISO. Upon a change in control, in some cases that
provisions of Code section 280G and 4999 may disallow a deduction to the Company
and impose an exercise tax on the grantee.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Plan was adopted by the Board on and approved by the
Company's shareholders on , prior to the closing of the Offering. Under
the Employee Plan, shares of Common Stock are reserved for issuance.
The Employee Plan, which is intended to qualify under Code section 423, will be
administered by the Compensation Committee of the Board.
Under the Employee Plan, there are two purchase periods each year: from
January 1 through June 30 and from July 1 through December 31. Eligible
employees may purchase up to 1000 shares of
54
<PAGE>
Common Stock during each purchase period through payroll deductions, which may
not exceed 10% of the employee's regular rate of salary or wages (excluding
overtime, bonuses, commissions and reimbursements) in effect immediately before
the relevant purchase period. Notwithstanding the foregoing, no employee shall
be permitted to purchase shares under the Employee Plan at a rate exceeding
$25,000 of the fair market value of the Common Stock in any year. Generally, all
Company employees are eligible to participate in the Employee Plan except
employees who have been employed less than six months as of the beginning of a
purchase period and employees customarily employed less than 20 hours per week
or 5 months per year and persons deemed, for purposes of Code section 423, to
own 5% or more of the total combined voting power or value of the Company's
stock. The price at which Common Stock is purchased is equal to the lesser of
85% of the fair market value of the Common Stock on the first day of the
applicable purchase period and 85% of the fair market value of the Common Stock
on the last day of the applicable purchase period. Unless terminated by the
Board earlier, the Employee Plan will terminate following the purchase period
beginning on the tenth anniversary of the date the first purchase period begins
or, if earlier, when all of the shares reserved for issuance under the Employee
Plan have been sold. The Employee Plan may be amended by the Board, subject to
shareholder approval in certain cases as described in the Employee Plan.
DIRECTOR COMPENSATION
The Company's current policy is not to pay additional compensation to
Directors who are also employees of the Company. Non-employee directors of the
Company do not receive any compensation for serving as a director of the Board,
other than reimbursement for travel costs and out-of-pocket expenses incurred in
attending each directors' meeting and committee meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Dr. Jay, who has
served as a member and Chairman since December 1994 and Mr. Steinman, who has
been a member since January 1996. Damion E. Wicker, M.D. served as a member of
the Compensation Committee from December 1994 to January 1996. John Adams served
as a member of the Compensation Committee from December 1994 to July 1995.
Dr. Jay is a general partner of Whitney. Mr. Steinman and Dr. Wicker are
principals of CCP. For a discussion of the transactions between the Private
Equity Investors and the Company, see "Certain Transactions." John Adams served
as an executive officer of the Company from August 1991 until his resignation in
July 1995.
55
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 30, 1996, and as adjusted to reflect
this offering, by (i) each director of the Company, (ii) each executive officer,
(iii) each person known to the Company to be the beneficial owner of more than
5% of the Common Stock and (iv) all directors and executive officers of the
Company as a group. See "Management--Compensation Committee Interlocks and
Insider Participation" and "Description of Capital Stock." Except as may be
indicated in the footnotes to the table, the Company believes that each of the
persons named in the table has the sole voting and investment power with respect
to all shares of Common Stock indicated. Unless otherwise indicated, the address
of each shareholder is c/o UtiliMed, Inc., 40 Skokie Boulevard, Northbrook,
Illinois 60062-1618.
<TABLE><CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
-----------------------
SHARES PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING(2)
- -------------------------------------------------------- --------------------- -------- -----------
<S> <C> <C> <C>
Carl R. Adkins, M.D. (3)(4)(6).......................... 88,254 2.1% 1.3%
Mark T. Richards(5)..................................... -- -- --
Bradford W. Keller(6)................................... -- -- --
Alan H. Spiro, M.D.(3)(4)(6)............................ 27,492 0.6 0.6
James E. Zechman(3)(4)(6)............................... 33,198 0.8 0.5
Lawrence Rubinstein, Esq.(3)(4)(7)...................... 117,105 2.8 2.0
Peter M. Castleman(8)................................... 1,615,753 37.9 23.5
Jeffrey R. Jay, M.D.(8)................................. 1,615,753 37.9 23.5
Mitchell J. Blutt, M.D.(9).............................. 1,615,753 37.9 23.5
Jonas L. Steinman(9).................................... 1,615,753 37.9 23.5
Alan P. Mintz, M.D.(3)(4)(10)........................... 234,147 5.5 3.8
J.H. Whitney & Co.(4)(11)............................... 1,615,753 37.9 23.5
177 Broad Street
Stamford, CT 06901
Chase Capital Partners(4)(12)........................... 1,615,753 37.9 23.5
380 Madison Avenue
New York, NY 10017
Cheryl E. Lippert(3)(13)................................ -- -- --
All executive officers and directors as a group......... 3,731,702 87.6% 55.2%
</TABLE>
- ------------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options or
warrants. Each beneficial owner's percentage ownership is determined by
assuming that the shares underlying an option or warrant that are
exercisable within 60 days have been exercised. It is assumed that the
Stock Purchase Warrants are not exercisable. See Note 1 to the "Offering."
(2) If the Stock Purchase Warrants that remain outstanding become exercisable
subsequent to the consummation of this offering, the percent of shares of
Common Stock beneficially owned after this offering by Dr. Adkins, Mr.
Richards, Mr. Keller, Dr. Spiro, Mr. Zechman, Mr. Rubinstein, Mr.
Castleman, Dr. Jay, Dr. Blutt, Mr. Steinman, Dr. Mintz, J.H.Whitney & Co.,
Chase Capital Partners and Ms. Lippert would be 1.3%, 0%, 0%, 0.5%, 1.6%,
1.9%, 23.1%, 23.1%, 23.1%, 23.1%, 3.7%, 23.1%, 23.1% and 0.4%,
respectively. See "Risk Factors--Dilution," "Capitalization" and "Certain
Transactions--1995 Transaction."
(3) Does not include shares of Common Stock issuable upon the exercise of the
Stock Purchase Warrants held by Mr. Zechman and Ms.Lippert in the amounts
of 79,842 and 29,250 shares of Common Stock, respectively. Does include
22,212, 9,783, 15,549 and 8,887 shares of Common Stock transferred by the
Private Equity Investors to Drs. Mintz and Spiro and Messrs. Rubinstein and
Adams, respectively, upon the consummation of this offering in connection
with the surrender of their Stock Purchase Warrants for cancellation by the
Company pursuant to agreements
(Footnotes continued on following page)
56
<PAGE>
(Footnotes continued from preceding page)
entered into in June 1996. See "Certain Transactions--1995 Transaction" and
"Certain Transactions--Stock Purchase Warrants."
(4) These shareholders are parties to the Shareholders' Agreement, which will
terminate upon the consummation of this offering. See "Certain
Transactions--Shareholders' Agreement."
(5) Does not include 50,651 shares of Common Stock underlying a stock option
granted to Mr. Richards. See "Management--Executive Compensation."
(6) Does not include 156,895, 33,429, 25,999 and 109,434 shares of Common Stock
issued or sold, as the case may be, to each of Dr. Adkins, Mr. Keller, Dr.
Spiro and Mr. Zechman pursuant to restricted share agreements dated as of
November 17, 1995 (as amended as of January 26, 1996), January 15, 1996,
September 15, 1995 and September 15, 1995, respectively. See
"Management--Executive Compensation."
(7) Includes 9,043 shares of Common Stock held of record by the Adam M.
Rubinstein Irrevocable Trust (12/19/94), 9,043 shares of Common Stock held
of record by the Adina R. Herman Irrevocable Trust (12/19/94) and 9,043
shares of Common Stock held of record by the Elana B. Rubinstein
Irrevocable Trust (12/19/94).
(8) The address of these directors is c/o J.H. Whitney & Co. Consists of an
aggregate of 1,615,753 shares of Common Stock held of record by Whitney,
Whitney Equity Fund and Whitney Debt Fund (together, the "Whitney
Entities") that Mr. Castleman and Dr. Jay may be deemed to beneficially own
due to their relationship with such entities. Such beneficial ownership is
disclaimed by both Mr. Castleman and Dr. Jay. See footnote 11 below and
"Management-- Executive Officers and Directors."
(9) The address of these directors is c/o Chase Capital Partners. Consists of
1,615,753 shares of Common Stock held of record by CCP that Dr. Blutt and
Mr. Steinman may be deemed to beneficially own due to their relationship
with such entity. Such beneficial ownership is disclaimed by both Dr. Blutt
and Mr. Steinman. See footnote 12 below and "Management--Executive Officers
and Directors."
(10) The address of this shareholder is 1140 Sheridan Road, Glencoe, Illinois
60022. Includes 18,086 shares of Common Stock held of record by the Steven
Hillel Mintz Irrevocable Trust (12/19/94), 18,086 shares of Common Stock
held of record by the Ari David Mintz Irrevocable Trust (12/19/94), 18,086
shares of Common Stock held by record by the Jonathon Ephraim Mintz
Irrevocable Trust (12/19/94) and 18,086 shares of Common Stock held of
record by the Jeffery Adam Mintz Irrevocable Trust (12/19/94).
(11) The shares of Common Stock beneficially owned by the Whitney Entities are
issuable upon conversion of 677,002 shares of Series A Preferred Stock and
229,240 shares of Class B Stock held by the Whitney Entities prior to this
offering. The conversion of Series A Preferred Stock and Class B Stock will
occur immediately prior to the consummation of this offering. See "Certain
Transactions--Recapitalization," "Certain Transactions--1995 Transaction"
and "Description of Capital Stock."
(12) The shares of Common Stock beneficially owned by CCP are issuable upon
conversion of 677,002 shares of Series A Preferred Stock and 229,240 shares
of Class B Stock held by CCP prior to this offering. The conversion of
Series A Preferred Stock and Class B Stock will occur immediately prior to
the consummation of this offering. See "Certain Transactions
--Recapitalization," "Certain Transactions--1995 Transaction" and
"Description of Capital Stock."
(13) The address of this shareholder is 2872 Whittier Drive, Bloomfield Hills,
Michigan 48304.
57
<PAGE>
CERTAIN TRANSACTIONS
RECAPITALIZATION
In November 1994, the Company entered into the Recapitalization whereby it
redeemed outstanding shares of capital stock from then existing management and
financed the transaction by issuing new capital stock and debt to the Private
Equity Investors in order to provide liquidity to the Company's founders and
senior management. By aligning the Company's organizational and capital
structure with professional investors, the Company believed the Recapitalization
would also allow the Company (i) to attract experienced and qualified directors,
such as Dr. Blutt, Mr. Castleman, Mr. Steinman and Dr. Jay who, based on their
prior business or related experience, could assist management with operational
issues as well as the strategic direction of the Company, (ii) to access the
financial and managerial advice and experience of CCP and Whitney, private
investment firms which have each invested in other similarly situated companies;
and (iii) to facilitate capital investment by other professional investors that
would not ordinarily invest in a closely-held company. See "Use of Proceeds."
In the Recapitalization, the Company redeemed an aggregate of 56% of the
then outstanding shares of Common Stock from Alan P. Mintz, M.D., John E. Adams,
Lawrence Rubinstein, Nancie Blatt, Alan H. Spiro, M.D. and Sheldon K. Gulinson
(together, the "Redeemed Holders") for a total consideration of $39,874,059. The
consideration consisted of cash and an aggregate of $13,874,059 of Junior
Subordinated Notes due November 3, 2002 bearing interest at 10.0% per annum,
issued to each of the following in the specified principal amounts: Dr. Mintz,
$6,700,000; Mr. Adams, $3,200,000; Dr. Spiro, $574,059; and Mr. Rubinstein,
$3,400,000. In connection with the 1995 Transaction, the holders of the Junior
Subordinated Notes irrevocably waived the right to receive any and all accrued
but unpaid interest thereon and agreed that no further interest would accrue. On
May 24, 1996 the Junior Subordinated Notes were converted into 94,039 shares of
Common Stock in accordance with their terms.
To finance the redemptions and related expenses of the Recapitalization, the
Company issued (i) 22,969 shares of Common Stock at $7.22 per share, 427,328
shares of Class B Stock at $17.55092 per share and 1,262,000 shares of Series A
Preferred Stock at $17.82884 per share representing, in the aggregate, 37.381%
of the Company's capital stock on a fully-diluted basis (giving effect to the
conversion of the Series A Preferred Stock and Class B Stock into shares of
Common Stock in accordance with their terms) to the Private Equity Investors;
and (ii) the Senior Subordinated Notes bearing interest at 10.101% per annum.
The Company has paid an aggregate of $1,675,082 in interest on the Senior
Subordinated Notes quarterly, and intends to use the net proceeds of this
offering to pay the outstanding principal amount of and accrued interest on the
Senior Subordinated Notes. See "Use of Proceeds."
1995 TRANSACTION
Following the Recapitalization, the Company grew rapidly in terms of gross
revenues derived from new CDIP contracts. During the third quarter of 1995,
however, then existing management and the Private Equity Investors recognized
that there were significant problems managing the rapid growth of the business
and that the financial condition of the Company had deteriorated during 1995 as
evidenced by substantial operating losses. As a result, in September 1995 the
Company, together with the Redeemed Holders, the Private Equity Investors and
certain others completed the 1995 Transaction, which resulted in changes to the
capitalization, management and business of the Company. The principal components
of the 1995 Transaction included a return of capital to the Company by the
Redeemed Holders as well as significant adjustments to the relative equity
positions of the Company's shareholders, a new management team and development
and introduction of the RMP product. See "Business--Strategy."
In the 1995 Transaction: (i) the Redeemed Holders subsequently reduced the
aggregate redemption price paid at the time of the Recapitalization by
$7,500,000 through a combination of cash payments and the delivery of
irrevocable letters of credit and promissory notes to the Company; (ii) the
58
<PAGE>
holders of the Junior Subordinated Notes irrevocably waived their right to
receive any and all accrued and unpaid interest thereon and agreed that no
further interest would accrue; (iii) Whitney Debt Fund and CCP exchanged an
aggregate of 22,969 shares of Common Stock for 92,004 shares of Series A
Preferred Stock and 31,152 shares of Class B Stock and the conversion ratios
applicable to the conversion of Series A Preferred Stock and Class B Stock into
Common Stock were adjusted so that the Private Equity Investors' percentage
ownership of the Company, immediately prior to the consummation of this offering
and assuming conversion of all shares of Series A Preferred Stock and Class B
Stock into Common Stock, increased from 37.4% to 73.0% on a fully diluted basis;
(iv) the Private Equity Investors obtained control of the Board pursuant to an
amendment to the Shareholders' Agreement; and (v) Dr. Mintz resigned as
President and Chief Executive Officer and agreed to a $100,000 reduction in his
salary.
The Company also issued the Stock Purchase Warrants to the Redeemed Holders
and certain other members of the management for the purchase of an aggregate of
641,236 shares of Common Stock that are exercisable at an exercise price of $.05
per share only if, on or prior to June 30, 1997 (or, under certain conditions,
prior to September 30, 1997), (i) the Company consummates an initial public
offering of the Common Stock such that (a) the net cash proceeds to the Company
from such offering exceed $30 million and (b) the price per share of Common
Stock sold in such offering is at least $24.90 or (ii) there occurs on or prior
to June 30, 1997 (or, under certain conditions, September 30, 1997), a sale of
the capital stock of the Company held by the Private Equity Investors or a
merger, consolidation or other business combination, and in each case, (x) the
Senior Subordinated Notes are repaid in full and (y) the Private Equity
Investors receive cash proceeds (net of certain expenses and fees) that exceed
$75 million for the Class B Stock and Series A Preferred Stock held by the
Private Equity Investors. If the Stock Purchase Warrants do not become
exercisable upon the consummation of this offering they may become exercisable
in the future upon a sale of the stock of the Company under the conditions
specified in clause (ii) above. See "Risk Factors--Dilution," "Capitalization"
and "Principal Shareholders."
In connection with the 1995 Transaction, the Company entered into amendments
to the employment agreements of Alan H. Spiro, M.D., Lawrence Rubinstein and
James E. Zechman. See "Management--Employment Agreements."
Dr. Spiro executed a promissory note (the "Spiro Note") in favor of the
Company to evidence (i) a demand loan in the original principal amount of
$150,000 advanced to Dr. Spiro by the Company on April 14, 1995 and (ii) an
initial advance of $374,625 on September 6, 1995 to satisfy certain of Dr.
Spiro's obligations arising out of the 1995 Transaction. The Spiro Note (i) is
secured by a pledge of 53,487 shares of Common Stock to the Company owned by Dr.
Spiro, (ii) matures on the earlier to occur of September 6, 2005 or Dr. Spiro
ceasing to be an employee of the Company (subject in some cases to a grace
period before repayment) and (iii) is subject to certain mandatory prepayment
events.
Prior to the 1995 Transaction, the Company entered into long term employment
arrangements with Jack Korsower, M.D. and Maria McAfee to assist in the
development of physician networks for the Company. As these arrangements
contained economic terms that were unfavorable to the Company, the new
management team renegotiated Ms. McAfee's employment arrangement and reached a
mutually agreeable termination of Dr. Korsower's employment arrangement.
The Company and Ms. McAfee agreed to shorten the term of her employment
agreement from five years to one year (subject to renewal each year) and to
reduce her base salary to less than 50% of its previous level. Simultaneously
therewith, the Company issued 55,298 shares of Common Stock to Ms. McAfee
pursuant to a restricted shares agreement, all of which vested on June 30, 1996.
Ms. McAfee also received a stock option, which has been exercised, for 3,029
shares of Common Stock and the Company made a loan to her in the amount of
$137,000 pursuant to a promissory note (the "McAfee Note") that is secured by a
pledge of 55,298 shares of the Common Stock of the Company owned by Ms. McAfee.
The McAfee Note bears interest at 6% per annum and is repayable on the earlier
of November 15, 1999 or the occurrence of certain events specified therein.
59
<PAGE>
On February 15, 1996 the Company and Dr. Korsower entered into a severance
agreement pursuant to which the parties agreed upon a mutual release. Dr.
Korsower agreed to certain noncompetition, nonsolicitation and confidentiality
covenants and the Company agreed to the issuance of certain stock options, the
payment over three fiscal quarters of severance totaling $72,604 and the
issuance of the Korsower Note. The Korsower Note bears interest at 8.5% per
annum and matures by its terms on the closing of this offering. The Company
intends to pay the outstanding principal amount and accrued interest of the
Korsower Note with the net proceeds of this offering. See "Use of Proceeds."
Simultaneously with the hiring of Dr. Adkins to lead the Company's
management team, Dr. Mintz reduced his role solely to that of non-executive
Chairman and, effective as of December 31, 1995, the Company and Dr. Mintz
entered into a severance agreement (the "Mintz Severance Agreement"). Pursuant
to the Mintz Severance Agreement: (i) the Company agreed to allow Dr. Mintz to
reduce the amount of the letter of credit he posted with the Company in
connection with the 1995 Transaction by $430,898 in lieu of payment of any
severance or other monies to him, including with respect to any indebtedness for
personal funds previously deposited with the Company; (ii) Dr. Mintz agreed to
certain noncompetition, nonsolicitation and confidentiality obligations; and
(iii) the parties agreed to a mutual release. Simultaneously with the Mintz
Severance Agreement, the Company entered into a Settlement Agreement with Dr.
Michael P. Grossman, a former business partner of Dr. Mintz, pursuant to which
the Company paid Dr. Grossman, a former shareholder of a predecessor of the
Company, $100,000 as part of the settlement of a lawsuit between Dr. Grossman
and Dr. Mintz. The Company was not a party to such suit and received a release
of any potential claims Dr. Grossman may have had against the Company.
The employment of Cheryl Lippert, who served as Chief Financial Officer from
May 1995 to January 1996, was terminated effective January 11, 1996. The Company
and Ms. Lippert entered into a settlement agreement and general release pursuant
to which Ms. Lippert (i) received cash payments totaling $95,500 and (ii) agreed
to release the Company from any and all claims related to her employment with
the Company and her termination therefrom.
SENIOR NOTES
On March 6, 1996, the Company issued the Senior Notes to CCP and Whitney.
The Company used the proceeds of the Senior Notes issued to CCP and Whitney on
March 6, 1996 to fund a substantial amount of the deposit to a client in
connection with the renegotiation of a CDIP contract. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Clients; Capitation Contracts and Provider Contracts; RMP Contracts."
The Senior Notes bear interest at a rate of 14% per annum until September 6,
1996, after which time the rate increases to 16% per annum. The Company has paid
quarterly interest of $266,000 on the Senior Notes since March 6, 1996. The
Company intends to use a portion of the net proceeds of this offering to pay the
outstanding principal amount of and accrued interest on the Senior Notes, as
well as an additional $1 million representing certain deferred fees to the
Private Equity Investors incurred in connection with the issuance of the Senior
Notes. See "Use of Proceeds."
STOCK PURCHASE WARRANTS
In June 1996 the Company and the Private Equity Investors entered into
agreements with the holders of 82.4% of the Stock Purchase Warrants (potentially
exercisable for 528,466 shares of Common Stock) pursuant to which such Stock
Purchase Warrants were surrendered for cancellation in exchange for, among other
things, a commitment by the Private Equity Investors to transfer an aggregate of
59,740 shares of Common Stock held by Private Equity Investors to such persons
upon consummation of this offering. Pursuant to these agreements, Drs. Mintz and
Spiro and Messrs. Rubinstein and Adams will receive 22,212, 9,783, 15,549 and
8,887 shares of Common Stock, respectively, from the Private Equity Investors
upon the consummation of this offering. The Company has supplementally agreed to
make a loan to Dr. Spiro, to be secured by the Common Stock of the
60
<PAGE>
Company owned by Dr. Spiro, in an amount sufficient to pay the taxes associated
with the receipt of Common Stock from the Private Equity Investors.
SHAREHOLDERS' AGREEMENT
In connection with the Recapitalization, the Company entered into a
shareholders' agreement with the Private Equity Investors, the Redeemed Holders
and certain others governing the relationships among such shareholders (as
amended, the "Shareholders' Agreement"), which agreement will be terminated upon
the consummation of this offering. The Shareholders' Agreement provides for
restrictions on transfers of shares, rights of first refusal, tag-along
registration rights and election of directors. The members of the Board were
elected pursuant to the terms of the Shareholders' Agreement, which requires all
the parties to vote their shares in favor of a Board consisting of one member
designated by Whitney, two members designated by Whitney Equity Fund, three
members designated by CCP, two members designated by certain management
shareholders of the Company and three members designated by the vote of a
majority of the other members of the Board.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the prevailing market price from time to time.
Since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amounts of Common Stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.
Upon completion of this offering, 6,762,147 shares of Common Stock will be
outstanding. Of these shares, the 2,500,000 shares of Common Stock sold in this
offering will be freely tradeable by persons other than "affiliates" of the
Company, without restriction under the Securities Act and the remaining
4,262,147 shares of Common Stock outstanding will be "restricted" securities
within the meaning of Rule 144 under the Securities Act and may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption contained in Rule 144. As
defined in Rule 144, an "affiliate" of an issuer is a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, such issuer.
Upon completion of this offering, the holders of shares of Common
Stock, or their transferees, will be entitled to certain registration rights for
such shares under the Securities Act. See "Description of Capital Stock --
Registration Rights." Registration of such shares under the Securities Act would
result in such shares (except for shares purchased by affiliates) being
available for sale immediately upon the effectiveness of such registration.
All directors, executive officers and existing shareholders of the Company,
holding in the aggregate all of the shares of Common Stock outstanding prior to
this offering, have agreed with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated. However, Morgan Stanley & Co. Incorporated may in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to such agreements. See "Underwriters." The number of shares
of Common Stock available for sale in the public market is further limited by
restrictions under the Securities Act. Separately, Dr. Mintz and Messrs. Adams
and Rubinstein have agreed that for a period of two years following the
consummation of this offering, except upon exercise of certain registration
rights (see "Description of Capital Stock--Registration Rights"), they will not
effect any public sale or distribution of Common Stock without the prior written
consent of Whitney and CCP.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus a person (or persons whose shares are aggregated)
who has beneficially owned Restricted
61
<PAGE>
Shares for at least two years, including persons who may be deemed "affiliates"
of the Company, would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of one percent of the number of
shares of Common Stock then outstanding or the average weekly trading volume of
the Common Stock as reported through the American Stock Exchange during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. In addition, a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned for at least three years the restricted shares proposed to be
sold, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation, manner of sale provisions, public information
requirements or notice requirements. The Commission has proposed to amend the
holding periods of Rule 144 by reducing the two year period referred to above to
one year and the three year period referred to above to two years. The proposed
amendments have not yet been adopted.
Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Exchange Act pursuant to certain compensatory benefit plans
and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Exchange Act, in reliance upon Rule 144 but
without compliance with certain restrictions, including the holding period
requirements, contained in Rule 144. In addition, the Commission has indicated
that Rule 701 will apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options (including exercises after the
date of this Prospectus). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this Prospectus, may be sold by
persons other than affiliates pursuant to the manner of sale provisions of Rule
144 and by affiliates without compliance with the two-year minimum holding
period requirements under Rule 144.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company has amended and restated the Articles of Incorporation (the
"Articles") and Bylaws of the Company (the "Bylaws") to take effect upon the
effective date of the Registration Statement.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Prior to the consummation of this offering, the Company's capital stock
consisted of one series of preferred stock (1,354,004 Series A Preferred Stock,
all of which were issued and outstanding) and two other classes of stock
(5,065,057 shares of Common Stock, of which 1,030,641 shares were issued and
outstanding and 458,480 shares of Class B Stock, all of which shares were issued
and outstanding). Immediately prior to the consummation of this offering, all of
the issued and outstanding shares of Series A Preferred Stock and Class B Stock
will be converted into shares of Common Stock and the Company will effectuate a
5.361849 for one reverse stock split. As a result of the foregoing, immediately
prior to the consummation of this offering and after such conversion and reverse
stock split, all shares of Series A Preferred Stock and Class B Stock shall be
cancelled, retired and eliminated from the Company's authorized shares of Series
A Preferred Stock and Class B Stock.
Upon the consummation of this offering, the authorized capital stock of the
Company will consist of shares of Common Stock, of which 6,762,147 will be
issued and outstanding, and shares of preferred stock, no par value
("Preferred Stock"), none which will be issued. The description of the capital
stock below is qualified in its entirety by reference to the Articles and
Bylaws, which are filed as exhibits to the Registration Statement and
incorporated by reference herein.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock held of record by such holder on all matters on which shareholders
generally are entitled to vote under Illinois law. Voting rights are not
cumulative, so that the holders of a majority of the voting power of the Company
would elect all the directors standing for election at any annual or special
meeting of the shareholders, and the holders of the remaining shares may not be
able to elect any director.
The holders of the Common Stock are entitled to receive ratably dividends
only when and if declared by the Board out of funds legally available for
payment thereof. The ability of the Board to declare or pay dividends on Common
Stock or to cause the Company to repurchase shares of its capital stock may be
subject to restrictions or limitations contained in the provisions of any series
of Preferred Stock which may hereafter be issued by the Company.
Upon the liquidation, dissolution or winding up of the Company, or any
distribution of its assets, the holders of the Common Stock will be entitled to
receive ratably the assets of the Company available after the payment of all
debts and other liabilities and after the holders of any series of Preferred
Stock which may be issued have received the preferential amount fixed by the
Board for such shares.
The holders of Common Stock have no preemptive rights to purchase shares of
capital stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities or
property. The rights, preferences and privileges of the holder of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
the shares of any series of Preferred Stock which the Company may designate and
issue in the future. All outstanding shares of Common Stock are fully-paid and
non-assessable and the shares of Common Stock offered will be fully-paid and
non-assessable when issued.
PREFERRED STOCK
Pursuant to the Articles, the Board, without further shareholder
authorization, is authorized to issue shares of Preferred Stock in one or more
series and to determine and fix the rights, preferences and privileges of each
series, including dividend rights and preferences over dividends on the Common
Stock
63
<PAGE>
and one or more series of the Preferred Stock, conversion rights, voting rights
(in addition to those provided by law), redemption rights and the terms of any
sinking fund therefor, and rights upon liquidation, dissolution or winding up,
including preferences over the Common Stock and one or more series of the
Preferred Stock. Although the Company has no plan to issue any shares of
Preferred Stock, the issuance of shares of Preferred Stock, or the issuance of
rights to purchase such shares, may have the effect of delaying, deferring or
preventing a change in control of the Company or an unsolicited acquisition
proposal.
DIRECTOR'S AND OFFICER'S LIABILITY
The Company has included in its Articles provisions to eliminate the
personal liability of its directors and officers for monetary damages resulting
from breaches of their fiduciary duty. This provision does not eliminate
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or which involve gross negligence or willful misconduct. These provisions
will not limit the liability of the Company's directors under the Federal
securities laws. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.
REGISTRATION RIGHTS
At the completion of this offering, certain persons and entities the
("Rightsholders") will be entitled to certain rights with respect to the
registration under the Securities Act of a total of approximately
shares of Common Stock (the "Registerable Shares") under the terms of a
registration rights agreement entered into in connection with the
Recapitalization (the "Registration Rights Agreement"). In general, the
Registration Rights Agreement provides that in the event the Company proposes to
register any of its securities under the Securities Act for its own account or
for the account of other shareholders at any time or times subject to certain
exceptions, the Rightsholders shall be entitled to include certain Registerable
Shares in such registration, subject to the right of the managing underwriter of
any such offering to exclude for marketing reasons certain of such Registerable
Shares from such registration. Certain Rightsholders have the additional right
under the Registration Rights Agreement to require the Company to prepare and
file from time to time up to four registration statements under the Securities
Act with respect to their Registerable Shares if Rightsholders holding at least
25% of the Registerable Shares so request, and the Company is required to use
its best efforts to effect such registration, subject to certain conditions and
limitations. The Company is generally required to bear the expenses of all such
registrations. All the Registerable Shares are subject to the contractual
restrictions with respect to the sale or disposition of shares of Common Stock.
See "Shares Eligible for Future Sale."
ILLINOIS TAKEOVER STATUTE
Upon the consummation of this offering, the Company will become subject to
Section 7.85 of the IBCA and, at such times as a certain amount of shares are
held by or a certain number of shareholders are Illinois residents, Section
11.75 of the IBCA. These statutes place restrictions on business combinations
between certain Illinois corporations and Interested Shareholders as defined in
the respective sections.
Section 7.85 of the IBCA requires, in addition to any other requirements
imposed by law or a corporation's Articles of Incorporation, that a business
combination (as defined in the statute) involving a corporation and an
Interested Shareholder be approved by: (i) the affirmative vote of the holders
of at least 80% of the combined voting power of the voting shares (as defined in
the statute), voting together as a single class (but with the votes per share
specified in the corporation's Articles of Incorporation) and (ii) the
affirmative vote of a majority of the combined voting power of the then
outstanding voting shares held by disinterested shareholders voting together as
a single class. These voting requirements will not apply if the business
combination is approved by 66 2/3% of the disinterested directors, the price
paid to the shareholders of the corporation in such business combination is,
generally, the higher of fair market value (as defined in the statute) or the
price per share paid by the interested shareholder in
64
<PAGE>
acquiring its shares, and certain other conditions are met relating to the form
of consideration paid, the absence of dividend defaults, the absence of special
benefits to the interested shareholder and the provision of information to
shareholders. Section 7.85 of the IBCA defines an Interested Shareholder as a
person who (i) beneficially owns, directly or indirectly, 10% or more of the
combined voting power of the outstanding voting shares of a corporation or (ii)
is an affiliate or associate (as those terms are defined in Rule 12b-2 of the
Exchange Act) of the corporation and was the beneficial owner, directly or
indirectly, of 10% or more of the combined voting power of the then outstanding
voting shares at any time in the previous two years.
Section 11.75 of the IBCA prohibits a business combination (as defined in
the statute) involving a corporation and an Interested Shareholder for three
years after such shareholder becomes an Interested Shareholder unless: (i) prior
to such date, the Board of Directors approved the transaction that resulted in
the shareholder becoming an Interested Shareholder, (ii) upon completion of the
transaction that resulted in the shareholder becoming an Interested Shareholder,
the Interested Shareholder owned at least 85% of the voting shares outstanding
at the time such transaction commenced (excluding shares owned by directors who
are also officers and shares reserved under employee stock plans), or (iii) on
or after such date, the business combination is approved by the Board of
Directors and authorized at a meeting of the shareholders by 66 2/3% of the
outstanding voting shares not owned by the Interested Shareholder. For purposes
of Section 11.75 of the IBCA, an Interested Shareholder is a person who (i) owns
15% or more of the outstanding voting shares of a corporation or (ii) is an
affiliate or associate (as defined in the statute) of the corporation and was
the owner of 15% or more of the then outstanding voting shares at any time in
the previous three years.
Section 8.85 of the IBCA permits directors and officers to consider the
interests of certain constituencies other than the shareholders when exercising
their duties, including in the consideration of actions which could result in a
change of control of the Company.
65
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective number of shares of Common Stock set forth opposite their names
below:
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------- ---------
Morgan Stanley & Co. Incorporated...............................
Smith Barney Inc................................................
Volpe, Welty & Company..........................................
---------
Total........................................................... 2,500,000
---------
---------
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all the shares of Common Stock offered hereby (other than the shares of
Common Stock covered by the over-allotment option described below) if any such
shares are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other Underwriters or to certain other dealers. After the initial
offering of the shares of Common Stock, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 375,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such Underwriter's name in the preceding table bears to the total number
of shares of Common Stock offered by the Underwriters hereby.
The Company and its executive officers and directors, and certain
shareholders of the Company have agreed that they will not (a) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (b) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (a) or (b) above is to
be settled by
66
<PAGE>
delivery of Common Stock or other securities, in cash or otherwise for a 180-day
period after the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated, except that the Company may, without such
consent, grant options or issue stock upon the exercise of outstanding stock
options, pursuant to the Company's stock option plans.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price was determined through negotiations
among the Company and the Underwriters. Among the factors considered in such
negotiations, in addition to prevailing market conditions, were price-earnings
ratios of publicly traded companies that the Company and the Underwriters
believe to be comparable to the Company, the Company's results of operations in
recent periods, estimates of the business potential and earnings prospects of
the Company, the present state of the Company's development and the current
state of the Company's industry and the economy as a whole. The initial public
offering price set forth on the cover page of the Prospectus should not,
however, be considered an indication of the actual value of the Common Stock.
Such price is subject to change as a result of market conditions and other
factors.
The Company will apply for listing of the Common Stock on the American Stock
Exchange, under the symbol "MED," subject to official notice of issuance. In
connection with the listing, the Underwriters have undertaken that sales of
Common Stock will meet the American Stock Exchange's minimum distribution
standards.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
hereby made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other documents are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Registration Statement, including exhibits
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the Commission's Regional Offices located at
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such materials may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's Web site is http://www.sec.gov.
During December 1995, the Board decided to retain Ernst & Young LLP as its
independent public accountants and dismissed the Company's former auditors. The
former auditors' report on the Company's financial statement for the two years
ended December 31, 1994 does not cover the consolidated financial statements of
the Company included in this Prospectus. Such report did not contain an adverse
opinion or disclaimer of opinion and was not modified as to uncertainty, audit
scope or accounting principles. There were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure at the time of the change or
with respect to the Company's financial statements for fiscal years 1993 and
1994, which, if not resolved to the former auditors' satisfaction, would have
caused them to make reference to the subject matter of the disagreement in
connection with their report. Prior to retaining Ernst & Young LLP, the Company
had not consulted with Ernst & Young LLP regarding accounting principles.
67
<PAGE>
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters in
connection with this offering will be passed upon for the Company by Paul,
Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain legal matters in
connection with the Common Stock offered hereby will be passed upon for the
Underwriters by Latham & Watkins, Washington, D.C..
EXPERTS
The consolidated financial statements of UtiliMed, Inc. at December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UTILIMED, INC.
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995......................... F-3
Consolidated Statements of Changes in Shareholders' Equity (Deficit)................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995............................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995............................................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UtiliMed, Inc.
We have audited the accompanying consolidated balance sheets of UtiliMed,
Inc. (the Company) as of December 31, 1994 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 10, 1996
F-2
<PAGE>
UTILIMED, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
DECEMBER 31 MARCH 31
------------------- -----------
1994 1995 1996
------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $19,218 $ 4,696 $ 5,145
Accounts receivable..................................................... 485 146 271
Employee notes, less allowance for doubtful amounts of $287,000-1995
and 1996.............................................................. 905 1,895 1,094
Deposit with managed care organization.................................. -- -- 6,200
Prepaid expenses........................................................ 31 81 81
------- -------- -----------
Total current assets............................................ 20,639 6,818 12,791
Equipment and leasehold improvements:
Office equipment and furniture.......................................... 1,459 1,922 1,848
Leasehold improvements.................................................. 392 469 469
Computer equipment and software......................................... 1,433 2,222 2,226
------- -------- -----------
3,284 4,613 4,543
Less accumulated depreciation and amortization.......................... (762) (1,461) (1,637)
------- -------- -----------
Total equipment and leasehold improvements...................... 2,522 3,152 2,906
Other assets:
Deferred debt issuance costs, net of accumulated amortization........... 740 -- 917
Other................................................................... 32 120 154
------- -------- -----------
Total other assets.............................................. 772 120 1,071
------- -------- -----------
$23,933 $ 10,090 $ 16,768
------- -------- -----------
------- -------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Payables to plans and providers......................................... $18,360 $ 20,552 $ 22,304
Current maturities of long-term debt.................................... 3,782 537 378
Due to shareholders..................................................... 160 84 7,046
Loss contract accruals.................................................. 3,191 755 605
Other payables and accrued expenses..................................... 1,226 3,534 2,224
------- -------- -----------
Total current liabilities....................................... 26,719 25,462 32,557
Long-term liabilities:
Long-term debt, net of current maturities............................... 311 99 528
Long-term debt, net of current maturities due to shareholders........... 20,574 9,863 9,869
Deferred rent........................................................... 227 178 172
------- -------- -----------
Total long-term liabilities..................................... 21,112 10,140 10,569
Redeemable, convertible Series A preferred stock (1,262,000,1,354,004
and 1,354,004 shares authorized, issued and outstanding in 1994, 1995
and 1996, respectively; no par value; $17.83 per share redemption
value plus accrued 13.39% cumulative dividends of $484,300, $3,568,000
and $4,319,500 in 1994, 1995 and 1996, respectively).................. 22,984 27,708 28,460
Redeemable, convertible Class B stock (427,328, 458,480 and 458,480
shares authorized, issued and outstanding in 1994, 1995 and 1996,
respectively; no par value; $17.55 per share redemption value)........ 7,500 8,047 8,047
Shareholders' equity (deficit):
Common stock 1,549,964, 5,065,057 and 5,065,057 shares authorized;
480,709, 987,654 and 1,030,641 shares issued and outstanding in 1994,
1995 and 1996, respectively; no par value; 435,876 and 469,305 shares
restricted in 1995 and 1996).......................................... 4,465 14,898 16,704
Unearned compensation................................................... -- -- (1,212)
Accumulated deficit..................................................... (58,847) (76,165) (78,357)
------- -------- -----------
Total shareholders' equity (deficit).................................... (54,382) (61,267) (62,865)
------- -------- -----------
$23,933 $ 10,090 $ 16,768
------- -------- -----------
------- -------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
UTILIMED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
Contract revenues:
Continuing contracts.............. $ 19,308 $ 50,882 $ 76,457 $ 18,130 $ 24,055
Terminated contracts.............. 7,079 15,697 19,960 8,626 --
--------- --------- --------- --------- ---------
Total contract revenues......... 26,387 66,579 96,417 26,756 24,055
Operating expenses:
Cost of services:
Continuing contracts.............. 16,916 49,792 72,365 17,859 20,628
Terminated contracts.............. 5,781 16,696 18,437 8,975 --
--------- --------- --------- --------- ---------
Total cost of services.......... 22,697 66,488 90,802 26,834 20,628
Selling, general and
administrative...................... 6,107 13,224 22,016 4,815 3,785
Depreciation and amortization....... 209 493 740 163 210
Stock based compensation expense.... -- -- -- -- 593
Provision for loss on employee
notes............................... -- -- 287 -- --
--------- --------- --------- --------- ---------
Total operating expenses........ 29,013 80,205 113,845 31,812 25,216
--------- --------- --------- --------- ---------
Loss from operations................ (2,626) (13,626) (17,428) (5,056) (1,161)
Other income (expense):
Interest expense.................. (41) (572) (2,053) (592) (419)
Interest income................... 58 311 700 258 144
Other income (expense)............ 1 8 7 -- (4)
--------- --------- --------- --------- ---------
Total other income (expense),
net................................. 18 (253) (1,346) (334) (279)
--------- --------- --------- --------- ---------
Net loss............................ $ (2,608) $ (13,879) $ (18,774) $ (5,390) $ (1,440)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net loss per share:
Primary........................... $ (0.57) $ (3.05) $ (4.37) $ (1.25) $ (0.33)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fully diluted..................... $ (0.56) $ (2.98) $ (4.05) $ (1.14) $ (0.32)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of shares used in pro forma
net loss per share:
Primary........................... 4,568,824 4,547,914 4,296,439 4,303,522 4,375,823
Fully diluted..................... 4,681,594 4,660,684 4,502,989 4,510,330 4,488,592
</TABLE>
See accompanying notes.
F-4
<PAGE>
UTILIMED, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE><CAPTION>
COMMON STOCK TOTAL
-------------------- UNEARNED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT DEFICIT
---------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at January 1, 1993............... 746,011 $ 1 $ -- $ (470) $ (469)
Change in accounting for contract
development costs........................ -- -- -- (157) (157)
Net loss................................. -- -- -- (2,608) (2,608)
---------- ------- ------------ ----------- -------------
Balance at December 31, 1993............. 746,011 1 -- (3,235) (3,234)
Net loss................................. -- -- -- (13,879) (13,879)
Stock issuance costs..................... -- -- -- (1,375) (1,375)
Redemption of common stock by Company.... (418,023) -- -- (39,874) (39,874)
Accrual of dividends on Series A
preferred shares....................... -- -- -- (484) (484)
Common stock issuance.................... 129,752 4,300 -- -- 4,300
Common stock issued as attached to senior
subordinated notes....................... 22,969 164 -- -- 164
---------- ------- ------------ ----------- -------------
Balance at December 31, 1994............. 480,709 4,465 -- (58,847) (54,382)
Net loss................................. -- -- -- (18,774) (18,774)
Stock issuance costs..................... -- -- -- (187) (187)
Capital contributions.................... -- -- -- 7,500 7,500
Note receivable from shareholder......... -- -- -- (375) (375)
Accrual of dividends on Series A
preferred shares....................... -- -- -- (3,083) (3,083)
Conversion of junior subordinated debt... 94,038 10,574 -- (376) 10,198
Conversion of common stock to Series A
preferred and Class B shares............. (22,969) (164) -- (2,023) (2,187)
Common stock issuance--restricted........ 435,876 23 -- -- 23
---------- ------- ------------ ----------- -------------
Balance at December 31, 1995............. 987,654 14,898 -- (76,165) (61,267)
(Unaudited):
Net loss................................. -- -- -- (1,440) (1,440)
Accrual of dividends on Series A
preferred shares....................... -- -- -- (752) (752)
Common stock issuance--restricted........ 33,430 1,480 (1,218) -- 262
Common stock issuance--options
exercised................................ 9,557 59 -- -- 59
Common stock issuance--TARSOP options.... -- 267 (267) -- --
Amortization of unearned compensation.... -- -- 273 -- 273
---------- ------- ------------ ----------- -------------
Balance at March 31, 1996................ 1,030,641 $16,704 $ (1,212) $ (78,357) $ (62,865)
---------- ------- ------------ ----------- -------------
---------- ------- ------------ ----------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
UTILIMED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $(2,608) $(13,879) $(18,774) $(5,390) $(1,440)
Adjustments to reconcile net loss to net
cash and cash equivalents provided by
(used in) operating activities:
Depreciation and amortization............ 209 515 1,504 190 301
Stock based compensation expense......... -- -- -- -- 593
Valuation allowance on employee notes.... -- -- 287 -- --
Changes in assets and liabilities:
Decrease (increase) in receivables
and other assets................... (128) (1,071) 1,106 463 642
Deposit with managed care
organization............................... -- -- -- -- (6,200)
Increase in payables to providers.... 4,391 16,728 2,192 2,597 1,602
Increase (decrease) in other payables
and accrued expenses....................... 180 580 (253) 307 (916)
------- -------- -------- ------- -------
Net cash and cash equivalents provided by
(used in) operating activities............. 2,044 2,873 (13,938) (2,447) (5,418)
INVESTING ACTIVITIES
Issuance of shareholder notes.............. -- -- (287) -- --
Purchases of property and equipment........ (1,319) (1,313) (1,418) (396) (8)
Proceeds on sale of property............... -- -- 47 -- 41
------- -------- -------- ------- -------
Net cash and cash equivalents provided by
(used in) investing activities............. (1,319) (1,313) (1,658) (396) 33
FINANCING ACTIVITIES
Capital contributions...................... -- -- 5,231 -- --
Increase in capital leases................. -- -- 325 35 --
Decrease (increase) in shareholder notes
and advances............................. (1,176) 1,257 -- (154) (38)
Payments on note payable to bank........... (40) (75) (135) -- --
Proceeds from long-term debt............... 582 10,660 -- -- 6,000
Deferred debt issuance costs............... -- (758) -- -- --
Payments on long-term debt and capital
leases..................................... (104) (415) (3,807) (3,268) (130)
Issuance of common stock................... -- 4,300 23 -- 2
Issuance of Series A preferred stock....... -- 22,500 -- -- --
Issuance of Class B stock.................. -- 7,500 -- -- --
Stock issuance costs....................... -- (1,375) (563) -- --
Redemption of common shares................ -- (26,000) -- -- --
------- -------- -------- ------- -------
Net cash and cash equivalents provided by
(used in) financing activities............. (738) 17,594 1,074 (3,387) 5,834
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................ (13) 19,154 (14,522) (6,230) 449
Cash and cash equivalents at beginning of
period..................................... 77 64 19,218 19,218 4,696
------- -------- -------- ------- -------
Cash and cash equivalents at end of
period..................................... $ 64 $ 19,218 $ 4,696 $12,988 $ 5,145
------- -------- -------- ------- -------
------- -------- -------- ------- -------
</TABLE>
See accompanying notes.
F-6
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(MARCH 31, 1996 AMOUNTS ARE UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
UtiliMed, Inc. (formerly Medicon, Inc.) and subsidiaries (the Company)
contracts with managed care organizations and diagnostic imaging providers
throughout the United States to manage the utilization and quality of diagnostic
imaging services. Customers of the Company representing more than ten percent of
total contract revenues are as follows:
1993 1994 1995
---- ---- ----
Individual customers:
Choice Care Health Plans, Inc.......................... -- 16% 20%
United HealthCare of Ohio, Inc.--
Western Region....................................... 32% 22% 14%
GenCare Health Systems, Inc............................ 23% 10% 8%
Rush Prudential Health Plans........................... 22% 10% 3%
Customers under common control:
CIGNA affiliates....................................... 3% 20% 29%
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, UtiliMed C I, Inc.
(formerly Medicon C I, Inc.) and UtiliMed P II, Inc. (formerly Medicon P II,
Inc.) All significant intercompany accounts and transactions have been
eliminated.
CONTRACT REVENUES AND COST OF SERVICES
The Company's contract revenues are derived primarily from services
performed under contracts with managed care organizations which pay a fixed
monthly capitated charge for each covered member. Contract revenues are
recognized ratably over the diagnostic imaging services coverage period. Cost of
services represents payments to providers for covered diagnostic imaging
services. Certain full-service network providers of diagnostic imaging services
receive a contracted, fixed monthly amount per covered managed care member,
subject to various utilization adjustments. The Company also pays other network
providers of specialty diagnostic imaging services a contracted fee per incident
of care. Under certain managed care contracts, the Company is also obligated to
pay noncontracted providers of covered diagnostic imaging services on a
fee-for-service basis. Accordingly, the Company's revenues are primarily fixed
while the cost of services will vary based upon the services performed and the
contractual relationship with the providers.
During 1995, the Company began providing resource management services. Under
these agreements, the Company receives an administrative fee per covered managed
care member to provide various managed care services including credentialing,
pre-certification and utilization review. Under certain of these contracts, the
administrative fee received may be increased or decreased based upon the
achievement of various performance criteria. Included in 1995 and 1996 contract
revenues is $1,763,000 and $2,121,000, respectively, of administrative fee
revenue related to resource management services.
F-7
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES-- (CONTINUED)
Revenues and cost of services are recognized for financial reporting
purposes in the period in which the services are provided. Revenues received in
advance of the coverage period are deferred until the coverage period and
revenues due but unpaid are recognized over the coverage period.
"Contract revenues--terminated contracts" and "Costs of services--terminated
contracts" represent amounts related to certain unprofitable contracts
terminated during 1995.
LOSS CONTRACTS
Based upon analysis of individual contracts, management establishes a loss
contract accrual for the excess of estimated future cost of services over
estimated future contract revenue for the remaining contract period. Loss
contract accruals are updated as additional information becomes available. Loss
contract accruals are charged to earnings when probable and reasonably estimable
and are amortized over the remaining current term of the specific contracts.
CONTRACT DEVELOPMENT COSTS
All costs incurred related to obtaining and implementing client contracts
are expensed as incurred. These costs include marketing and business development
activities conducted before the client contract is probable, as well as direct
contract costs and indirect overhead costs associated with the implementation of
new client accounts.
During 1992 and 1993, the Company capitalized contract development costs.
During 1994, in conjunction with the decision to seek equity financing, the
Company changed its method of accounting to expense contract development costs
as incurred. The consolidated financial statements for 1993 were restated to
give effect to this change.
STOCK-BASED COMPENSATION
The Company measures the compensation cost of all stock-based employee
compensation using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning after
December 15, 1995, encourages, but does not require, all entities to adopt the
fair value based method of accounting for stock-based employee compensation.
While management continues to evaluate this new pronouncement, management
anticipates electing the option of continuing to use APB 25 in the preparation
of consolidated financial statements.
PENDING ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS
No. 121) establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995. The Company believes that the adoption of
SFAS No. 121 will not have a material impact on the Company.
F-8
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES-- (CONTINUED)
CASH EQUIVALENTS
Cash equivalents consist of highly liquid short-term investments with a
maturity at date of acquisition of three months or less.
EMPLOYEE NOTES
Included in employee notes as of December 31, 1995 and March 31, 1996 is
$1,895,000 and $1,094,000, respectively due from current and former employees
which arose in conjunction with the 1995 Transaction (see Note 6). The amounts
due were secured by irrevocable letters of credit that were drawn down in 1996
to satisfy such employee notes.
The balance of $287,000 of employee notes as of December 31, 1995 and March
31, 1996 represent interest bearing amounts due from employees which are
collateralized by the employees' vested and unvested stock options. An allowance
has been established at December 31, 1995 and March 31, 1996 for employee notes
arising in 1995 for which the Company has limited recourse.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using straight-line methods for financial reporting
purposes and accelerated methods for tax purposes over the estimated useful
lives of the respective assets (3 -- 7 years) or, for capital leases, the terms
of the related leases.
DEPOSIT WITH MANAGED CARE ORGANIZATION
Deposit with managed care organization represents interest bearing funds
deposited under the terms of one of the Company's contracts.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
amounts used for income tax purposes.
PAYABLES TO PLANS AND PROVIDERS
Payables to plans and providers include estimates of reported and unreported
services provided and accrued capitation fees and adjustments, which are unpaid
as of the balance sheet date. These payables estimates are based on statistical
information and revised as additional information becomes available. Any
adjustments resulting from these revisions are reflected in earnings currently.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that it is not practicable to estimate the fair value
of redeemable, convertible Series A preferred stock, redeemable, convertible
Class B stock or long-term debt obligations due to the significant restrictions
imposed on these instruments and the absence of a market for these instruments.
F-9
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES-- (CONTINUED)
DEFERRED DEBT ISSUANCE COSTS
During 1994, the Company deferred approximately $758,000 of expenses
directly related to certain financing transactions completed during the year.
The junior subordinated notes payable were converted to equity effective as of
December 31, 1995, and the corresponding $376,000 of unamortized deferred debt
issuance costs were transferred to shareholders' deficit.
SHARE INFORMATION
The consolidated financial statements and notes retroactively reflect a
5.361849-for-one reverse stock split which is assumed to occur immediately prior
to the consummation of an initial public offering. The stock split is not yet
effective and will not occur unless an initial public offering is consummated.
NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the number of common
and common equivalent shares outstanding during the periods in accordance with
the applicable rules of the Securities and Exchange Commission. All stock
options and restricted common stock issued have been considered as outstanding
common stock equivalents for all periods presented, even if anti-dilutive, under
the treasury stock method (based on initial public offering price). Shares of
common stock issuable upon conversion of the Series A preferred stock and Class
B stock are assumed to be common share equivalents for all periods presented.
Additionally, the number of shares used to compute the fully diluted net
loss per share includes shares issuable upon conversion of the junior
subordinated notes which have been treated as converted into common shares as if
such shares had been outstanding since January 1, 1995. All contingent warrants
for the purchase of shares of common stock have been considered as outstanding
common stock equivalents for all periods presented, even if anti-dilutive, under
the treasury stock method (based upon the contingent price specified in the
warrants). The net loss used to compute the fully diluted net loss per share has
been reduced by interest of $529,000 expensed in 1995 related to the junior
subordinated notes.
Shown below are supplementary pro forma earnings per share calculated as if
the planned retirement of debt would have occurred as of January 1, 1995.
<TABLE><CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED ----------------
DECEMBER 31, 1995 1995 1996
----------------- ------ ------
<S> <C> <C> <C>
Supplementary pro forma
net loss per share:
Primary.................................................. $ (3.61) $(0.99) $(0.23)
------ ------ ------
------ ------ ------
Fully diluted............................................ $ (3.36) $(0.95) $(0.22)
------ ------ ------
------ ------ ------
</TABLE>
2. OPERATIONAL MATTERS
The Company has experienced significant growth in new managed care contracts
and the number of covered lives. Revenues increased 45% from $66,579,000 in 1994
to $96,417,000 in 1995. The costs of negotiating new managed care contracts,
establishing provider networks to service the contracts, and implementing new
contracts are charged to operations as such costs are incurred. In addition,
certain
F-10
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
2. OPERATIONAL MATTERS-- (CONTINUED)
contracts were not favorable to the Company. The Company experienced net losses
of $13,879,000 and $18,774,000 for the years 1994 and 1995, respectively, and
negative cash flows of $14,522,000 for the year ended December 31, 1995. At
December 31, 1995, the Company has an accumulated deficit of $76,165,000 and
current liabilities exceeded current assets by $18,644,000.
Beginning in mid-1995, the Company implemented a number of operational
initiatives to improve profitability, including the engagement of a new
executive management team with more experienced professionals in finance,
operations, claims management and professional relations; the termination of
certain unprofitable contracts and the amendment of other contracts to improve
profitability; and the reduction of costs through a specific program.
In addition, certain shareholders provided financial support to the Company
in exchange for $6 million of senior promissory notes in March 1996 (see Note
4), and such shareholders have committed to provide additional financial support
of up to $3 million should such financial support be necessary in 1996. The
Company is in discussions with investment bankers and intends to raise
additional equity capital in 1996 to provide for its expansion and working
capital needs beyond 1996.
Assurances cannot be given that the Company will be successful in raising
additional capital through an initial public offering or in achieving profitable
operations and generating positive cash flow.
3. RISKS AND UNCERTAINTIES
PAYABLES TO PLANS AND PROVIDERS
While management has recorded their best estimate of payables to plans and
providers, considerable variability is inherent in this estimate given the
limited historical data available to project the liability. Actual results
inevitably will differ from these estimates, and such differences may adversely
affect the financial statements.
CONTRACT TERMINATIONS
Certain of the Company's contracts with managed care organizations and
diagnostic imaging providers include termination provisions which provide for
unilateral contract termination prior to expiration of the contract term. Early
termination of contracts with managed care organizations or diagnostic imaging
providers could adversely affect the Company's operations and cash flows.
RESOURCE MANAGEMENT SERVICES PROGRAM
Under the Company's Resource Management Program contracts, a portion or all
of the Company's administrative fee revenues may have to be refunded if the
contract does not result in specified cost savings. In the opinion of
management, the current performance requirements are being met and, accordingly,
a provision for possible refund of administrative fees has not been made.
Failure to achieve the contractual performance requirements could adversely
affect the Company's operations and cash flows.
F-11
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
4. DEBT
Long-term debt consists of the following:
<TABLE><CAPTION>
DECEMBER 31
------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior term note payable to bank, in monthly installments of $11,250
through February 1997, plus interest at prime (8.5% at December 31,
1995) plus 2%, secured by certain equipment............................ $ 268 $ 133
Senior subordinated notes payable to certain Series A preferred, Class B
and common shareholders, due November 2001, interest at 10.101%,
guaranteed by the Company's subsidiary (see below)..................... 10,000 10,000
Junior subordinated notes payable to certain shareholders, converted into
common stock, interest payable quarterly at 10% (see below).............. 10,574 --
Junior subordinated notes payable to certain shareholders, paid January
1995, interest at 10%.................................................. 3,300 --
Capitalized lease obligations, payable in various monthly installments
through December 1996, plus interest at 5% to 17%, secured by certain
equipment, guaranteed in part by a shareholder......................... 685 503
------- -------
24,827 10,636
Less discount on senior subordinated notes............................... 160 137
------- -------
24,667 10,499
Less current maturities of long-term debt................................ 3,782 537
------- -------
Long-term debt........................................................... $20,885 $ 9,962
------- -------
------- -------
</TABLE>
On November 3, 1994, the Company completed a private debt and equity
placement resulting in a new debt structure. In connection with the placement,
certain Series A preferred and Class B shareholders loaned the Company
$10,000,000 under the terms of senior subordinated note agreements with a face
value of $10,000,000 and with 22,969 shares of common stock attached thereto.
The Company recorded a discount on the senior subordinated notes equal to the
estimated fair market value of the common shares which totaled approximately
$164,000.
Payment of the senior subordinated notes is mandatory when certain events
occur, including a change in control of the Company, as defined, or the
completion of an initial public offering of the Company's stock.
If the Company fails to achieve certain annual earnings before interest,
taxes, depreciation and amortization (EBITDA) and revenue targets, as defined,
which are presented in the table below, the holders of the senior subordinated
notes may request prepayment. Prepayment may also be requested by the holders if
the Company's aggregate cash balance does not exceed $3,000,000, capital
expenditures
F-12
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
4. DEBT-- (CONTINUED)
exceed $2,000,000 or the Cash Flow Coverage Ratio (EBITDA divided by cash
interest expense) does not exceed 2.0, 2.5 and 3.0 subsequent to December 31,
1995, 1996 and 1997, respectively.
REVENUE EBITDA
-------- -------
(IN THOUSANDS)
Year ended December 31,
1995................................................... $103,228 $ 3,741
1996................................................... 180,234 11,407
1997................................................... 198,257 12,548
1998................................................... 218,083 13,802
1999................................................... 239,891 15,183
2000................................................... 263,880 16,701
Prepayments are restricted to the amount by which the current assets of the
Company (excluding receivables and prepaid expenses) exceed 50% of the payables
to providers due within one month. During 1995, the Company did not achieve the
annual EBITDA and revenue targets, as defined. The holders of the notes have
waived their prepayment rights through December 31, 1996, except in the event of
an initial public offering. As a result, the senior subordinated notes have been
classified as a non-current liability.
During 1994, the Company also entered into junior subordinated note
agreements with certain common shareholders in consideration of the redemption
of certain common shares. These junior subordinated notes had a face value of
approximately $10,574,000 and were convertible by the Company into common shares
at a conversion rate of $20.971 per share if the Company failed to achieve the
EBITDA targets defined above. During 1995, the Company did not achieve the
annual EBITDA and revenue targets specified in the agreements; thus the junior
subordinated notes have been treated as converted into common shares as of
December 31, 1995.
Aggregate maturities of long-term debt are as follows: 1996-$537,000 and
1997-$10,099,000.
The Company paid interest of $158,000 and $2,046,000 in 1995 and 1994,
respectively.
In March 1996, the Company issued $6,000,000 of senior promissory notes due
March 1997, held by certain shareholders. Costs of $1,000,000 were incurred and
capitalized but will not be paid until the debt is repaid in conjunction with
the issuance of these senior promissory notes.
5. INCOME TAXES
The Company files a consolidated federal income tax return that includes
both wholly owned subsidiaries.
In connection with certain debt and equity transactions on November 3, 1994,
the Company changed its tax status from that of an S Corporation to a C
Corporation. At the date that the Company became a C Corporation, net deferred
income tax assets, before valuation allowance, of approximately $3,605,000
existed relating to temporary differences.
At December 31, 1995, the Company has net operating loss carryforwards of
$13,700,000 available to offset future taxable income, of which $900,000 expires
in 2009, and $12,800,000 expires in 2010.
Full valuation allowances have been provided against net deferred income tax
assets at December 31, 1994 and 1995, respectively.
F-13
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
5. INCOME TAXES-- (CONTINUED)
The income tax provisions for the years ended December 31, 1994 and 1995,
are as follows:
1994 1995
------- -------
(IN THOUSANDS)
Current:
Federal................................................. $ (138) $ --
State................................................... (18) --
Deferred:
Federal................................................. (584) (5,515)
State................................................... (75) (690)
Effect of change in corporate tax status................ (3,605) --
Recognition of valuation allowance on deferred tax
assets.................................................. $ 4,420 $ 6,205
------- -------
$ -- $ --
------- -------
------- -------
The federal statutory tax rate is reconciled to the effective tax rate as
follows:
1994 1995
----- -----
Federal statutory rate....................................... (34.0)% (34.0)%
State taxes, net of federal benefit.......................... (4.3) (4.3)
Effect of change in corporate tax status to record deferred
tax assets................................................. (26.0) --
S Corporation tax loss passed through to shareholders........ 32.3 --
Recognition of valuation allowance on deferred tax assets.... 31.8 37.8
Other........................................................ 0.2 0.5
----- -----
--% --%
----- -----
----- -----
Significant components of the Company's deferred tax assets and liabilities
are as follows:
1994 1995
------- --------
(IN THOUSANDS)
Deferred tax assets:
Payable to providers................................... $ 4,198 $ 4,837
Other.................................................. 193 717
Net operating loss carryforwards....................... 157 5,232
------- --------
Total deferred tax assets.............................. 4,548 10,786
Valuation allowance for deferred tax assets............ (4,420) (10,625)
------- --------
Net deferred tax assets................................ 128 161
Deferred tax liabilities
Depreciation........................................... 128 161
------- --------
Total deferred tax liabilities......................... 128 161
------- --------
Net deferred tax asset................................. $ -- $ --
------- --------
------- --------
The Company paid no income taxes in 1993, 1994 or 1995.
F-14
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
6. CAPITAL STRUCTURE
On November 3, 1994, the Company completed a private debt and equity
placement. In connection with the placement, the Company authorized a new class
structure, including Series A preferred stock, Class B stock and common stock.
The Company then revised its capital structure by converting each share of
existing common stock to 933 shares of common stock. The shares authorized,
issued and outstanding have been restated to give retroactive effect to this
common stock conversion.
The placement also included the issuance of 1,262,000 shares of Series A
preferred stock for cash consideration of $22,500,000 and the issuance of
427,328 shares of Class B stock for cash consideration of $7,500,000.
In connection with the placement, certain Series A preferred and Class B
shareholders loaned the Company $10,000,000 under the terms of senior
subordinated notes with a face value of $10,000,000 and with 22,969 shares of
common stock attached thereto. The Company recorded a discount on the senior
subordinated notes equal to the estimated fair market value of the common shares
(see Note 4). Accordingly, the common shares were valued at approximately
$164,000.
On November 3, 1994, the Company redeemed 418,023 common shares for cash
consideration of $26,000,000 and junior subordinated notes totaling
approximately $13,874,000. The redemption of these shares increased the
Company's accumulated deficit by $39,874,000.
On September 6, 1995, the Company completed a capital transaction (the "1995
Transaction"). In connection with the 1995 Transaction, certain shareholders
converted 22,969 shares of common stock into 31,152 shares of Class B stock and
92,004 shares of Series A preferred stock. The conversion of these shares
reduced common stock by $164,000 and increased the Company's accumulated deficit
by $2,023,000. In connection with the transaction, certain common shareholders
were obligated to make capital contributions aggregating $7,500,000. As of
December 31, 1995, capital contributions aggregat-
ing $5,230,000 had been received by the Company. The remaining capital
contributions of $1,895,000 are backed by irrevocable letters of credit.
The Company incurred approximately $187,000 and $1,375,000 of costs in
connection with the restructuring and private equity placement transactions of
September 6, 1995 and November 3, 1994, respectively.
COMMON STOCK
Each share of common stock is entitled to one vote. Certain common stock
shares are restricted. The restricted shares vest over various periods of no
more than five years. Vesting may be accelerated upon the occurrence of certain
specified events such as the sale of the Company or a public offering of the
Company's common stock.
Warrants to purchase 641,236 shares of the Company's common stock at $.05
per share are outstanding at December 31, 1995. These warrants are contingent
upon the occurrence of certain events. In June 1996, 528,466 warrants were
surrendered for cancellation in exchange for a commitment from certain
shareholders to transfer shares of common stock of the Company.
SERIES A PREFERRED STOCK
Each share of Series A preferred stock is entitled to one vote, earns
cumulative dividends at the rate of 13.39% per annum and has liquidation
preference over all other classes of stock.
F-15
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
6. CAPITAL STRUCTURE-- (CONTINUED)
The Series A preferred stock is redeemable at $17.83 per share plus accrued
13.39% cumulative dividends at the option of the shareholder, after all
principal and interest on the senior subordinated notes have been paid in full.
Each share of Series A preferred stock is convertible to 1.78997 shares of
common stock at any time at the option of the shareholder, or at the option of
the Company upon the occurrence of an initial offering of the Company's stock.
CLASS B STOCK
Each share of Class B stock is entitled to one vote and has liquidation
preference over common stock.
The Class B stock is redeemable at $17.55 per share at the option of the
shareholder after all principal and interest on the senior subordinated notes
have been paid in full.
Each share of Class B stock is convertible to 1.76207 shares of common stock
at any time at the option of the shareholder, or at the option of the Company
upon the occurrence of an initial public offering of the Company's stock.
7. LEASE COMMITMENTS
The Company leases certain office facilities and equipment under
noncancellable operating leases. Rental expense was approximately $351,000,
$685,000 and $714,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Future minimum rental payments required under operating leases as
of December 31, 1995, are as follows: 1996-$441,000; 1997-$139,000;
1998-$54,000; and 1999-$2,000.
The Company has a noncancellable office facilities operating lease which had
an initial rent-free period. Deferred rent provides for recognition of lease
expense ratably over the entire lease term.
8. EMPLOYEE BENEFIT PLANS
During 1994, the Company adopted a defined contribution profit-sharing plan
which includes provisions under Section 401(k) of the Internal Revenue Code.
Full-time employees are eligible to participate in the plan after completing six
months of continuous service, as defined. Plan participants may defer up to 15%
of their annual compensation. The Company matches 50% of each participant's
contributions up to a maximum of 6% of the participant's compensation. The
Company may also make discretionary contributions to the plan. The Company's
contribution to the plan was approximately $100,000 and $83,000 during the year
ended December 31, 1995 and 1994, respectively.
The Company has a Time Accelerated Restricted Stock Option Plan (TARSOP) for
certain key employees. All options outstanding under this plan were canceled in
February 1996 and new options for 50,285 shares of common stock with an exercise
price of $.05 per share were granted. The aggregate number of shares of common
stock available for grant under this plan is 50,285. The options granted vest
nine years from the grant date. Vesting will be accelerated by 10% if the
Company's EBITDA exceeds a specified minimum of $6,376,000 for 1996, and will be
accelerated by a maximum of 20% if EBITDA equals or exceeds a specified maximum
of $7,501,000 for 1996. In subsequent years, the minimum and maximum EBITDA
goals will be established by the compensation committee of the Board of
Directors in accordance with the terms of the TARSOP.
F-16
<PAGE>
UTILIMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS-- (CONTINUED)
During 1995, the Company granted an employee an option to purchase 3,029
shares of common stock at an exercise price of $.05 per share. The option vested
immediately and expires on November 30, 2004. The option terminates if the
employee leaves the Company's employment.
During 1995, the Company issued 435,876 shares of restricted common stock to
employees for cash consideration of $8,000 and as compensation of $15,000.
During January 1996, the Company amended an agreement related to 245,149 shares
of restricted common stock. The amendment accelerated the vesting provisions of
the original agreement resulting in immediate vesting of 36% with the remainder
vesting over a four year period. Compensation expense is being recognized
related to the amended agreement.
In April 1996, the Company amended the TARSOP increasing the aggregate
number of shares of common stock available for grant to 57,745 and granted
options for 7,460 shares of common stock with an exercise price of $.05. The
Company also granted an employee an option to purchase 50,651 shares of common
stock at an exercise price of $.05 per share. The option vests over five years.
The Company will record compensation expense related to these option grants.
During the first quarter of 1996, the Company granted two former employees
options to purchase 10,985 shares of common stock at an exercise price of $.05
per share. The Company recorded compensation expense for the TARSOP grants and
grants to former employees.
F-17
<PAGE>
[UTILIMED LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, in connection with the issuance and distribution of
the securities registered hereby other than underwriting discounts and
commissions. All the amounts shown are estimates, except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the American Stock
Exchange listing fee. All of the following fees and expenses will be paid by the
Company.
Securities and Exchange Commission registration fee............. $ 15,862
NASD filing fee................................................. 5,100
American Stock Exchange listing fee............................. 30,000
Printing and engraving expenses................................. *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... 500,000
Blue Sky fees and expenses (including counsel fees and
expenses)....................................................... *
Transfer Agent and Registrar fees and expenses.................. *
Miscellaneous................................................... *
--------
Total....................................................... $
--------
--------
- ------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Illinois law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to an action (other than an action by
or in the right of the corporation) by reason of his service as a director or
officer of the corporation, or his service, at the corporation's request, as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees) that are actually and reasonably
incurred by him ("Expenses"), and judgments, fines and amounts paid in
settlement that are actually and reasonably incurred by him, in connection with
the defense or settlement of such action, provided that he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Although Illinois law permits a corporation to indemnify any person referred to
above against Expenses in connection with the defense or settlement of an action
by or in the right of the corporation, provided that he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to the corporation's
best interests, if such person has been judged liable to the corporation,
indemnification is only permitted to the extent that the adjudicating court (or
the court in which the action was brought) determines that, despite the
adjudication of liability, such person is entitled to indemnity for such
Expenses as the court deems proper. The determination as to whether a person
seeking indemnification has met the required standard of conduct is to be made
(1) by a majority vote of a quorum of disinterested members of the board, or (2)
by independent legal counsel in a written opinion, if such a quorum does not
exist or if the disinterested directors so direct, or (3) by the shareholders.
The Business Corporation Act of Illinois also provides for mandatory
indemnification of any director, officer, employee or agent against Expenses to
the extent such person has been successful in any proceeding covered by the
statute. In addition, the Business Corporation Act of Illinois provides the
general authorization of advancement of a director's or officer's litigation
expenses in lieu of requiring the authorization of such advancement by the board
in specific cases, and that indemnification and advancement of expenses provided
by the statute shall not be deemed exclusive of any other rights to
II-1
<PAGE>
which those seeking indemnification or advancement of expenses may be entitled
under any by-law, agreement, vote of shareholders or disinterested directors or
otherwise.
The Company's Articles of Incorporation provides that the Company shall
indemnify its directors and officers, and to the extent authorized by the Board,
employees and agents of the Company, to the full extent permitted by the law of
the State of Illinois. In addition, the Articles of Incorporation also permit
the Board to authorize the Company to purchase and maintain insurance against
any liability asserted against any director, officer, employee or agent of the
Company arising out of his or her capacity as such. The Company currently has in
place a standard director and officer liability insurance which, subject to
customary exclusions and specified limits, insures its directors and officers
against certain losses and expenses suffered or incurred by such persons as a
result of serving in such capacity. The Company believes that these provisions
and agreements are necessary to attract and retain talented and experienced
directors and officers.
The Company's Articles of Incorporation provides that the Company's
directors shall not be liable to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except to the extent that
exculpation from liabilities is not permitted under the Illinois Business
Corporation Act as in effect at the time such liability is determined.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company and its officers and directors for certain liabilities arising
under the Securities Act, or otherwise.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company in which
indemnification is being sought nor is the Company aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years the Company has issued the following securities,
none of which have been registered under the Securities Act of 1933, as amended
(the "Act"):
On January 1, 1994, the Company issued 391.966 shares of common stock, no
par value (the "Original Voting Stock"), to Alan P. Mintz, M.D. in exchange for
services rendered. The shares of Original Voting Stock issued to Dr. Mintz were
subsequently canceled and exchanged for a like number of shares of non-voting
common stock, no par value (the "Original Non-Voting Stock").
On January 1, 1994, the Company issued 34 shares of Original Voting Stock to
Lawrence Rubinstein in exchange for services rendered.
On January 1, 1994, the Company issued 34 shares of Original Voting Stock to
John E. Adams in exchange for services rendered.
On January 1, 1994, the Company issued 1.8 shares of Original Voting Stock
to Nancie Blatt in exchange for services rendered.
On January 1, 1994, the Company issued 44.5 shares of Original Voting Stock
to Alan H. Spiro, M.D. in exchange for services rendered.
On January 1, 1994, the Company issued 8.9 shares of Original Voting Stock
to Sheldon K. Gulinson in exchange for services rendered.
On June 10, 1994, the Company issued 35.6 shares of Original Voting Stock to
James E. Zechman for an aggregate consideration of $356.00.
On July 11, 1994, the Company canceled the 1.8 shares of Original Voting
Stock previously issued to Nancie Blatt and issued 17.8 shares of Original
Non-Voting Stock to her.
II-2
<PAGE>
On July 11, 1994, the Company canceled the 44.5 shares of Original Voting
Stock previously issued to Alan H. Spiro, M.D. and issued 44.5 shares of
Original Non-Voting Stock to him.
On July 11, 1994, the Company canceled the 8.9 shares of Original Voting
Stock previously issued to Sheldon K. Gulinson and issued 8.9 shares of Original
Non-Voting Stock to him.
On July 11, 1994, the Company canceled the 35.6 shares of Original Voting
Stock previously issued to James E. Zechman and issued 35.6 shares of Original
Non-Voting Stock to him.
On October 27, 1994, the Company issued 387.512 shares of Original Voting
Stock to Alan P. Mintz, M.D. in exchange for services rendered.
On October 27, 1994, the Company issued 5.79 shares of Original Voting Stock
to Lawrence Rubinstein in exchange for services rendered.
On October 27, 1994, the Company issued 5.79 shares of Original Voting Stock
to John E. Adams in exchange for services rendered.
On October 27, 1994, the Company issued 8.908 shares of Original Non-Voting
Stock to Sheldon K. Gulinson in exchange for services rendered.
On November 3, 1994, the Company issued 11,484 shares of Common Stock to
Whitney Subordinated Debt Fund, L.P. ("Whitney Debt Fund") for an aggregate
consideration of $82,948.00.
On November 3, 1994, the Company issued 504,800 shares of Series A Preferred
Stock and 170,931 shares of Class B Stock to Whitney 1990 Equity Fund, L.P.
("Whitney Equity Fund") for an aggregate consideration of $9,000,000.00 and
$3,000,000.00, respectively.
On November 3, 1994, the Company issued 126,200 shares of Series A Preferred
Stock and 42,733 shares of Class B Stock to J.H. Whitney & Co. ("Whitney") for
an aggregate consideration of $2,250,000.00 and $750,000.00, respectively.
On November 3, 1994, the Company issued 631,000 shares of Series A Preferred
Stock, 213,664 shares of Class B Stock and 11,484 shares of Common Stock to
Chase Capital Partners ("CCP"), the successor entity to Chemical Venture
Partners, for an aggregate consideration of $11,250,000.00, $3,750,000.00 and
$82,948.00, respectively.
On November 3, 1994, the Company issued a 10.101% Senior Subordinated
Promissory Note in the original principal amount of $5,000,000.00 to Whitney
Debt Fund for an aggregate consideration of $4,917,052.00.
On November 3, 1994, the Company issued a 10.101% Senior Subordinated
Promissory Note in the original principal amount of $5,000,000.00 to CCP for an
aggregate consideration of $4,917,052.00.
On November 3, 1994, as part of a share redemption transaction the Company
issued 10.0% Junior Subordinated Promissory Notes to each of Alan P. Mintz,
M.D., John Adams, Alan H. Spiro, M.D. and Lawrence Rubinstein in the original
principal amounts of $5,000,000, $2,500,000, $574,059 and $2,500,000,
respectively. On June 26, 1996, such Junior Subordinated Promissory Notes were
converted into an aggregate of 94,039 shares of Common Stock in accordance with
their terms.
On November 3, 1994, the Company issued 171,858 shares of Common Stock to
Alan P. Mintz, M.D. in connection with a recapitalization transaction.
On November 3, 1994, the Company issued 87,533 shares of Common Stock to
John E. Adams in connection with a recapitalization transaction.
On November 3, 1994, the Company issued 85,436 shares of Common Stock to
Lawrence Rubinstein in connection with a recapitalization transaction.
II-3
<PAGE>
On November 3, 1994, the Company issued 11,362 shares of Common Stock to
Nancie Blatt in connection with a recapitalization transaction.
On November 3, 1994, the Company issued 22,387 shares of Common Stock to
Alan H. Spiro, M.D. in connection with a recapitalization transaction.
On November 3, 1994, the Company issued 11,369 shares of Common Stock to
Sheldon K. Gulinson in connection with a recapitalization transaction.
On November 3, 1994, the Company issued 33,197 shares of Common Stock to
James E. Zechman in connection with a recapitalization transaction.
On December 1, 1994, the Company issued options to purchase 3,029 shares of
Common Stock at an exercise price of $95.39 per share to Maria McAfee in
connection with her employment by the Company.
On December 30, 1994, the Company issued 17,822 shares of Common Stock to
Alan P. Mintz, M.D.
On December 30, 1994, the Company issued 7,338 shares of Common Stock to
John E. Adams.
On December 30, 1994, the Company issued 9,435 shares of Common Stock to
Lawrence Rubinstein.
On March 29, 1995, the Company issued options to purchase an aggregate of
7,687 shares of Common Stock at an exercise price of $95.39 per share pursuant
to the Company's Time Accelerated Restricted Stock Option Plan for Certain
Employees ("TARSOP").
On May 1, 1995, the Company issued options to purchase 3,029 shares of
Common Stock at an exercise price of $95.39 per share to Jack M. Korsower,M.D.
in connection with his employment by the Company.
On September 6, 1995, Whitney Debt Fund and CCP each exchanged 11,484 shares
of Common Stock for 46,002 shares of Series A Preferred Stock and 15,576 shares
of Class B Stock.
On September 6, 1995, the Company adjusted the conversion ratios applicable
to the conversion of the Series A Preferred Stock and Class B Stock into Common
Stock to increase the equity ownership position of Whitney, Whitney Debt Fund,
Whitney Equity Fund and CCP from 37.4% to 73.0% on an aggregate basis.
On September 6, 1995, the Company issued stock purchase warrants for the
purchase of an aggregate of 641,236 shares of Common Stock that become
exercisable at an exercise price of $.05 per share only upon the satisfaction of
certain conditions.
On September 6, 1995, the Company issued 109,434 shares of Common Stock to
James E. Zechman for an aggregate consideration of $5,867.71.
On September 6, 1995, the Company issued 25,995 shares of Common Stock to
Alan H. Spiro, M.D. for an aggregate consideration of $1,393.79.
On November 15, 1995, in connection with the restructuring of Maria McAfee's
employment arrangement with the Company, the Company issued 55,298 shares of
Common Stock to Ms. McAfee for an aggregate consideration of $2,964.99. Also on
November 15, 1995, the Company canceled the options previously granted to Ms.
McAfee and granted her a new option to purchase 3,029 shares of Common Stock at
an exercise price of $.05 per share.
On November 17, 1995, the Company issued 245,149 shares of Common Stock to
Carl R. Adkins, M.D. as compensation of $13,144.51 in connection with his
employment by the Company.
II-4
<PAGE>
On January 15, 1996, the Company issued 33,429 shares of Common Stock to
Bradford W. Keller for an aggregate consideration of $1,792.43 in connection
with his employment by the Company.
On February 6, 1996, all of the options issued by the Company pursuant to
the TARSOP on March 29, 1995 were canceled and the Company issued options to
purchase an aggregate of 57,745 shares of Common Stock at an exercise price of
$.05 per share pursuant to the TARSOP.
On February 15, 1996, the Company canceled the options previously granted to
Jack M. Koroswer, M.D. and, in connection with the termination of his
employment, granted to Dr. Korsower a new option to purchase 6,528 shares of
Common Stock at an exercise price of $.05 per share. Also in connection with the
termination of Dr. Korsower's employment, the Company issued to him a 8.5%
Junior Subordinated Promissory Note in the original principal amount of
$400,000.00.
On February 15, 1996, the Company granted to Alan P.Mintz, M.D. an option to
purchase 4,457 shares of Common Stock at an exercise price of $.05 per share.
On March 6, 1996, the Company issued Senior Promissory Notes to each of
Whitney Debt Fund and CCP in the original principal amount of $3,000,000.00 for
an aggregate consideration of $3,000,000 for each of Whitney Debt Fund and CCP.
The interest rate on these Senior Promissory Notes is 14% per annum until
September 6, 1996, after which time the interest rate increases to 16%.
On April 8, 1996, the Company issued options to purchase an aggregate of
7,460 shares of Common Stock at an exercise price of $.05 per share pursuant to
the TARSOP.
On April 8, 1996, the Company canceled an option to purchase 50,651 shares
of Common Stock issued on February 6, 1996 pursuant to the TARSOP and, instead,
issued an option to purchase 50,651 shares of Common Stock at an exercise price
of $.05 per share to Mark T. Richards in connection with his employment by the
Company.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Act set forth in Section 4(2) thereof, relative to sales by an issuer not
involving any public offering or the rules and regulations thereunder, or, in
the case of options to purchase Common Stock, Rule 701 of the Act. All of the
foregoing securities are deemed restricted securities for the purposes of the
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Articles of Incorporation of the Company
*3.2 Amended and Restated Bylaws of the Company
+4.1 Specimen Common Stock Certificate of the Company
*5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
+10.1 Stock Purchase Agreement, dated as of November 3, 1994, among the Company, Whitney
Equity Fund, Whitney, CCP, Alan P. Mintz, John E. Adams, Lawrence Rubinstein, Alan
Spiro, M.D., Nancie Blatt and Sheldon K. Gulinson.
+10.2 Subordinated Note and Stock Purchase Agreement, dated as of November 3, 1994,
among the Company, Whitney Debt Fund, CCP, Alan P. Mintz, John E. Adams, Lawrence
Rubinstein, Alan Spiro, Nancie Blatt and Sheldon K. Gulinson.
+10.3 Senior Subordinated Promissory Note Due November 3, 2001, in the principal sum of
$5,000,000, dated November 3, 1994, and issued by the Company to Whitney Debt
Fund.
+10.4 Senior Subordinated Promissory Note Due November 3, 2001, in the principal sum of
$5,000,000, dated November 3, 1994, and issued by the Company to CCP.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
+10.5 Guaranty, dated as of November 3, 1994, by UtiliMed C I, Inc. in favor of Whitney
Debt Fund and CCP.
+10.6 Junior Subordinated Promissory Note Due November 3, 2002, in the principal sum of
$5,000,000, dated November 3, 1994 and issued by the Company to Alan P. Mintz,
M.D.
+10.7 Junior Subordinated Promissory Note Due November 3, 2002, in the principal sum of
$2,500,000, dated November 3, 1994 and issued by the Company to John Adams.
+10.8 Junior Subordinated Promissory Note Due November 3, 2002, in the principal sum of
$2,500,000, dated November 3, 1994 and issued by the Company to Lawrence
Rubinstein.
+10.9 Junior Subordinated Promissory Note Due November 3, 2002, in the principal sum of
$574,059, dated November 3, 1994 and issued by the Company to Alan Spiro, M.D.
+ 10.10 Registration Rights Agreement, dated as of November 3, 1994, among the Company,
Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P. Mintz, Lawrence
Rubinstein, John Adams, Nancie Blatt, Alan Spiro, Sheldon Gulinson and James E.
Zechman.
+ 10.11 Stockholders' Agreement, dated as of November 3, 1994, among the Company, Whitney,
Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P. Mintz, Lawrence Rubinstein,
John Adams, Nancie Blatt, Alan Spiro, Sheldon Gulinson and James Zechman.
+ 10.12 Amendment No. 1 to the Stockholders' Agreement, dated as of September 6, 1995,
among the Company, Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P.
Mintz, Lawrence Rubinstein, John E. Adams, Nancie Blatt, Alan Spiro, Sheldon
Gulinson, James Zechman and the other parties named therein.
+ 10.13 Amendment No. 2 to the Stockholders' Agreement, dated as of September 28, 1995,
among the Company, Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P.
Mintz, Lawrence Rubinstein, John E. Adams, Nancie Blatt, Alan Spiro, Sheldon
Gulinson, James Zechman and the other parties named therein.
+ 10.14 Letter Agreement Terminating the Stockholders' Agreement upon the consummation of
an initial public offering by the Company, among the Company and all parties to
the Stockholders' Agreement named therein.
+ 10.15 Restructuring Agreement, dated as of September 6, 1995, among the Company,
Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P. Mintz, Lawrence
Rubinstein, John E. Adams, Nancie Blatt, Alan Spiro, Sheldon K. Gulinson, James
Zechman and the other parties named therein.
+ 10.16 Class A Common Stock Purchase Warrant to purchase 986,894 shares of Class A Common
Stock, dated September 6, 1995 issued to Alan P. Mintz.
+ 10.17 Class A Common Stock Purchase Warrant to purchase 690,883 shares of Class A Common
Stock, dated September 6, 1995 issued to Lawrence Rubinstein.
+ 10.18 Class A Common Stock Purchase Warrant to purchase 394,872 shares of Class A Common
Stock, dated September 6, 1995 issued to John E. Adams.
+ 10.19 Class A Common Stock Purchase Warrant to purchase 434,683 shares of Class A Common
Stock, dated September 6, 1995 issued to Alan H. Spiro.
+ 10.20 Class A Common Stock Purchase Warrant to purchase 428,102 shares of Class A Common
Stock, dated September 6, 1995 issued to James E. Zechman.
+ 10.21 Class A Common Stock Purchase Warrant to purchase 73,510 shares of Class A Common
Stock, dated September 6, 1995 issued to Nancie Blatt.
+ 10.22 Class A Common Stock Purchase Warrant to purchase 73,470 shares of Class A Common
Stock, dated September 6, 1995 issued to Sheldon K. Gulinson.
+ 10.23 Class A Common Stock Purchase Warrant to purchase 156,838 shares of Class A Common
Stock, dated September 6, 1995 issued to Cheryl Lippert.
+ 10.24 Class A Common Stock Purchase Warrant to purchase 19,717 shares of Class A Common
Stock, dated September 6, 1995 issued to Patrick Sager.
+ 10.25 Senior Promissory Note Due March 6, 1997, in the principal sum of $3,000,000.00,
dated as of March 6, 1996 and issued by the Company to CCP.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
+ 10.26 Senior Promissory Note Due March 6, 1997 in the principal sum of $3,000,000.00,
dated as of March 6, 1996 and issued by the Company to Whitney .
+ 10.27 Deferred Fee Letter Agreement, dated March 6, 1996, among the Company, Whitney and
CCP.
+ 10.28 Settlement Agreement, dated December 20, 1995, by and between the Company and
Affiliated Radiologists S.C.
+ 10.29 Settlement Agreement by and between Unimed, Ltd., Michael P. Grossman, M.D. and
the Company, effective as of January 31, 1996.
+ 10.30 MedEcon Services, Inc. vs. Medicon, Inc., Consent Decree and Order of Dismissal,
filed May 14, 1996, United States District Court Southern District of Ohio Western
Division (Dayton).
*# 10.31 Diagnostic Imaging Services Agreement, dated April 1, 1996, by and between
ChoiceCare Health Plans, Inc. and the Company.
+ 10.32 Earmarking Letter Agreement, dated as of March 12, 1996, between the Company and
ChoiceCare Health Plans, Inc.
*# 10.33 Diagnostic Imaging Services Agreement for HMO, dated May 3, 1993, by and between
the Company and United HealthCare of Ohio, Inc.--Western Region.
*# 10.34 Diagnostic Imaging Services Agreement, dated June 1, 1996, by and between CIGNA
HealthCare of Northern New Jersey, Inc. and the Company.
*# 10.35 Diagnostic Imaging Services Agreement, dated as of February 1, 1996, by and
between CIGNA HealthCare of Florida, Inc. and the Company.
*# 10.36 Diagnostic Imaging Services Agreement for HMO, effective November 1, 1993, by and
between CIGNA HealthCare, Inc., for itself and on behalf of CIGNA HealthCare of
Oklahoma, Inc., and the Company.
*# 10.37 Diagnostic Imaging Services Agreement for HMO, effective November 1, 1993, by and
between CIGNA HealthCare, Inc., for itself and on behalf of CIGNA Healthplan of
Colorado, Inc., and the Company.
*# 10.38 Company Diagnostic Imaging Services Agreement, effective August 1, 1996, by and
between CIGNA HealthCare of New York, Inc. and the Company.
+ 10.39 Lease, Boulevard 40, Northbrook, Illinois, dated as of August 10, 1992, between
the Company and Teachers Insurance and Annuity Association of America.
+ 10.40 First Amendment to Lease, dated as of August 11, 1993, by and between Teachers
Insurance and Annuity Association of America and the Company.
+ 10.41 Second Amendment to Lease, dated as of April 24, 1995, by and between Teachers
Insurance and Annuity Association of America and the Company.
+ 10.42 Employment Agreement dated as of November 17, 1995, by and between the Company and
Carl R. Adkins, M.D.
+ 10.43 Restricted Shares Agreement, dated as of November 17, 1995, by and between the
Company and Carl R. Adkins, M.D.
+ 10.44 Amendment No. 1 to Restricted Shares Agreement, dated as of January 26, 1996, by
and between the Company and Carl R. Adkins, M.D.
+ 10.45 Restricted Shares Agreement, dated as of January 15, 1996, by and between the
Company and Brad Keller.
+ 10.46 Severance Agreement, dated as of February 15, 1996, and effective as of December
31, 1995, among the Company and Jack M. Korsower, M.D.
+ 10.47 Company Stock Option Agreement, dated as of February 15, 1996, by and between the
Company and Jack M. Korsower, M.D.
+ 10.48 Junior Subordinated Promissory Note in the principal sum of $400,000, dated as of
February 15, 1996, issued by the Company to Jack M. Korsower, M.D.
+ 10.49 Settlement Agreement and General Release, dated April 11, 1996, between Ms. Cheryl
Lippert and the Company.
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
+ 10.50 Restricted Shares Agreement, dated as of November 15, 1995, by and between the
Company and Maria McAfee.
+ 10.51 Limited Recourse Promissory Note in the principal amount of $137,000, dated
November 15, 1995 and issued by Maria McAfee to the Company.
+ 10.52 Pledge Agreement, dated as of November 15, 1995, by and between Maria McAfee and
the Company.
+ 10.53 Employment Agreement dated September 6, 1995 and effective as of October 1, 1995,
between the Company and Alan P. Mintz, M.D.
+ 10.54 First Amendment to Employment Agreement, dated as of November 3, 1994, by and
between the Company and Alan P. Mintz, M.D.
+ 10.55 Severance Agreement, dated as of January 31, 1996, among the Company and Alan P.
Mintz, M.D.
+ 10.56 Company Stock Option Agreement, dated as of February 15, 1996, by and between the
Company and Alan P. Mintz, M.D.
+ 10.57 Nonqualified Stock Option Agreement, effective, April 8, 1996, between the Company
and Mark Richards.
+ 10.58 Employment Agreement dated as of January 1, 1994 between Company and Lawrence
Rubinstein.
+ 10.59 First Amendment to Employment Agreement dated as of November 3, 1994 by and
between the Company and Lawrence Rubinstein.
+ 10.60 Second Amendment to Employment Agreement, dated September 6, 1995, by and between
the Company and Lawrence Rubinstein.
+ 10.61 Employment Agreement dated as of January 1, 1994 between the Company and Alan H.
Spiro, M.D.
+ 10.62 First Amendment to Employment Agreement dated as of November 3, 1994 by and
between the Company and Alan Spiro, M.D.
+ 10.63 Second Amendment to Employment Agreement, dated September 6, 1995, by and between
the Company and Alan Spiro, M.D.
+ 10.64 Restricted Shares Agreement, dated as of September 6, 1995, by and between the
Company and Alan H. Spiro, M.D.
+ 10.65 Promissory Note in the principal sum of $614,625.00, dated September 6, 1995 and
issued by Alan H. Spiro, M.D. to the Company.
+ 10.66 Pledge and Security Agreement, dated as of September 6, 1995, between Alan H.
Spiro, M.D. and the Company.
+ 10.67 Employment Agreement dated as of June 10, 1994 between Company and James E.
Zechman.
+ 10.68 First Amendment to Employment Agreement, dated as of September 6, 1995, by and
between the Company and James E. Zechman.
+ 10.69 Restricted Shares Agreement, dated as of September 6, 1995, by and between the
Company and James E. Zechman.
+ 10.70 Company Stock Option Plan for Non-Employee Directors.
+ 10.71 Amendment No. 1 to Company Stock Option Plan for Non-Employee Directors, dated as
of September 6, 1995.
+ 10.72 Amendment No. 2 to Company Stock Option Plan for Non-Employee Directors, dated as
of April 23, 1996.
+ 10.73 Company Time Accelerated Restricted Stock Option Plan for Certain Employees.
+ 10.74 Amendment No. 1 to Company Time Accelerated Restricted Stock Option Plan for
Certain Employees, dated as of September 6, 1995.
+ 10.75 Amendment No. 2 to Company Time Accelerated Restricted Stock Option Plan for
Certain Employees, dated as of November 14, 1995.
</TABLE>
II-8
<PAGE>
<TABLE>
<C> <S>
+ 10.76 Amendment No. 3 to Company Time Accelerated Restricted Stock Option Plan for
Certain Employees, dated as of November 28, 1995.
+ 10.77 Amendment No. 4 to Company Time Accelerated Restricted Stock Option Plan for
Certain Employees, dated as of February 6, 1996.
+ 10.78 Amendment No. 5 to Company Time Accelerated Restricted Stock Option Plan for
Certain Employees, dated as of February 15, 1996.
+ 10.79 Amendment No. 6 to Company Time Accelerated Restricted Stock Option Plan for
Certain Employees, dated as of April 8, 1996.
+ 10.80 Amendment No. 7 to Company Time Accelerated Restricted Stock Option Plan for
Certain Employees, dated as of April 23, 1996.
10.81 Settlement Agreement, dated as of June 27, 1996, among the Company, Whitney,
Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P. Mintz, M.D. and John E.
Adams.
11.1 Statement re Computation of Per Share Earnings
+16.1 Letter from Arthur Andersen LLP.
+21.1 List of Subsidiaries of UtiliMed, Inc.
*23.1 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the opinion
filed as Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney from officers and directors (included in signature pages).
</TABLE>
- ------------
* To be filed by amendment.
+ Previously filed with the Company's Registration Statement on Form S-1, dated
May 24, 1996.
# Confidential treatment is being requested.
(b) Financial Statement Schedules
The following schedule is filed as part of this Registration Statement, but
not included in the Prospectus.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in Regulation S-X of the
Commission are not required under the related instructions or are inapplicable
or the required information is included in the Consolidated Financial Statements
and Notes thereto and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
for such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule
II-9
<PAGE>
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the Village of Northbrook, State of Illinois, on July 8, 1996.
UTILIMED, INC.
By: /s/ CARL R. ADKINS, M.D.
..................................
Carl R. Adkins, M.D.
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below hereby constitutes and appoints Carl R. Adkins, M.D. and Jeffrey R. Jay,
M.D., and each of them, his or her true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in any and all capacities, to (i)
act on, sign and file with the Securities and Exchange Commission any and all
amendments (including post-effective amendments) to this registration statement
together with all schedules and exhibits thereto, (ii) act on, sign and file
such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment and (iv) take any and all actions which may be necessary or
appropriate in connection therewith, granting unto such agents, proxies and
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing necessary or appropriate to be done, as fully for
all intents and purposes as he or she might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact, any of them or any of his or her or their substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE><CAPTION>
SIGNATURES TITLE OR CAPACITIES DATE
- -------------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ CARL R. ADKINS, M.D. President and Chief Executive July 8, 1996
...................................... Officer, Chairman of the Board
Carl R. Adkins, M.D.
/s/ MARK T. RICHARDS Chief Financial Officer (Principal July 8, 1996
...................................... Financial and Accounting Officer)
Mark T. Richards
/s/ ALAN H. SPIRO, M.D. Chief Medical Officer, Director July 8, 1996
......................................
Alan H. Spiro, M.D.
/s/ PETER M. CASTLEMAN Director July 8, 1996
......................................
Peter M. Castleman
/s/ JEFFREY R. JAY, M.D. Director July 8, 1996
......................................
Jeffrey R. Jay, M.D.
/s/ MITCHELL J. BLUTT, M.D. Director July 8, 1996
......................................
Mitchell J. Blutt, M.D.
/s/ JONAS L. STEINMAN Director July 8, 1996
......................................
Jonas L. Steinman
</TABLE>
II-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
We have audited the consolidated financial statements of UtiliMed, Inc. as
of December 31, 1994 and 1995, and for each of the three years in the period
ended December 31, 1995, and have issued our report thereon dated May 10, 1996
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 10, 1996
S-1
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
UTILIMED, INC.
<TABLE><CAPTION>
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------------------------------- ---------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Reserve and allowances deducted
from asset accounts................ -- $ 287,000 -- -- $287,000
---------- ---------- ---------- ------------ --------------
-- $ 287,000 -- -- $287,000
---------- ---------- ---------- ------------ --------------
---------- ---------- ---------- ------------ --------------
Year Ended December 31, 1994
Reserve and allowances deducted
from asset accounts................ -- -- -- -- --
---------- ---------- ---------- ------------ --------------
---------- ---------- ---------- ------------ --------------
Year Ended December 31, 1993
Reserve and allowances deducted
from asset accounts................ -- -- -- -- --
---------- ---------- ---------- ------------ --------------
---------- ---------- ---------- ------------ --------------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Articles of Incorporation of the Company
*3.2 Amended and Restated Bylaws of the Company
+4.1 Specimen Common Stock Certificate of the Company
*5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
+10.1 Stock Purchase Agreement, dated as of November 3, 1994, among the
Company, Whitney Equity Fund, Whitney, CCP, Alan P. Mintz, John E.
Adams, Lawrence Rubinstein, Alan Spiro, M.D., Nancie Blatt and Sheldon
K. Gulinson.
+10.2 Subordinated Note and Stock Purchase Agreement, dated as of November 3,
1994, among the Company, Whitney Debt Fund, CCP, Alan P. Mintz, John E.
Adams, Lawrence Rubinstein, Alan Spiro, Nancie Blatt and Sheldon K.
Gulinson.
+10.3 Senior Subordinated Promissory Note Due November 3, 2001, in the
principal sum of $5,000,000, dated November 3, 1994, and issued by the
Company to Whitney Debt Fund.
+10.4 Senior Subordinated Promissory Note Due November 3, 2001, in the
principal sum of $5,000,000, dated November 3, 1994, and issued by the
Company to CCP.
+10.5 Guaranty, dated as of November 3, 1994, by UtiliMed C I, Inc. in favor
of Whitney Debt Fund and CCP.
+10.6 Junior Subordinated Promissory Note Due November 3, 2002, in the
principal sum of $5,000,000, dated November 3, 1994 and issued by the
Company to Alan P. Mintz, M.D.
+10.7 Junior Subordinated Promissory Note Due November 3, 2002, in the
principal sum of $2,500,000, dated November 3, 1994 and issued by the
Company to John Adams.
+10.8 Junior Subordinated Promissory Note Due November 3, 2002, in the
principal sum of $2,500,000, dated November 3, 1994 and issued by the
Company to Lawrence Rubinstein.
+10.9 Junior Subordinated Promissory Note Due November 3, 2002, in the
principal sum of $574,059, dated November 3, 1994 and issued by the
Company to Alan Spiro, M.D.
+10.10 Registration Rights Agreement, dated as of November 3, 1994, among the
Company, Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P.
Mintz, Lawrence Rubinstein, John Adams, Nancie Blatt, Alan Spiro,
Sheldon Gulinson and James E. Zechman.
+10.11 Stockholders' Agreement, dated as of November 3, 1994, among the
Company, Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P.
Mintz, Lawrence Rubinstein, John Adams, Nancie Blatt, Alan Spiro,
Sheldon Gulinson and James Zechman.
+10.12 Amendment No. 1 to the Stockholders' Agreement, dated as of September 6,
1995, among the Company, Whitney, Whitney Equity Fund, Whitney Debt
Fund, CCP, Alan P. Mintz, Lawrence Rubinstein, John E. Adams, Nancie
Blatt, Alan Spiro, Sheldon Gulinson, James Zechman and the other parties
named therein.
+10.13 Amendment No. 2 to the Stockholders' Agreement, dated as of September
28, 1995, among the Company, Whitney, Whitney Equity Fund, Whitney Debt
Fund, CCP, Alan P. Mintz, Lawrence Rubinstein, John E. Adams, Nancie
Blatt, Alan Spiro, Sheldon Gulinson, James Zechman and the other parties
named therein.
</TABLE>
<PAGE>
<TABLE><CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
+10.14 Letter Agreement Terminating the Stockholders' Agreement upon the
consummation of an initial public offering by the Company, among the
Company and all parties to the Stockholders' Agreement named therein.
+10.15 Restructuring Agreement, dated as of September 6, 1995, among the
Company, Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P.
Mintz, Lawrence Rubinstein, John E. Adams, Nancie Blatt, Alan Spiro,
Sheldon K. Gulinson, James Zechman and the other parties named therein.
+10.16 Class A Common Stock Purchase Warrant to purchase 986,894 shares of
Class A Common Stock, dated September 6, 1995 issued to Alan P. Mintz.
+10.17 Class A Common Stock Purchase Warrant to purchase 690,883 shares of
Class A Common Stock, dated September 6, 1995 issued to Lawrence
Rubinstein.
+10.18 Class A Common Stock Purchase Warrant to purchase 394,872 shares of
Class A Common Stock, dated September 6, 1995 issued to John E. Adams.
+10.19 Class A Common Stock Purchase Warrant to purchase 434,683 shares of
Class A Common Stock, dated September 6, 1995 issued to Alan H. Spiro.
+10.20 Class A Common Stock Purchase Warrant to purchase 428,102 shares of
Class A Common Stock, dated September 6, 1995 issued to James E.
Zechman.
+10.21 Class A Common Stock Purchase Warrant to purchase 73,510 shares of Class
A Common Stock, dated September 6, 1995 issued to Nancie Blatt.
+10.22 Class A Common Stock Purchase Warrant to purchase 73,470 shares of Class
A Common Stock, dated September 6, 1995 issued to Sheldon K. Gulinson.
+10.23 Class A Common Stock Purchase Warrant to purchase 156,838 shares of
Class A Common Stock, dated September 6, 1995 issued to Cheryl Lippert.
+10.24 Class A Common Stock Purchase Warrant to purchase 19,717 shares of Class
A Common Stock, dated September 6, 1995 issued to Patrick Sager.
+10.25 Senior Promissory Note Due March 6, 1997, in the principal sum of
$3,000,000.00, dated as of March 6, 1996 and issued by the Company to
CCP.
+10.26 Senior Promissory Note Due March 6, 1997 in the principal sum of
$3,000,000.00, dated as of March 6, 1996 and issued by the Company to
Whitney .
+10.27 Deferred Fee Letter Agreement, dated March 6, 1996, among the Company,
Whitney and CCP.
+10.28 Settlement Agreement, dated December 20, 1995, by and between the
Company and Affiliated Radiologists S.C.
+10.29 Settlement Agreement by and between Unimed, Ltd., Michael P. Grossman,
M.D. and the Company, effective as of January 31, 1996.
*10.30 MedEcon Services, Inc. vs. MedEcon, Inc., Consent Decree and Order of
Dismissal, filed May 14, 1996, United States District Court Southern
District of Ohio Western Division (Dayton).
*#10.31 Diagnostic Imaging Services Agreement, effective as of April 1, 1996, by
and between ChoiceCare Health Plans, Inc. and the Company.
+10.32 Earmarking Letter Agreement, dated as of March 12, 1996, between the
Company and ChoiceCare Health Plans, Inc.
*#10.33 Diagnostic Imaging Services Agreement for HMO, dated May 3, 1993, by and
between the Company and United HealthCare of Ohio, Inc.--Western Region.
*#10.34 Diagnostic Imaging Services Agreement, dated June 1, 1996, by and
between CIGNA HealthCare of Northern New Jersey, Inc. and the Company.
*#10.35 Diagnostic Imaging Services Agreement, dated as of February 1, 1996, by
and between CIGNA HealthCare of Florida, Inc. and the Company.
</TABLE>
<PAGE>
<TABLE><CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
*#10.36 Diagnostic Imaging Services Agreement for HMO, effective November 1,
1993, by and between CIGNA HealthCare, Inc., for itself and on behalf of
CIGNA HealthCare of Oklahoma, Inc., and the Company.
*#10.37 Diagnostic Imaging Services Agreement for HMO, effective November 1,
1993, by and between CIGNA HealthCare, Inc., for itself and on behalf of
CIGNA Healthplan of Colorado, Inc., and the Company.
*#10.38 Company Diagnostic Imaging Services Agreement, effective August 1, 1996,
by and between CIGNA HealthCare of New York, Inc. and the Company.
+10.39 Lease, Boulevard 40, Northbrook, Illinois, dated as of August 10, 1992,
between the Company and Teachers Insurance and Annuity Association of
America.
+10.40 First Amendment to Lease, dated as of August 11, 1993, by and between
Teachers Insurance and Annuity Association of America and the Company.
+10.41 Second Amendment to Lease, dated as of April 24, 1995, by and between
Teachers Insurance and Annuity Association of America and the Company.
+10.42 Employment Agreement dated as of November 17, 1995, by and between the
Company and Carl R. Adkins, M.D.
+10.43 Restricted Shares Agreement, dated as of November 17, 1995, by and
between the Company and Carl R. Adkins, M.D.
+10.44 Amendment No. 1 to Restricted Shares Agreement, dated as of January 26,
1996, by and between the Company and Carl R. Adkins, M.D.
+10.45 Restricted Shares Agreement, dated as of January 15, 1996, by and
between the Company and Brad Keller.
+10.46 Severance Agreement, dated as of February 15, 1996, and effective as of
December 31, 1995, among the Company and Jack M. Korsower, M.D.
+10.47 Company Stock Option Agreement, dated as of February 15, 1996, by and
between the Company and Jack M. Korsower, M.D.
+10.48 Junior Subordinated Promissory Note in the principal sum of $400,000,
dated as of February 15, 1996, issued by the Company to Jack M.
Korsower, M.D.
+10.49 Settlement Agreement and General Release, dated April 11, 1996, between
Ms. Cheryl Lippert and the Company.
+10.50 Restricted Shares Agreement, dated as of November 15, 1995, by and
between the Company and Maria McAfee.
+10.51 Limited Recourse Promissory Note in the principal amount of $137,000,
dated November 15, 1995 and issued by Maria McAfee to the Company.
+10.52 Pledge Agreement, dated as of November 15, 1995, by and between Maria
McAfee and the Company.
+10.53 Employment Agreement dated September 6, 1995 and effective as of October
1, 1995, between the Company and Alan P. Mintz, M.D.
+10.54 First Amendment to Employment Agreement, dated as of November 3, 1994,
by and between the Company and Alan P. Mintz, M.D.
+10.55 Severance Agreement, dated as of January 31, 1996, among the Company and
Alan P. Mintz, M.D.
+10.56 Company Stock Option Agreement, dated as of February 15, 1996, by and
between the Company and Alan P. Mintz, M.D.
+10.57 Nonqualified Stock Option Agreement, effective, April 8, 1996, between
the Company and Mark Richards.
+10.58 Employment Agreement dated as of January 1, 1994 between Company and
Lawrence Rubinstein.
+10.59 First Amendment to Employment Agreement dated as of November 3, 1994 by
and between the Company and Lawrence Rubinstein.
</TABLE>
<PAGE>
<TABLE><CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
+10.60 Second Amendment to Employment Agreement, dated September 6, 1995, by
and between the Company and Lawrence Rubinstein.
+10.61 Employment Agreement dated as of January 1, 1994 between the Company and
Alan H. Spiro, M.D.
+10.62 First Amendment to Employment Agreement dated as of November 3, 1994 by
and between the Company and Alan Spiro, M.D.
+10.63 Second Amendment to Employment Agreement, dated September 6, 1995, by
and between the Company and Alan Spiro, M.D.
+10.64 Restricted Shares Agreement, dated as of September 6, 1995, by and
between the Company and Alan H. Spiro, M.D.
+10.65 Promissory Note in the principal sum of $614,625.00, dated September 6,
1995 and issued by Alan H. Spiro, M.D. to the Company.
+10.66 Pledge and Security Agreement, dated as of September 6, 1995, between
Alan H. Spiro, M.D. and the Company.
+10.67 Employment Agreement dated as of June 10, 1994 between Company and James
E. Zechman.
+10.68 First Amendment to Employment Agreement, dated as of September 6, 1995,
by and between the Company and James E. Zechman.
+10.69 Restricted Shares Agreement, dated as of September 6, 1995, by and
between the Company and James E. Zechman.
+10.70 Company Stock Option Plan for Non-Employee Directors.
+10.71 Amendment No. 1 to Company Stock Option Plan for Non-Employee Directors,
dated as of September 6, 1995.
+10.72 Amendment No. 2 to Company Stock Option Plan for Non-Employee Directors,
dated as of April 23, 1996.
+10.73 Company Time Accelerated Restricted Stock Option Plan for Certain
Employees.
+10.74 Amendment No. 1 to Company Time Accelerated Restricted Stock Option Plan
for Certain Employees, dated as of September 6, 1995.
+10.75 Amendment No. 2 to Company Time Accelerated Restricted Stock Option Plan
for Certain Employees, dated as of November 14, 1995.
+10.76 Amendment No. 3 to Company Time Accelerated Restricted Stock Option Plan
for Certain Employees, dated as of November 28, 1995.
+10.77 Amendment No. 4 to Company Time Accelerated Restricted Stock Option Plan
for Certain Employees, dated as of February 6, 1996.
+10.78 Amendment No. 5 to Company Time Accelerated Restricted Stock Option Plan
for Certain Employees, dated as of February 15, 1996.
+10.79 Amendment No. 6 to Company Time Accelerated Restricted Stock Option Plan
for Certain Employees, dated as of April 8, 1996.
+10.80 Amendment No. 7 to Company Time Accelerated Restricted Stock Option Plan
for Certain Employees, dated as of April 23, 1996.
10.81 Settlement Agreement, dated as of June 27, 1996, among the Company,
Whitney, Whitney Equity Fund, Whitney Debt Fund, CCP, Alan P. Mintz,
M.D. and John E. Adams.
11.1 Statement re Computation of Per Share Earnings.
+16.1 Letter from Arthur Andersen LLP.
+21.1 List of Subsidiaries of UtiliMed, Inc.
*23.1 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the
opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
</TABLE>
<PAGE>
<TABLE><CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
24.1 Power of Attorney from officers and directors (included in signature
pages).
</TABLE>
- ------------
<TABLE>
<C> <S>
* To be filed by amendment.
+ Previously filed with the Company's Registration Statement on Form S-1, dated May 24,
1996.
# Confidential treatment is being requested.
</TABLE>
EXHIBIT 10.81
SETTLEMENT AGREEMENT
among
UTILIMED, INC.,
J.H. WHITNEY & CO.,
WHITNEY 1990 EQUITY FUND, L.P.,
WHITNEY SUBORDINATED DEBT FUND, L.P.,
CHASE VENTURE CAPITAL ASSOCIATES,
a California Limited Partnership,
ALAN P. MINTZ, M.D.
and
JOHN E. ADAMS
-------------------------------
Dated as of June 27, 1996
-------------------------------
<PAGE>
SETTLEMENT AGREEMENT
--------------------
SETTLEMENT AGREEMENT, dated as of June 27, 1996, among UTILIMED, INC., an
Illinois corporation (the "COMPANY"), J.H. WHITNEY & CO., a New York limited
---------
partnership ("JHW"), WHITNEY 1990 EQUITY FUND, L.P., a Delaware limited
partnership ("WHITNEY EQUITY FUND"), WHITNEY SUBORDINATED DEBT FUND, L.P., a
---------------------
Delaware limited partnership ("WHITNEY DEBT FUND," and together with JHW and the
-----------------
Whitney Equity Fund, the "WHITNEY GROUP"), CHASE VENTURE CAPITAL ASSOCIATES, a
---------------
California limited partnership ("CVCA," and together with the Whitney Group, the
----
"INVESTORS"), ALAN P. MINTZ, M.D. and JOHN E. ADAMS.
---------
WHEREAS, on September 6, 1995, the Investors, Dr. Mintz, Mr. Adams and
certain others entered into a Restructuring Agreement pursuant to which, among
other things, Dr. Mintz and Mr. Adams were issued Class A Common Stock Purchase
Warrants (each a "Warrant," and together, the "Warrants") by the Company to
purchase 986,894 shares and 394,872 shares, respectively, of Class A Common
Stock, no par value (the "Common Stock"), upon the occurrence of certain
conditions set forth in the Warrants; and
WHEREAS, the parties hereto desire to, among other things,(i) cancel the
Warrants, (ii) agree upon a transfer of shares of Common Stock to Dr. Mintz and
Mr. Adams in the event of an initial public offering or sale transaction within
the time frame described below and (iii) grant a release of liability from
claims in accordance with the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt and adequacy
of which is hereby acknowledged, the parties hereto agree as follows:
1. Cancellation of Warrants and Transfer of Stock. Dr. Mintz and Mr.
------------------------------------------------
Adams agree that concurrently with the execution and delivery of this Agreement
they shall surrender to the Company for cancellation the Warrants that were
previously issued to them by the Company for the purchase of 986,894 shares and
394,872 shares, respectively, of Common Stock. In exchange therefor, each of the
Whitney Group, on the one hand, and CVCA, on the other hand, severally agrees
that if the Company (i) consummates an Initial Public Offering (as defined
below) on or before June 30, 1997 (subject to extension to September 30, 1997 if
the Company has filed a registration statement for an Initial Public Offering on
or before June 30, 1997 and such Initial Public Offering is consummated on or
before September 30, 1997); or (ii) consummates a Qualified Sale Transaction (as
defined below) on or before June 30, 1997
<PAGE>
(subject to extension to September 30, 1997 if definitive documentation for a
Qualified Sale Transaction has been executed on or prior to June 30, 1997 and
such Qualified Sale Transaction is consummated on or before September 30, 1997),
it will transfer to Dr. Mintz and Mr. Adams the number of shares of Common Stock
set forth opposite its name below concurrently with the consummation of such an
Initial Public Offering or Qualified Sale Transaction, as the case may be:
SHARES TO MINTZ SHARES TO ADAMS
--------------- ---------------
Whitney Group 59,548 23,826
CVCA 59,548 23,826
Total 119,096 47,652
For purposes hereof:
"Initial Public Offering" shall mean the first underwritten offering
-----------------------
by the Company of its Common Stock pursuant to an effective registration
statement on Form S-1 or otherwise under the Securities Act of 1933, as amended,
and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
"Net cash Proceeds" shall mean, with respect to any Sale Transaction,
-----------------
(i) the cash proceeds received by the Investors, minus (ii) brokerage
-----
commissions or underwriting fees and all other costs, fees and expenses of the
Investors associated with such Sale Transaction (including, without limitation,
fees, charges and disbursements of counsel and reasonable fees and expenses of
investment bankers or other third party financial experts).
"Qualified Sale Transaction" means a Sale Transaction in which (i) the
--------------------------
senior subordinated promissory notes in the aggregate principal amount of
$10,000,000.00 payable to Whitney Subordinated Debt Fund, L.P. and CVCA,
together with all accrued and unpaid interest thereon, are repaid and (ii) the
Investors receive Net Cash Proceeds in excess of $75,000,000.00 for the Series A
Preferred Stock, no par value, and Common Stock of the Investors.
"Sale Transaction" shall mean (i) any sale of the capital stock of the
----------------
Company owned by the Investors or (ii) any merger, consolidation, sale or other
business combination involving the Company, in each case in one transaction or a
series of transactions occurring prior to the consummation of any Initial Public
Offering.
<PAGE>
3
2. Execution of Ancillary Documentation. Dr. Mintz and Mr. Adams
------------------------------------
agree that concurrently with the execution and delivery of this Agreement each
of them will, and in the case of Dr. Mintz, the trustee of each of the
irrevocable trusts established for the benefit of his children will, execute
where appropriate the documents attached hereto as Exhibits A-G.
------------
3. Registration Rights Agreement. Section 5(a) of the Registration
-----------------------------
Rights Agreement, dated as of November 3, 1994 among the Company, the Investors,
Dr. Mintz, Mr. Adams and certain other parties (the "Registration Rights
-------------------
Agreement") provides, among other things, that Dr. Mintz and Mr. Adams agree
- ---------
not to make any public sale or distribution of any Registrable Securities (as
defined in the Registration Rights Agreement) or any securities convertible into
or exchangeable or exercisable for such Registrable Securities at any time
following two years after the effective date of any Initial Public Offering by
the Company without the prior written consent of JHW and CVCA. The Investors
hereby irrevocably consent to any public sale or distribution of any Registrable
Securities or any securities convertible into or exchangeable or exercisable for
such Registrable Securities at any time following one year after the effective
date of any Initial Public Offering by the Company.
4. Mutual Release and Covenant Not to Sue.
--------------------------------------
(a) Alan P. Mintz, M.D. and John E. Adams on behalf of themselves
and their heirs, executors, administrators, legal representatives, predecessors,
successors and assigns, together with the respective past, present and future
agents, representatives, partners, affiliates, heirs, executors, administrators,
successors and assigns of any or all of them (the "Shareholder Releasors")
hereby fully, finally and forever waive, release and discharge, as applicable,
the Company, the Investors, Morgan Stanley & Co. Incorporated, Smith Barney
Inc., Volpe Welty & Company and any other underwriter or member of the
underwriting syndicate or dealer group in connection with the Company's initial
public offering, and each of their respective predecessors, control persons,
subsidiaries, parent companies, divisions, affiliates, heirs, executors,
administrators, past and present officers, directors, agents, shareholders,
employees, partners, attorneys, successors and assigns and any or all of them
(the "Company Releasees") from any and all claims, causes of action, demands,
suits, costs, expenses and damages that against the Company Releasees, the
Shareholder Releasors ever had, now have or hereafter can, shall or may have of
whatsoever nature and kind, whether known or unknown, whether now existing or
hereafter arising,
<PAGE>
4
whether at law or in equity, for, upon or by reason of any matter, cause or
thing whatsoever from the beginning of the world to the day of the date of this
Agreement. The parties acknowledge and agree that the foregoing release shall
specifically include any matters relating to the Company, the Company's
contemplated initial public offering (including the selection by the Company of
underwriters) or any transactions entered into by the Company through the date
hereof and that this specific reference to such matters is not in any way
intended to limit the generality of the immediately preceeding sentence.
Notwithstanding the foregoing, nothing contained in this paragraph shall be
deemed to (i) release, waive or discharge any claims, defenses, causes of
action, demands, suits, costs, expenses and damages that the Shareholder
Releasors or either of them have or may have against Lawrence Rubinstein and
which may be asserted in connection with claims related to the company known as
Professional Management & Billing, Inc. in any lawsuit, arbitration mediation or
other forum or (ii) extinguish or restrict any of the rights, duties or
obligations created by, continued by, or confirmed by the other provisions of
this Agreement or any agreements related hereto.
The Shareholder Releasors covenant that he, she or it, as the case may
be, will not commence, maintain, participate in or be a party to any lawsuit,
action, claim or cause of action against the Company Releasees in connection
with, arising out of or relating to any matters relating to the Company, the
Company's contemplated initial public offering (including the selection by the
Company of underwriters) or any transactions entered into by the Company through
the date hereof. In the event of a breach by the Shareholder Releasors or either
of them of the foregoing covenant, each of the Company Releasees shall be
entitled, in addition to all other available remedies, to recover their
respective reasonable attorney's fees and expenses incurred as a result of such
breach. Nothing in this paragraph, however, shall preclude (i) the Shareholder
Releasors or either of them from commencing, maintaining or participating in or
being a party to any lawsuit, action, claim or cause of action against Lawrence
Rubinstein and which may be asserted in connection with claims related to the
company known as Professional Management & Billing, Inc. or (ii) any action to
enforce this Agreement.
(b) The Company and the Investors on behalf of themselves and their
predecessors, subsidiaries, parent companies, divisions, affiliated
corporations, heirs, executors, administrators, past and present officers,
directors, agents, shareholders, employees, partners, attorneys, successors and
assigns (the "Company Releasors") hereby fully, finally and forever waive,
release and discharge, as applicable, Alan P. Mintz and John E. Adams
<PAGE>
5
and their heirs, executors, administrators, legal representatives, predecessors,
successors and assigns, together with the respective past, present and future
agents, representatives, partners, affiliates, heirs, executors, administrators,
successors and assigns of any or all of them (the "Shareholder Releasees") from
any and all claims, causes of action, demands, suits, costs, expenses and
damages that against the Shareholder Releasees, the Company Releasors ever had,
now have or hereafter can, shall or may have of whatsoever nature and kind,
whether known or unknown, whether now existing or hereafter arising, whether at
law or in equity, for, upon or by reason of any matter, cause or thing
whatsoever from the beginning of the world to the day of the date of this
Agreement. The parties acknowledge and agree that the foregoing release shall
specifically include any matters relating to the Company, the Company's
contemplated initial public offering (including the selection by the Company of
underwriters) or any transactions entered into by the Shareholder Releasees
(including any and all actions taken while acting as an officer or director of
the Company) through the date hereof and that this specific reference to such
matters is not in any way intended to limit the generality of the immediately
preceeding sentence. Notwithstanding the foregoing, nothing contained in this
paragraph shall be deemed to extinguish or restrict any of the rights, duties or
obligations created by, continued by, or confirmed by the other provisions of
this Agreement or any agreements related hereto.
Each of the Company Releasors hereby covenants that it will not
commence, maintain, participate in or be a party to any lawsuit, action, claim
or cause of action against the Shareholder Releasees in connection with, arising
out of or relating to any matters relating to the Company, the Company's
contemplated initial public offering (including the selection by the Company of
underwriters) or any transactions entered into by the Shareholder Releasees
(including any and all actions taken while acting as an officer or director of
the Company) through the date hereof. In the event of a breach by the Company
Releasors or any of them of the foregoing covenant, each of the Shareholder
Releasees shall be entitled, in addition to all other available remedies, to
recover their respective reasonable attorney's fees and expenses incurred as a
result of such breach. Nothing in this paragraph, however, shall preclude any
action to enforce this Agreement.
5. Miscellaneous
-------------
(a) Binding upon Successors. This Agreement shall inure to the
------------------------
benefit of and be binding upon the successors and assigns of the parties hereto.
<PAGE>
6
(b) Costs and Expenses. Each of the Company, on the one hand, and
------------------
Dr. Mintz and Mr. Adams, on the other hand in connection with the preparation of
the Agreement and the carrying out of the matters contemplated herein, shall
bear his or its own costs, expenses and attorneys' fees.
(c) Representation by Counsel. Each party acknowledges (i) that it
-------------------------
has been represented by independent legal counsel of its own choice through all
of the negotiations which preceded the execution of this Agreement, (ii) that it
has read this Agreement and assents to all of the terms and conditions contained
herein without any reservation whatsoever and (iii) that it has executed this
Agreement with the consent and upon the advice of such independent legal
counsel.
(d) Notices. All notices and other communications hereunder to the
-------
Company or the Investors shall be given in accordance with Section 9.2 of the
Stock Purchase Agreement, dated as of November 3, 1994, among the Company,
Whitney 1990 Equity Fund, Whitney, CVCA and the other parties named therein (the
"Stock Purchase Agreement"). All notices and other communications hereunder to
Dr. Mintz or Mr. Adams shall be given as follows:
(a) if to Dr. Mintz:
Alan P. Mintz, M.D.
c/o Rebecca C. Meriwether
Bell, Boyd & Lloyd
70 West Madison Street
Suite 3000
Chicago, Illinois
(b) if to Mr. Adams:
John E. Adams
115 East Laurel Avenue
Lake Forest, Illinois 60045
(e) Entire Agreement; Modifications. This Agreement contains the
-------------------------------
entire agreement among the parties with respect to the subject matter hereof,
and such agreement supersedes all prior agreements, written or oral, whether
binding or non-binding, among any of the parties hereto, with respect to the
subject matter hereof. No representations, warranties or inducements have been
made to the parties hereto or their counsel concerning this Agreement and the
agreements related hereto other than those representations, warranties and
covenants contained herein and in the agreements related hereto. Dr. Mintz and
Mr. Adams, on the one hand, and the Company and the Investors, on the other
hand, each hereby acknowledge that
<PAGE>
7
they are not relying upon anything said to them in the course of discussions
with each other or legal counsel therefor. No waiver, modification or amendment
of the terms of this Agreement shall be valid unless in writing signed by the
party to be charged and only to the extent therein set forth. Any failure by any
party to insist upon the strict performance by any other party of any of the
provisions of this Agreement shall not be deemed a waiver of any of the
provisions hereof, and such party, notwithstanding such failure shall have the
right thereafter to insist upon the strict performance of any and all of the
provisions of this Agreement to be performed by such other party.
(f) Headings. The headings contained in this Agreement are
--------
inserted only as a matter of convenience and in no way define, limit, extend or
describe the scope of this Agreement or the intent of any provision hereof.
(g) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Illinois, without regard
to the principles of conflicts of law of such State.
(h) Stock Splits etc. The share numbers referred to in this
----------------
Agreement do not reflect, but will be appropriately adjusted in the event of,
any stock split, stock dividend, subdivision or reclassification of the
Company's capital stock.
(i) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original
and all of which, when taken together, shall constitute one and the same
agreement.
(j) Jurisdiction. Each party to this Agreement hereby irrevocably
------------
agrees that any legal action or proceeding arising out of or relating to this
Agreement or any agreements or transactions contemplated hereby shall be brought
exclusively in the courts of the State of Illinois or of the United States of
America for the Northern District of Illinois and hereby expressly submits to
the venue of such courts for the purposes thereof and expressly waives any claim
of improper venue and any claim that such courts are an inconvenient forum.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first written above.
UTILIMED, INC.
By: /s/ Carl R. Adkins
-------------------------------
Name: Carl R. Adkins, M.D.
Title: Chief Executive Officer
WHITNEY 1990 EQUITY FUND, L.P.
By: /s/ Jeffrey R. Jay
-------------------------------
Name: Jeffrey R. Jay, M.D.
Title: General Partner
J.H. WHITNEY & CO.
By: /s/ Jeffrey R. Jay
-------------------------------
Name: Jeffrey R. Jay, M.D.
Title: General Partner
WHITNEY SUBORDINATED DEBT FUND, L.P
By: /s/ Jeffrey R. Jay
-------------------------------
Name: Jeffrey R. Jay, M.D.
Title: General Partner
<PAGE>
CHASE VENTURE CAPITAL
ASSOCIATES, A CALIFORNIA LIMITED
PARTNERSHIP
By: CHASE CAPITAL PARTNERS
Its General Partner
By: /s/ Mitchell J. Blutt
------------------------------
Name: Mitchell J. Blutt, M.D.
Title: Executive Partner
-----------------------------
Alan P. Mintz, M. D.
-----------------------------
John E. Adams
<PAGE>
CHASE VENTURE CAPITAL
ASSOCIATES, A CALIFORNIA LIMITED
PARTNERSHIP
By: CHASE CAPITAL PARTNERS
Its General Partner
By:
-------------------------------
Name: Mitchell J. Blutt, M.D.
Title: Executive Partner
/s/ Alan P . Mintz M.D.
----------------------------
Alan P . Mintz M.D.
----------------------------
John E. Adams
<PAGE>
CHASE VENTURE CAPITAL
ASSOCIATES, A CALIFORNIA LIMITED
PARTNERSHIP
By: CHASE CAPITAL PARTNERS
Its General Partner
By:
-------------------------------
Name:
Title:
---------------------------
Alan P. Mintz, M. D.
/s/ John E. Adams
---------------------------
John E. Adams
EXHIBIT 11.1
UTILIMED, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE><CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
(SEE NOTE)
Average shares outstanding................................ 746,012 725,102 574,285
Computation adjustments:
Assumed issuance of Common Stock upon the exercise of
stock options.......................................... 122,001 122,001 122,001
Assumed issuance of restricted Common Stock............. 469,305 469,305 368,647
Assumed issuance of Common Stock upon the conversion of
Series A Preferred Stock.................................. 2,423,632 2,423,632 2,423,632
Assumed issuance of Common Stock upon the conversion of
Class B Stock............................................. 807,874 807,874 807,874
--------- --------- ---------
Number of shares used in pro forma primary net loss per
share................................................. 4,568,824 4,547,914 4,296,439
Computation adjustments:
Assumed conversion of Junior Subordinated Debt to Common
Stock................................................. -- -- 93,780
Assumed exercise of contingent warrants for the purchase
of Common Stock....................................... 112,770 112,770 112,770
--------- --------- ---------
Number of shares used in pro forma fully diluted net
loss per share........................................ 4,681,594 4,660,684 4,502,989
--------- --------- ---------
--------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net loss $ (2,608) $ (13,879) $ (18,774)
Computation adjustment for interest expense on Junior
Subordinated Notes........................................ -- -- 529
--------- --------- ---------
Net loss $ (2,608) $ (13,879) $ (18,245)
--------- --------- ---------
--------- --------- ---------
Pro forma net loss per share:
Primary................................................. $ (0.57) $ (3.05) $ (4.37)
--------- --------- ---------
--------- --------- ---------
Fully diluted........................................... $ (0.56) $ (2.98) $ (4.05)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Note: All share amounts give effect to a 5.361849-for-one reverse stock split
which will occur upon consummation of this offering.
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated May 10, 1996, in the Registration Statement (Form
S-1 No. 333-4497) and related Prospectus of UtiliMed, Inc. for the registration
of 2,875,000 shares of its common stock.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
July 8, 1996
