<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996.
REGISTRATION NO. 333-4106
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APACHE MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 7373 23-2476415
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1650 TYSONS BOULEVARD
MCLEAN, VIRGINIA 22102
(703) 847-1400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
GERALD E. BISBEE, JR., PH.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
APACHE MEDICAL SYSTEMS, INC.
1650 TYSONS BOULEVARD
MCLEAN, VIRGINIA 22102
(703) 847-1400
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
Copies to:
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GEORGE C. MCKANN, ESQ. ALAN G. STRAUS, ESQ.
GARDNER, CARTON & DOUGLAS SKADDEN, ARPS, SLATE, MEAGHER & FLOM
321 NORTH CLARK STREET, SUITE 3200 919 THIRD AVENUE
CHICAGO, ILLINOIS 60610 NEW YORK, NEW YORK 10022
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective
date of this Registration Statement.
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 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: / /
CALCULATION OF REGISTRATION FEE
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Title of Each Class Proposed Proposed
of Securities to be Amount to be Maximum Offering Maximum Aggregate Amount of
Registered Registered(1) Price Per Share(2) Offering Price(2) Registration Fee
<S> <C> <C> <C> <C>
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Common Stock, $.01 par
value per share....... 2,300,000 $14.00 $32,200,000.00 $11,103.45(3)
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(1) Includes a maximum of 300,000 shares which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for purposes of determining registration fee.
(3) Previously paid.
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
APACHE MEDICAL SYSTEMS, INC.
FORM S-1
REGISTRATION STATEMENT
CROSS REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
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FORM S-1 ITEM NUMBER LOCATION IN PROSPECTUS
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<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 and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors
4. Use of Proceeds......................... Prospectus Summary; Use of Proceeds;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Certain Transactions
5. Determination of Offering Price......... Outside Front Cover Page; Underwriting
6. Dilution................................ Risk Factors; Dilution
7. Selling Security Holders................ Not Applicable
8. Plan of Distribution.................... Outside Front Cover Page; Underwriting; Back
Cover Page
9. Description of Securities to be
Registered.............................. Prospectus Summary; Capitalization; Description
of Capital Stock
10. Interests of Named Experts and
Counsel................................. Not Applicable
11. Information with Respect to the
Registrant.............................. Outside Front Cover Page; Prospectus Summary;
Risk Factors; The Company; Use of Proceeds;
Dividend Policy; Capitalization; Dilution;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE> 3
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.
PROSPECTUS (Subject To Completion)
Dated June 21, 1996
2,000,000 SHARES
APACHE LOGO
APACHE Medical Systems, Inc.
COMMON STOCK
------------------------------
All of the shares of common stock, $.01 par value per share (the "Common
Stock"), offered are being sold by APACHE Medical Systems, Inc. ("APACHE" or the
"Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price will be between $12.00 and $14.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for quotation and trading on
the Nasdaq National Market under the symbol "AMSI," subject to notice of
issuance.
------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
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Per Share............................... $ $ $
Total(3)................................ $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$750,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 300,000
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional shares
are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York on or about , 1996.
------------------------------
COWEN & COMPANY
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
, 1996
<PAGE> 4
DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
The graphic is entitled "The APACHE Advantage." The text reads as
follows:
Our clinically validated methodologies have been utilized in
connection with more than 600 peer-reviewed articles (in New
England Journal of Medicine, JAMA, Annals of Internal Medicine,
Science and others).
Patient-specific data identifies and tracks patient health status
throughout the hospital stay. (accompanied by representative
graphic of patient status graph showing risk of death and active
treatment risk)
Concurrent, predictive clinical information supports physician
decisions regarding the most appropriate therapy at the
point-of-care. (accompanied by a bar chart depicting an APACHE
Complication Risk Analysis of Bypass Surgery (CABG) and
Angioplasty (PTCA))
APACHE products and services provide clinical and financial
information to clinicians and administrators, with ongoing
development throughout the continuum of care. (accompanied by
graphic illustrating the continuum of care)
High-risk, high-cost patient focus targets the greatest potential
cost savings. (accompanied by graphic illustrating cost savings
for various cost/risk levels)
GATEFOLD
The graphic is entitled "The APACHE Medical Cost Management Program"
and is a four step flow diagram. The text is as follows:
Step 1. Compare performance to Best Demonstrated Practices
APACHE systems measure a variety of healthcare outcomes, including
mortality, length of stay, complications and ventilator days, for
a broad range of disease groups. (accompanied by representative
graphics of utilization management review of ICU length of stay by
service and actual versus predicted risk-adjusted length of stay)
Step 2. Target high-risk, high-cost patients
APACHE systems identify cost savings opportunities for high-risk,
high-cost disease groups, such as the examples listed here.
<PAGE> 5
Acute Care -- Heart attack, Open heart surgery (CABG), Congestive
heart failure, Hysterectomy, Laminectomy, Pneumonia, Stroke,
Vascular surgery, Lower bowel resection
Treatment sites: Hospital
Critical Care -- Unstable angina, Gastrointestinal cancer, Acute
myocardial infarction (AMI), Drug overdose, Carotid
endarterectomy, Sepsis, Bacterial pneumonia, Rhythm disturbance,
Lung cancer, Peripheral vascular disease, Craniotomy for neoplasm
Treatment sites: Medical ICU, Surgical ICU, Neurological
ICU, Trauma ICU
Cardiovascular Care -- Open heart surgery (CABG), Valve surgery,
Angioplasty (PTCA), Cardiac catheterization
Treatment sites: CCU, CTICU, Cath Lab, CV Operating Room
Sub-Acute Care -- Ventilator dependent: Emphysema (COPD),
Congestive heart failure, Pneumonia
Treatment sites: Hospital or long-term care facility
Step 3. Develop severity-adjusted guidelines
A unique feature of these guidelines is the ability to adjust the
guidelines for the patient's level of severity. (accompanied by
graphics depicting a discharge criteria check sheet and a bar
chart of APACHE length of stay guidelines for varying severity
levels)
Step 4. Apply to individual patients
APACHE systems monitor health status (risk of mortality, length of
stay, treatment level) for individual patients and for an entire
unit at a glance. (accompanied by graphic depicting sample
computer screens produced by APACHE clinical decision support
systems)
INSIDE BACK COVER
The graphic is entitled "APACHE Integration." It depicts the
interfacing of admission, lab, billing, cost and clinical data information with
an Outcomes Repository and its utilization in APACHE EIS and point of care
tools. The page also depicts a representative graphic screen from an APACHE
EIS tool.
The accompanying text is as follows:
The APACHE EIS monitors the costs and quality of care. "Point and
click" Windows technology sorts the analysis by payer, physician,
service line, treatment level, risk range, or other category
specified by the user.
<PAGE> 6
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
APACHE(R) is a registered trademark of APACHE Medical Systems, Inc. All
other trademarks and trade names referred to in this Prospectus are the property
of their respective owners.
2
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Except as otherwise specified, the information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option
and has been adjusted for a 1-for-2.86 reverse split of the Common Stock to be
effected prior to the consummation of this offering, and for: (i) the conversion
of all outstanding shares of preferred stock into 3,294,519 shares of Common
Stock; (ii) conversion of $1,000,000 of convertible debt into 122,257 shares of
Common Stock; and (iii) payment of $733,350 of accumulated preferred stock
dividends by the issuance of 56,413 shares of Common Stock, all to be effected
upon the consummation of this offering (collectively, the "Recapitalization
Transactions"). See "Description of Capital Stock," "Underwriting" and Notes 4,
8 and 12 of Notes to Consolidated Financial Statements.
THE COMPANY
APACHE provides clinically-based decision support information systems to
the healthcare industry. The Company believes that it is the only healthcare
information company that can provide hospitals and physicians with
patient-specific, concurrent and predictive outcomes information at the point of
care that can be used to assist them in making clinical and resource utilization
decisions. APACHE's products and services address the information needs of both
clinicians and healthcare administrators by enabling joint access to clinical
and cost information, which facilitates both the containment of costs and the
delivery of high-quality care. APACHE's products and services are focused on
high-risk, high-cost patients, such as cardiovascular care and critical care
patients, who typically account for a disproportionately large share of hospital
costs.
APACHE addresses the healthcare industry's need for sophisticated
outcomes-based clinical decision support information systems. The Company's
systems provide clinicians with information to assist them in making individual
patient care decisions, based on concurrent information about the patient's
health status and a severity-adjusted analysis of the outcomes of similar
patients in the Company's databases. The Company's products also enable
healthcare providers to analyze patient outcomes, physician performance and
hospital unit resource utilization in comparison to similar hospital, regional
and national norms. These analyses can be used to develop care guidelines and
allocate resources to reduce the cost of healthcare.
APACHE offers healthcare providers and suppliers a comprehensive line of
outcomes-based products and services, encompassing software, hardware, and
related consulting services. APACHE's products and services are differentiated
from other healthcare decision support products by: (i) using detailed clinical
data in addition to administrative or cost data; (ii) utilizing
patient-specific, severity-adjusted data; (iii) providing concurrent, predictive
outcomes information as well as comparative historical information; (iv)
providing patient information to the physician across the continuum of care; and
(v) focusing on high-risk, high-cost patients. The Company's products and
services are based on its clinical outcomes methodologies and its proprietary
databases, which contain clinical data on over 550,000 patients.
APACHE's principal product, the Medical Cost Management Program ("MCMP"),
is an integrated decision support system that provides point-of-care,
severity-adjusted clinical and financial information to physicians and
healthcare administrators. The Company also offers Benchmark Studies to compare
a customer's clinical and financial outcomes to industry norms on a
severity-adjusted basis. Other products and services include the Outcomes
Repository, the Enterprise Information System, Consulting Studies and Supplier
Studies. APACHE's products and services currently include coverage of patients
in the following categories: cardiovascular care, critical care, acute care and
long-term acute ("sub-acute") care.
The Company's objective is to become the leading provider of clinical
outcomes data and decision support systems to healthcare providers, suppliers
and payers. APACHE intends to achieve this objective by implementing its
strategy of: (i) leveraging its existing provider customer base; (ii) expanding
its market share in the provider and supplier markets and entering the payer
market; (iii) adding methodologies, databases, products and services; and (iv)
continuing to develop relationships with key industry participants. These
strategies have recently led to an agreement with an affiliate of Premier Inc.
pursuant to which the Company is designated as Premier Inc.'s exclusive supplier
of clinically-based outcomes data systems for high-risk, high-cost patients to
the approximately 1,700 Premier hospitals.
3
<PAGE> 8
THE OFFERING
Common Stock offered hereby... 2,000,000 shares(1)
Common Stock to be outstanding
after the offering.......... 6,549,435 shares(1)(2)
Use of proceeds............... For working capital and general corporate
purposes, including paying certain accumulated
preferred stock dividends, funding expansion of
the Company's sales and marketing activities,
developing or acquiring additional
methodologies and databases, or acquiring
complementary businesses, products or
technologies. See "Use of Proceeds."
Nasdaq National Market
symbol...................... AMSI
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue...................... $1,635 $ 1,974 $ 3,841 $ 5,317 $ 7,024 $ 1,259 $1,659
Expenses:
Cost of operations........ 767 1,457 2,152 3,700 2,866 733 753
Research and
development............. 393 667 1,017 1,813 1,919 578 364
Selling, general and
administrative.......... 1,079 1,810 2,976 6,030 5,631 1,577 1,445
------ ------- ------- ------- ------- ------- ------
Total expenses.......... 2,239 3,934 6,145 11,543 10,416 2,888 2,562
------ ------- ------- ------- ------- ------- ------
Loss from operations......... (604) (1,960) (2,304) (6,226) (3,392) (1,629) (903)
Other income (expense)....... 22 (71) (80) 34 (416) (20) (48)
------ ------- ------- ------- ------- ------- ------
Net loss..................... $ (582) $(2,031) $(2,384) $(6,192) $(3,808) $(1,649) $ (951)
====== ======= ======= ======= ======= ======= ======
Pro forma net loss per
share(3).................. $ (0.79) $(0.19)
======= ======
Pro forma weighted average
number of shares
outstanding(3)............ 4,610,379 4,625,881
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 2,627 $ 25,235
Working capital.................................................... 763 23,371
Total assets....................................................... 7,086 29,694
Long-term obligations, less current maturities..................... 1,114 271
Redeemable convertible preferred stock............................. 21,029 --
Stockholders' equity (deficit)..................................... (19,597) 24,883
</TABLE>
- ------------------------------
(1) Assumes the Underwriters' over-allotment option for up to 300,000 shares of
Common Stock is not exercised. See "Underwriting."
(2) Does not include 1,459,198 shares reserved for issuance upon the exercise of
currently outstanding options and warrants, exercisable at a weighted
average exercise price of $4.28 per share. See "Management -- Employee
Benefit Plans" and "Description of Capital Stock."
(3) See Note 2 of Notes to Consolidated Financial Statements.
(4) Gives effect to: (i) the sale of 2,000,000 shares of Common Stock offered
hereby at an assumed initial offering price of $13.00 per share and the
application of the net proceeds therefrom, after deducting the estimated
underwriting discounts and commissions and offering expenses as discussed
under "Use of Proceeds;" and (ii) the Recapitalization Transactions. See
Notes 4, 8 and 12 of Notes to Consolidated Financial Statements and "Use of
Proceeds."
4
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information in
this Prospectus, should be carefully considered in evaluating the Company and
its business before purchasing shares of Common Stock offered hereby.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT; EXPECTED LOSSES;
UNCERTAINTY OF FUTURE PROFITABILITY
The Company has never recorded an operating profit and had an accumulated
deficit of approximately $18.9 million as of March 31, 1996. The Company expects
to continue to record losses for at least the next five quarters. The ability of
the Company to achieve profitability in the future largely depends on its
ability to generate revenues from its products and services. In view of the
Company's operating history, there can be no assurance that the Company will be
able to generate revenue that is sufficient to achieve profitability, to
maintain profitability on a quarterly or annual basis or to sustain or increase
its revenue growth in future periods. The Company's limited capitalization may
adversely affect the ability of the Company to raise additional capital in the
future and could impair the Company's ability to invest in research and
development, sales and marketing programs and other operations, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations and on the price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary from quarter to quarter in the
future. Quarterly revenues and operating results may fluctuate as a result of a
variety of factors, including: the Company's relatively long sales cycle;
variable customer demand for its products and services; changes in the Company's
product mix and the timing and relative prices of product sales; the loss of
customers due to consolidation in the healthcare industry; changes in customer
budgets; investments by the Company in marketing or other corporate resources;
acquisitions of other companies or assets; the timing of new product
introductions and enhancements by the Company and its competitors; changes in
distribution channels; sales and marketing promotional activities and trade
shows; and general economic conditions. Further, due to the relatively fixed
nature of most of the Company's costs, which primarily include personnel as well
as facilities costs, any unanticipated shortfall in revenue in any fiscal
quarter would have an adverse effect on the Company's results of operations in
that quarter. Accordingly, the Company's operating results for any particular
quarterly period may not be indicative of results for future periods. Although
the Company has not historically experienced any material seasonality in its
operating results, the Company could experience such seasonality in the future,
which could cause fluctuations in the Company's quarterly results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's future success and financial performance will depend in large
part on its ability to successfully market its products and services. To date,
the Company's healthcare provider customers include over 500 of the
approximately 5,200 community hospitals in the United States. Healthcare
providers comprise most of the Company's customers to date. The Company only
recently began to target sales to healthcare suppliers and has not yet completed
any sales to healthcare payers. There can be no assurance that the Company will
be able to achieve more extensive penetration of its target markets. The failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations and on the price of the Common
Stock.
The Company's future success and financial performance will also depend on
its ability to meet the increasingly sophisticated needs of its customers
through the timely development and successful introduction of new and enhanced
versions of its products and services. The Company believes that significant
continuing product development efforts will be required to sustain the Company's
growth and that such efforts have inherent risks. The Company is currently
expanding its products and services to include additional high-risk,
5
<PAGE> 10
high-cost disease categories and to broaden coverage across the continuum of
care. There can be no assurance that the Company will be successful in entering
new markets or in developing and marketing new or enhanced products and
services, or that it will not experience significant delays in the introduction
of new products and services. In addition, there can be no assurance that new or
enhanced products or services developed by the Company will meet the
requirements of healthcare providers, suppliers or payers and achieve market
acceptance. The failure to enter new markets successfully, to develop new
products or to achieve market acceptance for new products could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock. See "Business -- The APACHE
Solution," "-- The APACHE Strategy," "-- APACHE Products and Services."
STATE AND FEDERAL GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such records may be released is subject to substantial regulation by state and
federal governments. These state and federal laws and regulations govern both
the disclosure and use of confidential patient medical record information. To
protect patient confidentiality, data entries to APACHE's databases omit any
patient identifiers, including name, address, hospital and physician. The
Company believes that its procedures comply with the laws and regulations
regarding the collection of patient data in substantially all jurisdictions, but
regulations governing patient confidentiality rights are evolving rapidly and
are often unclear and difficult to apply in the rapidly restructuring healthcare
market. Additional legislation governing the dissemination of medical record
information is continually being proposed at both the state and federal level.
This legislation may require holders or users of such information to implement
security measures that may result in substantial cost to the Company. There can
be no assurance that changes to state or federal laws will not materially
restrict the ability of the Company to obtain or disseminate patient
information. The inability to obtain or disseminate patient information could
have a material adverse effect on the Company's business, financial condition
and results of operations and on the price of the Common Stock.
Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the United States Food
and Drug Administration (the "FDA") as medical devices. The laws administered by
the FDA impose substantial regulatory controls over the manufacturing, labeling,
testing, distribution, sale, marketing and promotion of medical devices and
other related activities. These regulatory controls can include compliance with
the following requirements: manufacturer establishment registration and device
listing; current good manufacturing practices; completion of premarket
notification or premarket approval; medical device adverse event reporting; and
general controls prohibiting misbranding and adulteration. Violations of the
laws concerning medical devices can result in severe criminal and civil
penalties and other sanctions. In its 1989 Policy for the Regulation of Computer
Products (the "1989 Policy Statement"), the FDA stated that it intended to issue
regulations exempting certain clinical decision support software products from a
number of regulatory controls, and that until those regulations were issued it
would not require manufacturers of such products to comply with requirements
other than the general controls. The Company believes that its products are not
medical devices and, thus, are not subject to the controls imposed on
manufacturers of such products. The Company further believes that to the extent
that its products were determined to be medical devices, the products would fall
within the exemptions for decision support systems provided by the 1989 Policy
Statement. The Company has not taken action to comply with the controls that
would otherwise apply if the Company's products were non-exempt medical devices.
The FDA has stated that it intends to revise its 1989 Policy Statement and that
it may eliminate some or all of the exemptions that it currently allows.
Accordingly, there can be no assurance that the FDA will not now or in the
future make a determination that the Company's current or future products are
medical devices subject to FDA regulations and are ineligible for the exemptions
from those regulations. Such determinations by the FDA could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock. See "Business -- Government
Regulation."
In addition to legislation regarding patient records and potential FDA
regulation, state and federal lawmakers have proposed, and are likely to
continue to propose, a number of other legislative initiatives
6
<PAGE> 11
regulating various aspects of the healthcare industry. The Company is unable to
predict what impact, if any, such legislation could have on the Company's
business, financial condition and results of operations or on the price of the
Common Stock.
INTEGRITY AND RELIABILITY OF METHODOLOGIES AND DATABASES
The Company's success is highly dependent on the integrity and reliability
of its methodologies and databases. The Company's methodologies have been
validated by a large number of academic researchers. The Company believes that
it takes adequate precautions to safeguard the completeness and consistency of
the data in its databases. Moreover, while the Company believes that the
information contained in its databases is representative of the clinical and
financial aspects of various types of hospitals and patients, there can be no
assurance that such information is appropriate for comparative analysis in all
cases or that the databases accurately reflect general or specific trends in the
healthcare industry. If the validity of the Company's methodologies were
challenged in the future or if the information contained in the databases were
found, or were perceived, to be inaccurate or unreliable, there could be a
material adverse effect on the Company's business, financial condition and
results of operations and on the price of the Common Stock. See "Business -- The
APACHE Solution."
RISK OF LIABILITY CLAIMS
Customer reliance on the Company's products and services could result in
exposure of the Company to liability claims if the Company's products fail to
perform as intended or if patient care decisions based in part on guidance from
the Company's products or services are challenged. Even unsuccessful claims
could result in the expenditure of funds in litigation, diversion of management
time and resources or damage to the Company's reputation and the marketability
of the Company's products and services. While the Company takes contractual
steps to obtain indemnification for certain liabilities and maintains general
commercial liability insurance, there can be no assurance that a successful
claim could not be made against the Company, that the amount of indemnification
payments or insurance would be adequate to cover the costs of defending against
or paying such a claim or that damages payable by the Company would not have a
material adverse effect on the Company's business, financial condition and
results of operations and on the price of the Common Stock.
TECHNOLOGICAL CHANGE
The healthcare information industry is relatively new and is experiencing
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. In addition, as the computer and
software industries continue to experience rapid technological change, the
Company must be able to quickly and successfully adapt its products so that they
continue to integrate well with the other computer platforms and software
employed by its customers. There can be no assurance that the Company will not
experience difficulties, including lack of necessary capital or expertise, that
could delay or prevent the successful development and introduction of product
enhancements or new products in response to technological changes. If the
Company is unable to respond to technological changes in a timely and cost-
effective manner, there could be a material adverse effect on the Company's
business, financial condition and results of operations and on the price of the
Common Stock. See "Business -- APACHE Products and Services."
HIGHLY COMPETITIVE INDUSTRY
The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical decision support products and services are the
quality and depth of the underlying clinical outcomes databases, the proprietary
nature of methodologies, databases and technical resources, the usefulness of
the data and reports generated by the software, customer service and support,
compatibility with the customer's existing information systems, potential for
product enhancement, vendor reputation, price and the effectiveness of sales and
marketing efforts.
7
<PAGE> 12
The Company's competitors include other companies that collect and
distribute healthcare data, such as Impath Laboratories Inc., Mecon, Inc., HCIA
Inc., Summit Medical Systems, Inc., and Transition Systems Inc. Other companies
that provide healthcare information systems include Cerner Corporation, HBO &
Company, Shared Medical Systems Corporation and Phamis Inc. However, the
Company's products and services are differentiated from the products and
services offered by those competitors by virtue of the fact that the Company's
products and services, unlike competing products and services, focus primarily
on high-risk, high-cost patients and provide both concurrent and predictive
outcomes information. Moreover, the Company believes that there are no dominant
competitors to the Company in the field of healthcare information systems that
focus on high-risk, high-cost patients or that provide concurrent and predictive
outcomes information. Many of the Company's competitors and potential
competitors have greater financial, product development, technical and marketing
resources than the Company, and currently have, or may develop or acquire,
substantial installed customer bases in the healthcare industry. The Company
also faces significant competition from internal information services at
individual hospitals, large hospital alliances, for-profit hospital chains and
managed care companies, many of which have developed their own outcomes
databases. As the market for decision support systems develops, additional
competitors may enter the market and competition may intensify. While the
Company believes that it has successfully differentiated itself from
competitors, there can be no assurance that future competition would not have a
material adverse effect on the Company's business, financial condition and
results of operations or on the price of the Common Stock. See "Business --
Competition."
UNCERTAINTY AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. During the past several years, state and
federal government regulation of reimbursement rates and capital expenditures in
the United States healthcare industry has increased. Lawmakers continue to
propose programs to reform the United States healthcare system, which may
contain proposals to increase governmental involvement in healthcare, lower
Medicare and Medicaid reimbursement rates or otherwise change the operating
environment for the Company's customers. Healthcare industry participants may
react to these proposals by curtailing or deferring investments, including
investments in the Company's products. In addition, the healthcare industry has
experienced, and could continue to experience, consolidation as a result of
mergers and acquisitions of healthcare providers, suppliers and payers, which
typically puts additional pressure on the consolidated companies to reduce
expenses. The Company cannot predict what impact, if any, such factors would
have on its business, financial condition and results of operations or on the
price of the Common Stock.
In addition, many healthcare providers are consolidating to create larger
healthcare delivery enterprises with greater regional market power. Such
consolidation could erode the Company's existing customer base and reduce the
size of the Company's target market. In addition, the resulting enterprises
could have greater bargaining power, which could lead to price erosion affecting
the Company's products and services. The reduction in the size of the Company's
target market or the failure of the Company to maintain adequate price levels
could have a material adverse effect on the Company's business, financial
condition and results of operations or on the price of the Common Stock.
DEPENDENCE ON KEY PERSONNEL AND OTHERS
The success of the Company and of its business strategy is dependent in
large part on its key management and operating personnel, including its Chairman
and Chief Executive Officer, Gerald E. Bisbee, Jr., Ph.D., and its President and
Chief Operating Officer, Robert E. Ciri. The Company has entered into
confidentiality and noncompetition agreements with each of its executive
officers. The Company believes that its success in the future will also depend
upon its ability to attract and retain highly skilled technical, managerial and
marketing personnel. Such individuals are in high demand and are often subject
to competing offers. In particular, the Company's success will depend on its
ability to retain the services of its executive officers and to hire additional
management personnel as needed. As the Company's marketing efforts continue to
grow, the Company plans to reassign certain of its management employees from
administrative positions to management positions in marketing or client
relations, replacing them with newly hired personnel. For instance, the
8
<PAGE> 13
Company is considering recruiting a new Chief Financial Officer, so that Brion
D. Umidi, who has served as the Vice President of Finance and Administration of
the Company since 1991, would be able to assume responsibility for management of
the Company's information systems business unit. The Company will also have an
ongoing need to expand the number of its management and support personnel. The
loss of the services of one or more members of management or key employees, or
the inability to hire additional personnel as needed, could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock. While the Company maintains a
key person life insurance policy on Dr. Bisbee, the amount of insurance may not
be sufficient to offset the impact of the Company's loss of the services of Dr.
Bisbee. See "Management."
William A. Knaus, M.D., a founder, a director and the Chief Scientific
Advisor of the Company, was instrumental in the creation of the APACHE critical
care methodology. Although the Company has obtained a perpetual license to this
methodology, there can be no assurance that a significant change in Dr. Knaus's
relationship with the Company would not have a material adverse effect on the
Company's business, financial condition and results of operations or on the
price of the Common Stock.
DEPENDENCE ON PROPRIETARY ASSETS
The Company has made significant investments in its methodologies,
databases and technology and relies on a combination of trade secret and
copyright laws, nondisclosure and other contractual provisions, and technical
measures to protect its proprietary rights. There can be no assurance that these
protections will be adequate or that the Company's competitors will not
independently develop methodologies, databases or technologies that are
substantially equivalent or superior to those of the Company. In addition, there
can be no assurance that the legal protections and precautions taken by the
Company will be adequate to prevent infringement or misappropriation of the
Company's proprietary assets.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any such claim
may require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations and the
price of the Common Stock. See "Business -- Proprietary Rights."
The Company's ability to successfully maintain and expand its business
through the acquisition of rights to, and the refinement and development of, its
methodologies and databases is dependent, in large part, upon its contractual
relationships with academic researchers and physicians. There can be no
assurance that a disruption or severance of any one or more of these
relationships would not have a material adverse effect on the Company's
business, financial condition and results of operations or on the price of the
Common Stock. See "Business -- The APACHE Solution."
IDENTIFICATION AND INTEGRATION OF ACQUISITIONS
The Company may seek to expand its product line through the acquisition of
complementary businesses, products, methodologies, databases and technologies.
Acquisitions involve numerous risks, including difficulties in the assimilation
of operations and products, the ability to manage geographically remote units,
the diversion of management's attention from other business concerns, the risks
of entering markets in which the Company has either limited or no direct
experience and the potential loss of key employees of the acquired companies.
Identifying and pursuing acquisition opportunities, integrating acquired
products and businesses, and managing growth requires a significant amount of
management time and skill. The Company has limited experience in acquiring
businesses and there can be no assurance that the Company will be effective in
identifying and effecting attractive acquisitions or assimilating such
acquisitions in a timely fashion. Any delay or failure to successfully
assimilate such acquisitions could result in the expenditure of money and
increased demands on management's time and could have a material adverse effect
on the Company's business, financial condition and results of operations and on
the price of the Common Stock. In addition, acquisitions may
9
<PAGE> 14
involve the expenditure of significant funds and/or the issuance of additional
securities, which may be dilutive to stockholders.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE CAPITAL WILL BE AVAILABLE
Since its inception, the Company has financed its operations through cash
provided by operations, the sale of equity and the issuance of debt instruments.
If the Company were unable to generate sufficient revenues to fund its
operations in the future, the Company may be required to raise additional funds
to meet its capital and operating requirements through public or private
financing, including equity financing. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, will require payment
of interest and may involve restrictive covenants that could impose limitations
on the operating flexibility of the Company. Adequate funds for the Company's
operations may not be available when needed and, if available, may not be on
terms attractive to the Company. The failure to obtain funding on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations and on the price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market after the
offering could adversely affect the prevailing market price for the Common Stock
and could impair the Company's future ability to raise capital through offerings
of its equity securities. In addition to the 2,000,000 shares offered hereby, a
total of 3,657,578 shares held by the directors, officers and other stockholders
of the Company will become available for sale in the public market 180 days
after the date of this Prospectus upon the expiration of certain agreements
entered into between the stockholders and the Underwriters, subject to the
provisions of Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act"). In addition, the Company intends to file, as soon as
practicable after the expiration of such 180-day period, registration statements
under the Securities Act to register an aggregate of 1,770,000 shares of Common
Stock issued or reserved for issuance under the Company's employee benefit
plans. See "Management," "Shares Eligible for Future Sale" and "Underwriting."
After this offering and subject to the terms of the lock-up agreements, the
holders of approximately 4,495,915 shares of Common Stock, who will have the
right to acquire up to an aggregate of 942,870 additional shares of Common Stock
pursuant to the exercise of vested options and warrants, will be entitled to
certain rights to cause the Company to register the sale of such shares under
the Securities Act. In addition, the Company has undertaken to effect at least
one registration of Common Stock per year for the next four years for shares of
Common Stock held by stockholders with registration rights. By exercising their
registration rights, subject to certain limitations, such holders could cause a
large number of shares to be registered and become freely tradable without
restrictions under the Securities Act (except for those shares purchased in the
offering by affiliates of the Company) immediately upon the effectiveness of
such registration. Such sales may have an adverse effect on the market price for
the Common Stock and could impair the Company's ability to raise capital through
an offering of its equity securities. See "Recent Developments" and "Description
of Capital Stock -- Registration Rights."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; SHARE PRICE VOLATILITY
There has been no prior public market for the Common Stock and there can be
no assurance that an active public market for the Common Stock will develop or
be sustained after the offering. The initial public offering price will be
determined by negotiations between representatives of the Company and the
representatives of the Underwriters (as defined in "Underwriting") and may not
be indicative of future market prices. See "Underwriting" for information
related to the method of determining the initial public offering price. The
trading price of the Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, changes in
earnings estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
healthcare or software and computer industries, developments or disputes
concerning copyrights or proprietary
10
<PAGE> 15
rights, regulatory developments and economic or other factors. In addition, in
recent years the stock market in general, and the shares of healthcare and
computer software companies in particular, have experienced extreme price
fluctuations. This volatility has had a substantial effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Common Stock. See "Underwriting."
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which prohibits the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date on which the person first becomes an "interested
stockholder," unless the business combination is approved in a prescribed
manner. The application of these provisions could have the effect of delaying or
preventing a change of control of the Company, which could adversely effect the
market price of the Company's Common Stock. See "Description of Capital Stock."
DILUTION; ABSENCE OF DIVIDENDS
Purchasers of shares of Common Stock in the offering will experience
immediate and substantial dilution of $9.31 per share in pro forma net tangible
book value per share. In addition, purchasers of shares of Common Stock in the
offering will incur additional dilution to the extent outstanding options and
warrants are exercised. See "Dilution." The Company has never declared or paid
any dividends on the Common Stock and does not anticipate paying any dividends
on the Common Stock in the foreseeable future. See "Dividend Policy."
11
<PAGE> 16
THE COMPANY
The Company was incorporated in Delaware in 1987 and maintains its
executive offices at 1650 Tysons Boulevard, McLean, Virginia 22102. The
Company's telephone number is (703) 847-1400. References in this Prospectus to
"APACHE" or the "Company" include APACHE Medical Systems, Inc. and its
wholly-owned subsidiary in the United Kingdom, Critical Audit, Ltd.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 2,000,000
shares of Common Stock offered hereby are estimated to be $23,430,000
($27,057,000 if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $13.00 per share. A portion of the
net proceeds of the offering will be used to pay $821,670 of accumulated
dividends on the Company's preferred stock. The remainder of the net proceeds
will be used for working capital and general corporate purposes, including to
fund expansion of the Company's sales and marketing activities, to develop or
acquire additional methodologies and databases, or to acquire businesses,
products or technologies complementary to the Company's business. Although the
Company regularly reviews acquisition proposals involving complementary
businesses, there are currently no agreements or negotiations with respect to
such acquisitions. Pending such use, the Company intends to invest the net
proceeds of this offering in interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not anticipate paying dividends on its Common Stock in the foreseeable
future. The Company intends to retain any future earnings for use in the
operations, development and growth of its business.
12
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996: (i) on an actual basis; (ii) on a pro forma basis to give effect
to the Recapitalization Transactions; and (iii) on an as adjusted basis to
reflect the receipt and application of the estimated net proceeds from the sale
of 2,000,000 shares of Common Stock pursuant to this offering.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, less current maturities............... $ 1,114 $ 271 $ 271
Redeemable convertible preferred stock....................... 21,029 -- --
Stockholders' equity (deficit):
Common stock, par value $.01 per share, 5,769,231 shares
authorized and 1,075,575 shares issued and outstanding,
actual; 30,000,000 shares authorized pro forma and as
adjusted; 4,548,764 shares issued and outstanding pro
forma; and 6,548,764 shares issued and outstanding as
adjusted(1)............................................. 31 65 86
Additional paid in capital................................. 1,344 20,247 43,656
Cumulative dividends and accreted issue costs on redeemable
preferred stock......................................... (2,113) -- --
Accumulated deficit........................................ (18,859) (18,859) (18,859)
-------- --------- ---------
Total stockholders' equity (deficit).................... (19,597) 1,453 24,883
-------- --------- ---------
Total capitalization.................................. $ 2,546 $ 1,724 $ 25,154
======== ========= =========
</TABLE>
- ------------------------------
(1) Does not include 1,409,645 shares reserved for issuance upon the exercise of
options and warrants outstanding as of March 31, 1996, exercisable at a
weighted average exercise price of $4.07 per share. See "Management --
Employee Benefit Plans" and "Description of Capital Stock."
13
<PAGE> 18
DILUTION
The net tangible book value of the Common Stock as of March 31, 1996 (on a
pro forma basis to give effect to the Recapitalization Transactions) was
$763,554, or $0.17 per share. Pro forma net tangible book value per share
represents the amount of the Company's total pro forma tangible assets, less
total pro forma liabilities, divided by 4,548,764 shares of pro forma Common
Stock. See Note 2 of Notes to Consolidated Financial Statements.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the offering made hereby and the as adjusted net tangible book value
per share of Common Stock immediately after completion of the offering. After
giving effect to the sale of 2,000,000 shares of Common Stock in this offering
at an assumed initial public offering price of $13.00 per share and the receipt
of the estimated net proceeds therefrom, the as adjusted net tangible book value
of the Company as of March 31, 1996 would have been $24,193,554, or $3.69 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.52 per share to existing stockholders and immediate dilution in pro
forma net tangible book value of $9.31 per share to purchasers of Common Stock
in the offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $13.00
Pro forma net tangible book value per share as of March 31, 1996........... $0.17
Increase per share attributable to new investors........................... 3.52
-----
As adjusted net tangible book value per share after the offering............. 3.69
------
Pro forma net tangible book value dilution per share to new investors........ $ 9.31
======
</TABLE>
The following table sets forth the pro forma number of shares of Common
Stock purchased from the Company, the total pro forma consideration paid and the
average price per share paid by existing stockholders and to be paid (at an
assumed initial offering price of $13.00 per share) by purchasers of shares
offered hereby (before deducting the underwriting discounts and commissions and
estimated expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.............. 4,548,764 69.5% $20,312,231 43.9% $ 4.47
New Investors...................... 2,000,000 30.5 26,000,000 56.1 $ 13.00
--------- ----- ----------- -----
Total......................... 6,548,761 100.0% $46,312,231 100.0%
========= ===== =========== =====
</TABLE>
The foregoing excludes 1,700,000 shares of Common Stock reserved for
issuance under the APACHE Medical Systems, Inc. Employee Stock Option Plan (the
"Stock Option Plan")(under which options for 866,705 shares at a weighted
average exercise price of $4.61 per share are outstanding), 70,000 shares of
Common Stock reserved for issuance under the APACHE Medical Systems, Inc.
Non-Employee Director Option Plan (the "Director Option Plan"), 65,735
outstanding options issued outside of the Stock Option Plan and the Director
Option Plan at a weighted average exercise price of $4.29 per share and 477,205
shares of Common Stock issuable upon the exercise of outstanding warrants at a
weighted average exercise price of $3.04 per share. To the extent such options
and warrants are exercised, there will be future dilution to investors in this
offering. See "Management -- Employee Benefit Plans" and "Description of Capital
Stock -- Warrants."
14
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data presented below for each of
the years in the four-year period ended December 31, 1995, and the consolidated
balance sheet data as of the end of each of the years in the four-year period
ended December 31, 1995, are derived from the Company's consolidated financial
statements which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated statement of operations data for
the year ended December 31, 1991, and the consolidated balance sheet data as of
December 31, 1991, are derived from the Company's internal financial statements
which, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to reflect the financial position and
results of operations for the period presented. The consolidated financial data
as of March 31, 1996, and for the three months ended March 31, 1995 and 1996,
are derived from the unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus, which have been prepared on a basis
consistent with the audited consolidated financial statements and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position and
results of operations for the periods presented. The results of operations for
the three months ended March 31, 1996 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31,
1996. The data set forth below should be read in conjunction with the Company's
consolidated financial statements, related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Systems........................ $1,237 $ 827 $ 2,004 $ 3,587 $ 4,096 $ 700 $1,242
Support........................ 52 277 486 836 1,352 318 330
Professional services.......... 346 870 1,351 894 1,576 241 87
------ ------- ------- ------- --------- ------- ---------
Total revenue............. 1,635 1,974 3,841 5,317 7,024 1,259 1,659
Expenses:
Cost of operations............. 767 1,457 2,152 3,700 2,866 733 753
Research and development....... 393 667 1,017 1,813 1,919 578 364
Selling, general and
administrative............... 1,079 1,810 2,976 6,030 5,631 1,577 1,445
------ ------- ------- ------- --------- ------- ---------
Total expenses............ 2,239 3,934 6,145 11,543 10,416 2,888 2,562
------ ------- ------- ------- --------- ------- ---------
Loss from operations.............. (604) (1,960) (2,304) (6,226) (3,392) (1,629) (903)
Other income (expense):
Interest income................ 16 65 67 94 62 19 58
Interest expense............... -- (106) (102) (69) (483) (39) (106)
Other.......................... 6 (30) (45) 9 5 -- --
------ ------- ------- ------- --------- ------- ---------
Net loss.......................... $ (582) $(2,031) $(2,384) $(6,192) $(3,808) $(1,649) $ (951)
====== ======= ======= ======= ========= ======= =========
Pro forma net loss per share...... $(0.79) $(0.19)
========= =========
Pro forma weighted average number
of shares outstanding.......... 4,610,379 4,625,881
</TABLE>
<TABLE>
<CAPTION>
MARCH
DECEMBER 31, 31,
------------------------------------------------- --------
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 164 $ 3,342 $ 567 $ 209 $ 4,036 $ 2,627
Working capital (deficiency)............. (353) 3,271 (352) (1,896) 1,518 763
Total assets............................. 632 4,301 2,455 4,245 7,909 7,086
Long-term obligations, less current
maturities............................ 1,159 1,013 813 549 1,079 1,114
Redeemable convertible preferred stock... 2,000 7,944 8,124 14,515 20,732 21,029
Total stockholders' equity (deficit)..... (3,341) (5,290) (7,865) (14,399) (18,312) (19,597)
</TABLE>
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in 1987 for the purpose of developing and
marketing clinically-based decision support products and services incorporating
the APACHE methodologies. The Company introduced its Medical Cost Management
Program in 1992 as an integrated decision support system that provides
physicians and healthcare administrators point-of-care, severity-adjusted
clinical and financial information on critical care patients. Early market
feedback indicated the need to extend the scope of the Company's product
offerings to include non-critical care patients and to develop a product
strategy that would provide for both group and patient-specific knowledge across
the continuum of care, incorporating clinical, administrative and financial
information. In 1995, the Company added acute care coverage to its line of
products and services, including an acute care module for the MCMP. In the first
quarter of 1996, APACHE announced the addition of cardiovascular care coverage.
Since 1993, APACHE has supported various suppliers to the healthcare marketplace
in their efforts to provide high-quality effective products and services to
healthcare providers. Recently, the professional services business unit was
expanded to provide similar services to healthcare providers, which represents
an extension of their traditional information system-based relationship with
APACHE.
The Company's revenue results primarily from: (i) licensing and sales of
information systems; (ii) support fees; and (iii) professional services
consulting. Systems revenue is derived mainly from the licensing and sale of
information system products and related implementation services to individual
hospitals, provider groups, integrated health services providers and long-term
sub-acute care facilities. The MCMP incorporates system integration,
installation, training, project management and program related consulting as
well as software licenses, necessary hardware and post-implementation customer
support services. Revenue derived from the sale of hardware does not constitute
a significant portion of systems revenue. For example, in 1995, hardware sales
comprised less than 20% of the total sales of MCMP systems and had a gross
margin of approximately 15%. The Company's support revenue is derived mainly
from annual client service or maintenance fees for the MCMP. Professional
services revenue relates primarily to value-added, database-driven consulting
services provided to pharmaceutical, biotechnology and other suppliers as well
as to provider clients. Professional services revenue has varied significantly
from period to period because to date the Company has generally made such
services available in response to specific customer requests rather than as part
of a concerted marketing effort. The Company's total revenue grew by
approximately 83% from 1993 to 1995. The Company's quarterly revenues and
operating results have varied significantly in the past and are likely to vary
significantly in the future.
The Company's cost structure includes the direct cost of operations,
research and development costs and selling, general and administrative expenses.
Cost of operations includes the cost of hardware and software sold, amortization
of capitalized software development costs and direct staffing and other costs
required to deliver the Company's products and services. The Company
historically has not identified cost of operations by its primary revenue
sources and, accordingly, is unable to develop historical gross margins, or
reliable estimates thereof, by revenue source. The Company is currently
implementing a process to identify such costs for future periods, and intends to
report gross margin by revenue source beginning with the three-month period
ending June 30, 1996. Research and development costs include the employee
related costs associated with the development and refinement of the Company's
products and services. Selling, general and administrative expenses include all
selling, marketing, accounting, facilities, human resources, legal and corporate
expenses. These costs have varied significantly due to the timing of investments
made in the Company's infrastructure, facilities and core staffing.
The Company has never recorded an operating profit and had an accumulated
deficit of approximately $18.9 million as of March 31, 1996. The Company expects
to continue to record losses for at least the next five quarters. The ability of
the Company to achieve profitability in the future largely depends on its
ability to generate revenues from its products and services. In view of the
Company's operating history, there can be no assurance that the Company will be
able to generate revenue that is sufficient to achieve profitability, to
16
<PAGE> 21
maintain its profitability on a quarterly or annual basis or to sustain or
increase its revenue growth in future periods. The Company's limited
capitalization may adversely affect the ability of the Company to raise
additional capital in the future and could impair the Company's ability to
invest in research and development, sales and marketing programs and other
operations.
There are a number of current proposals to revise existing, or to adopt
new, state and federal government statutes, regulations and policies affecting
various aspects of the healthcare industry. These proposals, if adopted, could
affect the business, financial condition and results of operations of the
Company. However, given the number of proposals, the fact that many of them
conflict with one another and the overall state of uncertainty in this area, the
Company is unable to estimate the extent of the impact, if any, that would
result from the adoption of one or more of these proposals.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Systems....................................... 52 % 67% 58 % 56% 75 %
Support....................................... 13 16 19 25 20
Professional services......................... 35 17 23 19 5
--- ---- --- ----- ----
Total revenue......................... 100 100 100 100 100
Expenses:
Cost of operations............................ 56 70 41 58 45
Research and development...................... 26 34 27 46 22
Selling, general and administrative........... 78 113 80 125 87
--- ---- --- ----- ----
Total expenses........................ 160 217 148 229 154
--- ---- --- ----- ----
Loss from operations............................ (60 ) (117) (48 ) (129) (54 )
Interest income............................... 2 2 1 1 3
Interest expense.............................. (3 ) (1) (7 ) (3) (6 )
Other......................................... (1 ) -- -- -- --
--- ---- --- ----- ----
Net loss........................................ (62 )% (116)% (54 )% (131)% (57 )%
=== ==== === ===== ====
</TABLE>
Three Months Ended March 31, 1996 and 1995
Revenue. Revenue for the three months ended March 31, 1996 increased 32% to
$1.7 million from $1.3 million in the prior year period. Systems revenue for the
three months ended March 31, 1996 increased 77% to $1.2 million from $700,000 in
the prior year period and accounted for all of the revenue growth. This increase
was due primarily to the increase in unit sales of the Company's MCMP product in
addition to the introduction and sale of new MCMP component products. Support
revenue for the three months ended March 31, 1996 increased 4% to $330,000 from
$318,000 in the prior year period due to an increase in the MCMP installed base
of clients. Professional service revenue for the three months ended March 31,
1996 decreased 64% to $87,000 from $242,000 in the prior year period. This
change is primarily related to variability in the timing of performance under
new and existing consulting contracts.
Cost of Operations. Cost of operations for the three months ended March 31,
1996 increased 3% to $753,000 from $733,000 in the prior year period, due
primarily to the increase of $53,000 in amortization expense of capitalized
software development costs. No amortization was recorded in the comparable prior
year period as the related products were not ready for sale. Cost of operations
for the three months ended March 31, 1996 decreased to 45% of revenue from 58%
in the prior year period, due to the increase in revenue for the period.
17
<PAGE> 22
Research and Development. Research and development expenses for the period
ended March 31, 1996 decreased 37% to $364,000 from $578,000 in the prior year
period, due primarily to a decrease in subcontracting costs for development
related activities. During the three months ended March 31, 1996, $42,000 of
product development activity was capitalized, compared to $68,000 in the prior
year period. Research and development expenses for the three months ended March
31, 1996 decreased to 22% of revenue from 46% in the prior year period,
primarily due to the increase in revenue.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 1996 decreased 8% to $1.4 million
from $1.6 million in the prior year period, due to a decrease in staffing and
related overhead costs and the implementation of cost controls. Selling, general
and administrative expenses for the three months ended March 31, 1996 decreased
to 87% of revenue from 125% for the prior year period due primarily to the
increase in revenue and the relative fixed nature of these costs.
Other Income (Expense). Other income (expense) decreased from ($20,000) in
the three months ended March 31, 1995 to ($48,000) for the three months ended
March 31, 1996. The decrease is attributable to the increase in non-cash imputed
interest expense resulting from the issuance of convertible debt, which was
partially offset by an increase in earnings from the Company's average cash and
cash equivalents balance.
Years Ended December 31, 1995 and 1994
Revenue. Revenue in 1995 increased 32% to $7.0 million from $5.3 million in
1994. Systems related revenue in 1995 increased 14% to $4.1 million from $3.6
million in 1994. This increase was primarily due to the increase in unit sales
of the Company's MCMP product and the introduction and sale of new MCMP
component products and other systems. Support revenue in 1995 increased 62% to
$1.4 million from $837,000 in 1994 due to an increase in the MCMP installed
client base. Professional services revenue in 1995 increased 76% to $1.6 million
from $894,000 in 1994 due to an increase in revenues from supplier studies
contracts in 1995.
Cost of Operations. Cost of operations in 1995 decreased 23% to $2.9
million from $3.7 million in 1994, due primarily to a decrease in staffing.
Staffing reductions resulted from realizing efficiencies in delivering,
installing and supporting new and existing clients. Cost of revenue in 1995
included $63,000 in amortization expense of capitalized software development
costs. No amortization was recorded in 1994 as the related products had not yet
been released. Cost of operations in 1995 decreased to 41% of revenue from 70%
in 1994, due to the same factors together with an increase in revenue during the
same period.
Research and Development. Research and development expenses in 1995
increased 6% to $1.9 million from $1.8 million in 1994, due to the enhancement
of current product lines as well as development activities for new products and
services. During 1995, $426,000 of product development activity was capitalized,
compared to $338,000 in 1994. Research and development expenses in 1995
decreased to 27% of revenue from 34% in 1994, primarily due to revenue
increasing at a faster pace than development-related activities.
Selling, General and Administrative. Selling, general and administrative
expenses in 1995 decreased 7% to $5.6 million from $6.0 million in 1994.
Staffing levels were lower in 1995 than in 1994, and 1994 included costs
associated with the move of the corporate offices. Selling, general and
administrative expenses in 1995 decreased to 80% of revenue from 113% in 1994
due to the same factors together with an increase in revenue during the same
period.
Other Income (Expense). Other income (expense) decreased from $35,000 in
1994 to ($416,000) in 1995. The decrease from 1994 to 1995 was attributable
primarily to an increase in non-cash imputed interest expense on convertible
debt and a decrease in interest income resulting from lower cash and cash
equivalents balances during the first three quarters of 1995, compared to 1994.
Years Ended December 31, 1994 and 1993
Revenue. Revenue in 1994 increased 38% to $5.3 million from $3.8 million
in 1993. Systems revenue in 1994 increased 79% to $3.6 million from $2.0 million
in 1993. This increase is due primarily to the increase in unit sales of the
Company's MCMP product and the introduction and sale of new MCMP component
18
<PAGE> 23
products. Support revenue in 1994 increased 72% to $837,000 from $486,000 in
1993 due to an increase in the MCMP installed client base. Professional services
revenue in 1994 decreased 34% to $894,000 from $1.4 million in 1993 due to a
decrease in revenues from supplier studies contracts as several significant
contracts were concluded.
Cost of Operations. Cost of operations in 1994 increased 72% to $3.7
million from $2.2 million in 1993, due primarily to additional staffing required
to establish the Company's primary delivery capabilities. Cost of operations in
1994 increased to 70% of revenue from 56% in 1993, due to the same factors.
Research and Development. Research and development expenses in 1994
increased 78% to $1.8 million from $1.0 million in 1993, due primarily to
additional staffing. During 1994, $338,000 of product development activity was
capitalized, compared to $0 in 1993. Research and development expenses in 1994
increased to 34% from 26% of revenue in 1993, primarily to the foregoing
factors.
Selling, General and Administrative. Selling, general and administrative
expenses in 1994 increased 103% to $6.0 million from $3.0 million in 1993, due
primarily to costs associated with the move of the corporate offices in 1994 and
an increase in staffing management, facilities, equipment and general expenses.
Selling, general and administrative expenses in 1994 increased to 113% of
revenue from 77% in 1994 due to the same factors.
Other Income (Expense). Other income (expense) increased from ($80,000) in
1993 to $35,000 in 1994. The increase was primarily attributable to the earnings
on the increase in the Company's cash and cash equivalents balances and a
decrease in interest expense due to a reduction in debt in 1994 compared to
1993.
19
<PAGE> 24
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data,
as well as certain unaudited quarterly financial data as a percentage of
revenues, for 1994 and 1995 and for the first quarter of 1996. In the opinion of
the Company's management, this unaudited information has been prepared on the
same basis as the audited information included elsewhere in this Prospectus and
includes all adjustments necessary (consisting of normal recurring adjustments)
to present fairly the information set forth therein. The operating results for
any quarter are not necessarily indicative of results for any future period.
<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>
Revenue:
Systems................ $ 772 $ 823 $ 1,304 $ 688 $ 700 $ 626 $ 1,256 $1,514
Support................ 59 171 288 319 318 282 366 387
Professional
services............. 280 227 197 189 241 408 524 402
------- -------- ------- -------- ------- -------- ------- -------
Total revenue...... 1,111 1,221 1,789 1,196 1,259 1,316 2,146 2,303
Expenses:
Cost of operations..... 583 862 990 1,265 733 715 686 732
Research and
development.......... 183 410 448 771 578 497 529 315
Selling, general and
administrative....... 1,246 1,412 1,428 1,945 1,577 1,379 1,232 1,443
------- -------- ------- -------- ------- -------- ------- -------
Total expenses..... 2,012 2,684 2,866 3,981 2,888 2,591 2,447 2,490
------- -------- ------- -------- ------- -------- ------- -------
Loss from operations..... (901) (1,463) (1,077) (2,785) (1,629) (1,275) (301) (187)
Interest income........ 33 35 21 4 19 8 2 33
Interest expense....... (21) (15) (17) (15) (39) (115) (140) (189)
Other.................. -- 1 6 2 -- -- 2 3
------- -------- ------- -------- ------- -------- ------- -------
Net loss................. $ (889) $ (1,442) $(1,067) $ (2,794) $(1,649) $ (1,382) $ (437) $ (340)
======= ======== ======= ======== ======= ======== ======= =======
<CAPTION>
THREE MONTHS ENDED
- ------------------------------------
MARCH 31,
1996
---------
(IN THOUSANDS)
<S> <C>
Revenue:
Systems................ $ 1,242
Support................ 330
Professional
services............. 87
-------
Total revenue...... 1,659
Expenses:
Cost of operations..... 753
Research and
development.......... 364
Selling, general and
administrative....... 1,445
-------
Total expenses..... 2,562
-------
Loss from operations..... (903)
Interest income........ 58
Interest expense....... (106)
Other.................. --
-------
Net loss................. $ (951)
=======
<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
------- -------- ------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Systems................ 69% 67% 73% 58% 56% 48% 59% 66%
Support................ 5 14 16 27 25 21 17 17
Professional
services............. 25 19 11 16 19 31 24 17
------- -------- ------- -------- ------- -------- ------- -------
Total revenue...... 100 100 100 100 100 100 100 100
Expenses:
Cost of operations..... 52 71 55 106 58 54 32 32
Research and
development.......... 16 34 25 64 46 38 25 14
Selling, general and
administrative....... 112 116 80 163 125 105 57 63
------- -------- ------- -------- ------- -------- ------- -------
Total expenses..... 181 220 160 333 229 197 114 108
------- -------- ------- -------- ------- -------- ------- -------
Loss from operations..... (81) (120) (60) (233) (129) (97) (14) (8)
Interest income........ 3 3 1 -- 1 1 -- 1
Interest expense....... (2) (1) (1) (1) (3) (9) (7) (8)
Other.................. -- -- -- -- -- -- -- --
------- -------- ------- -------- ------- -------- ------- -------
Net loss................. (80)% (118)% (60)% (234)% (131)% (105)% (20)% (15)%
======= ======== ======= ======== ======= ======== ======= =======
<CAPTION>
THREE MONTHS ENDED
- ------------------------------------
MARCH 31,
1996
-------
<S> <C>
Revenue:
Systems................ 75%
Support................ 20
Professional
services............. 5
-------
Total revenue...... 100
Expenses:
Cost of operations..... 45
Research and
development.......... 22
Selling, general and
administrative....... 87
-------
Total expenses..... 154
-------
Loss from operations..... (54)
Interest income........ 3
Interest expense....... (6)
Other.................. --
-------
Net loss................. (57)%
=======
</TABLE>
20
<PAGE> 25
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary from quarter to quarter in the
future. Quarterly revenues and operating results may fluctuate as a result of a
variety of factors, including: the Company's relatively long sales cycle,
variable customer demand for its products and services; changes in the Company's
product mix and the timing and relative prices of product sales; the loss of
customers due to consolidation in the healthcare industry; changes in customer
budgets; investments by the Company in marketing or other corporate resources;
acquisitions of other companies or assets; the timing of new product
introductions and enhancements by the Company and its competitors; changes in
distribution channels; sales and marketing promotional activities and trade
shows; and general economic conditions. Further, due to the relatively fixed
nature of most of the Company's costs, which primarily include personnel costs,
as well as facilities costs, any unanticipated shortfall in revenue in any
fiscal quarter would have an adverse effect on the Company's results of
operations in that quarter. Accordingly, the Company's operating results for any
particular quarterly period may not necessarily be indicative of results for
future periods.
In addition, the Company's quarterly results have been, and may continue to
be, affected by supplier and provider budgeting practices that cause many
discretionary purchase decisions to be made before certain quarter and year
ends. The timing of quarterly revenue is also affected by the ability of the
Company to perform on its contracts, which is subject to the availability of the
client personnel as well as the availability of the Company's personnel.
Although the Company has not historically experienced any material seasonality
in its operating results, the Company could experience such seasonality in the
future, which could cause fluctuations in the Company's quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has never recorded an operating profit and had an accumulated
deficit of approximately $18.9 million as of March 31, 1996. Since its
inception, the Company has financed its operations primarily through the private
issuance of Common Stock, convertible preferred stock, stockholder notes and
other debt instruments for net proceeds aggregating $22.2 million and, to a
lesser extent, from revenues from operations. The Company's working capital
needs are expected to continue to increase as the Company pursues its growth
strategy and the Company does not expect to record a profit for at least the
next five quarters. As of March 31, 1996, the Company had net working capital of
$763,000, including cash and cash equivalents of $2.6 million. The Company
currently has no material commitments for capital expenditures.
Historically, the Company's operating activities have not generated
positive cash flow due to increasing accounts receivable attendant to the
Company's growth as well as research and development and other expenses. The
Company has executed a letter of intent to obtain a secured line of credit to
finance its accounts receivable growth. While the Company believes that it will
be successful in securing this line of credit, there can be no assurance that
the Company will be able to enter into a line of credit on terms satisfactory to
the Company.
The Company anticipates financing its growth strategy through the net
proceeds from this offering, its current cash resources, revenues from
operations and third party credit facilities. The Company believes the
combination of these sources will be sufficient to fund its operations and
satisfy the Company's cash requirements for the next 24 months. If proceeds from
the offering, together with such other sources of funds, are not sufficient to
fund operations until the Company achieves positive cash flow, the Company would
be required to seek additional capital by incurring additional indebtedness or
issuing, in public or private transactions, equity or debt securities. However,
there can be no assurance that suitable debt or equity financing would be
available to the Company.
The Company does not believe the impact of inflation has significantly
affected the Company's operations.
21
<PAGE> 26
BUSINESS
OVERVIEW
APACHE provides clinically-based decision support information systems to
the healthcare industry. The Company believes that it is the only healthcare
information company that can provide hospitals and physicians with
patient-specific, concurrent and predictive outcomes information at the point of
care that can be used to assist them in making clinical and resource utilization
decisions. APACHE's products and services address the information needs of both
clinicians and healthcare administrators by enabling joint access to clinical
and cost information, which facilitates both the containment of costs and the
delivery of high-quality care. APACHE's products and services are focused on
high-risk, high-cost patients, such as cardiovascular care and critical care
patients, who typically account for a disproportionately large share of hospital
costs.
INDUSTRY BACKGROUND
The nearly $1 trillion healthcare industry in the United States has
undergone rapid changes during the past decade. Government regulators and the
private sector have instituted various measures intended to lower the rate of
increase in healthcare expenditures, including the institution of prospective
payment programs, reductions in reimbursement rates, discounted fee-for-service
programs and capitation payments. As a result of the continued migration from
fee-for-service towards managed care, significant components of the financial
risk inherent in the provision of healthcare have been transferred from payers
to providers. Providers include hospitals, physicians and integrated delivery
systems ("IDSs"), which are combinations of hospitals and physicians for managed
care contracting purposes. In response to the transfer of financial risk,
healthcare providers have increasingly focused their efforts on reducing costs
while continuing to meet expectations for high-quality care.
Hospitals initially responded to the increasing financial pressure by
pursuing administrative cost savings. These cost savings, such as those
resulting from negotiating discounted purchases and optimizing staff and
inventory, were facilitated in part through the analysis of data generated by
administrative and financial information systems. Although many of these
administrative savings initiatives have been implemented, the financial
pressures on providers continue to increase. The next opportunity to realize
significant savings is in more efficiently managing utilization of clinical
resources, such as controlling the number and type of procedures performed and
the length of a patient's stay. In order to realize such savings while
maintaining the quality of care, providers have sought access to sophisticated
clinical information.
Initial efforts to develop decision support tools were based on the use of
data derived from charge-based information such as billing and claims forms.
Charge-based systems have a number of limitations, including: (i) the lack of
clinical detail that is inherent in charge data; (ii) the lack of statistically
significant comparative clinical information against which individual cases can
be measured; (iii) the retrospective nature of the information, which is unable
to support medical decision makers during the care process; and (iv) clinicians'
skepticism of clinical data derived from financial records. Moreover, such
systems generally have not been designed to focus on high-risk, high-cost
patients, who typically account for a disproportionately large share of hospital
costs.
In recent years, it has become possible to develop clinical decision
support systems that overcome these limitations. Methodologies have been
developed that incorporate complex techniques of data collection and analysis to
allow the assessment and prediction of clinical outcomes, or results, of patient
treatment. Using these methodologies, extensive databases comprised of clinical
outcomes information have been created. The collection of information for these
databases has been made more affordable by the development of integration
technology, which allows the information to be drawn directly from patient
recordkeeping systems. Finally, more powerful software and hardware have become
available to collect, retrieve and analyze patient-specific clinical outcomes
data.
In response to these technological advancements and continued healthcare
industry trends, healthcare providers and suppliers are seeking more
sophisticated, outcomes-based clinical decision support information
22
<PAGE> 27
systems. Such systems could provide timely access to patient-specific and
severity-adjusted clinical outcomes information to assist healthcare providers
in making critical point-of-care decisions. Ultimately, the Company believes
that the availability of decision support tools that measure the current health
status of patients and help predict clinical outcomes would facilitate the
delivery of high-quality care at a lower cost.
THE APACHE SOLUTION
APACHE believes that its products and services address the healthcare
industry's need for sophisticated outcomes-based clinical decision support
information systems. The APACHE solution bridges the gap between the information
needs of clinicians and those of hospital administrators by enabling joint
access to clinical and cost information, which facilitates both the containment
of costs and the delivery of high-quality care. The Company's systems, which
incorporate software, hardware and related consulting services, generate
information to assist providers in making timely and informed clinical resource
utilization and patient care decisions. These clinical decision support systems
are designed to enable providers to:
- Determine appropriate cost-effective treatment plans for individual
patients.
- Compare actual individual patient outcomes with both predicted patient
outcomes and statistically relevant similar hospital, regional and
national norms.
- Analyze the performance of physicians by using clinically-based,
peer-reviewed severity-adjustment methods.
- Analyze and measure quantifiable improvements in the clinical and cost
outcomes of specified groups of patients.
- Relate staffing and bed mix to the severity-adjusted mix of patients in a
hospital unit.
APACHE's products and services are differentiated from other healthcare
decision support systems by the combination of the following factors:
- Detailed Clinical Data. APACHE's products and services utilize detailed
clinical data on a variety of health parameters (e.g., vital signs,
laboratory results and measures of physiological function) and outcomes
data (e.g., adverse occurrences, morbidity and mortality). In addition,
APACHE's products and services utilize administrative and cost data, such
as active treatment data and patient length of stay data.
- Patient-specific, Severity-adjusted Data. APACHE's products and services
utilize clinical and cost data for individual patients, in addition to
patient groups. APACHE's methodologies severity-adjust these data to
enable the assessment of the overall health status of the patient.
Severity adjustment is a technique for weighting the relative factors
affecting the degree of illness of a patient. Physicians use APACHE's
patient-specific clinical decision support systems to develop individual
patient care plans incorporating APACHE's severity-adjusted outcomes
predictions.
- Concurrent, Predictive Outcomes Information. APACHE's systems support
physician decision making by providing outcomes information to the
physician in three timeframes: (i) predictions of the patient's outcomes
(e.g., mortality, adverse occurrences and length of stay); (ii) current
information, such as the patient's daily health status; and (iii)
historical or retrospective information about the patient or groups of
similar patients. In contrast to retrospective systems, APACHE's ability
to provide concurrent information permits the generation of predictive
information during the course of a patient's care, thereby enhancing a
physician's ability to direct treatment resources as the patient's health
status changes.
- Continuum of Care Capability. APACHE's products and services provide
information to the physician throughout a patient's hospital stay by
tracking the patient's outcomes with predictions on clinical and cost
results, both pre- and post-procedure, thereby enabling physicians to
better measure the appropriateness and adequacy of the care.
- High-risk, High-cost Patient Focus. Unlike decision support systems that
focus primarily on general hospital patients, APACHE's systems are
specifically designed to help predict outcomes for high-risk,
23
<PAGE> 28
high-cost patients, such as cardiovascular care and critical care
patients. These patients typically represent a disproportionately large
share of hospital costs.
APACHE's solution is derived from the Company's clinical outcomes
methodologies and proprietary databases.
Clinical Outcomes Methodologies. APACHE's methodologies include algorithms
that apply relative weightings to selected physiological variables to define a
patient's health status. APACHE's methods of measuring variations in a patient's
health status have been utilized in connection with more than 600 peer-reviewed
articles in professional journals. APACHE has acquired rights to and refined
these methodologies, which were originally developed over periods ranging from
six to 18 years by leading academic medical centers such as The George
Washington University Hospital, Dartmouth-Hitchcock Medical Center and The
Cleveland Clinic Foundation. APACHE acquired rights to its first methodology,
the critical care methodology, in 1988 through an exclusive commercial license
agreement with The George Washington University.
Proprietary Databases. The Company's databases include data on a variety of
health parameters, such as vital signs, laboratory results and measures of
physiological function, as well as outcomes data, such as adverse occurrences,
morbidity and mortality. The databases contain information from more than
550,000 patients, many of whom are high-risk, high-cost patients. The Company
created, and continues to refine, the critical care and sub-acute care
databases. APACHE acquired rights to its cardiovascular care and acute care
databases in connection with the acquisition of the rights to related
methodologies and has subsequently expanded and refined these databases.
APACHE's databases are periodically updated with patient data from customers as
well as special studies, with the goal of ensuring that the databases reflect
the results of current medical practice on a national basis.
APACHE's products and services currently include coverage of patients in
the following categories: cardiovascular care, critical care, acute care and
sub-acute care. The cardiovascular care category includes angioplasty, open
heart surgery and cardiac catheterization patients, among others. The critical
care category includes acute myocardial infarction, lung cancer and drug
overdose patients, among others. The acute care category includes congestive
heart failure, stroke and hysterectomy patients, among others. The sub-acute
care category includes emphysema, pneumonia and ventilator-dependent patients,
among others.
THE APACHE STRATEGY
The Company's objective is to become the leading provider of clinical
outcomes data and decision support systems and services to healthcare providers,
suppliers and payers. APACHE intends to achieve this objective through the
implementation of the following strategies:
- Leverage Existing Customer Base. APACHE's comprehensive and integrated
product line provides opportunities for the Company to market additional
products and services to its existing customer base. The modular nature
of APACHE's Medical Cost Management Program ("MCMP") allows healthcare
providers to add to an existing system as APACHE introduces new products
and services or as customer needs expand. The Company believes that many
of its existing Benchmark Study and Consulting Study customers will
purchase the Company's more sophisticated MCMP systems as they experience
the benefits of APACHE's products and services.
- Expand Market Share in the Provider Market. APACHE has provided products
or services to over 500 of the approximately 5,200 community hospitals
throughout the United States and, therefore, believes it has a
significant opportunity to expand its market share. The Company plans to
expand its market share by increasing (i) the range of products and
services offered; (ii) the size of the direct sales force; (iii) its
marketing budget; and (iv) its utilization of distribution relationships.
- Expand Market Share in the Supplier Market and Enter the Payer
Market. APACHE has performed clinical trial studies and disease
management projects for leading pharmaceutical and biotechnology
companies and plans to expand its presence in the supplier market. In
addition, while the Company currently markets its products and services
primarily to providers and suppliers, APACHE intends to pursue
opportunities in the healthcare payer market by leveraging existing
methodologies and databases to develop products and services for
healthcare payers.
24
<PAGE> 29
- Add Methodologies, Databases, Products and Services. APACHE seeks to
acquire, license or develop new methodologies, databases, software and
technologies in order to enhance existing products as well as to offer new
products and services across the continuum of care, both within and
outside of the hospital. In addition to its internal product development
activities, the Company expects to pursue the acquisition of product lines
and medical data resources and will consider the acquisition of
complementary businesses.
- Continue to Develop Relationships with Key Industry Participants. The
Company believes that relationships with key industry participants
enhance APACHE's ability to develop new products, increase penetration of
existing markets and gain access to new markets. The Company has formed a
relationship with Cerner Corporation ("Cerner") pursuant to which Cerner
has agreed to market one of APACHE's methodologies as a component of
Cerner's product line. In addition, the Company cooperates with other
industry participants, such as Hewlett-Packard Company and EMTEK Motorola
Healthcare Company, to incorporate APACHE's software into their critical
care products. APACHE intends to pursue strategic relationships with
other healthcare information systems companies, providers, suppliers and
payers.
APACHE PRODUCTS AND SERVICES
APACHE offers a comprehensive line of integrated clinical decision support
products and services to healthcare providers and suppliers. These products and
services encompass software, hardware, and related consulting services. The
following table summarizes the products and services offered or being developed
by the Company:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF
YEAR CUSTOMER CUSTOMER
PRODUCT/SERVICE INTRODUCED TYPE SALES(1) DESCRIPTION
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medical Cost Management 1992 Hospitals 50 Comprehensive clinical
Program and IDSs decision support system
- --------------------------------------------------------------------------------------------------------------
Outcomes Repository and 1996 Hospitals 2 Collection and integration
Integration Services(2) and IDSs system for a hospital's
clinical and financial data
- --------------------------------------------------------------------------------------------------------------
Enterprise Information 1995 Hospitals 24 Software tool to provide
System ("EIS") and IDSs comparative analysis of a
provider's performance
- --------------------------------------------------------------------------------------------------------------
Benchmark Study 1993 Hospitals 173 Comparative analysis and
and IDSs report of a provider's
clinical and financial
performance
- --------------------------------------------------------------------------------------------------------------
Hand-held Risk Predictor Under Hospitals N/A Portable electronic device
Development used to predict clinical
outcomes at the point of
care
- --------------------------------------------------------------------------------------------------------------
Consulting Studies 1994 Hospitals 11 Clinical process and
management consulting
- --------------------------------------------------------------------------------------------------------------
Supplier Studies 1993 Pharmaceutical 16 Studies that analyze
and Biotechnology clinical trial data and
Companies develop disease management
patient profiles and
outcomes data
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Some customers have purchased more than one product or service.
(2) Available previously only as part of the MCMP.
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<PAGE> 30
Medical Cost Management Program. The MCMP is the centerpiece of APACHE's
family of products and services. It is an integrated decision support system
comprised of software, hardware and related consulting services designed to
provide point-of-care, severity-adjusted clinical and financial information to
physicians within the hospital.
Healthcare providers can use the Company's MCMP system to: (i) manage the
quality and cost of care for high-risk, high-cost patients; (ii) compare actual
individual patient outcomes with both predicted patient outcomes and
statistically relevant similar hospital, regional and national norms; (iii)
analyze and compare the performance of physicians using clinically-based,
peer-reviewed severity-adjustment methods; (iv) analyze and measure quantifiable
improvements in the clinical and cost outcomes of specified groups of patients;
and (v) relate staffing and bed mix to the severity-adjusted mix of patients in
a hospital unit. Through the MCMP, a provider can develop a customized
outcomes-based clinical decision support program. The customer may select from
four care-specific modules: cardiovascular care, critical care, acute care and
sub-acute care. The reports and analyses that customers can produce using the
MCMP include length of stay reviews, physician profiling reports, readmission
reviews and non-surviving outlier reports.
The technical capabilities of the MCMP are combined with a four-step
clinical process improvement strategy that provides clinicians with a structured
approach for using information generated by a Company system to match the
patient's health status with the most appropriate care plan. First, the MCMP
analyzes and compares, initially through a Benchmark Study, the clinical and
financial data of a select group of the provider's patients who all suffer from
the same disease to the best demonstrated practices identified in APACHE's
database. Second, providers combine these guidelines with their patients'
severity-adjusted clinical data to target specific patients for active practice
management. Third, providers utilize the results from this analysis to develop
severity-adjusted guidelines and practice management strategies. In the final
step, the MCMP generates real-time, severity-adjusted information that the
provider can use to improve the cost-effectiveness and appropriateness of an
individual patient's care.
The hub of the MCMP is the Outcomes Repository, which holds the hospital's
relevant clinical and financial data. The Outcomes Repository can interface
electronically with the hospital's existing computerized systems, such as
laboratory, clinical registries, billing, admissions and cost accounting, and is
designed to reduce substantially manual data entry. The Outcomes Repository
interfaces can be real-time, providing current information to APACHE's software
applications. For example, when a laboratory test is completed, the results can
be made immediately available in the Outcomes Repository. The Company currently
offers Outcomes Repository interfaces for most major hospital information
systems, including those offered by HBO & Company, Shared Medical Systems, Inc.,
Cerner and Sunquest Information Systems, Inc.
The EIS is the analysis and reporting software tool that can also provide
the customer with easy access to data in the Outcomes Repository. This
Windows-based system uses point and click technology that requires little
training. The EIS is designed to operate on the desktop personal computers of
administrative and clinical decision makers.
Outcomes Repository and Integration Services. During the first quarter of
1996, the Company introduced the Outcomes Repository and associated services as
a stand-alone product line. It is designed for hospitals or IDSs that have
special integration or data repository requirements.
EIS. In addition to being a fully-integrated component of the MCMP, during
1995, the Company made the EIS available as a stand-alone product. Hospitals and
IDSs that do not purchase a complete MCMP can purchase an EIS to perform
comparative analysis and reporting of data from a stand-alone Outcomes
Repository or clinical data from other sources.
Benchmark Studies. APACHE offers Benchmark Studies that provide an
independent, severity-adjusted assessment of the customer's performance, with
particular focus on high-risk, high-cost patients. The first step of a Benchmark
Study is to gather physiological, outcome and other relevant retrospective data
from a sample of the provider's own patients. These data are then compared to
APACHE's national databases of severity-adjusted clinical information. This
comparison is used to generate a report that shows the provider's
26
<PAGE> 31
performance in rendering patient care in the treatment of a specific medical
condition and allows six levels of normative comparisons of the provider's
practices: best demonstrated practices, optimal practices, similar hospital
practices, regional practices, national practices and international practices.
In addition to using the results of a Benchmark Study as a one-time
"snapshot" of the provider's historical performance, a provider can use the
study as the basis for adjusting its future practices to better align it with
the best demonstrated practices identified by the study. Hospitals can use
Benchmark Study data to identify areas for improvement in clinical practices,
quality and cost performance. Benchmark Studies are currently offered in
cardiovascular care, critical care, acute care and sub-acute care, and they can
serve as an entry point to the MCMP and other APACHE products and services.
Hand-held Risk Predictor. The Company is currently developing this portable
device, which is designed to make APACHE's outcomes predictions available at the
point of care in locations where an MCMP might not be needed (e.g., physicians'
offices). This device will provide severity-adjusted individual patient
predictions designed to assist clinicians in making informed decisions prior to
treatment. The development of this device is being conducted pursuant to an
agreement with one of the Company's healthcare provider customers, who is
currently testing prototype versions of the device. The Company intends to
develop this hand-held product further, to enable wireless access to a
customer's Outcomes Repository.
Consulting Studies. APACHE's clinical and financial consultants work with
existing MCMP customers and others in the following areas: (i) high-risk,
high-cost patient facilities planning and management; (ii) severity-adjusted
care guideline development; (iii) clinical process improvement for specific
diseases; (iv) strategic outcomes planning; (v) organizational and productivity
assessment; and (vi) population-based planning. APACHE's consultants also work
with customers to design and build customized outcomes solutions supporting the
customer's business strategies.
Supplier Studies. The Company offers clinical trial support services to
pharmaceutical and biotechnology companies. Through the use of its methodologies
and proprietary databases, APACHE assists these companies by providing clinical
trial data support for drugs under testing or review for approval by the FDA or
other regulatory authorities. APACHE also utilizes its methodologies and
proprietary databases to assist suppliers of disease management programs in
developing patient profiles and analyzing the outcomes of selected courses of
treatment. These programs, which typically focus on a specific chronic disease
such as congestive heart failure, consist of profiles of typical patients,
criteria for evaluating patient risks and needs, and recommended courses of
treatment. Suppliers of disease management programs can help healthcare
providers more efficiently treat these patients by providing a "prepackaged"
treatment program for common non-acute diseases.
Hardware. Incidental to the sale of its clinical decision support products
the Company offers hardware to its customers. Most of the Company's customers
purchase hardware from the Company as a matter of convenience; however,
customers may purchase the hardware directly from third-party vendors. While the
Company currently purchases the bulk of its hardware requirements from one
manufacturer, there are a number of other sources that offer functionally
equivalent hardware. Furthermore, the Company is not under any commitment to
purchase a minimum volume of hardware from any vendor.
CUSTOMER TRAINING AND SUPPORT
The Company provides training to customers on the use of APACHE's products.
In addition to direct user training, APACHE trains customer representatives to
train their own personnel. Following initial training, the Company provides a
high level of customer support including follow-up training, a toll-free,
24-hour-per-day, seven-day-per-week customer service hotline and periodic
product upgrades. Customers pay an annual support service fee approximately
equal to 15% of the hardware and software portion of the product price for these
ongoing support services.
27
<PAGE> 32
CUSTOMERS
APACHE currently markets its products and services to two types of
customers: healthcare providers and healthcare suppliers. To date, APACHE has
sold its products and services to more than 280 customers. The Company's
healthcare provider customers, representing more than 500 hospitals worldwide,
are primarily medium to large individual hospitals, hospital systems or
alliances and large physician group practices. The Company's healthcare supplier
customers are primarily pharmaceutical manufacturers and biotechnology
companies. In addition, as the Company increases the range of products and
services offered, the Company intends to market to insurance companies, health
maintenance organizations and other managed care companies, and other healthcare
payers.
The Company's provider customer base is geographically diverse, including
urban and rural hospitals located primarily throughout the United States. The
Company has also sold an MCMP to a hospital in Australia and consulting services
to hospital groups in the United Kingdom and Japan. APACHE's supplier customers
are located primarily in the United States. While foreign activity has not been
material to date, the Company intends to develop further these markets in the
future.
The Company's provider customers include hospitals within investor-owned
hospital chains, such as Doctor's Hospital of Dallas, a member of Tenet
Healthcare Corporation, and St. Vincent Charity Hospital, a member of
Columbia/HCA Healthcare Corporation; academic and teaching hospitals, such as
The Cleveland Clinic Foundation and The Mayo Foundation; not-for-profit
hospitals within integrated systems, such as Kaiser Foundation Hospitals; and
community hospitals. In addition, APACHE's provider customers include Vencor,
Inc., a multi-facility provider of long-term acute and sub-acute care; medical
professional organizations, such as the American College of Cardiology, with
which the Company recently contracted to provide data analysis and risk modeling
services for approximately 200 hospitals; medical consortiums, such as the
University HealthSystem Consortium, with which the Company recently contracted
to conduct Benchmark Studies at approximately 40 hospitals; and medical
coalitions, such as the Cleveland Health Quality Choice Program.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company believes that the timely development of new products and the
enhancement of existing products and services are important to continue to build
on its competitive position. APACHE releases upgrades and new products on a
periodic basis.
The Company's product development strategy is directed toward creating new
products that: (i) leverage APACHE's databases; (ii) increase the functionality
of current products; (iii) expand coverage along the continuum of care and to
additional disease or procedure groups; and (iv) provide customers with a
selection of decision support systems at various price points. The Company's
products are primarily internally developed software and analytical studies.
Hardware products offered by the Company are sourced from other vendors and
resold by APACHE as components of an integrated system incorporating the
Company's software. The software products are generally built on a client/server
architecture that includes UNIX workstation servers, Windows-based PCs,
graphical user interfaces and other software developed by third-party vendors.
The server hosts a comprehensive data repository using relational database
management system ("RDBMS") technologies and multidimensional database ("MDDB")
technologies. The server can interface with hospital systems, such as the
laboratory, admission and bedside charting systems, and uses the current
versions of the industry standard healthcare information protocols.
In addition, the Company has developed relationships with key industry
participants to enhance its product offerings. For example, the Company has
cooperated with Hewlett-Packard Company and EMTEK Motorola Healthcare Company to
incorporate APACHE's software into their critical care products.
APACHE's consultants offer guidance to the Company's research and
development process by providing current market research regarding customer
preferences. Consulting services build on the Company's databases, software
products and broad disease coverage. As these products and services continue to
evolve, additional consulting applications will be developed and marketed to
existing and new customers.
28
<PAGE> 33
SALES AND MARKETING
The Company markets and sells its products and services generally through
its ten-person direct sales force, each of whom focuses on a specific geographic
region of the country. The Company has developed a customer profiling process
based upon criteria established by the Company that is designed to identify
healthcare providers that have the greatest opportunities for cost savings.
APACHE's direct sales force targets its marketing efforts at those healthcare
providers that are highlighted through this profiling process.
APACHE believes that the most effective use of its direct sales force in
marketing provider programs is to focus on individual hospitals, typically
having 250 or more licensed beds, hospital systems or alliances and large
physician group practices. The Company markets some of its provider programs,
particularly Benchmark Studies and the EIS, to smaller individual hospitals and
other healthcare providers through focused print advertising and telemarketing,
as well as through medical professional organizations and medical consortiums.
In addition, the Company has formed a relationship with Cerner pursuant to which
Cerner has agreed to market one of APACHE's methodologies as a component of
Cerner's product line.
APACHE's consulting services are marketed both as part of the MCMP and
separately by the Company's consultants as a stand-alone product. The Company's
supplier programs are marketed by the developers of those programs and other
Company professionals directly to pharmaceutical and biotechnology companies.
The Company intends to use a portion of the proceeds of the offering to
expand its direct sales force from ten to 14 representatives. This increase will
reduce the geographic responsibility for each salesperson, thereby allowing more
intense coverage in each region. In addition, APACHE may rely on strategic
relationships in the future to market certain of its provider programs, both
domestically and internationally.
PROPRIETARY RIGHTS
The Company has made significant investments in the development and
maintenance of its risk-adjustment methodologies and its proprietary clinical
and financial databases and software. The clinical databases maintained by the
Company include a highly detailed level of clinical information that the Company
believes provides a key advantage over competing decision support systems when
combined with APACHE's value-added clinical software. APACHE has
multi-disciplinary clinical and database management personnel that audit, edit
and standardize data from customers and other sources to maintain highly
statistically relevant databases. The Company believes that the sophistication
of its risk-adjustment methodologies, the richness of its corresponding
proprietary databases and the usefulness of its software provide better outcomes
measurements and utilization control than competitive systems.
The Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes its software products under agreements that grant
customers non-exclusive licenses and contain terms and conditions restricting
the disclosure and use of APACHE's databases or software and prohibiting the
unauthorized reproduction or transfer of its products. In addition, APACHE
attempts to protect the secrecy of its proprietary databases and other trade
secrets and proprietary information through agreements with employees and
consultants. Portions of APACHE's methodologies are, however, available in
scientific literature and bona fide researchers have been granted access to
portions of APACHE's databases for peer review and other research purposes.
The Company also seeks to protect the source code of its software and its
databases as trade secrets and under copyright law. The Company has copyright
registrations for certain of its software, user manuals and databases. The
copyright protection accorded to databases, however, is fairly limited. While
the arrangement and selection of data are protectible, the actual data are not,
and others are free to create databases that perform the same function. The
Company believes, however, that the creation of competing databases would be
very time consuming and costly.
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<PAGE> 34
"APACHE" is registered as a trademark and/or service mark in connection
with certain of the Company's current products and services in the United
States, Australia, Benelux, Brazil, France, Germany, Sweden and the United
Kingdom. Applications to register the "APACHE" mark are pending in Canada and
Italy. The Company believes that it has developed substantial goodwill in
connection with its mark as an indicator of quality products and services.
The Company believes that, aside from the various legal protections of its
proprietary information and technologies, factors such as the technological and
creative skills of its personnel and its ongoing reliable product maintenance
and support are integral to establishing and maintaining its leadership position
within the healthcare industry due to the rapid pace of innovation within the
software industry. In addition, although the Company believes that its products
do not infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that a license or similar agreement will be available
on reasonable terms in the event of an unfavorable ruling on any such claim.
COMPETITION
The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical outcomes systems are the quality and depth of
the underlying clinical outcomes databases, the proprietary nature of
methodologies, databases and technical resources, the usefulness of the data and
reports generated by the software, customer service and support, compatibility
with the customer's existing information systems, potential for product
enhancement, vendor reputation, price and the effectiveness of marketing and
sales efforts.
The Company's competitors include other companies that collect and
distribute healthcare data, such as Impath Laboratories Inc., Mecon, Inc., HCIA
Inc., Summit Medical Systems, Inc., and Transition Systems Inc. Other companies
that provide healthcare information systems include Cerner Corporation, HBO &
Company, Shared Medical Systems Corporation and Phamis Inc. However, the
Company's products and services are differentiated from the products and
services offered by those competitors by virtue of the fact that the Company's
products and services, unlike competing products and services, focus primarily
on high-risk, high-cost patients and provide both concurrent and predictive
outcomes information. Moreover, the Company believes that there are no dominant
competitors to the Company in the field of healthcare information systems that
focus on high-risk, high-cost patients or that provide concurrent and predictive
outcomes information. Many of the Company's competitors and potential
competitors have greater financial, product development, technical and marketing
resources than the Company, and currently have, or may develop or acquire,
substantial installed customer bases in the healthcare industry. The Company
also faces significant competition from internal information services at
individual hospitals, large hospital alliances, for-profit hospital chains and
managed care companies, many of which have developed their own outcomes
databases. As the market for decision support systems develops, additional
competitors may enter the market and competition may intensify. While the
Company believes that it has successfully differentiated itself from
competitors, there can be no assurance that future competition would not have a
material adverse effect on the Company.
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such records may be released is subject to substantial regulation under state
and federal laws and regulations. To protect patient confidentiality, data
entries to APACHE's databases omit any patient identifiers, including name,
address, hospital and physician. The Company believes that its procedures comply
with the laws and regulations regarding the collection of patient data in
substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly and are often difficult to apply.
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal level. This legislation may
require holders of such information to implement security measures that may be
of substantial cost to the Company. There can be no assurance that changes to
state or federal laws would not materially restrict the ability of the Company
to obtain patient information originating from records.
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<PAGE> 35
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. During the past several years, government
regulation of reimbursement rates and capital expenditures in the United States
healthcare industry has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company's customers.
Healthcare industry participants may react to these proposals by curtailing or
deferring investments, including investments in the Company's products. The
Company cannot predict what impact, if any, such factors may have on its
business, financial condition and results of operations or on the price of the
Common Stock.
Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the FDA under the Federal
Food, Drug and Cosmetic Act of 1938 (the "FDCA"), as amended. The FDCA imposes
substantial regulatory controls over the manufacturing, testing, labeling, sale,
distribution, marketing and promotion of medical devices and other related
activities. These regulatory controls can include, for example, compliance with
the following: manufacturer establishment registration and device listing;
current good manufacturing practices; completion of premarket notification or
premarket approval; medical device adverse event reporting; and general controls
over misbranding and adulteration. Violations of the FDCA can result in severe
criminal and civil penalties, and other sanctions, including, but not limited
to, product seizure, recall, repair or refund orders, withdrawal or denial of
premarket notifications and approvals, and denial or suspension of government
contracts, and injunctions against unlawful product manufacture, labeling,
promotion, and distribution or other activities.
In its 1989 Policy for the Regulation of Computer Products (the "1989
Policy Statement"), the FDA stated that it intended to exempt certain clinical
decision support software products from a number of regulatory controls. Under
the 1989 Policy Statement, the FDA stated that it intended to promulgate
regulations exempting decision support software products that are intended to
involve "competent human intervention before any impact on human health occurs
(e.g., where clinical judgment and experience can be used to check and interpret
a system's output)" from the following controls: manufacturer establishment
registration and device listing, premarket notification, and compliance with the
medical device reporting and current good manufacturing practice regulations. In
the 1989 Policy Statement, the FDA stated that until it promulgated regulations
implementing the exemptions, manufacturers of eligible decision support software
products would not be required to comply with those controls.
Since issuing the 1989 Policy Statement, the FDA has neither promulgated
the exemption regulations discussed in the 1989 Policy Statement nor actively
sought to enforce compliance with the controls discussed in such Policy
Statement. Furthermore, the FDA has referred to the 1989 Policy Statement in
official presentations regarding software regulation and in decisions and
opinions regarding the regulatory status of various products. Over the last few
years, however, the FDA has stated that it intends to revise the 1989 Policy
Statement and to base exemptions from regulatory controls, if any, upon a
product specific "risk factor" analysis. The risk factors the FDA has proposed
using include: (i) seriousness of the disease to be diagnosed or treated; (ii)
time frame for use of the information; (iii) concordance with accepted medical
practice; (iv) format of data and its presentation; (v) individualized versus
aggregate patient care recommendations; and (vi) clarity of algorithms used in
the software. Given the formative state of the FDA's evaluation and possible
revision of the 1989 Policy Statement, there can be no assurance as to the
criteria or application of such revisions, if any.
The Company's products are intended to assist health care providers analyze
economic and quality data related to patient care and expected outcomes in order
to maximize or monitor the cost-effectiveness of general treatment plans and
practice guidelines. These products are not intended to provide specific
diagnostic data or results or affect the use of specific therapeutic
interventions. As such, the Company believes that its products are not medical
devices under the FDCA and, thus, are not subject to the controls imposed on
manufacturers of medical devices. The Company further believes that to the
extent that its products are determined to be medical devices, they fall within
the exemptions for decision support systems provided by the
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<PAGE> 36
1989 Policy Statement. The Company has not taken action to comply with the
requirements that would otherwise apply if the Company's products were
non-exempt medical devices.
Since 1992, the Company's products have been widely marketed and have been
reviewed or evaluated in the medical literature. The FDA has neither requested
that the Company take any action to comply with any controls under the FDCA nor
notified the Company that it is not in compliance with any such controls. The
Company is not aware of the FDA requiring other developers of similar products
to take any action to comply with any controls under the FDCA, or of the FDA
notifying such developers that they are not in compliance with any such controls
with respect to those similar products.
Nevertheless, there can be no assurance that the FDA will not make such a
request or take other action to require the Company to comply with any or all
current or future controls applicable to medical devices. There can be no
assurance that, if such a request were made or other action were taken, the
Company could comply in a timely manner, if at all, or that any failure to
comply would not have a material adverse effect on the Company's business,
financial condition, results of operations or on the price of the Common Stock,
or that the Company would not be subjected to significant penalties or other
sanctions. There can be no assurance that the FDA will continue any or all of
the exemptions provided in the 1989 Policy Statement, or in a revised policy
statement, if any, or that the FDA will promulgate regulations formally
implementing such exemptions. There can be no assurance that the Company's
current or future products will qualify for future exemptions, if any, nor can
there any assurance that any future requirements will not have a material
adverse effect on the Company's business, financial condition, results of
operations or on the price of the Common Stock.
EMPLOYEES
As of June 15, 1996, the Company employed a total of 63 full-time
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are excellent.
FACILITIES
The Company occupies approximately 21,000 square feet of space at its
headquarters in McLean, Virginia, under a lease expiring November 1999. The
Company also leases office space for two regional sales offices.
LEGAL PROCEEDINGS
The Company is a defendant from time to time in lawsuits incidental to its
business. The Company is not currently subject to, and none of its properties is
subject to, any material legal proceedings.
RECENT DEVELOPMENTS
On June 3, 1996, the Company entered into a marketing agreement with an
affiliate of Premier Inc. ("Premier"), which provides buying services to a group
of approximately 1,700 hospitals. Pursuant to the agreement, the Premier
affiliate will designate the Company as the exclusive supplier to the hospitals
purchasing through the Premier buying group of clinically-based outcomes data
systems for high-risk, high-cost patients, including critical care,
cardiovascular care and medical-surgical care patients, through December 31,
1999. In return, the Company has agreed to provide certain discounts to these
hospitals and, following the consummation of the offering, will grant to the
Premier affiliate three options to purchase up to a total of 366,294 shares of
Common Stock. Each of the options will have a ten year term. One of the options
will vest upon grant and will permit the Premier affiliate to purchase 65,488
shares of Common Stock at an exercise price of $8.18 per share. The other two
options will vest, if at all, based on the volume of products and services sold
to Premier hospitals and allow the Premier affiliate to purchase up to 300,806
shares of Common Stock at an exercise price of $13.00 per share. The Company has
also entered into a registration rights agreement with the Premier affiliate
pursuant to which the Company has undertaken to effect at least one registration
of Common Stock per year for the next four years that may include shares held by
the Premier affiliate as well as by other Company stockholders with existing
registration rights. In addition, this agreement gives the Premier affiliate
certain other "piggyback" and demand registration rights.
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<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information concerning executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- ---- ------------------------------------------------------
<S> <C> <C>
Gerald E. Bisbee, Jr., Ph.D.(3)....... 53 Chairman and Chief Executive Officer
Robert E. Ciri........................ 44 President and Chief Operating Officer
Elizabeth A. Draper, R.N., M.S........ 49 Executive Vice President and Secretary
James C. Flounlacker.................. 35 Vice President, Client Services
Sherrie L. Jones...................... 40 Vice President, Sales and Marketing
Stephen C. Strategos.................. 39 Vice President, Systems Engineering
Douglas I. Thompson................... 37 Vice President, Consulting Services
Brion D. Umidi........................ 33 Vice President, Finance and Administration, Treasurer
Edward J. Connors..................... 67 Director
Thomas W. Hodson(1)(3)................ 49 Director
William A. Knaus, M.D.(2)............. 49 Director
Lawrence S. Lewin..................... 58 Director
Neal L. Patterson(1)(2)............... 46 Director
Stephen W. Ritterbush,
Ph.D.(1)(2)(3)...................... 49 Director
Francis G. Ziegler(1)(2).............. 56 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Capital Financing Committee.
GERALD E. BISBEE, JR., PH.D. has been Chairman and Chief Executive Officer
of the Company since December 1989. Before joining APACHE, Dr. Bisbee was the
Chairman and CEO of the Hanger Orthopedic Group, Inc. which he created and
financed. He founded and managed the Health Care Group of the Corporate Finance
Department of Kidder, Peabody & Co., leaving to found Hanger in 1988. From 1978
until moving to Kidder, Peabody in 1984, he was President of the Hospital
Research and Educational Trust, a new venture and product development company
affiliated with the American Hospital Association. Dr. Bisbee also managed the
Yale University Health Services, which included a 22,000-member health
maintenance organization. He is a director of Cerner Corporation, Yamaichi
Funds, Inc. and Geriatric & Medical Companies, Inc. Dr. Bisbee received his B.A.
from North Central College, his M.B.A. from the Wharton School of the University
of Pennsylvania and his Ph.D. from Yale University, where his dissertation was
instrumental in the development of Diagnosis Related Groups ("DRGs").
ROBERT E. CIRI has been President and Chief Operating Officer of APACHE
since February 1996. For 15 years prior to joining APACHE, Mr. Ciri was employed
by Hewlett-Packard Company in the area of clinical systems and healthcare
information systems. From 1989 to 1995, he served as Hewlett-Packard's National
and North American Field Operations Manager of internally developed
applications, consulting, hardware, and services. From 1995 until joining
APACHE, he served as part of a special task force developing strategic business
plans for Hewlett-Packard's healthcare operation and integrated health system
account structure. Before joining Hewlett-Packard, Mr. Ciri was a hospital
administrator in New York, where he was involved with both inpatient and
ambulatory care programs. In addition to a B.S. from Rensselaer Polytechnic
Institute and an M.S. in medical biology and education, he has done
post-graduate work in an M.P.A. in healthcare administration and finance and in
the executive program at the Wharton School of the University of Pennsylvania.
ELIZABETH A. DRAPER, R.N., M.S. has been Executive Vice President and
Secretary of the Company since March 1988 and served as a director from the
founding of the Company until December 1994. From 1981 to 1988, Ms. Draper was
Senior Research Scientist at the ICU Research Unit at George Washington
University,
33
<PAGE> 38
where she was a founding member of the APACHE team. From 1976 until 1988, she
was an adjunct professor of physiology at the Graduate School of Nursing at The
Catholic University. Ms. Draper has 12 years of clinical experience in intensive
care nursing. She received her B.S. in nursing from the University of
Massachusetts and an M.S. in physiology from George Washington University.
JAMES C. FLOUNLACKER has been Vice President, Client Services of the
Company since April 1995. He joined APACHE in January of 1994 as Director of
Client Services. From September of 1991 until joining APACHE, Mr. Flounlacker
was Manager of Installation Services at American International Healthcare, Inc.,
where he lead a team of Project Managers responsible for installation and
implementation of a managed healthcare information system. From January 1991
until September 1991, Mr. Flounlacker was Manager of Acquisitions Development of
Columbia Freestate Health Plan, a health maintenance organization. Mr.
Flounlacker received his B.A. in English from the University of Maryland, and
his M.B.A. from Loyola College in Baltimore, Maryland.
SHERRIE L. JONES has served as Vice President, Sales and Marketing since
February 1996. From October 1994 until February 1996, she held the position of
Vice President, Marketing. Ms. Jones joined APACHE in early 1990 as a marketing
consultant responsible for assisting the design plan and market definition for
the APACHE Critical Care System, and later that year she assumed a permanent
position as a sales representative. Prior to joining APACHE, she spent 12 years
with Datapoint Corporation in the areas of accounting, finance, contracts
management and sales. Ms. Jones holds a B.A. in accounting from the University
of Texas.
STEPHEN C. STRATEGOS has been Vice President, Systems Engineering since
February of 1995. He joined APACHE in May 1991 as Director of Systems
Engineering. He has been responsible for the development and technical quality
of all software products since joining the Company. From 1990 until joining
APACHE, Mr. Strategos was the Director of Software Development at I-NET, Inc. in
Bethesda, Maryland, where he managed software development activities for the
Network Management division. Mr. Strategos received a B.A. in biology from State
University College at Oswego, New York and an M.S. in computer science from
State University of New York at Stony Brook.
DOUGLAS I. THOMPSON has served as Vice President, Consulting Services since
August 1993. From the time he joined APACHE until August 1993, he acted as Vice
President, Client Services. Mr. Thompson was a manager at Ernst & Young L.L.P.
in Phoenix, Arizona from 1989 until joining APACHE. While at Ernst & Young, he
led process improvement projects for hospital clients, which involved consulting
with physician groups on marketing, operations and organizational structure
issues, and prepared business plans for startup healthcare firms. Before joining
Ernst & Young, Mr. Thompson was employed from 1987 to 1988 by APM, Inc. in both
New York City and San Francisco as a consultant for healthcare clients. Mr.
Thompson received an M.B.A. in marketing from Columbia University and a B.S. in
business from Brigham Young University.
BRION D. UMIDI has been Vice President, Finance and Administration, and
Treasurer of the Company since February 1991. From 1987 until joining APACHE, he
was a commercial finance loan officer at the Mercantile Safe Deposit and Trust
Company in Baltimore, Maryland and an auditor with MNC Financial, Inc. in
Baltimore, Maryland from 1986 to 1987. He received his B.B.A. from Loyola
College in Baltimore, Maryland, where he majored in accounting and finance.
EDWARD J. CONNORS has served as a director of the Company since April 1990.
In 1993, he retired as the President and Chief Executive Officer of Mercy Health
Services, where he had been employed since 1976, and he is currently acting as
President Emeritus. Since 1993, Mr. Connors has been the President of
Connors/Roberts & Associates, a healthcare consulting firm located in
Morrisville, Vermont. He has also held academic and management leadership
positions at the University of Michigan and its hospital in Ann Arbor and the
University of Wisconsin Hospital in Madison. Mr. Connors has served as chair of
the AHA Board of Trustees and as chair of the American Healthcare Systems Board
of Governors. Mr. Connors has served as a Commissioner of the Joint Commission
on Accreditation of Healthcare Organizations Board of Commissioners and on the
Board of the American Hospital Association's Hospital Research and Educational
Trust. Currently, Mr. Connors serves on the Board of Trustees for the Eastern
Mercy Health System in
34
<PAGE> 39
Radnor, Pennsylvania, the Sisters of Providence Health System in Springfield,
Massachusetts, and Trinity College in Burlington, Vermont. Effective January 1,
1995, Mr. Connors assumed the responsibilities of Chairman of the Board of
Trustees of Fletcher Allen Health Care in Burlington, Vermont. In 1991, Mr.
Connors was elected to membership in the Institute of Medicine of the National
Academy of Science. Mr. Connors holds an M.H.A. from the University of
Minnesota.
THOMAS W. HODSON has served as a director of APACHE since December 1994 and
has been the Senior Vice President, Chief Financial Officer and a director of
Caremark International Inc. since August 1992. Caremark was spun off in 1992
from Baxter International, Inc., a manufacturer and marketer of healthcare
products, where Mr. Hodson had been Group Vice President for the Alternate Site
businesses from April 1992 until November 1992. From 1990 until April 1992, Mr.
Hodson was a Senior Vice President of Baxter, responsible for financial
relations, strategic planning, acquisitions and divestitures and corporate
communications. He holds a B.S. in business administration and economics from
Lehigh University and an M.B.A. from the Harvard Business School.
WILLIAM A. KNAUS, M.D. was a founder of the Company and currently serves as
the Company's Chief Scientific Advisor. He has been a director of the Company
since December 1994. Dr. Knaus is the Evelyn Troop Hobson Professor and Chairman
of the Department of Health Evaluation Sciences of the ICU at The University of
Virginia School of Medicine and a Fellow of the American College of Physicians.
He was the founder and, from 1978 to October 1995, a director of the ICU
Research Unit at George Washington University and developer of the APACHE
prognostic scoring system. Dr. Knaus has been honored with an appointment as a
professor at the University of Paris as well as numerous visiting lectureships
at universities in Western Europe, New Zealand and Australia. He is a
distinguished alumnus of both Widener and West Virginia Universities.
LAWRENCE S. LEWIN has been a director of the Company since December 1989
and has acted as the Chief Executive Officer and Chairman of Lewin-VHI, a
healthcare policy and management consulting firm, since December 1992. From 1987
until founding Lewin-VHI, he served as the Chief Executive Officer of Lewin-ICF,
a healthcare policy consulting firm. He founded Lewin and Associates, Inc. in
1970. He serves as a Trustee of Intermountain Health Care, Inc. and is a member
of the Advisory Board of Hambrecht & Quist Healthcare Investors and Life
Sciences Funds. Mr. Lewin holds an A.B. from Princeton's Woodrow Wilson School
of Public and International Affairs and an M.B.A. from the Harvard Business
School where he was a Baker Scholar.
NEAL L. PATTERSON has served as a director of APACHE since December 1989.
In 1980, Mr. Patterson was a founder of Cerner Corporation and has held the
position of its Chairman and Chief Executive Officer since 1986. He has played
an instrumental role in the development of the Healthcare Network Architecture,
which forms the basis for all Cerner systems, as well as the design of
individual products. Mr. Patterson has served as a director of LabOne, Inc.
since 1987. He holds a B.S. in finance and an M.B.A. from Oklahoma State
University.
STEPHEN W. RITTERBUSH, PH.D. has served as a director of APACHE since
December 1989. He is managing general partner of Fairfax Partners/The Venture
Fund of Washington, L.P., a venture capital fund, which he co-founded in 1989.
From 1986 to 1990, he was a director and an officer of ICF Kaiser International,
Inc., an environmental and remedial engineering firm. Prior to 1986, Dr.
Ritterbush served as President and Chief Executive Officer of Arthur D. Little
Far East, Inc., in Singapore. He holds a B.S. in engineering and a B.A. in
political science from Union College, in Schenectady, New York, an M.S. in
geophysics from the East West Center of the University of Hawaii, and an M.A.
and Ph.D. in international economics from the Fletcher School of Law and
Diplomacy of Tufts and Harvard Universities.
FRANCIS G. ZIEGLER has been a director of the Company since December 1994
and has acted as the President and Chief Executive Officer of Claneil
Enterprises, Inc., a privately owned holding company, since January 1993. He
joined Claneil in 1993 after thirty years as an operations and marketing
executive with Johnson & Johnson, where he served as President of five domestic
and international subsidiaries. Mr. Ziegler holds a B.S. in economics from St.
Peter's College, and attended the University of Santa Clara Business School, as
well as Advanced Management Programs at the Harvard and Columbia Business
Schools.
35
<PAGE> 40
ELECTION OF DIRECTORS
All of the current directors were elected to the Board of Directors
pursuant to a Stockholders Agreement, dated December 28, 1995, or its
predecessor agreements and serve for one-year terms or until their successors
are elected and qualified. The Stockholders Agreement, including all provisions
governing composition and election of the Board of Directors, will terminate
upon the closing of this offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has (i) an Audit Committee that reviews the results
and scope of the annual audit and other services provided by the Company's
independent public accountants; (ii) a Compensation Committee that makes
recommendations concerning salaries and incentive compensation for employees of
the Company; and (iii) a Capital Financing Committee that is responsible for
investigating and securing capital financing. The Company's Board of Directors
has designated the Compensation Committee as the administrator of the Company's
Stock Option Plan described below.
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers or
employees of the Company are entitled to reimbursement of expenses for attending
each meeting of the Board of Directors and each meeting of any committee.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by the
following individuals for services rendered to the Company during the fiscal
year ended December 31, 1995: (i) the Chief Executive Officer ("CEO") and (ii)
the Company's four other most highly compensated executive officers (the CEO and
those officers are referred to herein collectively as the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL ALL OTHER
COMPENSATION COMPENSATION
------------ ------------
NAME AND PRINCIPAL POSITION SALARY($) ($)
- ------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Gerald E. Bisbee, Jr., Ph.D. -- Chairman and Chief Executive
Officer.......................................................... 150,000 2,598(1)
James L. Oakes, Jr. -- Chief Operating Officer(2).................. 144,000 --
Judith Hedstrom -- Vice President, Business Development(2)......... 109,979 --
Sherrie L. Jones -- Vice President, Sales and Marketing............ 108,045 --
Elizabeth A. Draper, R.N., M.S. -- Executive Vice President........ 106,000 --
</TABLE>
- -------------------------
(1) Consists of premiums paid on a life insurance policy.
(2) Mr. Oakes' employment terminated in April 1996. Ms. Hedstrom's employment
terminated in February 1996.
OPTION GRANTS
None of the Named Executive Officers was granted stock options during the
fiscal year ended December 31, 1995.
FISCAL YEAR-END VALUES
None of the Named Executive Officers exercised any stock options during
fiscal year 1995. The following table provides information regarding stock
options held by the Named Executive Officers as of the end of fiscal year 1995.
36
<PAGE> 41
OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AT DECEMBER 31, 1995 OPTIONS AT DECEMBER 31, 1995(1)
------------------------------ --------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
- ---------------------------------- ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Gerald E. Bisbee, Jr., Ph.D....... 377,449 22,728 2,339,755 107,903
James L. Oakes, Jr................ 17,483 52,449 -- --
Judith Hedstrom................... 18,064 16,902 16,537 15,469
Sherrie L. Jones.................. 5,766 15,214 -- --
Elizabeth A. Draper, R.N., M.S.... -- -- -- --
</TABLE>
- ------------------------------
(1) Value is calculated by subtracting the exercise price per share from $8.18,
the estimated fair market value at December 31, 1995 as determined by the
Board of Directors, and multiplying the result by the number of shares
subject to the option.
EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Stock Option Plan was adopted by the Company's Board of Directors and
approved by the Company's stockholders on November 8, 1990. The Stock Option
Plan was amended and restated in April 1996. The Company has reserved 1,700,000
shares of Common Stock for issuance under the Stock Option Plan. Unless
terminated sooner by the Board of Directors, the Stock Option Plan will
terminate in April 2006.
The Stock Option Plan is administered by the Compensation Committee of the
Board of Directors. The Committee has the authority and discretion, subject to
the provisions of the Stock Option Plan, to select persons to whom options will
be granted, to designate the number of shares to be covered by options, to
specify the type of consideration to be paid to the Company, and to establish
all other terms and conditions of each stock option.
The Stock Option Plan provides for the grant of stock options to officers
and employees of the Company or its subsidiaries. Options granted under the
Stock Option Plan may be qualified or non-qualified stock options. The exercise
price for a stock option may not be less than the fair market value of the
Company's Common Stock on the date of grant. Stock options granted under the
Stock Option Plan may not be transferred other than by will or by the laws of
descent and distribution. Upon the occurrence of a Change of Control, as defined
in the Stock Option Plan, all outstanding unvested options under the Stock
Option Plan immediately vest.
Director Option Plan
In April 1996, the Company adopted the Director Option Plan, pursuant to
which non-employee directors of the Company will receive options to purchase
2,500 shares of Common Stock for each year of service. The exercise price of
such options shall be at the fair market value of the Company's Common Stock on
the date of grant. Stock options granted under the Director Option Plan may not
be transferred other than by will or by the laws of descent and distribution.
The Company has reserved 70,000 shares of Common Stock for issuance under the
Director Option Plan. The Director Option Plan may be terminated by the Board of
Directors at any time. Upon the occurrence of a Change of Control, as defined in
the Director Option Plan, all outstanding unvested options under the Director
Option Plan immediately vest.
37
<PAGE> 42
CERTAIN TRANSACTIONS
On February 23, 1995 and August 17, 1995, Caremark International Inc.
("Caremark") entered into convertible note agreements with the Company, pursuant
to which Caremark loaned $600,000 and $200,000, respectively, to the Company.
Caremark received warrants to purchase 119,881 shares of Common Stock at $1.43
per share and 24,452 shares of Common Stock at $8.18 per share in connection
with these loans. In December 1995, Caremark converted both loans into an
aggregate of 27,999 shares of Series F Convertible Preferred Stock, which shares
will be converted automatically at the closing of this offering into 97,899
shares of Common Stock. On an as-if converted basis, Caremark owns more than 5%
of the outstanding Common Stock of the Company, and Thomas W. Hodson, a director
of the Company, is Senior Vice President and Chief Financial Officer of
Caremark.
On February 24, 1995 and August 17, 1995, Benefit Capital Management
Corporation as Investment Manager for the Prudential Insurance Company of
America ("Benefit Capital") entered into convertible note agreements with the
Company pursuant to which Benefit Capital loaned $250,000 and $200,000,
respectively, to the Company. Benefit Capital received warrants to purchase
49,950 shares of Common Stock at $1.43 per share and 24,452 shares of Common
Stock at $8.18 per share, in connection with these loans. In December 1995, the
Company prepaid the $200,000 loan. The $250,000 loan is due and payable on
December 31, 1996, is non-interest bearing and is convertible at maturity into
30,458 shares of Common Stock. On an as-if converted basis, Benefit Capital owns
more than 5% of the outstanding Common Stock of the Company.
On April 16, 1995 and August 17, 1995, New York Life Insurance Company
("New York Life") entered into convertible note agreements with the Company,
pursuant to which New York Life loaned $800,000 and $100,000, respectively, to
the Company. New York Life received warrants to purchase 159,841 shares of
Common Stock at $1.43 per share and 12,226 shares of Common Stock at $8.18 per
share in connection with these loans. In December 1995, the Company prepaid the
$100,000 loan and New York Life agreed to extend the due date of the $800,000
loan from December 31, 1996 to December 31, 1997, in consideration of the
payment of interest on such loan at the per annum rate of 10% from and after
January 1, 1996. Prior to January 1, 1996, such loan had been non-interest
bearing. New York Life will convert the $800,000 loan into 97,805 shares of
Common Stock at the closing of this offering. On an as-if converted basis, New
York Life owns more than 5% of the outstanding Common Stock of the Company.
On February 24, 1995 and August 17, 1995, LHC Corporation ("LHC") entered
into convertible note agreements with the Company, pursuant to which LHC loaned
$100,000 and $100,000, respectively, to the Company. LHC received warrants to
purchase 19,981 shares of Common Stock at $1.43 per share and 12,226 shares of
Common Stock at $8.18 per share in connection with these loans. In December
1995, LHC agreed to extend the due date of both loans from December 31, 1996 to
December 31, 1997, in consideration of the payment of interest on such loans at
the per annum rate of 10% from and after January 1, 1996. Prior to January 1,
1996, the first $100,000 loan had been non-interest bearing and the second
$100,000 loan had borne interest at the prime rate plus 2%. LHC will convert
these loans into 24,452 shares of Common Stock at the closing of this offering.
Francis G. Ziegler, a director of the Company, is Chairman of LHC.
In connection with the Company's private placement of Series E Convertible
Preferred Stock, the Company issued a warrant to the placement agent, Allen &
Company Incorporated ("Allen"), which gives Allen the right to purchase 36,713
shares of Common Stock at a price of $8.18 per share. On an as-if converted
basis, including the warrant, Allen owns more than 5% of the outstanding Common
Stock of the Company.
In February 1995, the Company entered into an agreement with Cerner
Corporation ("Cerner") by which Cerner may incorporate certain of the Company's
proprietary methodologies into Cerner products and license such products to end
users in return for royalty payments to the Company. Cerner made a payment of
$250,000 against future royalties. Neal L. Patterson, a director of the Company,
is the Chairman and Chief Executive Officer of Cerner Corporation.
Each of the transactions described above was a negotiated transaction and
was approved by a disinterested majority of the Company's Board of Directors.
The Company believes that each of these transactions was fair to the Company and
on terms no less favorable than would have been available in similar
transactions with unaffiliated third parties. In addition, each of these
transactions was initiated at the request of the Company's management rather
than at the request of the affiliated party and the material terms of the
transactions and the nature of the interest of the affiliated party were fully
disclosed to the disinterested directors.
38
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock (including shares of
Common Stock issuable upon the Recapitalization Transactions) as of March 31,
1996, and as adjusted to give effect to the sale of shares of Common Stock
offered hereby, by (i) each person known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer and (iv) all of the Company's
executive officers and directors as a group. Except as indicated in the
footnotes to the table, the Company believes that the persons named in the table
have sole voting and investment power with respect to the shares of Common Stock
indicated:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF TOTAL
SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
OWNED(1) OFFERING OFFERING
------------ ---------- ---------
<S> <C> <C> <C>
5% STOCKHOLDERS
Caremark International Inc.(2)................................. 866,925 18.5 13.0
Benefit Capital Management Corporation(3)...................... 582,487 12.6 8.8
Baxter Healthcare Corporation(4)............................... 564,067 12.4 8.6
New York Life Insurance Company(5)............................. 460,405 9.8 6.9
Fairfax Partners/The Venture Fund of Washington, L.P.(6)....... 454,546 10.0 6.9
Allen & Company Incorporated(7)................................ 250,245 5.5 3.8
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Gerald E. Bisbee, Jr., Ph.D.(8)................................ 400,177 8.1 5.8
James L. Oakes, Jr.(9)......................................... 32,780 * *
Judith S. Hedstrom(10)......................................... 18,064 * *
Sherrie L. Jones(11)........................................... 5,766 * *
Elizabeth A. Draper, R.N., M.S................................. 176,521 3.9 2.7
Edward J. Connors(12).......................................... 10,490 * *
Thomas W. Hodson(13)........................................... 3,497 * *
William A. Knaus, M.D.(14)..................................... 405,752 8.9 6.2
Lawrence S. Lewin(15).......................................... 10,490 * *
Neal L. Patterson(16).......................................... 10,490 * *
Stephen W. Ritterbush, Ph.D.(17)............................... 10,490 * *
Francis G. Ziegler(18)......................................... 3,497 * *
All directors and executive officers as a group (15
persons)(13),(16),(17),(18),(19)............................. 1,173,006 22.8 16.4
</TABLE>
- ------------------------------
* Represents less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares listed in the table.
Share ownership information includes shares of Common Stock issuable
pursuant to outstanding options that may be exercised within 60 days after
March 31, 1996.
(2) Includes 144,333 shares issuable upon exercise of vested warrants. The
address of Caremark is 2215 Sanders Road, Suite 400, Northbrook, Illinois
60062. Mr. Hodson, a director of the Company, is the Senior Vice President,
Chief Financial Officer and a director of Caremark, which is a publicly
traded corporation.
(3) Includes 74,402 shares issuable upon exercise of vested warrants. Benefit
Capital Management Corporation holds all shares and warrants in its
capacity as Investment Manager for the Prudential Insurance Company of
America Separate Account #VCA-GA-5298 and disclaims beneficial ownership of
all such shares and warrants. Prudential Insurance Company of America is a
publicly traded corporation. The address of Benefit Capital Management
Corporation is 39 Old Ridgebury Road, Danbury, Connecticut 06817.
39
<PAGE> 44
(4) The address of Baxter Healthcare Corporation is 17221 Red Hill Avenue,
Irvine, California 92714. Baxter Healthcare Corporation is a publicly
traded corporation.
(5) Includes 172,067 shares issuable upon exercise of vested warrants. The
address of New York Life Insurance Company is 51 Madison Avenue, New York,
New York 10010. New York Life Insurance Company is a mutual insurance
company owned by its policyholders.
(6) Includes 17,483 shares issuable upon exercise of a vested warrant. The
address of Fairfax Partners/The Venture Fund of Washington, L.P. is 1568
Spring Hill Road, Suite 200, McLean, Virginia 22102. Mr. Ritterbush, a
director of the Company, is the managing general partner of Fairfax
Partners/The Venture Fund of Washington, L.P.
(7) Includes 36,713 shares issuable upon exercise of a vested warrant. Allen
disclaims beneficial ownership of 8,812 of such shares. Allen also
disclaims beneficial ownership of 5,504 shares of the 250,245 shares listed
above, which are held by Allen as nominee for certain of its officers and
directors. Does not include 288,204 shares beneficially owned by other
officers, directors and related parties of Allen. Allen is a privately held
investment banking company. The address of Allen is 711 Fifth Avenue, New
York, New York 10022.
(8) Consists of 400,177 shares issuable upon exercise of vested options. Dr.
Bisbee's address is c/o APACHE Medical Systems, Inc., 1650 Tysons
Boulevard, McLean, Virginia 22102.
(9) Consists of 32,780 shares issuable upon exercise of vested options.
(10) Consists of 18,066 shares issuable upon exercise of vested options.
(11) Consists of 5,770 shares issuable upon exercise of vested options.
(12) Consists of 10,490 shares issuable upon exercise of vested options.
(13) Consists of 3,497 shares issuable upon the exercise of vested options. Mr.
Hodson disclaims all beneficial ownership of the 866,925 shares owned or to
be owned of record by Caremark Inc.
(14) Dr. Knaus' address is c/o Department of Health Evaluation Sciences, Box
600, University of Virginia School of Medicine, Charlottesville, Virginia
22908.
(15) Consists of 10,490 shares issuable upon exercise of a vested option.
(16) Consists of 10,490 shares issuable upon exercise of a vested option. Mr.
Patterson disclaims beneficial ownership of the 182,262 shares owned or to
be owned of record by Cerner Corporation.
(17) Consists of 10,490 shares issuable upon exercise of a vested option. Dr.
Ritterbush disclaims beneficial ownership of the 454,546 shares owned or to
be owned of record by Fairfax Partners/The Venture Fund of Washington, L.P.
(18) Consists of 3,497 shares issuable upon exercise of a vested option. Mr.
Ziegler disclaims beneficial ownership of the 191,113 shares owned or to be
owned of record by LHC Corporation.
(19) Includes 590,733 shares issuable upon exercise of vested options and
options that will vest within 60 days.
40
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of the offering made hereby, the
authorized capital stock of the Company will consist of 30,000,000 shares of
Common Stock, par value $.01 per share, and 1,543,704 shares of preferred stock,
par value $.01 per share.
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock. As of
March 31, 1996, the Company had outstanding 1,075,575 shares of Common Stock and
had 13 holders of record of the Common Stock. Upon the consummation of the
offering made hereby, there will be 6,549,435 shares of Common Stock outstanding
after giving effect to (i) the sale of the shares of Common Stock offered
hereby, (ii) the automatic conversion of 200,000 outstanding shares of Series A
Convertible Preferred Stock, 140,754 outstanding shares of Series B Convertible
Preferred Stock, 118,110 outstanding shares of Series C Convertible Preferred
Stock, 209,994 outstanding shares of Series D Convertible Preferred Stock,
174,995 outstanding shares of Series E Convertible Preferred Stock and 27,999
outstanding shares of Series F Convertible Preferred Stock into an aggregate of
3,294,519 shares of Common Stock, (iii) the conversion of certain promissory
notes having an aggregate principal amount of $1,000,000 into an aggregate of
122,257 shares of Common Stock and (iv) the payment of $733,350 of accumulated
dividends through the issuance of an aggregate of 56,413 shares of Common Stock.
Such total excludes shares issuable upon the exercise of outstanding options and
warrants. Each stockholder of record is entitled to one vote for each
outstanding share of Common Stock owned by him on every matter properly
submitted to the stockholders for their vote.
The holders of Common Stock are entitled to receive ratably such dividends
as are declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock have the right to a ratable
portion of assets remaining after payment of liabilities. Holders of Common
Stock have neither preemptive rights nor rights to convert their Common Stock
into any other securities and are not subject to future calls or assessments by
the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the shares
offered hereby upon issuance and sale will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the consummation of this offering all of the issued and outstanding
shares of the preferred stock will be converted into 3,294,519 shares of Common
Stock. Following such conversion, the Board of Directors of the Company may not
authorize the issuance of shares of preferred stock.
WARRANTS
In connection with the Company's private placement of Series E Convertible
Preferred Stock, the Company issued a warrant to the placement agent, Allen,
which gives Allen the right to purchase 36,713 shares of Common Stock at a price
of $8.18 per share. Additionally, the Company issued warrants to purchase an
aggregate of up to 349,653 shares of Common Stock at $1.43 per share in February
1995 and April 1995 and 73,356 shares of Common Stock at $8.18 per share to four
lenders in connection with loan transactions consummated in August 1995. In May
1991, the Company issued a warrant to purchase up to 17,483 shares of Common
Stock at $2.86 per share to a lender in connection with a loan transaction.
REGISTRATION RIGHTS
The Company has granted certain registration rights to its preferred
stockholders (the "Preferred Holders"), certain majority common stockholders
(the "Key Holders") and an affiliate of Premier (the "Business Holder")
(collectively, the "Holders"), who will own in the aggregate 4,495,915 shares of
Common Stock upon consummation of this offering and have the right to acquire
through the exercise of vested options and warrants up to an aggregate of
942,870 additional shares of Common Stock. The Holders have "piggyback"
registration rights to request that the Company register any of their shares in
the event that the
41
<PAGE> 46
Company proposes to register any of its securities under the Securities Act
(other than a registration effected solely to implement an employee benefit plan
or a transaction to which Rule 145 of the Securities and Exchange Commission is
applicable). However, if such piggyback rights are exercised in connection with
an underwritten public offering of the Company's Common Stock, the managing
underwriter of such an offering has the right to exclude or otherwise limit the
number of such shares to be included in such public offering. The Company has
undertaken annually for the next four years to initiate a registration with
respect to which the Holders will have piggyback rights. Additionally, the
Preferred Holders have "demand" registration rights to have the Company prepare
and file, on two occasions, a registration statement so as to permit a public
offering and sale of their shares of Common Stock, provided that Preferred
Holders owning at least 51%, in the case of the first demand, or 25%, in the
case of the second demand, of the shares covered by the registration rights must
demand such registration and must dispose of at least 20% of the then
registrable stock through the registration statement. After the first demand by
the Preferred Holders, the Business Holder shall have one right (or two under
certain circumstances) to demand a registration of at least 50,000 shares of
their Common Stock. Once the Company is eligible to register its securities on
Form S-3 with the Securities and Exchange Commission, the Preferred Holders can
demand up to six additional registrations, each at least six months apart and
for an aggregate expected public offering price of at least $500,000, and after
January 1, 2001, the Business Holder can demand up to two additional
registrations on Form S-3, each at least six months apart and for at least
50,000 shares.
DELAWARE LAW AND CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
Section 203 of Delaware General Corporation Law
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of such assets having an aggregate value in excess of 10% of the consolidated
assets of the corporation, and certain transactions that would increase the
interested stockholder's proportionate share ownership in the corporation)
between an interested stockholder and a corporation for a period of three years
after the date the interested stockholder becomes an interested stockholder,
unless (i) the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an interested
stockholder, (ii) the interested stockholder acquired at least 85% of the voting
stock of the corporation (other than stock held by directors who are also
officers or by certain employee stock plan) in the transaction in which it
becomes an interested stockholder or (iii) the business combination is approved
by a majority of the board of directors and by the affirmative vote of 66 2/3%
of the outstanding voting stock that is not owned by the interested stockholder.
Indemnification and Limitation of Liability
The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall, subject to certain limitations, indemnify its directors
and officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful.
Section 102 of the Delaware General Corporation Law ("DGCL") permits a
Delaware corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. DGCL Section
102 provides, however, that liability for breaches of the duty of loyalty, acts
or omissions not in good faith or involving intentional misconduct, or knowing
violation of the law, and the unlawful purchase or redemption of stock or
payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. The Company's Restated
Certificate of Incorporation includes a provision which
42
<PAGE> 47
eliminates, to the fullest extent permitted, director liability for monetary
damages for breaches of fiduciary duty.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be First Chicago
Trust Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 6,549,435
outstanding shares of Common Stock, including shares of Common Stock issuable
upon the Recapitalization Transactions. Of these shares, the 2,000,000 shares of
Common Stock sold in this offering (assuming the Underwriters' over-allotment
option is not exercised) will be freely tradable without restriction or further
registration under the Securities Act unless purchased by affiliates of the
Company (as such term is defined under the Securities Act). The 4,549,435 shares
held by existing stockholders, representing 69% of the total number of shares of
Common Stock to be outstanding upon the completion of this offering, may not be
resold except pursuant to an effective registration statement filed by the
Company or an applicable exemption from registration, including an exemption
under Rule 144. In addition, certain holders of Common Stock have agreed that
they will not, without obtaining the prior written approval of the
Representatives (as defined in "Underwriting"), directly or indirectly offer for
sale, sell, transfer, encumber, contract to sell, grant any option, right or
warrant to purchase or otherwise dispose (or announce any offer, sale, transfer,
encumbrance, contract to sell, grant of an option to purchase or other
disposition) of any shares of Common Stock, or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock, for a period of 180
days after the effective date of the Registration Statement of which this
Prospectus forms a part.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company (as defined
in Rule 144, an "Affiliate"), who has beneficially owned "restricted securities"
(as that term is defined in Rule 144) for a period of at least two years from
the later of the date such restricted securities were acquired from the Company
or the date they were acquired from an Affiliate, is entitled to sell, within
any three-month period, a number of such securities that does not exceed the
greater of (i) 1% of the then outstanding shares of the Company's Common Stock
(approximately 65,488 shares immediately after this offering) or (ii) the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks preceding the filing of notice of such sale. Sales under Rule 144
are also subject to certain restrictions on the manner of sale, notice
requirements, and the availability of current public information about the
Company. Under Rule 144(k), 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 the shares proposed to be sold for at least three years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering, subject to the 180-day restriction on transfer
described in the preceding paragraph. The Securities and Exchange Commission has
proposed an amendment to Rule 144 that would reduce the holding period required
for shares subject to Rule 144 to become eligible for sale in the public market.
If the proposed amendment becomes effective, the two-year and three-year holding
periods referred to in this paragraph will be reduced to one-year and two-year
holding periods, respectively.
Under Rule 701 under the Securities Act, certain shares issued pursuant to
employee benefit plans or arrangements in effect prior to this offering are
eligible for resale 90 days after the Company becomes a reporting company under
the Exchange Act and may be sold by persons other than Affiliates subject only
to the manner of sale provisions of Rule 144 and by Affiliates without
compliance with the holding period requirements of Rule 144.
As soon as practicable following the expiration of the 180-day period
described above, the Company intends to file a registration statement or
statements on Form S-8 under the Securities Act to register the shares of Common
Stock issuable pursuant to the Stock Option Plan and the Director Option Plan.
As of
43
<PAGE> 48
March 31, 1996, options issued pursuant to the Stock Option Plan to purchase
approximately 866,705 shares were outstanding, of which options to purchase
646,483 shares were exercisable. Shares issued upon the exercise of the options
generally will be eligible for sale in the public market after the effective
date of such registration, subject, in certain cases, to the lock-up agreements
described herein and volume and other restrictions.
Prior to this offering, there has been no public market for the Common
Stock. No predictions can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the specific
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Company's Common Stock.
After the completion of this offering, certain persons will be entitled to
certain rights with respect to registration under the Securities Act of
approximately 5,373,300 shares of Common Stock (including shares issuable upon
the exercise of outstanding warrants). In addition, after the completion of this
offering, the Company will issue options to purchase up to an aggregate of
366,294 shares of Common Stock to an affiliate of Premier. The Premier affiliate
will be entitled to certain rights with respect to registration under the
Securities Act of the shares issuable upon exercise of these options. See
"Recent Developments" and "Description of Capital Stock -- Registration Rights."
44
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Cowen & Company, Lehman Brothers Inc. and Volpe, Welty & Company (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Cowen & Company..............................................................
Lehman Brothers Inc. ........................................................
Volpe, Welty & Company.......................................................
----------
Total................................................................... 2,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby (other
than the shares subject to the over-allotment option) if any such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain dealers. After
the initial public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus to cover over-allotments, if any. To the extent the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to 2,000,000,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 2,000,000 shares are being offered.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, as amended.
The Company, certain of its officers and directors who own shares of Common
Stock and certain other stockholders and option holders of the Company have
entered into agreements providing that, for a period of 180 days after the date
of this Prospectus, they will not, without the prior written consent of Cowen &
Company, on behalf of the Underwriters, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into, or exercisable or exchangeable for, Common Stock, or any option, warrant
or right to purchase any shares of Common Stock or any such convertible,
exercisable or exchangeable securities or grant any option to dispose of any
shares of Common Stock. See "Shares Eligible for Future Sale."
45
<PAGE> 50
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiations among the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations are prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies which the Company and the Representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gardner, Carton & Douglas, Chicago, Illinois. Certain legal matters
in connection with this offering will be passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom, New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1994 and 1995, and for each of the years in the three-year period
ended December 31, 1995, have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C. 20549, a Registration Statement on Form S-1, including
amendments thereto, under the Securities Act of 1933 with respect to shares of
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith, certain portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other documents referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being deemed to
be qualified in its entirety by such reference. The Registration Statement,
including all exhibits and schedules thereto, may be inspected without charge at
the principal office of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven World
Trade Center, Suite 1300, New York, New York 10048, and copies of all or any
part thereof may be obtained from such offices upon the payment of the
prescribed fees. In addition, electronically filed documents, including reports,
proxy and information statements and other information regarding the Company,
can be obtained from the SEC's Web site at: http://www.sec.com.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent certified public
accountants and quarterly reports containing unaudited financial statements for
the first three quarters of each fiscal year.
46
<PAGE> 51
APACHE MEDICAL SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets -- December 31, 1994 and 1995, March 31, 1996 and Pro
Forma March 31, 1996............................................................... F-3
Consolidated Statements of Operations -- Years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995 and 1996................................. F-4
Consolidated Statements of Changes in Stockholders' Deficit -- Years ended December
31, 1993, 1994 and 1995 and the three months ended March 31, 1996.................. F-5
Consolidated Statements of Cash Flows -- Years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995 and 1996................................. F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
APACHE Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of APACHE
Medical Systems, Inc., and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 APACHE
Medical Systems, Inc., and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
March 22, 1996, except as to note 12
which is as of June 18, 1996
McLean, Virginia
KPMG Peat Marwick LLP
F-2
<PAGE> 53
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ---------------------------
--------------------------- PRO FORMA
1994 1995 1996 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 208,596 $ 4,035,787 $ 2,626,806 $ 2,626,806
Accounts receivable, net of allowance for
doubtful accounts of $143,000 in 1994, $190,800
in 1995 and $190,800 at March 31, 1996 (note
3)............................................. 934,524 1,419,959 2,201,841 2,201,841
Other trade receivables (note 3)................. 181,436 162,466 147,301 147,301
Prepaid expenses and other....................... 156,860 124,690 145,833 145,833
------------ ------------ ------------ ------------
Total current assets...................... 1,481,416 5,742,902 5,121,781 5,121,781
Other trade receivables, net of current maturities
(note 3)......................................... 348,289 74,875 35,736 35,736
Furniture and equipment (note 6)................... 2,900,820 2,887,115 2,893,073 2,893,073
Less accumulated depreciation and amortization... (823,318) (1,496,114) (1,654,462) (1,654,462)
------------ ------------ ------------ ------------
Net furniture and equipment........................ 2,077,502 1,391,001 1,238,611 1,238,611
Capitalized software development costs, net........ 337,944 700,543 689,732 689,732
------------ ------------ ------------ ------------
Total assets.............................. $ 4,245,151 $ 7,909,321 $ 7,085,860 $ 7,085,860
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable........................... $ 1,428,925 $ 921,726 $ 812,395 $ 812,395
Accrued expenses................................. 585,726 723,024 738,761 738,761
Preferred stock dividends payable................ -- -- -- 821,670
Current maturities of obligations under capital
leases (note 6)................................ 108,960 190,797 174,617 174,617
Current maturities of notes payable --
stockholders (note 4).......................... -- 250,000 250,000 250,000
Current maturities of notes payable -- other
(note 5)....................................... 122,115 224,020 200,980 200,980
Deferred revenue................................. 1,132,170 1,915,192 2,181,815 2,181,815
------------ ------------ ------------ ------------
Total current liabilities................. 3,377,896 4,224,759 4,358,568 5,180,238
Deferred rent benefit (note 6)..................... 202,590 186,431 181,335 181,335
Obligations under capital leases, net of current
maturities (note 6).............................. 117,722 62,405 36,752 36,752
Notes payable -- stockholders, net of current
maturities and discounts (note 4)................ 100,000 835,000 901,250 58,250
Notes payable -- other, net of current maturities
(note 5)......................................... 330,975 181,282 175,999 175,999
------------ ------------ ------------ ------------
Total liabilities......................... 4,129,183 5,489,877 5,653,904 5,632,574
Redeemable convertible preferred stock (note 8).... 14,514,906 20,731,878 21,029,333 --
Stockholders' Equity (Deficit) (note 9):
Common stock, $.01 par value, authorized shares,
4,947,552 at December 31, 1994, 5,769,231 at
December 31, 1995, 5,769,231 at March 31, 1996
and 30,000,000 pro forma at March 31, 1996;
issued and outstanding shares, 1,072,835 at
December 31, 1994, 1,075,458 at December 31,
1995, 1,075,575 at March 31, 1996, and
4,548,764 pro forma at March 31, 1996.......... 30,683 30,758 30,762 65,494
Additional paid-in capital....................... 548,678 1,343,269 1,344,217 20,246,737
Cumulative dividends and accreted issue costs on
redeemable convertible preferred stock......... (878,112) (1,778,689) (2,113,411) --
Accumulated deficit.............................. (14,100,187) (17,907,772) (18,858,945) (18,858,945)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)...... (14,398,938) (18,312,434) (19,597,377) 1,453,286
------------ ------------ ------------ ------------
Commitments (notes 6 and 11)
Total liabilities and stockholders' equity
(deficit)............................... $ 4,245,151 $ 7,909,321 $ 7,085,860 $ 7,085,860
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 54
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Systems..................... $ 2,004,184 $ 3,586,991 $ 4,096,458 $ 699,665 $ 1,241,750
Support..................... 485,798 836,530 1,351,963 317,535 330,439
Professional services....... 1,350,643 893,610 1,575,684 241,500 86,883
----------- ----------- ----------- ----------- -----------
Total revenue....... 3,840,625 5,317,131 7,024,105 1,258,700 1,659,072
Expenses:
Cost of operations.......... 2,150,879 3,700,297 2,866,055 732,949 753,608
Research and development.... 1,017,374 1,812,579 1,919,264 577,970 363,824
Selling, general and
administrative........... 2,976,235 6,030,427 5,630,611 1,577,225 1,444,991
----------- ----------- ----------- ----------- -----------
Total expenses...... 6,144,488 11,543,303 10,415,930 2,888,144 2,562,423
----------- ----------- ----------- ----------- -----------
Loss from operations.......... (2,303,863) (6,226,172) (3,391,825) (1,629,444) (903,351)
Other income (expense):
Interest income............. 67,298 93,849 62,354 18,680 57,810
Interest expense............ (102,110) (68,733) (482,890) (38,974) (105,632)
Other, net.................. (45,261) 9,438 4,776 195 --
----------- ----------- ----------- ----------- -----------
Net loss...................... (2,383,936) (6,191,618) (3,807,585) (1,649,543) (951,173)
Accretion of dividends and
issue costs on redeemable
convertible preferred
stock....................... (179,495) (669,720) (900,577) (205,100) (334,722)
----------- ----------- ----------- ----------- -----------
Net loss to common
stockholders...... $(2,563,431) $(6,861,338) $(4,708,162) $(1,854,643) $(1,285,895)
=========== =========== =========== =========== ===========
Pro Forma (unaudited):
Pro Forma net loss per
share....................... $ (0.79) $ (0.19)
=========== ===========
Weighted average number of
shares used for calculation
of Pro Forma loss per
share....................... 4,610,379 4,625,881
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 55
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Years ended December 31, 1993, 1994 and 1995
and three months ended March 31, 1996
<TABLE>
<CAPTION>
CUMULATIVE DIVIDENDS
AND ACCRETED
COMMON STOCK ADDITIONAL ISSUE COSTS ON
------------------- PAID-IN CUMULATIVE REDEEMABLE ACCUMULATED
SHARES AMOUNT CAPITAL PREFERRED STOCK DEFICIT TOTAL
--------- ------- ---------- --------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ 1,064,093 $30,433 $ 221,748 $ (28,897) $ (5,524,633) $ (5,301,349)
Accretion of dividends and
issue costs on redeemable
preferred stock........... -- -- -- (179,495) -- (179,495)
Net loss.................... -- -- -- -- (2,383,936) (2,383,936)
--------- ------- ---------- ---------- ------------ ------------
Balance at December 31,
1993........................ 1,064,093 30,433 221,748 (208,392) (7,908,569) (7,864,780)
Issuance of common stock.... 8,742 250 71,250 -- -- 71,500
Issuance of common stock
options................... -- -- 255,680 -- -- 255,680
Accretion of dividends and
issue costs on redeemable
preferred stock........... -- -- -- (669,720) -- (669,720)
Net loss.................... -- -- -- -- (6,191,618) (6,191,618)
--------- ------- ---------- ---------- ------------ ------------
Balance at December 31,
1994........................ 1,072,835 30,683 548,678 (878,112) (14,100,187) (14,398,938)
Issuance of convertible
preferred stock
warrants.................. -- -- 787,166 -- -- 787,166
Issuance of common stock.... 2,623 75 7,425 -- -- 7,500
Accretion of dividends and
issue costs on redeemable
preferred stock........... -- -- -- (900,577) -- (900,577)
Net loss.................... -- -- -- -- (3,807,585) (3,807,585)
--------- ------- ---------- ---------- ------------ ------------
Balance at December 31,
1995........................ 1,075,458 30,758 1,343,269 (1,778,689) (17,907,772) (18,312,434)
Issuance of common stock
(unaudited)............... 117 4 948 -- -- 952
Accretion of dividends and
issue costs on redeemable
preferred stock
(unaudited)............... -- -- -- (334,722) -- (334,722)
Net loss (unaudited)........ -- -- -- -- (951,173) (951,173)
--------- ------- ---------- ---------- ------------ ------------
Balance at March 31, 1996
(unaudited)................. 1,075,575 $30,762 $1,344,217 $(2,113,411) $(18,858,945) $(19,597,377)
========= ======= ========== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 56
APACHE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1993, 1994 and 1995
and three months ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------- -----------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................. $(2,383,936) $(6,191,618) $(3,807,585) $(1,649,543) $ (951,173)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 167,862 445,885 736,050 148,449 216,157
Gain on forgiveness of debt........ -- (19,500) -- -- --
Options issued for software
license.......................... -- 255,680 -- -- --
Loss on sale of furniture and
equipment........................ -- -- 68,735 -- --
Accretion of interest.............. -- -- 366,167 17,416 66,250
Provision for doubtful accounts.... -- 78,429 47,838 -- 25,000
(Increase) decrease in accounts
receivable....................... (572,275) 45,471 (533,273) 372,716 (806,882)
(Increase) decrease in other trade
receivables...................... -- (529,725) 292,381 (49,133) 54,304
(Increase) decrease in other
current assets................... (29,078) (65,074) 32,173 (146,079) (26,244)
Increase (decrease) in accounts
payable and accrued expenses..... 195,561 1,375,761 (369,901) 284,726 (93,595)
Increase (decrease) in deferred
rent............................. 3,832 184,566 (16,159) (6,284) (5,096)
Increase in deferred revenue....... 459,276 672,896 783,020 252,336 266,623
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities.................... (2,158,758) (3,747,229) (2,400,554) (775,396) (1,254,656)
Cash Flows from Investing Activities:
Purchase of furniture and
equipment.......................... (495,366) (1,785,514) (56,985) (6,747) (5,958)
Proceeds from sale of furniture and
equipment.......................... -- 206,247 221,217 92,517 --
Capitalized software development
costs.............................. -- (337,944) (425,852) (66,725) (41,896)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities.......... (495,366) (1,917,211) (261,620) 19,045 (47,854)
Cash Flows from Financing Activities:
Principal payments on borrowings..... (124,425) (390,108) (347,788) (10,480) (28,323)
Principal payments on capital lease
obligation......................... (31,508) (25,366) (192,742) (27,043) (41,833)
Proceeds from issuance of note
payable............................ 46,000 -- 2,350,000 950,000 --
Proceeds from issuance of preferred
stock, net of issuance costs....... (11,250) 5,721,596 4,672,395 -- (37,267)
Proceeds from issuance of common
stock upon exercise of options..... -- -- 7,500 -- 952
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities.......... (121,183) 5,306,122 6,489,365 912,477 (106,471)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents..................... (2,775,307) (358,318) 3,827,191 156,126 (1,408,981)
Cash and Cash Equivalents at Beginning
of Period............................ 3,342,221 566,914 208,596 208,596 4,035,787
----------- ----------- ----------- ----------- -----------
Cash and Cash Equivalents at End of
Period............................... $ 566,914 $ 208,596 $ 4,035,787 $ 364,722 $ 2,626,806
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 57
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF THE BUSINESS
APACHE Medical Systems, Inc. (the "Company"), a Delaware corporation, was
incorporated on September 1, 1987. The Company is a leading provider of
clinically-based decision support information systems to the healthcare
industry. The Company offers healthcare providers and suppliers a comprehensive
line of outcomes-based products and services, encompassing software, hardware,
and related consulting services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Critical Audit, Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Activities of the subsidiary to date have been immaterial. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results inevitably will differ from those estimates.
Revenue Recognition
Revenues for sales of systems requiring production activities both before
and subsequent to delivery are recognized by the percentage-of-completion method
using significant milestones to estimate progress toward completion. Sales of
other systems and products are recognized at delivery. Systems support fees are
recognized ratably over the period of performance. Professional service revenues
are recognized as these services are provided. Amounts received prior to the
performance of service or completion of a milestone are deferred.
Prior to 1995, all revenues associated with the sales of systems were
recorded when the system was delivered, net of an accrual for the estimated cost
of fulfilling the Company's obligations. The new method of accounting was
adopted to more accurately reflect timing of the recognition of the contractual
amount of revenue consistent with the timing of further production activities by
the Company subsequent to the initial delivery, and has been applied by
restating all periods presented in the accompanying consolidated financial
statements.
Cost of Operations
Cost of operations consists primarily of cost of equipment sold,
amortization of software development costs, direct personnel costs and other
direct costs.
Furniture and Equipment
Furniture and equipment are stated at cost. Furniture and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation and amortization are calculated on the straight-line basis over the
estimated useful lives of the assets ranging from 3 to 5 years. Amortization of
equipment held under capital leases is provided on the straight-line basis over
the shorter of the estimated useful life of the assets or the life of the lease.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents for purposes of the statement of
cash flows. Cash equivalents consisted of approximately $2,600,000 of interest
bearing overnight bank investment accounts at December 31, 1995 and a $50,000
certificate of deposit at December 31, 1994, which are carried at cost which
approximates market.
F-7
<PAGE> 58
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Software Capitalization
The Company capitalizes certain software development costs subsequent to
the establishment of technological feasibility of its products. Technological
feasibility is established generally upon completion of a working model of a
product. Costs incurred prior to technological feasibility are expensed and are
included as research and development costs in the accompanying consolidated
financial statements. Amortization of capitalized costs begins when products are
available for general release to customers and is computed on a
product-by-product basis in the amount which is the greater of (a) the ratio
that current revenues bear to the total of the current and future anticipated
revenues, or (b) the straight-line method over the remaining estimated economic
life of the product, not to exceed three years. Such costs are reflected in cost
of operations.
The Company capitalized approximately $0, $338,000 and $426,000 in software
development costs during 1993, 1994, and 1995, respectively. Amortization of
software development costs approximated $0, $0 and $63,000 in 1993, 1994 and
1995, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Current Vulnerability Due to Certain Concentrations
The Company currently depends on certain suppliers for the provision of
computer hardware to its customers. The Company has not experienced and does not
expect any disruption of such services and the Company believes that
functionally equivalent computer hardware is available from other sources.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents and
trade receivables. Concentrations of credit risk with respect to trade
receivables result from the Company's customer base comprising primarily
hospitals and other health care industry companies. Management regularly
monitors the creditworthiness of its customers and believes that it has
adequately provided for any exposure to potential credit losses. No single
customer accounted for more than 10 percent of revenues in 1993, 1994 or 1995.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement 121
in the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.
F-8
<PAGE> 59
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price not less than the fair value of the shares as determined
by the Board of Directors at the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees, and, accordingly, recognizes compensation expense for stock option
grants only when the exercise price is less than the fair value of the shares at
the date of grant.
Interim Financial Information (Unaudited)
The unaudited interim information as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996, including such information included in the
Notes to Consolidated Financial Statements is unaudited. It has been prepared on
the same basis as the annual consolidated financial statements and, in the
opinion of the Company's management, reflects normal recurring adjustments
necessary for a fair presentation of the information for the periods presented.
Operating results for any quarter are not necessarily indicative of results for
any future periods.
Pro Forma Balance Sheet (Unaudited)
Upon the consummation of this offering, all of the outstanding shares of
Series A, B, C, D, E and F Redeemable Convertible Preferred Stock, and, at the
holders' option, cumulative dividends to date, will automatically convert into
shares of common stock. The unaudited pro forma presentation of the balance
sheet has been prepared assuming the automatic conversion of the preferred stock
into 3,294,519 shares of common stock on March 31, 1996, and the conversion of
$733,350 of accrued dividends into 56,413 shares of common stock based on the
stated preference of the holders. Cumulative dividends of $821,670, which are to
be paid with the proceeds of this offering, have been reflected as dividends
payable, and $558,391 of accreted issue costs have been reflected as a decrease
in paid-in capital. Additionally, notes payable with an outstanding principal
balance of $1,000,000 and a net carrying value of approximately $843,000 will
convert into 122,257 shares of common stock.
Pro Forma Net Loss Per Common Share (Unaudited)
The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the treasury
stock method) outstanding after certain adjustments described below. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive, except that, in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued during the twelve-month period prior
to the filing of the initial public offering ("cheap stock") even when
antidilutive, have been included in the calculation as if they were outstanding
for all periods, using the treasury stock method and the expected initial public
offering price of $13.00 per share. In the computation of pro forma net loss per
share, accretion of preferred stock to the mandatory redemption amount is not
included as an increase to net loss. The pro forma net loss per common share
gives effect to the mandatory conversion of all outstanding shares of preferred
stock, including certain accumulated dividends, the conversion of certain
convertible debt, including the reduction of related interest, and the cheap
stock related to stock options and warrants, all effective upon the consummation
of this offering.
F-9
<PAGE> 60
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ----------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Billed accounts...................................... $1,008,565 $1,296,671 $1,822,806
Unbilled accounts.................................... 68,959 314,088 569,835
---------- ---------- ----------
1,077,524 1,610,759 2,392,641
Less allowance for doubtful accounts................. (143,000) (190,800) (190,800)
---------- ---------- ----------
$ 934,524 $1,419,959 $2,201,841
========== ========== ==========
</TABLE>
Unbilled accounts represent revenue that has been recognized for work
performed for which billings had not been presented to customers, as such
accounts were not billable under contract terms at the balance sheet date. It is
anticipated that substantially all of these accounts will be billed and
collected within one year of the respective balance sheet date.
In 1994, the Company sold software systems on trade terms that allow for
payment over an agreed upon period. Amounts due under such installment terms are
included as other trade receivables in the accompanying financial statements and
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
YEAR 1995 1996
-------------------------------------------- ------------ ---------
<S> <C> <C>
1996........................................ $159,534 $ 104,640
1997........................................ 76,811 76,811
-------- --------
Total amounts............................... 236,345 181,451
Less imputed interest at 14%................ 35,369 29,991
-------- --------
Installment trade receivables............... 200,976 151,460
Less current maturities..................... 143,493 127,949
-------- --------
Noncurrent installment trade receivables.... $ 57,483 $ 23,511
======== ========
</TABLE>
In 1994, the Company leased equipment to certain of its customers under
sales-type leases. Future minimum lease receipts under sales-type equipment
leases are included in other trade receivables in the accompanying consolidated
balance sheet and are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
1996........................................ $ 22,062 $14,368
1997........................................ 20,223 20,223
------- -------
Total minimum lease payments to be
received.................................. 42,285 34,591
Less amounts representing interest at 14%... 5,920 3,014
------- -------
Net investment in sales-type leases......... 36,365 31,577
Less current maturities..................... 18,973 19,352
------- -------
Noncurrent maturities....................... $ 17,392 $12,225
======= =======
</TABLE>
F-10
<PAGE> 61
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES PAYABLE -- STOCKHOLDERS
Notes payable -- stockholders, which are all unsecured, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ----------
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Convertible notes payable, interest at 10 percent, interest
imputed at 22%, principal and interest due December 31,
1997..................................................... $ -- $1,000,000 $1,000,000
Less imputed interest...................................... -- (210,000) (157,000)
-------- ---------- ----------
-- 790,000 843,000
Convertible notes payable, non-interest bearing, interest
imputed at 22%, principal due December 31, 1996.......... -- 250,000 250,000
Less imputed interest...................................... -- (55,000) (41,750)
-------- ---------- ----------
-- 195,000 208,250
Notes payable, non-interest bearing, principal due after
cumulative year-end retained earnings exceeds $200,000... 100,000 100,000 100,000
-------- ---------- ----------
100,000 1,085,000 1,151,250
Less current maturities.................................... -- (250,000) (250,000)
-------- ---------- ----------
$100,000 $ 835,000 $ 901,250
======== ========== ==========
</TABLE>
Interest expense relating to notes payable-stockholders was approximately
$29,000, $6,000 and $366,167 for the years ended December 31, 1993, 1994, and
1995, respectively.
The 10% convertible notes were originally issued in February and April 1995
as non-interest bearing notes in the amount of $1,750,000 with detachable
warrants to purchase 349,653 shares of the Company's common stock at $1.43 per
share. The warrants have been valued at $691,166, which amount has been included
as capital stock and debt discount which is being amortized to interest expense
over the life of the note. The original notes were due December 31, 1996. The
notes are convertible at the holder's option into shares of the Company's
preferred stock at the same price and terms as the then most recently completed
preferred equity investment in the Company. In December 1995, $600,000 of these
notes were converted to 20,999 shares of Series F redeemable, convertible
preferred stock. Further, at that date, $900,000 of these notes were amended to
mature on December 31, 1997, bearing stated interest at 10% beginning January 1,
1996, payable at maturity. The interest at the stated rate and the remaining
imputed interest will be recognized over the life of the note. At December 31,
1995 and March 31, 1996, $250,000 of the originally issued non-interest bearing
notes remain outstanding.
In August 1995, the Company issued $600,000 of convertible notes, with
stated interest at prime plus 2 percent, due December 31, 1996, with detachable
warrants to purchase 73,356 shares of the Company's common stock at $8.18 per
share. The warrants did not become exercisable until 120 days after issuance and
were cancellable if the notes were repaid or converted prior to that date. The
warrants have been valued at $96,000 which amount has been included as capital
stock and debt discount which is being amortized to interest expense over the
life of the note. The notes have the same convertibility features as the
February and April notes. In December 1995, subsequent to the warrant
cancellation date, $200,000 of these notes were converted to 7,000 shares of
Series F redeemable convertible preferred stock, $300,000 were repaid and
$100,000 were amended to mature December 31, 1997, bearing stated interest at
10% beginning January 1, 1996, payable at maturity. The interest at the stated
rate and the remaining imputed interest will be recognized over the life of the
note.
F-11
<PAGE> 62
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES PAYABLE -- OTHER
Notes payable -- other consist of promissory notes to various medical and
financial institutions. All the notes are unsecured.
Notes payable -- other consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Note payable, 6% interest, payable in monthly
installments of principal plus interest through March
1996................................................... $ 13,288 $ -- $ --
Note payable, 10% interest payable semi-annually,
principal payable in annual installments of $34,500
through May 1998....................................... 117,895 83,395 83,395
Note payable, 10% interest payable semi-annually,
principal payable in annual installments of $34,500
commencing August 1994 through August 1998............. 138,000 138,000 138,000
Note payable, prime plus 2% interest (10.75% at December
31, 1995), payable in monthly installments of principal
plus interest through November 1999.................... 105,645 105,645 103,884
Note payable, prime plus 2% interest (10.75% at December
31, 1995), payable in monthly installments of principal
plus interest through January 1999..................... 78,262 78,262 51,700
-------- -------- --------
453,090 405,302 376,979
Less current maturities.................................. 122,115 224,020 200,980
-------- -------- --------
$330,975 $181,282 $ 175,999
======== ======== ========
</TABLE>
During 1995, the Company had not complied with the repayment terms of three
notes with an outstanding balance of $321,907 at December 31, 1995. These notes
were brought to a current status, or were repaid, in April, 1996. Amounts
classified as current liabilities at December 31, 1995 include amounts for which
the note holder could demand repayment.
Scheduled maturities of notes payable -- other are as follows (1995
delinquent installments of $133,891 are included as 1996 maturities):
<TABLE>
<CAPTION>
YEAR
---------------------------------------------------
<S> <C>
1996............................................... $224,020
1997............................................... 90,129
1998............................................... 70,332
1999............................................... 20,821
</TABLE>
F-12
<PAGE> 63
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LEASE COMMITMENTS
Future minimum lease payments at December 31, 1995, under non-cancelable
operating and capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------------------------------------------- -------- ----------
<S> <C> <C>
1996......................................................... $213,862 $ 433,562
1997......................................................... 66,352 446,569
1998......................................................... -- 459,966
1999......................................................... -- 433,701
-------- ----------
Total........................................................ 280,214 $1,773,798
==========
Less amounts representing interest at 6% to 18%.............. 27,012
--------
Present value of net minimum lease payments.................. 253,202
Less current maturities...................................... 190,797
--------
$ 62,405
========
</TABLE>
Operating Leases
In 1994, the Company entered into a new lease agreement for its current
office space. The lease stipulates a rent abatement period of six months. Rent
expense is recorded on a straight-line basis over the term of the lease. The
difference between rent payments and rent expense resulted in a deferred rent
benefit.
Total rent expense under all operating leases was approximately $153,000,
$358,000 and $416,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $101,000 for the three months ended March 31, 1996.
Capital Leases
During 1994 and 1995, the Company entered into agreements to sell and
leaseback certain of its office equipment. The resulting leases are capital
leases that expire at various dates through 1997.
Office equipment and related accumulated amortization under capital leases
included in furniture and equipment on the accompanying balance sheet at
December 31, 1995 is as follows:
<TABLE>
<S> <C>
Office equipment................................... $380,429
Less accumulated amortization...................... 223,732
--------
$156,697
========
</TABLE>
(7) INCOME TAXES
The Company had no provision for income taxes in 1993, 1994 or 1995 or the
three months ended March 31, 1996 as a result of its net losses for both
financial statement and income tax purposes.
F-13
<PAGE> 64
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES -- (CONTINUED)
The approximate tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities
Book value of equipment in excess of tax
basis................................... $ (37,000) $ (28,100)
Capitalized software development costs..... (126,800) (262,500)
---------- ----------
Gross deferred tax liabilities............... (164,300) (290,600)
Deferred tax assets:
Accrued vacation........................... 51,700 28,100
Allowance for doubtful accounts............ 53,600 71,600
Deferred rent benefit...................... 76,000 69,900
Excess of tax over book revenue
recognized.............................. 429,400 997,500
Net operating loss carryforwards........... 5,287,600 6,715,400
---------- ----------
Gross deferred tax assets.................... 5,898,300 7,882,500
Less deferred tax assets valuation
allowance.................................. 5,734,000 7,591,900
---------- ----------
Net deferred tax assets...................... 164,300 290,600
---------- ----------
Total deferred tax assets (liabilities)...... $ -- $ --
========== ==========
</TABLE>
The change in the total valuation allowance for the years ended December
31, 1994 and 1995 were increases of $3,512,500 and $1,857,900, respectively.
The Company has a net operating loss carryforward for income tax reporting
purposes at December 31, 1995 of $13,795,000, which expire in approximate
amounts as follows: $2,000,000 in 2004, $1,000,000 in 2005, $500,000 in 2006,
$2,000,000 in 2007, $800,000 in 2008, $6,200,000 in 2009 and $1,300,000 in 2010.
The Company's ability to use the carryforwards is subject to limitations
resulting from changes in ownership, as defined by the Internal Revenue Code.
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has 200,000 shares of Series A redeemable convertible preferred
stock ("Series A"), 211,131 shares of Series B redeemable convertible preferred
stock ("Series B"), 118,110 shares of Series C redeemable convertible preferred
stock ("Series C"), 209,994 shares of Series D redeemable convertible preferred
stock ("Series D"), 174,995 shares of Series E redeemable convertible preferred
stock ("Series E") and 27,999 shares of Series F redeemable convertible
preferred stock ("Series F" and, together with the Series A, Series B, Series C,
Series D and Series E, the "Series Preferred") issued and outstanding. The net
proceeds from the issuance of the preferred stock were as follows: Series A,
$2,000,000; Series B, $3,139,078; Series C, $2,776,120; Series D, $5,721,596;
Series E, $4,672,395; and Series F, $800,000. Issue costs are accreted to
stockholders' equity in amounts relative to increases in redemption values over
time.
In conjunction with the 1995 issuance of Series E, the Company issued
36,713 warrants to purchase common stock at $8.18 to a stockholder relating to
transaction fees. In the opinion of management, the value of these warrants do
not materially effect the financial statements.
F-14
<PAGE> 65
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
Among others, the principal rights, privileges, and preferences of all
Series Preferred stockholders, all as defined in the Company's Amended and
Restated Certificate of Incorporation or as set forth in the respective Series
Preferred Stock Purchase Agreements, are as follows:
Redemption:
Unless previously converted to common stock, all Series Preferred are
redeemable at the option of the holders in annual increments of 33.33%
commencing January 1, 1998. The redemption price is $10.00, $23.09, $25.40
per share for Series A, B, and C, respectively, and $28.58 per share for
Series D, E, and F, plus all accrued and unpaid dividends, if any. No
shares have been redeemed through March 31, 1996.
At December 31, 1995, the maximum aggregate redemptions that could be
demanded of the Company in each of the next five years are as follows:
1996, $0; 1997, $0; 1998, $6.683 million; 1999, $6.683 million; and 2000,
$6.684 million.
Liquidation preference:
In the event of a liquidation event, as defined in the Series
Preferred Stock Purchase Agreements, all Series Preferred stockholders are
ranked prior to all other classes of stock. All Series Preferred
stockholders are ranked equally and distributions are to be made in
proportion to the value of the investments originally made. As of December
31, 1995 all Series Preferred stockholders have an aggregate liquidation
preference equal to their initial investment of $20,050,000, as follows:
Series A, $2,000,000; Series B, $3,250,000; Series C, $3,000,000; Series D,
$6,000,000; Series E, $5,000,000; and Series F, $800,000.
Conversion:
All Series Preferred is convertible into common stock at the option of
the holder and conversion is mandatory in certain circumstances, including
the closing of a public stock offering meeting defined criteria. Subject to
certain adjustments, the Series A, B, C, D, E and F are convertible into
699,302 shares, 738,222 shares, 412,973 shares, 734,246 shares, 611,877
shares, and 97,899 shares of the Company's common stock, respectively. All
Series Preferred stockholders have certain anti-dilution protection rights.
The Company has reserved 3,294,519 shares of common stock for issuance upon
conversion of preferred stock.
Dividends and Voting rights:
Dividends, if any, declared and payable to common stockholders must
also first be paid to all Series Preferred stockholders. Dividends are
cumulative as of November 1, 1993, for Series A and B; as of November 1,
1994, for Series C; as of November 1, 1995, for Series D; and as of
November 1, 1997, for Series E and F. The annual dividend payable is
equivalent to $0.80 per share for Series A, $1.8472 per share for Series B,
$2.032 per share for Series C and $2.286 per share for Series D, E and F.
Holders of all Series Preferred have voting rights equal to the number
of common shares into which each class of Series Preferred is convertible.
Unpaid and undeclared dividends for the years ended December 31, 1993, 1994
and 1995, respectively, are as follows: Series A, $26,670, $160,000 and
$160,000; Series B, $43,330, $260,000 and $260,000; Series C, $0, $40,000
and $240,000; and Series D, $0, $0 and $80,000, and have been accreted in
stockholders' equity (deficit). Total Series Preferred dividends accreted
for the three months ended March 31, 1996 amounted to $285,000. Upon
conversion,
F-15
<PAGE> 66
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
cumulative dividends may be paid in cash or shares of common stock at the
option of each holder of Series Preferred.
Other rights, privileges and preferences:
The Company is prohibited from making, among other things, certain
further amendments to its Amended and Restated Certificate of Incorporation
without the affirmative vote of 66.67% of Series Preferred stockholders
voting together as a class. Holders of Series Preferred have certain demand
and "piggyback" registration rights with respect to these securities, or
the securities they may be converted into, and possess certain rights
relating to election of Board of Director slots.
(9) COMMON STOCK, OPTIONS AND WARRANTS
Common Stock
The Company is restricted from paying dividends on common stock unless and
until all cumulative preferred stock dividends have been paid.
Stock Warrants
The Company has 17,483 outstanding warrants issued to a stockholder in 1991
with an exercise price of $2.86 per share which expire in 2001; 349,653
outstanding warrants issued to stockholders in 1995 with an exercise price of
$1.43 per share which expire in 2000; and 110,069 outstanding warrants issued to
stockholders in 1995 with an exercise price of $8.18 per share which expire in
2000.
Stock Options
The Company has a nonqualified employee stock option plan (the "Plan") for
the benefit of its employees and directors. All options are subject to
forfeiture until vested, and unexercised options expire on the tenth anniversary
of the year granted. Vesting periods are from one to five years. The Company has
also granted 65,735 vested stock options outside the Plan with an exercise price
of $4.29 per share.
F-16
<PAGE> 67
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMON STOCK, OPTIONS AND WARRANTS -- (CONTINUED)
The following is a summary of the option transactions for the years ending
December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
EXERCISE
PRICE SHARES
---------- -------
<S> <C> <C>
Outstanding, December 31, 1992.............................. $0.72-2.86 616,797
Granted................................................... 7.26 78,852
Forfeited................................................. 6.61-7.26 6,740
---------- --------
Outstanding, December 31, 1993.............................. 0.72-7.26 688,909
Granted................................................... 4.29-8.18 205,256
Forfeited................................................. 2.86-8.18 13,768
---------- --------
Outstanding, December 31, 1994.............................. 0.72-8.18 880,397
Granted................................................... 8.18 93,511
Forfeited................................................. 7.26-8.18 102,239
Exercised................................................. 2.86 2,623
---------- --------
Outstanding, December 31, 1995.............................. 0.72-8.18 869,046
Granted................................................... 8.18 87,413
Forfeited................................................. 7.26-8.18 23,902
Exercised................................................. 8.18 117
---------- --------
Outstanding, March 31, 1996................................. $0.72-8.18 932,440
========== =========
</TABLE>
At December 31, 1995 and March 31, 1996, options for 655,226 and 712,218
shares were exercisable and 42,143 and 153,488 shares were available for grant
under the Plan, respectively.
(10) RELATED PARTY TRANSACTION
The Company entered into a license agreement with a stockholder on February
2, 1995. The stockholder is licensed to sell a product of the Company for which
the stockholder will pay a royalty on each sale. The stockholder made a payment
against future royalties of $250,000.
(11) OTHER COMMITMENTS
In 1994, the Company purchased rights to databases and methodologies from
an unrelated company in exchange for 65,735 irrevocable options to purchase the
Company's common stock for $4.29 per share. The estimated fair value of the
stock option, $255,680, was recorded as software license expense. The Company
also committed $200,000, payable in monthly installments through March 1996, for
enhancements to the databases and the methodologies. At December 31, 1995,
$25,000 of these installment payments were remaining.
The Company has entered into an exclusive 10 year licensing agreement with
an unrelated company for its database and methodologies. The Company is
committed to pay $1,000,000 from 1994 to 1998 for the license and royalties on
the sale of the Company's product related to these methodologies. The Company is
F-17
<PAGE> 68
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) OTHER COMMITMENTS -- (CONTINUED)
also committed to pay $100,000 per year from 1994 to 1998 for marketing
services. Amounts committed by the Company related to this arrangement are as
follows at December 31:
<TABLE>
<S> <C>
1996............................................... $300,000
1997............................................... 325,000
1998............................................... 325,000
--------
$950,000
========
</TABLE>
(12) SUBSEQUENT EVENTS
On June 18, 1996, the Company effected a 1-for-2.86 reverse stock split.
Accordingly, all shares and per share amounts have been adjusted to reflect the
reverse stock split as though it had occurred at the beginning of the initial
period presented. Additionally, the authorized common shares of the Company were
increased to 30,000,000.
Effective January 1996, the Board of Directors increased the number of
shares available under the Plan by 174,825 shares. In April 1996, the Board of
Directors amended and restated the Plan to, among other things, increase the
number of shares available for issuance under the Plan to 1,700,000.
Additionally, the Company adopted a Non-Employee Directors Option plan with a
total of 70,000 shares available for grant at fair market value on the grant
date. Further, the Company authorized a future Employee Stock Purchase Plan.
In June 1996, the Company entered into a marketing agreement pursuant to
which the Company may, among other things, grant options to purchase up to
366,294 shares of common stock, subject to defined terms and conditions. If
granted, options to purchase 65,488 shares of common stock will have an exercise
price of $8.18 per share and options to purchase 300,806 shares of common stock
will have an exercise price of $13.00 per share.
(13) PROFIT SHARING PLAN
The Company sponsors a profit sharing plan intended to qualify under
Section 401(k) of the Internal Revenue Code. All employees are eligible to
participate in the plan after three months of service. Employees may contribute
a portion of their salary to the plan, subject to annual limitations imposed by
the Internal Revenue Code. The Company may make matching or discretionary
contributions to the plan at the discretion of the Board of Directors, but has
made no such contribution to date. Employer contributions generally vest over
seven years.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $114,000, $67,000 and $33,000 for the years
ended December 31, 1993, 1994 and 1995 and $8,000 and $15,000 for the three
months ended March 31, 1995 and 1996.
The following is supplemental information concerning non-cash investing and
financing activities:
During 1993, the Company allowed a customer/noteholder to offset an
invoice due the Company against the amount owed on the note of $54,300.
During 1994, the Company issued 8,742 shares of common stock in
exchange for the forgiveness of $91,000 of debt. The difference between the
amount of debt forgiven and the estimated fair value of the common stock,
$71,000, was recorded as other income.
F-18
<PAGE> 69
APACHE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
During 1994, the Company entered into an agreement for the sale and
leaseback of certain equipment. The lease is classified as a capital lease
and a capital lease obligation of $202,247 was recorded.
During 1995, the Company issued 27,999 shares of Series F upon
conversion of $800,000 of convertible debt.
During 1995, the Company entered into two agreements for the sale and
leaseback of certain equipment. The leases are classified as capital leases
and a total capital lease obligation of $219,262 was recorded.
During 1995, the Company issued warrants to acquire common stock in
connection with the issuance of convertible notes payable and Series E. The
estimated value of the warrants is included in additional paid-in capital
and $787,166 of debt discount was recorded.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments included in current assets and current liabilities
include cash and cash equivalents, accounts and trade receivables and accounts
payable and accrued expenses. The carrying amounts of these instruments
approximate fair value because of the short maturity of those instruments.
Notes payable-stockholders and obligations under capital leases have
carrying values that approximate fair values as the significant notes are
carried net of imputed interest calculated at approximate current market rates.
F-19
<PAGE> 70
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 5
The Company............................. 12
Use of Proceeds......................... 12
Dividend Policy......................... 12
Capitalization.......................... 13
Dilution................................ 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................... 16
Business................................ 22
Recent Developments..................... 32
Management.............................. 33
Certain Transactions.................... 38
Principal Stockholders.................. 39
Description of Capital Stock............ 41
Shares Eligible for Future Sale......... 43
Underwriting............................ 45
Legal Matters........................... 46
Experts................................. 46
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES
APACHE LOGO
APACHE Medical
Systems, Inc.
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
COWEN & COMPANY
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting compensation, are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................... $ 11,103
National Association of Securities Dealers, Inc. filing fee....................... 3,720
Nasdaq National Market entry fee.................................................. 33,872
Blue Sky fees and expenses........................................................ 20,000
Legal fees and expenses........................................................... 185,000
Accountants' fees and expenses.................................................... 180,000
Printing and engraving expenses................................................... 195,000
Transfer Agent and Registrar fees and expenses.................................... 6,000
Miscellaneous..................................................................... 115,305
--------
Total........................................................................ $750,000
========
</TABLE>
The Company will bear all of the foregoing fees and expenses.
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the Nasdaq National Market entry fee, are estimates.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Registrant's Amended and Restated Certificate of Incorporation provides
that the Registrant shall, subject to certain limitations, indemnify its
directors and officers against expenses (including attorneys' fees, judgments,
fines and certain settlements) actually and reasonably incurred by them in
connection with any suit or proceeding to which they are a party so long as they
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to a criminal action
or proceeding, so long as they had no reasonable cause to believe their conduct
to have been unlawful.
Section 102 of the Delaware General Corporation Law permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. The enabling
statute provides, however, that liability for breaches of the duty of loyalty,
acts or omissions not in good faith or involving intentional misconduct, or
knowing violation of the law, and the unlawful purchase or redemption of stock
or payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. The Registrant's Amended and
Restated Certificate of Incorporation includes a provision which eliminates, to
the fullest extent permitted, director liability for monetary damages for
breaches of fiduciary duty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company sold the following securities that were not registered under the
Securities Act:
On January 24, 1994, the Company sold an aggregate of 209,994 shares of
Series D Convertible Preferred Stock for net proceeds of $5,721,596.
In August 1994, the Company issued 8,742 shares of Common Stock to George
Washington University in consideration of certain contractual commitments and
agreements as to certain methodologies and databases transferred to the Company.
On December 28, 1995, the Company sold an aggregate of 174,995 shares of
Series E Convertible Preferred Stock for net proceeds of $4,672,395.
II-1
<PAGE> 72
On December 28, 1995, the Company issued 27,999 shares of Series F
Convertible Preferred Stock in conversion of promissory notes in the principal
amount of $800,000.
In August 1995, the Company issued 2,623 shares of Common Stock to a former
employee who exercised a vested stock option at the per share exercise price of
$2.86. In February 1996, the Company issued 117 shares of Common Stock to a
former employee who exercised a vested stock option at the per share exercise
price of $8.18. In May 1996, the Company issued 671 shares of Common Stock to a
former employee who exercised a vested stock option at the per share exercise
price of $8.18.
Since January 1, 1993, the Company has issued to various directors,
employees and advisers of the Company, pursuant to the Company's Stock Option
Plan, options to purchase 399,297 shares of Common Stock at exercise prices
ranging from $7.26 to $8.18.
In connection with the Company's private placement of Series E Convertible
Preferred Stock, the Company issued a warrant to the placement agent, Allen &
Company Incorporated ("Allen"), which gives Allen the right to purchase 36,713
shares of Common Stock at a price of $8.18 per share. Additionally, the Company
issued warrants to purchase an aggregate of up to 349,653 shares of Common Stock
at $1.43 per share in February 1995 and April 1995 and 73,356 shares of Common
Stock at $8.18 per share to four lenders in connection with loan transactions
consummated in August 1995.
In April 1994, the Company issued to Cleveland Clinic Foundation an option
to purchase up to 65,735 shares of Common Stock at a price of $4.29 per share in
connection with the acquisition of cardiovascular surgery know-how and a related
database.
No underwriters were involved in any of the foregoing sales of securities.
Each of the foregoing issuances was made in reliance upon an exemption from the
registration provisions of the Securities 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 shares of
Common Stock issued pursuant to the Company's Stock Option Plan, Rule 701 of the
Securities Act as being pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS -- See Index to Exhibits.
(b) FINANCIAL STATEMENT SCHEDULES
VIII Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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
against 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.
II-2
<PAGE> 73
The undersigned registrant hereby undertakes that:
(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 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.
II-3
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of McLean,
State of Virginia, on the 21st day of June, 1996.
APACHE MEDICAL SYSTEMS, INC.
By: /s/ GERALD E. BISBEE, JR.
------------------------------------
Gerald E. Bisbee, Jr.
Chairman and Chief Executive Officer
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 indicated on June 21, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- --------------------------------------------
<C> <S>
/s/ GERALD E. BISBEE, JR. Chairman and Chief Executive Officer
- --------------------------------------------
Gerald E. Bisbee, Jr.
/s/ BRION D. UMIDI Vice President, Finance and Administration,
- -------------------------------------------- Treasurer (Chief Financial and Accounting
Brion D. Umidi Officer)
* Director
- --------------------------------------------
Edward J. Connors
* Director
- --------------------------------------------
Thomas W. Hodson
* Director
- --------------------------------------------
William A. Knaus
* Director
- --------------------------------------------
Lawrence S. Lewin
Director
- --------------------------------------------
Neal L. Patterson
* Director
- --------------------------------------------
Stephen W. Ritterbush
* Director
- --------------------------------------------
Francis G. Ziegler
*/s/ GERALD E. BISBEE, JR.
- --------------------------------------------
Gerald E. Bisbee, Jr., as attorney-in-fact
pursuant to power of attorney granted in
Registration Statement No. 333-4106,
April 26, 1996.
</TABLE>
S-1
<PAGE> 75
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
CHARGED CHARGED
BALANCE AT TO COSTS AND TO OTHER BALANCE AT
DESCRIPTION BEGINNING OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------- ------------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable
1993......................... $ 64,500 -- -- -- $ 64,500
1994......................... 64,500 $ 78,500 -- -- 143,000
1995......................... 143,000 126,300 -- $ 78,500 190,800
Deferred tax assets valuation
allowance
1993......................... -- -- $2,221,500 -- 2,221,500
1994......................... 2,221,500 -- 3,512,500 -- 5,734,000
1995......................... 5,734,000 -- 1,857,900 -- 7,882,500
</TABLE>
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTIONS PAGE
- ------- ------------------------------------------------------------------------------------ ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation
3.2 * By-laws
4.1 * Specimen Common Stock Certificate
5.1 Opinion of Gardner, Carton & Douglas
10.1 * APACHE Medical Systems, Inc. Employee Stock Option Plan
10.2 * APACHE Medical Systems, Inc. Non-Employee Director Option Plan
10.3 * Sublease Agreement between the Company and First Union National Bank of Virginia,
dated March 17, 1994.
10.4 * Registration Agreement between the Company and Certain Stockholders, dated December
28, 1995.
10.5 * Form of Warrant Agreement relating to warrants issued in 1995
10.6 * Warrant Agreement between the Company and Venture Fund of Washington dated May 13,
1991
10.7 * Loan Agreement between the Company and Benefit Capital Management Corporation, dated
February 24, 1995
10.8 * Licensing Agreement between the Company and Cerner Corporation, dated February 2,
1995
10.9 * Nonqualified Stock Option Agreement between the Company and The Cleveland Clinic
Foundation, dated August 19, 1994
10.10*+ Agreement between the Company and The George Washington University, dated August 19,
1994
10.11*+ Letter Agreement between the Company and the Northern New England Cardiovascular
Disease Study Group, dated March 13, 1995
10.12+ Licensing Agreement between the Company and Quality Information Management
Corporation, dated March 24, 1994
10.13+ Marketing Agreement between the Company and American Healthcare Systems Purchasing
Partners, L.P., dated as of June 3, 1996
11.1 * Statement re: Computation of Per Share Earnings
21.1 * List of Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Gardner, Carton & Douglas (included in Exhibit 5.1)
24.1 * Powers of Attorney (included on signature page)
27.1 * Financial Data Schedule
</TABLE>
- -------------------------
* Previously filed.
+ Confidential treatment has been requested for a portion of this exhibit.
E-1
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares
APACHE Medical Systems, Inc.
Common Stock
UNDERWRITING AGREEMENT
___________, 1996
COWEN & COMPANY
LEHMAN BROTHERS INC.
VOLPE, WELTY & COMPANY
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Dear Sirs:
1. Introductory. APACHE Medical Systems, Inc., a
Delaware corporation (the "Company"), proposes to sell, pursuant to the terms
of this Agreement, to the several underwriters named in Schedule A hereto (the
"Underwriters" or, each, an "Underwriter"), an aggregate of 2,000,000 shares of
Common Stock, $.01 par value (the "Common Stock") of the Company. The
aggregate of 2,000,000 shares so proposed to be sold is hereinafter referred to
as the "Firm Stock". The Company also proposes to sell to the Underwriters,
upon the terms and conditions set forth in Section 3 hereof, up to an
additional 300,000 shares of Common Stock (the "Optional Stock") . The Firm
Stock and the Optional Stock are hereinafter collectively referred to as the
"Stock". Cowen & Company ("Cowen"), Lehman Brothers Inc. ("Lehman") and
Volpe, Welty & Company ("Volpe") are acting as representatives of the several
Underwriters and in such capacity are hereinafter referred to as the
"Representatives".
2. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, the several Underwriters
that:
(a) A registration statement on Form S-1 (File No.
333-4106) in the form in which it became or becomes effective, and
also in such form as it may be when any post-effective amendment
thereto shall become effective with respect to the Stock, including
any preeffective prospectuses included as part of the registration
statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Securities
Act of 1933, as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and
Exchange
<PAGE> 2
Commission (the "Commission") thereunder, copies of which have
heretofore been delivered to you, has been carefully prepared by the
Company in conformity with the requirements of the Securities Act and
has been filed with the Commission under the Securities Act; one or
more amendments to such registration statement, including in each case
an amended preeffective prospectus, copies of which amendments have
heretofore been delivered to you, have been so prepared and filed. If
it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed
and must be declared effective before the offering of the Stock may
commence, the term "Registration Statement" as used in this Agreement
means the registration statement as amended by said post-effective
amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement relating to
the Stock that is filed and declared effective pursuant to Rule 462(b)
under the Securities Act. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the
Registration Statement, or, (A) if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A
under the Securities Act and such information is included in a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information
and other information contained in the prospectus filed with the
Commission pursuant to Rule 424 (b) and (B) if prospectuses that meet
the requirements of Section 10(a) of the Securities Act are delivered
pursuant to Rule 434 under the Securities Act, then (i) the term
"Prospectus" as used in this Agreement means the "prospectus subject
to completion" (as such term is defined in Rule 434 (g) under the
Securities Act) as supplemented by (a) the addition of Rule 430A
information or other information contained in the form of prospectus
delivered pursuant to Rule 434 (b) (2) under the Securities Act or (b)
the information contained in the term sheets described in Rule 434 (b)
(3) under the Securities Act, and (ii) the date of such prospectuses
shall be deemed to be the date of the term sheets. The term
"Preeffective Prospectus" as used in this Agreement means the
prospectus subject to completion in the form included in the
Registration Statement at the time of the initial filing of the
Registration Statement with the Commission, and as such prospectus
shall have been amended from time to time prior to the date of the
Prospectus.
(b) The Commission has not issued or threatened to issue
any order preventing or suspending the use of any Preeffective
Prospectus, and, at its date of issue, each Preeffective Prospectus
conformed in all material respects with the requirements of the
Securities Act and did not include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and, when
the Registration Statement became or becomes effective and at all
times subsequent thereto up to and including the Closing Dates (as
hereinafter defined), the Registration Statement and the Prospectus
and any amendments or supplements thereto
2
<PAGE> 3
contained and will contain all material statements and information
required to be included therein by the Securities Act and conformed
and will conform in all material respects to the requirements of
the Securities Act and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, included or
will include any untrue statement of a material fact or omitted or
will omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the foregoing representations, warranties and agreements
shall not apply to information contained in or omitted from any
Preeffective Prospectus or the Registration Statement or the
Prospectus or any such amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter, directly or through you,
specifically for use in the preparation thereof; there is no
franchise, lease, contract, agreement or document required to be
described in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement which is not described
therein or filed as required; and all descriptions of any such fran-
chises, leases, contracts, agreements or documents contained in the
Registration Statement are accurate and complete descriptions of such
documents in all material respects.
(c) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and
except as set forth or contemplated in the Prospectus, neither the
Company nor its subsidiary has incurred any liabilities or
obligations, direct or contingent, nor entered into any transactions
not in the ordinary course of business, and there has not been any
material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of
operations of the Company and its subsidiary considered as a whole, or
any change in the capital stock, short-term or long-term debt of the
Company and its subsidiary considered as a whole.
(d) The financial statements, together with the related
notes and schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present, on the basis stated in the
Registration Statement, the financial position and the results of
operations and changes in financial position of the Company and its
subsidiary at the respective dates and for the respective periods
therein specified. Such statements and related notes and schedules
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis. The selected financial and
statistical data set forth in the Prospectus under the caption
"Selected Consolidated Financial Data" fairly present, on the basis
stated in the Registration Statement, the information set forth
therein.
(e) KPMG Peat Marwick LLP, who have expressed their
opinions on the audited financial statements and related schedules
included in the Registration Statement
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<PAGE> 4
and the Prospectus, are independent public accountants as required by
the Securities Act and the Rules and Regulations.
(f) The Company and its subsidiary have been duly
organized and are validly existing and in good standing as
corporations under the laws of their respective jurisdictions of
organization, with power and authority (corporate and other) to own or
lease their businesses as described in the Prospectus; each of the
Company and its subsidiary are in possession of and operating in
compliance with all franchises, grants, authorizations, licenses,
permits, easements, consents, certificates and orders required for the
conduct of its business, all of which are valid and in full force and
effect; and the Company and its subsidiary are duly qualified to do
business and in good standing as foreign corporations in all other
jurisdictions where their ownership or leasing of properties or the
conduct of their businesses requires such qualification, other than
where the failure to be so qualified or in good standing would not
have a material adverse effect on the Company and its subsidiary. The
Company and its subsidiary have all requisite power and authority, and
all necessary consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all
public regulatory or governmental agencies and bodies to own, lease
and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the
Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. The Company owns or controls, directly
or indirectly, only the following corporation: Critical Audit, Ltd.
(g) The Company's authorized and outstanding capital
stock is on the date hereof, and will be on the Closing Dates (as
hereinafter defined), as set forth under the caption "Description of
Capital Stock" in the Prospectus; the outstanding shares of capital
stock of the Company conform to the description thereof in the
Prospectus and have been duly authorized and validly issued and are
fully paid and nonassessable, and have been issued in compliance with
all federal and state securities laws and were not issued in violation
of or subject to any preemptive rights or similar rights to subscribe
for or purchase securities and conform to the description thereof
contained in the Prospectus. The (i) 3,294,519 shares of Common Stock
to be issued upon the conversion of all outstanding shares of
preferred stock of the Company, (ii) 122,257 shares of Common Stock to
be issued upon the conversion of $1,000,000 of convertible debt of the
Company, and (iii) [56,413] shares of Common Stock to be issued as the
payment of [$733,350] of accumulated preferred stock dividends, all to
be effected upon the consummation of this offering, have been duly and
validly authorized and when issued, will be duly and validly issued,
fully paid, and nonassessable and free of any preemptive or similar
rights. Except as disclosed in and or contemplated by the Prospectus
and the financial statements of the Company and related notes thereto
included in the Prospectus, the Company does not have outstanding any
options or warrants to
4
<PAGE> 5
purchase, or any preemptive rights or other rights to subscribe for or
to purchase any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock
or any such options, rights, convertible securities or obligations.
The description of the Company's Stock Option Plan and the
Non-Employee Director Option Plan, or arrangements, and the options or
other rights granted or exercised thereunder, as set forth in the
Prospectus, accurately and fairly presents the information required to
be shown with respect to such plans, arrangements, options and rights.
All outstanding shares of capital stock of the Company's subsidiary
have been duly authorized and validly issued, and are fully paid and
nonassessable and (except for directors' qualifying shares) are owned
directly by the Company free and clear of any liens, encumbrances,
equities or claims.
(h) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will
be duly and validly issued, fully paid and nonassessable and free of
any preemptive or similar rights and will conform to the description
thereof in the Prospectus.
(i) There are no legal or governmental proceedings
pending to which the Company or its subsidiary or any affiliates is a
party or of which any property of the Company or its subsidiary or any
affiliate is subject, which, if determined adversely to the Company or
its subsidiary or any such affiliate, might individually or in the
aggregate (i) prevent or adversely affect the transactions
contemplated by this Agreement, (ii) suspend the effectiveness of the
Registration Statement, (iii) prevent or suspend the use of the
Preeffective Prospectus in any jurisdiction or (iv) result in a
material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of
operations of the Company and its subsidiary considered as a whole;
and to the best of the Company's knowledge no such proceedings are
threatened or contemplated against the Company or its subsidiary or
any affiliate by governmental authorities or others. The Company is
not a party nor subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body or other
governmental agency or body. The description of the Company's
litigation under the caption "Legal Proceedings" in the Prospectus is
true and correct and complies with the Rules and Regulations.
(j) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein contemplated
(A) will not result in any violation of the provisions of the
certificate of incorporation, by-laws or other organizational
documents of the Company or its subsidiary, or any law, order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or its subsidiary or any of their
properties or assets, (B) will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement
or other agree-
5
<PAGE> 6
ment or instrument to which the Company or its subsidiary is a party
or by which the Company or the subsidiary or any of the property or
assets of the Company or its subsidiary is subject or (C) will not
result in the creation or imposition of a lien upon any property or
assets of the Company and its subsidiary.
(k) No consent, approval, authorization or order of any
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated by this Agreement,
except such consents approvals, or authorizations which have been
obtained, such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or under the Securities Act or
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or securities or "Blue Sky" laws of any jurisdiction in connection
with the purchase and distribution of the Stock by the Underwriters.
(l) The Company has the full corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder (including to issue, sell and deliver the Stock), and this
Agreement has been duly and validly authorized, executed and delivered
by the Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
(m) The Company and its subsidiary are in all material
respects in compliance with, and conduct their businesses in
conformity with, all applicable federal, state, local and foreign
laws, rules and regulations (including but not limited to the Foreign
Corrupt Practices Act) or any court or governmental agency or body; to
the knowledge of the Company, otherwise than as set forth in the
Registration Statement and the Prospectus, no prospective change in
any of such federal or state laws, rules or regulations has been
adopted which, when made effective, would have a material adverse
effect on the operations of the Company and its subsidiary.
(n) The Company and its subsidiary have filed all
necessary federal, state, local and foreign income, payroll, franchise
and other tax returns and have paid all taxes shown as due thereon or
with respect to any of their properties, and there is no tax
deficiency that has been, or to the knowledge of the Company is likely
to be, asserted against the Company or its subsidiary or any of their
respective properties or assets that would adversely affect the
financial position, business or operations of the Company and its
subsidiary.
(o) No person or entity has the right to require
registration of shares of Common Stock or other securities of the
Company because of the filing or effectiveness of the Registration
Statement or otherwise, except for persons and entities who have
expressly waived such right or who have been given proper notice and
have failed to exercise such right within the time or times required
under the terms and conditions of such right.
6
<PAGE> 7
(p) Neither the Company nor any of its officers,
directors or affiliates has taken or will take, directly or
indirectly, any action designed or intended to stabilize or manipulate
the price of any security of the Company, or which caused or resulted
in, or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any security
of the Company.
(q) The Company has provided you with all financial
statements since inception to the date hereof that are available to
the officers of the Company, including financial statements for the
three months ended March 31, 1996.
(r) The Company and its subsidiary own or possess the
right to use all patents, trademarks, trademark registrations, service
marks, service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights described in the Prospectus as
being owned by them or any of them or necessary for the conduct of
their respective businesses, except such as would not have a material
adverse effect on the Company and its subsidiary and the Company is
not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and its subsidiary with respect to
the foregoing. The Company's business as now conducted and as
proposed to be conducted does not infringe or conflict with in any
material respect patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses or other intellectual property or
franchise right of any person. Except as described in the Prospectus,
no claim has been made against the Company alleging the infringement
by the Company of any patent, trademark, service mark, trade name,
copyright, trade secret, license in or other intellectual property
right or franchise right of any person which, if the subject of an
unfavorable decision, ruling or finding would have a material adverse
effect on the financial position, business or operations of the
Company.
(s) The Company and its subsidiary have performed all
material obligations required to be performed by them under all
contracts required by Item 601(b)(10) of Regulation S-K under the
Securities Act to be filed as exhibits to the Registration Statement,
and neither the Company nor its subsidiary nor any other party to such
contract is in default under or in breach of any such obligations.
Neither the Company nor its subsidiary has received any notice of such
default or breach.
(t) The Company is not involved in any labor dispute nor
is any such dispute threatened. The Company is not aware that (A) any
executive, key employee or significant group of employees of the
Company or its subsidiary plans to terminate employment with the
Company or its subsidiary or (B) any such executive or key employee is
subject to any noncompete, nondisclosure, confidentiality, employment,
consulting or similar agreement that would be violated by the present
or proposed business activities of the Company and its subsidiary.
Neither the Company nor its subsidiary has or expects to have any
liability for any prohibited transaction or funding
7
<PAGE> 8
deficiency or any complete or partial withdrawal liability with
respect to any pension, profit sharing or other plan which is subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), to which the Company or its subsidiary makes or ever has
made a contribution and in which any employee of the Company or its
subsidiary is or has ever been a participant. With respect to such
plans, the Company and its subsidiary are in compliance in all
material respects with all applicable provisions of ERISA.
(u) The Company has obtained the written agreement
described in Section 8(j) of this Agreement from each of its officers,
directors and holders of Common Stock listed on Schedule C hereto.
(v) The Company and its subsidiary have, and the Company
and its subsidiary as of the Closing Dates (as hereinafter defined)
will have, good and marketable title in fee simple to all real
property and good and marketable title to all personal property owned
or proposed to be owned by them which is material to the business of
the Company or of its subsidiary, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as would not have a material adverse effect on the
Company and its subsidiary considered as a whole; and any real
property and buildings held under lease by the Company and its
subsidiary or proposed to be held after giving effect to the
transactions described in the Prospectus are, or will be as of the
Closing Dates, held by them under valid, subsisting and enforceable
leases with such exceptions as would not have a material adverse
effect on the Company and its subsidiary considered as a whole, in
each case except as described in or contemplated by the Prospectus.
(w) The Company and its subsidiary are insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are customary in the businesses in
which they are engaged or propose to engage after giving effect to the
transactions described in the Prospectus; and neither the Company nor
its Subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue their business at a cost that would not
materially and adversely affect the condition, financial or otherwise,
or the earnings, business or operations of the Company and its
subsidiary considered as a whole, except as described in or
contemplated by the Prospectus.
(x) Other than as contemplated by this Agreement, there
is no broker, finder or other party that is entitled to receive from
the Company any brokerage or finder's fee or other fee or commission
as a result of any of the transactions contemplated by this Agreement.
8
<PAGE> 9
(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) To the Company's knowledge, neither the Company nor
its subsidiary nor any employee or agent of the Company or its
subsidiary has made any payment of funds of the Company or its
subsidiary or received or retained any payment in violation of any
law, rule or regulation, which payment, receipt or retention of funds
is of a character required to be disclosed in the Prospectus.
(aa) Neither the Company nor its subsidiary is or, after
application of the net proceeds of this offering as described under
the caption "Use of Proceeds" in the Prospectus, will become an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended.
(bb) Each certificate signed by an officer of the Company
and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company as
to the matters covered thereby.
3. Purchase by and Sale and Delivery to, Underwriters --
Closing Dates. The Company agrees to sell to the Underwriters the Firm Stock;
and on the basis of the representations, warranties, covenants and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase the Firm Stock from
the Company, the number of shares of Firm Stock to be purchased by each
Underwriter being set opposite its name in Schedule A, subject to adjustment in
accordance with Section 12 hereof.
The purchase price per share to be paid by the Underwriters to
the Company will be $[ ] per share (the "Purchase Price").
The Company will deliver the Firm Stock to the Representatives
for the respective accounts of the several Underwriters in the form of
definitive certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or
prior to 12:00 Noon, New York Time, on the second full business day preceding
the First Closing Date (as defined below) or, if no such direction is received,
in the names of the respective Underwriters or in such other names as Cowen may
designate
9
<PAGE> 10
(solely for the purpose of administrative convenience) and in such
denominations as Cowen may determine, against payment of the aggregate Purchase
Price therefor by certified or official bank check or checks in Clearing House
funds (next day funds), payable to the order of the Company, all at the offices
of Skadden, Arps, Slate, Meagher & Flom, 1440 New York Avenue, NW, Washington,
DC 20005. The time and date of the delivery and closing shall be at 10:00
A.M., New York Time, on [ ], 1996, in accordance with Rule 15c6-1
of the Exchange Act. The time and date of such payment and delivery are herein
referred to as the "First Closing Date". The First Closing Date and the
location of delivery of, and the form of payment for, the Firm Stock may be
varied by agreement between the Company and Cowen. The First Closing Date may
be postponed pursuant to the provisions of Section 12.
The Company shall make the certificates for the Stock
available to the Representatives for examination on behalf of the Underwriters
not later than 10:00 A.M., New York Time, on the business day preceding the
First Closing Date at the offices of Cowen & Company, Financial Square, New
York, New York 10005.
It is understood that Cowen or Lehman or Volpe, individually
and not as Representatives of the several Underwriters, may (but shall not be
obligated to) make payment to the Company on behalf of any Underwriter or
Underwriters, for the Stock to be purchased by such Underwriter or
Underwriters. Any such payment by Cowen, Lehman or Volpe, shall not relieve
such Underwriter or Underwriters from any of its or their other obligations
hereunder.
The several Underwriters agree to make an initial public
offering of the Firm Stock at the initial public offering price as soon after
the effectiveness of the Registration Statement as in their judgment is
advisable. The Representatives shall promptly advise the Company of the making
of the initial public offering.
For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Company hereby grants to the Underwriters an option to
purchase, severally and not jointly, up to the aggregate number of shares of
Optional Stock set forth on Schedule B hereto. The price per share to be paid
for the Optional Stock shall be the Purchase Price. The option granted hereby
may be exercised as to all or any part of the Optional Stock at any time, and
from time to time, not more than thirty (30) days subsequent to the effective
date of this Agreement. No Optional Stock shall be sold and delivered unless
the Firm Stock previously has been, or simultaneously is, sold and delivered.
The option granted hereby may be exercised by the Underwriters
by giving written notice from Cowen to the Company setting forth the number of
shares of the Optional Stock to be purchased by them and the date and time for
delivery of and payment for the Optional Stock. Each date and time for
delivery of and payment for the Optional Stock (which may be the First Closing
Date, but not earlier) is herein called the "Option Closing Date" and shall in
no event be earlier than two (2) business days nor later than ten (10) business
days
10
<PAGE> 11
after written notice is given. (The Option Closing Date and the First Closing
Date are herein called the "Closing Dates".) All purchases of Optional Stock
from the Company shall be made on a pro rata basis. Optional Stock shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Stock set forth opposite such Underwriter's name in
Schedule A hereto bears to the total number of shares of Firm Stock (subject to
adjustment by the Underwriters to eliminate odd lots). Upon exercise of the
option by the Underwriters, the Company agrees to sell to the Underwriters the
number of shares of Optional Stock set forth in the written notice of exercise
and the Underwriters agree, severally and not jointly and subject to the terms
and conditions herein set forth, to purchase the number of such shares
determined as aforesaid.
The Company will deliver the Optional Stock to the
Underwriters (in the form of definitive certificates) issued in such names and
in such denominations as the Representatives may direct by notice in writing to
the Company given at or prior to 12:00 Noon, New York Time, on the second full
business day preceding the Option Closing Date or, if no such direction is
received, in the names of the respective Underwriters or in such other names as
Cowen may designate (solely for the purpose of administrative convenience) and
in such denominations as Cowen may determine, against payment of the aggregate
Purchase Price therefor by certified or official bank check or checks in
Clearing House funds (next day funds), payable to the order of the Company, all
at the offices of Skadden, Arps, Slate, Meagher & Flom, 1440 New York Avenue,
NW, Washington, DC 20005. The Option Closing Date and the location of delivery
of, and the form of payment for, the Option Stock may be varied by agreement
between the Company and Cowen. The Option Closing Date may be postponed
pursuant to the provisions of Section 12.
4. Covenants and Agreements of the Company. The Company
covenants and agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the
Representatives have determined not to proceed pursuant to Rule 430A
of the Rules and Regulations, use its best efforts to cause the
Registration Statement to become effective, (ii) if the Company and
the Representatives have determined to proceed pursuant to Rule 430A,
use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and Rule
424 of the Rules and Regulations and (iii) if the Company and the
Representatives have determined to deliver Prospectuses pursuant to
Rule 434 of the Rules and Regulations, to use its best efforts to
comply with all the applicable provisions thereof. The Company will
advise the Representatives promptly as to the time at which the
Registration Statement becomes effective, will advise the
Representatives promptly of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose, and will use its
best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible the lifting thereof, if issued. The
Company will advise the Representatives promptly of the receipt of any
comments of the Com-
11
<PAGE> 12
mission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to
the Registration Statement or supplement to the Prospectus which shall
not previously have been submitted to the Representatives a reasonable
time prior to the proposed filing thereof or to which the
Representatives shall reasonably object in writing or which is not in
compliance with the Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the
commission, promptly upon the request of the Representatives, any
amendments or supplements to the Registration Statement or the
Prospectus which in the opinion of the Representatives may be
necessary to enable the several Underwriters to continue the
distribution of the Stock and will use its best efforts to cause the
same to become effective as promptly as possible.
(c) If at any time after the effective date of the
Registration Statement when a prospectus relating to the Stock is
required to be delivered under the Securities Act any event relating
to or affecting the Company or its subsidiary occurs as a result of
which the Prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact, or omit to state any
material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if it
is necessary at any time to amend the Prospectus to comply with the
Securities Act, the Company will promptly notify the Representatives
thereof and will prepare an amended or supplemented prospectus which
will correct such statement or omission; and in case any Underwriter
is required to deliver a prospectus relating to the Stock nine (9)
months or more after the effective date of the Registration Statement,
the Company upon the request of the Representatives and at the expense
of such Underwriter will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to the Representatives, at
or before the Closing Dates, signed copies of the Registration
Statement, as originally filed with the Commission, and all amendments
thereto including all financial statements and exhibits thereto, and
will deliver to the Representatives such number of copies of the
Registration Statement, including such financial statements, but
without exhibits, and all amendments thereto, as the Representatives
may reasonably request. The Company will deliver or mail to or upon
the order of the Representatives, from time to time until the
effective date of the Registration Statement, as many copies of the
Preeffective Prospectus as the Representatives may reasonably request.
The Company will deliver or mail to or upon the order of the
Representatives on the date of the initial public offering, and
thereafter from time to time during the period when delivery of a
prospectus relating to the Stock is required under the Securities Act,
as many copies of the Prospectus, in final form or as thereafter
amended or supplemented as the Repre-
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<PAGE> 13
sentatives may reasonably request; provided, however, that the
expense of the preparation and delivery of any prospectus required for
use nine (9) months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to
deliver such prospectus.
(e) The Company will make generally available to its
shareholders as soon as practicable, but not later than fifteen (15)
months after the effective date of the Registration Statement, an
earnings statement which will be in reasonable detail (but which need
not be audited) and which will comply with Section 11(a) of the
Securities Act, covering a period of at least twelve (12) months
beginning after the "effective date" (as defined in Rule 158 under the
Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives
to enable the Stock to be registered or qualified for offering
and sale by the Underwriters and by dealers under the securities laws
of such jurisdictions as the Representatives may designate and at the
request of the Representatives will make such applications and furnish
such consents to service of process or other documents as may be
required of it as the issuer of the Stock for that purpose; provided,
however, that the Company shall not be required to qualify to do
business or to file a general consent (other than that arising out of
the offering or sale of the Stock) to service of process in any such
jurisdiction where it is not now so subject. The Company will, from
time to time, prepare and file such statements and reports as are or
may be required of it as the issuer of the Stock to continue such
qualifications in effect for so long a period as the Representatives
may reasonably request for the distribution of the Stock. The Company
will advise the Representatives promptly after the Company becomes
aware of the suspension of the qualifications or registration of (or
any such exception relating to) the Common Stock of the Company for
offering, sale or trading in any jurisdiction or of any initiation or
threat of any proceeding for any such purpose, and in the event of the
issuance of any orders suspending such qualifications, registration or
exception, the Company will, with the cooperation of the
Representatives use its best efforts to obtain the withdrawal thereof.
(g) The Company will furnish to its shareholders annual
reports containing financial statements certified by independent
public accountants and with quarterly summary financial information in
reasonable detail which may be unaudited. During the period of five
(5) years from the date hereof, the Company will deliver to the
Representatives and, upon request, to each of the other Underwriters,
as soon as they are available, copies of each annual report of the
Company and each other report furnished by the Company to its
shareholders and will deliver to the Representatives, (i) as soon as
they are available, copies of any other reports (financial or other)
which the Company shall publish or otherwise make available to any of
its shareholders as such, (ii) as soon as they are available, copies
of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange and (iii)
13
<PAGE> 14
from time to time such other information concerning the Company as you
may request. So long as the Company's subsidiary is active, such
financial statements will be on a consolidated basis to the extent the
accounts of the Company and its subsidiary are consolidated in reports
furnished to its shareholders generally.
(h) The Company will use its best efforts to cause the
Stock to be listed, subject to official notice of issuance, on the
Nasdaq National Market, concurrently with the effectiveness of the
Registration Statement.
(i) The Company will maintain a transfer agent and
registrar for its Common Stock.
(j) The Company will not offer, sell, assign, transfer,
encumber, contract to sell or otherwise dispose of any shares of
Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock (including, without limitation, Common
Stock of the Company which may be deemed to be beneficially owned by
the undersigned in accordance with the Rules and Regulations) during
the 180 days following the date on which the price of the Common Stock
to be purchased by the Underwriters is set, other than the Company's
sale of Common Stock hereunder and the Company's issuance of Common
Stock upon the exercise of warrants and stock options which are
presently outstanding and described in the Prospectus; except that the
Company may grant options to purchase shares of Common Stock, provided
that such options are not exercisable within such 180-day period.
(k) Prior to filing with the Commission any reports on
Form SR pursuant to Rule 463 of the Rules and Regulations, the Company
will furnish a copy thereof to the counsel for the Underwriters and
receive and consider its comments thereon, and will deliver promptly
to the Representatives a signed copy of each report on Form SR filed
by it with the Commission.
(l) The Company will apply the net proceeds from the sale
of the Stock as set forth in the description under "Use of Proceeds"
in the Prospectus, which description complies in all respects with the
requirements of Item 504 of Regulation S-K.
(m) The Company will supply you with copies of all
correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Stock under the
Securities Act.
(n) Prior to the Closing Dates the Company will furnish
to you, as soon as they have been prepared, copies of any unaudited
interim consolidated financial statements of the Company and its
subsidiary for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
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(o) Prior to the Closing Dates, the Company will issue no
press release or other communications directly or indirectly and hold
no press conference with respect to the Company or its subsidiary, the
financial condition, results of operations, business, prospects,
assets or liabilities of any of them, or the offering of the Stock,
without your prior written consent. For a period of twelve (12)
months following the Closing Date, the Company will use its best
efforts to provide to you copies of each press release or other public
communications with respect to the financial condition, results of
operations, business, prospects, assets or liabilities of the Company
at least twenty-four (24) hours prior to the public issuance thereof
or such longer advance period as may reasonably be practicable.
(p) During the period of five (5) years hereafter, the
Company will furnish to the Representatives, and upon request of the
Representatives, to each of the Underwriters: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as
of the close of such fiscal year and statements of income,
stockholder's equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public accountants; (ii)
as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q,
Current Report on Form 8-K or other report filed by the Company with
the Commission, or the NASD or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock.
5. Payment of Expenses. (a) The Company will pay
(directly or by reimbursement) all costs, fees and expenses incurred in
connection with or incident to the performance of its obligations under this
Agreement and in connection with the transactions contemplated hereby,
including but not limited to (i) all expenses and taxes incident to the
issuance and delivery of the Stock to the Representatives; (ii) all expenses
incident to the registration of the Stock under the Securities Act; (iii) the
costs of preparing stock certificates (including printing and engraving costs);
(iv) all fees and expenses of the registrar and transfer agent of the Stock;
(v) all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Stock to the Underwriters; (vi) fees and expenses of
the Company's counsel and the Company's independent accountants; (vii) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preeffective Prospectus and the Prospectus (including all exhibits and
financial statements) and all amendments and supplements provided for herein,
the "Agreement Among Underwriters" between the Representatives and the
Underwriters, the Master Selected Dealers' Agreement, the Underwriters'
Questionnaire and the Blue Sky memoranda and this Agreement; (viii) all filing
fees, reasonable attorneys fees' and expenses incurred by the Company or the
Underwriters in connection with exemptions from the qualifying or registering
(or obtaining qualification or registration of) all or any part of the Stock
for offer and sale and determination of its eligibility for investment under
the Blue Sky or other securities laws of such jurisdictions as the
Representatives may designate; (ix) all fees
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<PAGE> 16
and expenses paid or incurred in connection with filings made with the NASD;
and (x) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section.
(b) In addition to their other obligations under Section
6(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising out of
or based upon (i) any statement or omission or any alleged statement or
omission, (ii) any act or failure to act or any alleged act or failure to act
or (iii) any breach or inaccuracy in its representations and warranties, it
will reimburse each Underwriter on a quarterly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Company's obligation to reimburse each Underwriter for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter shall
promptly return it to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by
[ ], New York, New York (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter in a timely manner as provided
below shall bear interest at the Prime Rate from the due date for such
reimbursement. This expense reimbursement agreement will be in addition to any
other liability which the Company may otherwise have. The request for
reimbursement will be sent to the Company.
(c) In addition to its other obligations under Section
6(b) hereof, each Underwriter severally agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in Section 6(b) hereof which relates
to information furnished by the Underwriters to the Company, it will reimburse
the Company (and, to the extent applicable, each officer, director, or
controlling person) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, or controlling person) for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director, or controlling person)
shall promptly return it to the Underwriters together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
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<PAGE> 17
(d) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in paragraph (b)
and/or (c) of this Section 5, including the amounts of any requested
reimbursement payments and the method of determining such amounts, shall be
settled by arbitration conducted under the provisions of and pursuant to the
provisions of the Constitution and Rules of the Board of Governors of the New
York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of
the NASD. Any such arbitration must be commenced by service of a written
demand for arbitration or written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in paragraph (b) and/or (c) of
this Section 5 and would not resolve the ultimate propriety or enforceability
of the obligation to reimburse expenses which is created by the provisions of
Section 6.
6. Indemnification and Contribution. (a) The Company
agrees to indemnify and hold harmless each Underwriter and each person, if any,
who controls such Underwriter within the meaning of the Securities Act and the
respective officers, directors, partners, employees, representatives and agents
of each of such Underwriter (collectively, the "Underwriter Indemnified
Parties" and, each, an "Underwriter Indemnified Party"), against any losses,
claims, damages, liabilities or expenses (including the reasonable cost of
investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, which may be based upon
the Securities Act, or any other statute or at common law, (i) on the ground or
alleged ground that any Preeffective Prospectus, the Registration Statement or
the Prospectus (or any Preeffective Prospectus, the Registration Statement or
the Prospectus as from time to time amended or supplemented) includes or
allegedly includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, unless such statement or omission was made in reliance upon,
and in conformity with, written information furnished to the Company by any
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof or (ii) for any act or failure to act or any alleged
act or failure to act by any Underwriter in connection with, or relating in any
manner to, the Stock or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, damage, liability or expense
arising out of or based upon matters covered by clause (i) above (provided that
the Company shall not be liable under this clause (ii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or expense resulted directly from any such acts
or failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct). The Company will be
entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but if
the Company elects to assume the defense, such defense shall be conducted by
counsel chosen by it and reasonably acceptable to the Underwriters. In the
event the Company elects to assume
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<PAGE> 18
the defense of any such suit and retain such counsel, any Underwriter
Indemnified Parties, defendant or defendants in the suit, may retain additional
counsel but shall bear the fees and expenses of such counsel unless (i) the
Company shall have specifically authorized the retaining of such counsel or
(ii) the parties to such suit include any such Underwriter Indemnified Parties,
and the Company and such Underwriter Indemnified Parties at law or in equity
have been advised by counsel to the Underwriters that one or more legal
defenses may be available to it or them which may not be available to the
Company, in which case the Company shall not be entitled to assume the defense
of such suit notwithstanding its obligation to bear the fees and expenses of
such counsel. This indemnity agreement is not exclusive and will be in
addition to any liability which the Company might otherwise have and shall not
limit any rights or remedies which may otherwise be available at law or in
equity to each Underwriter Indemnified Party.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively, the "Company
Indemnified Parties"), against any losses, claims, damages, liabilities or
expenses (including, unless the Underwriter or Underwriters elect to assume the
defense, the reasonable cost of investigating and defending against any claims
therefor and counsel fees incurred in connection therewith), joint or several,
which arise out of or are based in whole or in part upon the Securities Act,
the Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus, as from
time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading, but only insofar as any
such statement or omission was made in reliance upon, and in conformity with,
written information furnished to the Company by such Underwriter, directly or
through the Representatives, specifically for use in the preparation thereof;
provided, however, that in no case is such Underwriter to be liable with
respect to any claims made against any Company Indemnified Party against whom
the action is brought unless such Company Indemnified Party shall have notified
such Underwriter in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon the Company Indemnified Party, but failure to notify such
Underwriter of such claim shall not relieve it from any liability which it may
have to any Company Indemnified Party otherwise than on account of its
indemnity agreement contained in this paragraph. Such Underwriter shall be
entitled to participate at its own expense in the defense, or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but,
if such Underwriter elects to assume the defense, such defense shall be
conducted by counsel chosen by it. In the event that any Underwriter elects to
assume the defense of any such suit and retain such counsel, the Company
Indemnified Parties and any other Underwriter or Underwriters or controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any
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<PAGE> 19
additional counsel retained by them, respectively. The Underwriter against
whom indemnity may be sought shall not be liable to indemnify any person for
any settlement of any such claim effected without such Underwriter's consent.
This indemnity agreement is not exclusive and will be in addition to any
liability which such Underwriter might otherwise have and shall not limit any
rights or remedies which may otherwise be available at law or in equity to any
Company Indemnified Party.
(c) If the indemnification provided for in this Section 6
is unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the Stock. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating defending, settling or compromising any such
claim. Notwithstanding the provisions of this subsection (c), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the shares of the Stock underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. The
Underwriters' obligations to contribute are several in proportion to their
respective underwriting obligations and not joint. No person guilty of
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<PAGE> 20
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
7. Survival of Indemnities, Representations, Warranties,
etc. The respective indemnities, covenants, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by them respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, the Company or any of
its officers or directors or any controlling person, and shall survive delivery
of and payment for the Stock.
8. Conditions of Underwriters' Obligations. The
respective obligations of the several Underwriters hereunder shall be subject
to the accuracy, at and (except as otherwise stated herein) as of the date
hereof and at and as of the Closing Dates, of the representations and
warranties made herein by the Company, to compliance at and as of the Closing
Dates by the Company with its covenants and agreements herein contained and
other provisions hereof to be satisfied at or prior to the Closing Dates, and
to the following additional conditions:
(a) The Registration Statement shall have become
effective and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been
initiated or, to the knowledge of the Company or the Representatives,
shall be threatened by the Commission, and any request for additional
information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to the reasonable satisfaction of the Representatives.
Any filings of the Prospectus, or any supplement thereto, required
pursuant to Rule 424(b) or Rule 434 of the Rules and Regulations,
shall have been made in the manner and within the time period required
by Rule 424(b) and Rule 434 of the Rules and Regulations, as the case
may be.
(b) The Representatives shall have been satisfied that
there shall not have occurred any change, on a consolidated basis,
prior to the respective Closing Dates in the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiary considered as
a whole, or any change in the capital stock, short-term or long-term
debt of the Company and its subsidiary considered as a whole, such
that (i) the Registration Statement or the Prospectus, or any
amendment or supplement thereto, contains an untrue statement of fact
which, in the opinion of the Representatives, is material, or omits to
state a fact which, in the opinion of the Representatives, is required
to be stated therein or is necessary to make the statements therein
not misleading, or (ii) it is impracticable in the reasonable judgment
of the Representatives to proceed with the public offering or purchase
the Stock as contemplated hereby.
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<PAGE> 21
(c) The Representatives shall be satisfied that no legal
or governmental action, suit or proceeding affecting the Company which
is material and adverse to the Company or which affects or may affect
the Company's ability to perform its obligations under this Agreement
shall have been instituted or threatened and there shall have occurred
no material adverse development in any existing such action, suit or
proceeding.
(d) At the time of execution of this Agreement, the
Representatives shall have received from KPMG Peat Marwick LLP,
independent certified public accountants, a letter, dated the date
hereof, in form and substance satisfactory to the Underwriters.
(e) The Representatives shall have received from KPMG
Peat Marwick LLP, independent certified public accountants, letters,
dated the Closing Dates, to the effect that such accountants reaffirm,
as of the Closing Dates, and as though made on the Closing Dates, the
statements made in the letter furnished by such accountants pursuant
to paragraph (d) of this Section 8.
(f) The Representatives shall have received from Gardner,
Carton & Douglas, counsel for the Company, an opinion, dated the
Closing Dates, to the effect set forth in Exhibit I hereto.
(g) The Representatives shall have received from Skadden,
Arps, Slate, Meagher & Flom, counsel for the Underwriters, their
opinion or opinions dated the Closing Dates with respect to the
incorporation of the Company, the validity of the Stock, the
Registration Statement and the Prospectus and such other related
matters as it may reasonably request, and the Company shall have
furnished to such counsel such documents as they may request for the
purpose of enabling them to pass upon such matters.
(h) The Representatives shall have received a
certificate, dated the Closing Dates, of the Chief Executive Officer
and the chief financial or accounting officer of the Company to the
effect that:
(i) No stop order suspending the effectiveness of
the Registration Statement has been issued, and, to the best
of the knowledge of the signers, no proceedings for that
purpose have been instituted or are pending or contemplated
under the Securities Act;
(ii) Neither any Preeffective Prospectus, as of
its date, nor the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, as of the time when
the Registration Statement became effective and at all times
subsequent thereto up to the delivery of
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<PAGE> 22
such certificate, included any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading;
(iii) Subsequent to the respective dates as of
which information is given in the Registration Statement and
the Prospectus, and except as set forth or contemplated in the
Prospectus, neither the Company nor any of its subsidiary has
incurred any material liabilities or obligations, direct or
contingent, nor entered into any material transactions not in
the ordinary course of business and there has not been any
material adverse change in the condition (financial or
otherwise), properties, business, management, prospects, net
worth or results of operations of the Company and its
subsidiary considered as a whole, or any change in the capital
stock, short-term or long-term debt of the Company and its
subsidiary considered as a whole;
(iv) The representations and warranties of the
Company in this Agreement are true and correct at and as of
the Closing Dates, and the Company has complied with all the
agreements and performed or satisfied all the conditions on
its part to be performed or satisfied at or prior to the
Closing Dates; and
(v) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as disclosed in or contemplated by the
Prospectus, (i) there has not been any material adverse change
or a development involving a material adverse change in the
condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of
the Company and its subsidiary considered as a whole; (ii) the
business and operations conducted by the Company and its
subsidiary have not sustained a loss by strike, fire, flood,
accident or other calamity (whether or not insured) of such a
character as to interfere materially with the conduct of the
business and operations of the Company and its subsidiary
considered as a whole; (iii) no legal or governmental action,
suit or proceeding is pending or threatened against the
Company which is material to the Company, whether or not
arising from transactions in the ordinary course of business,
or which may materially and adversely affect the transactions
contemplated by this Agreement; (iv) since such dates and
except as so disclosed, the Company has not incurred any
material liability or obligation, direct, contingent or
indirect, made any change in its capital stock (except
pursuant to its stock plans), made any material change in its
short-term or funded debt or repurchased or otherwise
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<PAGE> 23
acquired any of the Company's capital stock; and (v) the
Company has not declared or paid any dividend, or made any
other distribution, upon its outstanding capital stock payable
to stockholders of record on a date prior to the Closing Date.
(i) The Company shall have furnished to the
Representatives such additional certificates as the Representatives
may have reasonably requested as to the accuracy, at and as of the
Closing Dates, of the representations and warranties made herein by it
and as to compliance at and as of the Closing Dates by it with its
covenants and agreements herein contained and other provisions hereof
to be satisfied at or prior to the Closing Dates, and as to
satisfaction of the other conditions to the obligations of the
Underwriters hereunder.
(j) Cowen shall have received the written agreements of
the officers, directors and holders of Common Stock listed in
Schedule C that each will not, without the prior written consent of
Cowen, on behalf of the Representatives, offer, sell, transfer,
encumber, contract to sell, grant an option, right or warrant to
purchase or otherwise dispose (or announce any offer, sale, transfer,
encumbrance, contract to sell, grant of an option to purchase or other
disposition) of, any shares of Common Stock or any security
convertible into or exchangeable or exercisable for shares of Common
Stock (including, without limitation, Common Stock of the Company
which may be deemed to be beneficially owned by the undersigned in
accordance with the Rules and Regulations) during the 180 days
following the date of the final Prospectus.
All opinions, certificates, letters and other documents will
be in compliance with the provisions hereunder only if they are satisfactory in
form and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section shall not have been
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing or by telegram at or prior to the Closing Dates, but Cowen, on
behalf of the Representatives, shall be entitled to waive any of such
conditions.
9. Effective Date. This Agreement shall become
effective immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17
and, as to all other provisions, at 11:00 a.m. New York City time on the first
full business day following the effectiveness of the Registration Statement or
at such earlier time after the Registration Statement becomes effective as the
Representatives may determine on and by notice to the Company or by release of
any of the Stock for sale to the public. For the purposes of this Section 9,
the Stock shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Stock or upon the
release by you of telegrams (i) advising
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<PAGE> 24
Underwriters that the shares of Stock are released for public offering or (ii)
offering the Stock for sale to securities dealers, whichever may occur first.
10. Termination. This Agreement (except for the
provisions of Section 5) may be terminated by the Company at any time before it
becomes effective in accordance with Section 9 by notice to the Representatives
and may be terminated by the Representatives at any time before it becomes
effective in accordance with Section 9 by notice to the Company. In the event
of any termination of this Agreement under this or any other provision of this
Agreement, there shall be no liability of any party to this Agreement to any
other party, other than as provided in Sections 5, 6 and 11 and other than as
provided in Section 12 as to the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by
the Representatives by notice to the Company (i) if at or prior to the First
Closing Date, or the Option Closing Date trading in securities on any of the
New York Stock Exchange, American Stock Exchange, or the Nasdaq National Market
shall have been suspended or minimum or maximum prices shall have been
established on any such exchange or market, or a banking moratorium shall have
been declared by New York or United States authorities; (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market; (iii) if at or prior to the First Closing Date or the
Option Closing Date there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power or of any other
insurrection or armed conflict involving the United States or (B) any change in
financial markets or any calamity or crisis which, in the judgment of the
Representatives, makes it impractical or inadvisable to offer or sell the Firm
Stock or Optional Stock, as applicable on the terms contemplated by the
Prospectus; (iv) if there shall have been any development or prospective
development involving particularly the business or properties or securities of
the Company or its subsidiary or the transactions contemplated by this
Agreement, which, in the judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Firm Stock or the Optional
Stock, as applicable, on the terms contemplated by the Prospectus; (v) if there
shall be any litigation or proceeding, pending or threatened, which, in the
judgment of the Representatives, makes it impracticable or inadvisable to offer
or deliver the Firm Stock or Optional Stock, as applicable, on the terms
contemplated by the Prospectus; or (vi) if there shall have occurred any of the
events specified in the immediately preceding clauses (i) - (v) together with
any other such event that makes it, in the judgment of the Representatives,
impractical or inadvisable to offer or deliver the Firm Stock or Optional
Stock, as applicable on the terms contemplated by the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any
other provisions hereof, if this Agreement shall not become effective by reason
of any election of the Company pursuant to the first paragraph of Section 10 or
shall be terminated by the Representatives under Section 8 or Section 10, the
Company will bear and pay the expenses specified in Section 5 hereof and, in
addition to their obligations pursuant to Section 6 hereof, the Company will
reimburse the reasonable out-of-pocket expenses of the several Underwriters
24
<PAGE> 25
(including reasonable fees and disbursements of counsel for the Underwriters)
incurred in connection with this Agreement and the proposed purchase of the
Stock, and promptly upon demand the Company will pay such amounts to you as
Representatives.
12. Substitution of Underwriters. If any Underwriter or
Underwriters shall default in its or their obligations to purchase shares of
Stock hereunder and the aggregate number of shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed ten
percent (10%) of the total number of shares underwritten, the other
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the shares which such defaulting Underwriter
or Underwriters agreed but failed to purchase. If any Underwriter or
Underwriters shall so default and the aggregate number of shares with respect
to which such default or defaults occur is more than ten percent (10%) of the
total number of shares underwritten and arrangements satisfactory to the
Representatives and the Company for the purchase of such shares by other
persons are not made within forty-eight (48) hours after such default, this
Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are
required hereby or agree to take up all or part of the shares of Stock of a
defaulting Underwriter or Underwriters as provided in this Section 12, (i) the
Company shall have the right to postpone the Closing Dates for a period of not
more than five (5) full business days in order that the Company may effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective numbers of shares to be purchased by the remaining Underwriters or
substituted Underwriters shall be taken as the basis of their underwriting
obligation for all purposes of this Agreement. Nothing herein contained shall
relieve any defaulting Underwriter of its liability to the Company or the other
Underwriters for damages occasioned by its default hereunder. Any termination
of this Agreement pursuant to this Section 12 shall be without liability on the
part of any non-defaulting Underwriter or the Company, except for expenses to
be paid or reimbursed pursuant to Section 5 and except for the provisions of
Section 6.
13. Notices. All communications hereunder shall be in
writing and, if sent to the Underwriters shall be mailed, delivered or
telegraphed and confirmed to you, as their Representatives c/o Cowen & Company
at Financial Square, New York, New York 10005 except that notices given to an
Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at
the address furnished by the Representatives or, if sent to the Company, shall
be mailed, delivered or telegraphed and confirmed to Gerald E. Bisbee, Jr. at
1650 Tysons Boulevard, McLean, Virginia 22102.
14. Successors. This Agreement shall inure to the
benefit of and be binding upon the several Underwriters, the Company and their
respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or shall be
25
<PAGE> 26
construed to give any person other than the persons mentioned in the preceding
sentence any legal or equitable right, remedy or claim under or in respect of
this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person;
except that the representations, warranties, covenants, agreements and
indemnities of the Company contained in this Agreement shall also be for the
benefit of the person or persons, if any, who control any Underwriter or
Underwriters within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, and the indemnities of the several Underwriters shall
also be for the benefit of each director of the Company, each of its officers
who has signed the Registration Statement and the person or persons, if any,
who control the Company within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act.
15. Applicable Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
16. Authority of the Representatives. In connection with
this Agreement, you will act for and on behalf of the several Underwriters, and
any action taken under this Agreement by Cowen, as Representative, will be
binding on all the Underwriters.
17. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
18. General. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof.
19. Counterparts. This Agreement may be signed in two
(2) or more counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter and your acceptance shall constitute a binding
agreement between us.
26
<PAGE> 27
Very truly yours,
APACHE MEDICAL SYSTEMS, INC.
By:
------------------------
Name:
Title:
Accepted and delivered in
New York, New York as of
the date first above written.
COWEN & COMPANY
LEHMAN BROTHERS INC.
VOLPE, WELTY & COMPANY
Acting on their own behalf and as
Representatives of several Underwriters
referred to in the foregoing Agreement.
By: Cowen Incorporated,
its general partner
By:
---------------------------------
Name:
Title:
27
<PAGE> 28
SCHEDULE A
<TABLE>
<CAPTION>
Number Number of
of Firm Optional
Shares Shares
to be to be
Name Purchased Purchased
- ---- --------- ---------
<S> <C> <C>
Cowen & Company . . . . . . . . . . . . .
Lehman Brothers Inc.. . . . . . . . . . .
Volpe, Welty & Company . . . . . . . . .
Total . . . . . . . . . . . . . . . . . .
--------- ---------
========= =========
</TABLE>
<PAGE> 29
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Optional
Shares to
be Sold
---------
<S> <C> <C>
APACHE Medical Systems, Inc.
Total . . . . . . . . . . . . . . . . .
------------- -------------
============= =============
</TABLE>
<PAGE> 30
SCHEDULE C
<PAGE> 31
EXHIBIT I
FORM OF OPINION TO BE DELIVERED BY COUNSEL TO COMPANY
1. The Company has been duly incorporated and is validly existing
and in good standing as a corporation under the laws of its jurisdiction of
organization, with the corporate power and authority necessary to own and lease
its properties and conduct its business as described in the Registration
Statement and the Prospectus; and the Company is duly registered and qualified
to conduct business and is in good standing in each jurisdiction where the
conduct of its business requires such registration or qualification (other than
those jurisdictions in which the failure to so register or qualify would not
have a material adverse effect on the Company).
2. The Company has an authorized capitalization as set forth
under the caption "Capitalization" in the Prospectus, and the authorized
capital stock of the Company conforms to the descriptions thereof contained in
the Prospectus under the caption "Description of Capital Stock"; all of the
issued and outstanding shares of capital stock of the Company have been duly
and validly authorized and issued and are fully paid and nonassessable. Except
as set forth in the Prospectus, there are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the voting or transfer
of, the Common Stock pursuant to the Company's charter or by-laws or any
agreement or other instrument. The (i) 3,294,519 shares of Common Stock to be
issued upon the conversion of all outstanding shares of preferred stock of the
Company, (ii) 122,257 shares of Common Stock to be issued upon the conversion
of $1,000,000 of convertible debt of the Company, and (iii) [56,413] shares of
Common Stock to be issued as the payment of [$733,350] of accumulated preferred
stock dividends, all to be effected upon the consummation of the offering, have
been duly and validly authorized and when issued, will be duly and validly
issued, fully paid, and nonassessable.
3. There are no outstanding options, warrants or other rights
calling for the issuance of, nor any commitment, plan or arrangement to issue,
any shares of capital stock of the Company or any security convertible into or
exchangeable or exercisable for capital stock of the Company, except as
described in the Prospectus.
4. The Stock has been duly and validly authorized and, upon
issuance, delivery and payment therefor as described in the Underwriting
Agreement, (a) will be duly and validly issued, fully paid and nonassessable,
(b) will be free of any preemptive or similar rights that entitle or will
entitle any person to acquire any Stock upon the issuance thereof by the
Company and (c) will conform to the description thereof in the Prospectus.
5. The certificates representing the Stock are in proper form
under the Delaware General Corporation Law.
<PAGE> 32
6. The Registration Statement and all post-effective amendments,
if any, have become effective under the Securities Act and the Prospectus has
been filed with the Commission in the manner and time period required pursuant
to Rule 424(b) of the Rules and Regulations, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and, to such counsel's knowledge, no proceedings
for that purpose have been instituted by or are pending before or contemplated
by the Commission.
7. The Registration Statement and the Prospectus and any
supplements or amendments thereto as of their respective dates, appeared on
their face to be appropriately responsive in all material respects with the
requirements of the Securities Act and with the Rules and Regulations, except
as to the financial statements, the notes thereto and the related schedules and
other financial and statistical data contained therein, as to which such
counsel need express no opinion.
8. The Company has the corporate power and authority to enter
into the Underwriting Agreement and to perform its obligations thereunder
(including to issue, sell and deliver the Stock to the Underwriters as provided
therein), and the Underwriting Agreement has been duly and validly authorized,
executed and delivered by the Company and is a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms,
except to the extent that (a) such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
similar laws of general application relating to or affecting the rights and
remedies of creditors and by the application of general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law) and (b) rights to indemnification and contribution may be limited under
federal and state securities laws or the policies embodied therein.
9. The execution, delivery and performance of the Underwriting
Agreement, the consummation of the transactions contemplated thereby and the
issuance, sale and delivery of the Stock (A) will not result in any violation
of the provisions of the certificate of incorporation, by-laws or other
organizational documents of the Company or its subsidiary, or any law of the
United States or the Delaware General Corporation Law or any law, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company or its subsidiary or any of their properties or assets, or
(B) will not conflict with or result in a breach or violation of, constitute a
default under, or result in the creation or imposition of any lien pursuant to
the provisions of, any contract, indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument listed on Schedule A attached
hereto. In rendering the opinions set forth in clause (B) of this paragraph,
we confirm that we have been advised by the Company that those contracts, other
agreements or instruments listed on Schedule A constitute the only material
such items to which the Company or its subsidiary is a party or by which the
Company or its subsidiary or any of their respective properties or assets are
bound.
2
<PAGE> 33
10. No consent, approval, authorization or order of, and no notice
to or filing or registration with, any court or governmental agency or body is
required to be obtained or made by the Company for the valid execution,
delivery and performance of the Underwriting Agreement, the consummation of the
transactions contemplated thereby, and the issuance, sale and delivery of the
Stock pursuant to the Underwriting Agreement, except such consents approvals,
authorizations or registrations which have been obtained, such as may be
required by the National Association of Securities Dealers, Inc. or under the
Securities Act or the Exchange Act, or securities or "Blue Sky" laws of any
jurisdiction in connection with the purchase and distribution of the Stock.
11. To the best of such counsel's knowledge, except as set forth
in the Prospectus, there are no legal or governmental proceedings pending to
which the Company or its subsidiary or any affiliates is a party or of which
any property of the Company or its subsidiary or any affiliate is subject,
which, if determined adversely to the Company or its subsidiary or any such
affiliate, might individually or in the aggregate (i) prevent or adversely
affect the transactions contemplated by the Underwriting Agreement, (ii)
suspend the effectiveness of the Registration Statement, (iii) prevent or
suspend the use of the Preeffective Prospectus in any jurisdiction or (iv)
result in a material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of operations
of the Company and its subsidiary considered as a whole; and to the best of
such counsel's knowledge, no such proceedings are threatened or contemplated
against the Company or its subsidiary or any affiliate by governmental
authorities or others. To the best of such counsel's knowledge, the Company is
not a party nor subject to the provisions of any material injunction, judgment,
decree or order of any court, regulatory body or other governmental agency or
body.
12. To the best of such counsel's knowledge, there are no
franchises, leases, contracts, agreements or other documents that are required
to be described in the Registration Statement or Prospectus (or any amendment
or supplement thereto) or to be filed as exhibits to the Registration Statement
which have not been described or filed as required.
13. The statements in the Registration Statement and Prospectus
under the captions "Business - Government Regulation", "Business - Proprietary
Rights", "Management - Employee Benefit Plans", "Certain Transactions", and
"Description of Capital Stock", to the extent that such statements constitute a
summary of documents referred to therein or matters of law, or legal
conclusions, are accurate summaries in all material respects and fairly present
the information called for by the Securities Act and the Rules and Regulations
with respect to such documents and matters. Such counsel does not know of any
laws, rules or regulations or legal or governmental proceedings applicable to
the business of the Company or its subsidiary required to be described in the
Registration Statement or the Prospectus that are not described as required.
3
<PAGE> 34
14. To the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Securities Act,
except as set forth in the Prospectus and, except for persons who have
expressly waived such right, who have been given proper notice and have failed
to exercise such right within the time or times required under the terms and
conditions of such right or who have given notice of their intent to exercise
such right and have been informed that the Underwriters would not permit the
inclusion of shares offered by selling stockholders in the offering.
15. The Company is not now and upon the sale of the Stock to be
issued and sold in accordance with the Underwriting Agreement and the
application of the net proceeds from such sale as described in the Prospectus
under the caption "Use of Proceeds", will not be an "investment company" within
the meaning of such term under the United States Investment Company Act of 1940
and the rules and regulations of the Commission thereunder.
16. The Company is the record owner of the trademark and
servicemark registrations and applications for the mark "APACHE," and the
copyright registrations, each as described in the Prospectus, free and clear of
any liens, security interests, assignments, and encumbrances recorded in the
United States Patent and Trademark Office or in the United States Copyright
Offices and to the best of our knowledge, free and clear of any other liens,
security, interests, assignments and encumbrances; the registrations are
subsisting and in good standing and, as of the date hereof, all filings that
are required to be made in order to avoid cancellation, expiration, or
abandonment of the registrations and applications have been timely made; to
such counsel's knowledge, there are no pending proceedings before any trademark
or copyright registry to cancel any of the registrations.
17. The agreements, pursuant to which the Company has obtained any
rights to use or incorporate the intellectual property owned by (or formerly
owned by) a third party into any product or service of the Company, described
in the Prospectus give the Company valid, binding and enforceable rights with
respect to the subject matter thereof in accordance with their respective
terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar laws of general application relating to or affecting the
rights and remedies of creditors and by the application of general principles
of equity (regardless of whether enforcement is sought in a proceeding in
equity or at law).
18. To the best of such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened (i) against the Company or its
subsidiary that involves a claim that the APACHE name or the Company's products
or services infringe or misappropri-
4
<PAGE> 35
ate any intellectual property rights of any third party or (ii) by the Company
or its subsidiary that involves a claim that a third party's name or its
products or services infringe or misappropriate the Company's intellectual
property rights, which, in either case, if determined adversely to the Company
or its subsidiary would result in a material adverse change in the condition
(financial or otherwise), properties, business, prospects, net worth or results
of operations of the Company and its subsidiary considered as a whole.
In addition, such Counsel shall state that nothing came to
such counsel's attention during the preparation of the Registration Statement
that led such counsel to believe that the Registration Statement, as of the
date it was declared effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus, as of its date or on the date hereof, contained or contains an
untrue statement of a material fact or omitted or omits to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circum- stances under which they were made, not misleading
(provided that such counsel need express no view with respect to the financial
statements, the notes thereto and the related schedules and other financial or
statistical data included in the Registration Statement or the Prospectus).
The opinions set forth herein do not cover current or future
regulation of the Company's business or products and services by the federal
Food and Drug Administration.
5
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF APACHE MEDICAL SYSTEMS, INC.
(Pursuant to Sections 242 & 245 of the
General Corporation Law of the State of Delaware)
Gary E. Bisbee, Jr. hereby certifies that:
1. Gary E. Bisbee, Jr., is the Chairman of APACHE Medical
Systems, Inc., a Delaware corporation.
2. The certificate of incorporation of the corporation filed on
September 1, 1987 and amended and restated on December 26, 1991, January 2,
1992, December 31, 1992 and January 20, 1994, amended on August 17, 1995 and
amended and restated on December 28, 1995 is amended and restated to read as
follows:
FIRST. Name. The name of the corporation is APACHE Medical
Systems, Inc.
SECOND. Registered Office. The address of its registered office in
the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of
New Castle 19805. The name of its registered agent at such address is
Corporation Service Company.
THIRD. Purposes. The nature of the business or purposes to be
conducted or promoted is:
To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware and
to do all things and exercise all powers, rights and privileges
which a business corporation may now or hereafter be organized or
authorized to do or to exercise under the laws of the State of
Delaware.
FOURTH. Authorized Capital. The total number of shares of all classes
of capital stock which the corporation shall have authority to issue is
Thirty-One Million Five Hundred Forty-Three Thousand Seven Hundred Four
(31,543,704) shares, comprised of Thirty Million (30,000,000) shares of Common
Stock with a par value of One Cent ($.01) per share (the "Common Stock") and
One Million Five Hundred Forty-Three Thousand Seven Hundred Four (1,543,704)
shares of Preferred Stock with a par value of One Cent ($.01) per share (the
"Preferred Stock"); provided, however, that following an automatic conversion
pursuant to Section 7.4, the Board of Directors of the corporation may not
reissue any share of Preferred Stock that was converted into Common Stock
pursuant to Section 7.4.
A description of the respective classes of stock and a statement of
the designations, preferences, voting powers (or no voting powers), relative,
participating, optional or other special rights and privileges, and the
qualifications, limitations and restrictions of the Preferred Stock and Common
Stock are as follows:
<PAGE> 2
A. PREFERRED STOCK
1. Designation. Two Hundred Thousand (200,000) of the shares
of Preferred Stock are hereby designated "Series A Preferred Stock," One
Hundred Forty Thousand Seven Hundred Fifty-Four (140,754) of the shares of
Preferred Stock are hereby designated "Series B Preferred Stock," One Hundred
Forty Thousand Seven Hundred Fifty-Four (140,754) of the shares of Preferred
Stock are hereby designated "Series B-1 Preferred Stock", One Hundred Eighteen
Thousand One Hundred Ten (118,110) of the shares of Preferred Stock are hereby
designated "Series C Preferred Stock," One Hundred Eighteen Thousand One
Hundred Ten (118,110) of the shares of Preferred Stock are hereby designated
"Series C-1 Preferred Stock," Two Hundred Nine Thousand Nine Hundred
Ninety-Four (209,994) of the shares of Preferred Stock are hereby designated
"Series D Preferred Stock," Two Hundred Nine Thousand Nine Hundred Ninety-Four
(209,994) of the shares of Preferred Stock are hereby designated "Series D-1
Preferred Stock," One Hundred Seventy-Four Thousand Nine Hundred Ninety-Five
(174,995) of the shares of Preferred Stock are hereby designated "Series E
Preferred Stock," One Hundred Seventy-Four Thousand Nine Hundred Ninety-Five
(174,995) of the shares of Preferred Stock are hereby designated "Series E-1
Preferred Stock," Twenty-Seven Thousand Nine Hundred Ninety-Nine (27,999) of
the shares of Preferred Stock are hereby designated "Series F Preferred Stock"
and Twenty-Seven Thousand Nine Hundred Ninety-Nine (27,999) of the shares of
Preferred Stock are hereby designated "Series F-1 Preferred Stock," with each
of the Series A, Series B, Series B-1, Series C, Series C-1, Series D, Series
D-1, Series E, Series E-1, Series F and Series F-1 Preferred Stock having the
preferences, voting powers (or no voting powers), relative, participating,
optional or other special rights and privileges, and the qualifications,
limitations and restrictions set forth below. The Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, any subsequently
authorized Series B-Type Preferred Stock (as hereinafter defined in Section
7.3.14), Series C Preferred Stock, Series C-1 Preferred Stock, any subsequently
authorized Series C-Type Preferred Stock (as hereinafter defined in Section
7.3.14), Series D Preferred Stock, Series D- 1 Preferred Stock, any
subsequently authorized Series D-Type Preferred Stock (as hereinafter defined
in Section 7.3.14), Series E Preferred Stock, Series E-1 Preferred Stock, any
subsequently authorized Series E-Type Preferred Stock (as hereinafter defined
in Section 7.3.14), Series F Preferred Stock, Series F-1 Preferred Stock and
any subsequently authorized Series F-Type Preferred Stock (as hereinafter
defined in Section 7.3.14) are hereinafter collectively referred to as the
"Designated Preferred Stock".
2. Dividend Rights.
2.1. Dividend Preference. Each issued and outstanding share of
Designated Preferred Stock shall entitle the holder of record thereof to
receive, when, as and if declared by the Board of Directors, out of any funds
legally available therefor, dividends in cash at the annual rate per share of:
Eighty Cents ($.80) in the case of Series A Preferred Stock (or such greater
amount per share as such Series A Preferred Stock would be entitled to if such
Series A Preferred Stock were converted into Common Stock); One Dollar
Eighty-Four Cents and Seventy-Two One Hundredths of One Cent ($1.8472) in the
case of any Series B-Type Preferred Stock (or such greater amount per share as
any such Series B- Type Preferred Stock would be entitled to if such Series
B-Type Preferred Stock were converted into Common Stock); Two Dollars Three
Cents
<PAGE> 3
and Two Tenths of One Cent ($2.032) in the case of Series C-Type Preferred
Stock (or such greater amount per share as such Series C-Type Preferred Stock
would be entitled to if such Series C-Type Preferred Stock were converted into
Common Stock); Two Dollars Twenty-Eight Cents and Six Tenths of One Cent
($2.286) in the case of Series D-Type Preferred Stock (or such greater amount
per share as such Series D-Type Preferred Stock would be entitled to if such
Series D-Type Preferred Stock were converted into Common Stock); Two Dollars
Twenty-Eight Cents and Six Tenths of One Cent ($2.286) in the case of Series
E-Type Preferred Stock (or such greater amount per share as such Series E-Type
Preferred Stock would be entitled to if such Series E-Type Preferred Stock were
converted into Common Stock); Two Dollars Twenty-Eight Cents and Six Tenths of
One Cent ($2.286) in the case of Series F-Type Preferred Stock (or such greater
amount per share as such Series F-Type Preferred Stock would be entitled to if
such Series F-Type Preferred Stock were converted into Common Stock); provided
that all such dividends shall be adjusted for stock splits, stock dividends,
recapitalizations, reclassifications and similar events (together herein
referred to as "Recapitalization Events"). Dividends and distributions (other
than those payable solely in Common Stock) may be paid, or declared and set
aside for payment, upon shares of Common Stock in any calendar year only if
dividends shall have been paid, or declared and set apart for payment, on
account of all shares of Designated Preferred Stock then issued and
outstanding, at the aforesaid rate for such calendar year. Except as
hereinafter set forth, the Board of Directors of this corporation is under no
obligation to pay dividends and the dividend preference granted herein to
shares of Designated Preferred Stock shall apply only at such time as the Board
of Directors may in its discretion decide to pay or declare and set aside for
payment any dividends on any shares of Common Stock of the corporation.
2.2 Non-Cumulative Dividends. Until November 1, 1993 in the case
of the Series A Preferred Stock and Series B-Type Preferred Stock, until
November 1, 1994 in the case of the Series C-Type Preferred Stock, until
November 1, 1995 in the case of the Series D-Type Preferred Stock, and until
November 1, 1997 in the case of the Series E-Type Preferred Stock and Series
F-Type Preferred Stock (except as otherwise provided in Section 2.3 in the case
of Series E-Type Preferred Stock and Series F-Type Preferred Stock), the right
to dividends upon the issued and outstanding shares of Designated Preferred
Stock shall be non-cumulative and shall not be deemed to accrue, whether
dividends are earned or whether there be funds legally available therefor,
unless and until such dividends shall have been declared by the Board of
Directors.
2.3 Cumulative Dividends. From and after November 1, 1993 in the
case of the Series A Preferred Stock and Series B-Type Preferred Stock, from
and after November 1, 1994 in the case of the Series C-Type Preferred Stock,
from and after November 1, 1995 in the case of Series D-Type Preferred Stock,
and from and after November 1, 1997 in the case of the Series E-Type Preferred
Stock and Series F-Type Preferred Stock (except as otherwise provided below),
the right to dividends upon the issued and outstanding shares of Designated
Preferred Stock shall be cumulative so that such rights shall be deemed to
accrue from and after November 1, 1993 in the case of the Series A Preferred
Stock and Series B-Type Preferred Stock, from and after November 1, 1994 in the
case of the Series C- Type Preferred Stock, from and after November 1, 1995 in
the case of the Series D-Type Preferred Stock, and from and after November 1,
1997 in the case of the Series E-Type Preferred Stock and Series F-Type
Preferred Stock (except as
3
<PAGE> 4
otherwise provided below), whether earned, or whether there be funds legally
available therefor, or whether said dividends shall have been declared; and
if such dividends in respect of any period beginning November 1, 1993, in the
case of Series A Preferred Stock and Series B-Type Preferred Stock, beginning
November 1, 1994, in the case of Series C- Type Preferred Stock, beginning
November 1, 1995, in the case of Series D-Type Preferred Stock, and beginning
November 1, 1997, in the case of Series E-Type Preferred Stock and Series
F-Type Preferred Stock (except as otherwise provided below), shall not have
been declared and either paid or a sum sufficient for the payment thereof set
aside in full, the deficiency shall first be fully paid on the Designated
Preferred Stock, before any dividend or other distribution (other than those
payable solely in Common Stock or involving the repurchase of shares of Common
Stock from terminated employees pursuant to contractual arrangements) may be
paid, or declared and set apart for payment, to the holders of shares of Common
Stock, and shall in any event be paid upon the automatic conversion of the
Designated Preferred Stock in accordance with Section 7, in cash, or, at the
individual election of the respective holders of shares of Designated Preferred
Stock, partly in cash and partly in shares of Common Stock, or all in shares of
Common Stock, at the fair market value of the Common Stock at the time of
payment, as determined in good faith by the Board of Directors of the
corporation. Any accumulation of dividends on the shares of Designated
Preferred Stock shall not bear interest. Any dividends payable upon the issued
and outstanding shares of Series A Preferred Stock and Series B-Type Preferred
Stock shall be payable upon a prorated annual basis for the period beginning
November 1, 1993 and ending December 31, 1993. Any dividends payable upon the
issued and outstanding shares of Series C-Type Preferred Stock shall be payable
upon a prorated annual basis for the period beginning November 1, 1994 and
ending December 31, 1994. Any dividends payable upon the issued and outstanding
shares of Series D-Type Preferred Stock shall be payable upon a prorated annual
basis for the period beginning November 1, 1995 and ending December 31, 1995.
Any dividends payable upon the issued and outstanding shares of Series E-Type
Preferred Stock and Series F-Type Preferred shall be payable upon a prorated
annual basis for the period beginning November 1, 1997 and ending December 31,
1997, except as otherwise provided below.
Notwithstanding the foregoing, in the event that (i) the corporation
has determined that it will register its Common Stock under the Securities Act
of 1933, as amended, for sale to the public, (ii) such offering does not
constitute an "Automatic Conversion" ( as set forth in Section 7.4), (iii) the
corporation has obtained all corporate approvals necessary for such public
offering, including the consent of at least 66 2/3% of the Board of Directors
of the corporation, and (iv) one or more holders of Preferred Stock have
refused to convert their respective shares of Preferred Stock into shares of
Common Stock in connection with such public offering ("Refusing Holder") and
such refusal either (x) effectively precludes the corporation from undertaking
such public offering or (y) substantially and materially adversely impacts the
value of the corporation such that the corporation is effectively precluded
from undertaking such public offering, then the right to dividends upon the
issued and outstanding shares of Series E-Type Preferred Stock and the Series
F-Type Preferred Stock shall be cumulative so that such rights shall have been
deemed to accrue from and after December 28, 1995 and all references to the
date "November 1, 1997" in Sections 2.2 and 2.3 shall be deemed to be "December
28, 1995" and the reference to the date "December 31, 1997" in Section 2.3
shall be deemed to be "December 31, 1995"; provided however, if any Refusing
Holder is a holder of issued and outstanding shares of Series E-Type Preferred
Stock or a holder of issued and outstanding shares of Series F-Type Preferred
Stock,
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then the right to dividends upon the issued and outstanding shares of Series
E-Type Preferred Stock or Series F-Type Preferred Stock, as the case may be,
shall not be deemed to accrue from and after December 28, 1995 for the entire
series, whether it be Series E-Type Preferred Stock or Series F-Type Preferred
Stock, to which any such Refusing Holder belongs and the references to the
dates "November 1, 1997" and "December 31, 1997" in sections 2.2 and 2.3 shall
remain unchanged for the entire series, whether it be Series E-Type Preferred
Stock or Series F-Type Preferred Stock, to which any such Refusing Holder
belongs.
2.4 Pro Rata. All dividends per share on the Designated Preferred
Stock shall be declared and paid pro rata (a) such that the ratio of dividends
being declared and paid per share of Series A Preferred Stock, Series B-Type
Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock,
Series E-Type Preferred Stock and Series F-Type Preferred Stock is the same as
the ratio of the Original Issue Price (as defined in Section 3) for the Series
A Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred
Stock, Series D-Type Preferred Stock, Series E- Type Preferred Stock and Series
F-Type Preferred Stock, which numbers shall be adjusted from time to time as
necessary to reflect any Recapitalization Events of the Series A Preferred
Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series
D-Type Preferred Stock, Series E-Type Preferred Stock and Series F-Type
Preferred Stock, respectively, and (b) as among the holders of each Series
based on the number of shares of such Series so held.
2.5 No Derogation of Other Restrictions. The restrictions on
dividends and distributions with respect to shares of Common Stock and of
Designated Preferred Stock set forth in this Section 2 are in addition to, and
not in derogation of, the other restrictions on such dividends and
distributions set forth herein.
3. Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the corporation, whether voluntary or not, the
holders of any Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock and Series F-Type Preferred Stock shall be entitled to receive, before
any amount shall be paid to holders of Common Stock, an amount per share equal
to $10.00, $23.09, $25.40, $28.58, $28.58 and $28.58, respectively, plus for
each Series all declared and unpaid dividends if any (each of the $10.00,
$23.09, $25.40, $28.58, $28.58 and $28.58 amounts shall be adjusted for
Recapitalization Events and each of such numbers as so adjusted is hereafter
referred to as "Original Issue Price" of the respective Series). If upon the
occurrence of a liquidation, dissolution or winding up of the corporation, the
assets distributed among the holders of Preferred Stock shall be insufficient
to permit the payment to such holders of the full preferential amounts referred
to in this Section 3 for each such Series, then the entire remaining assets and
surplus funds of the corporation legally available for distribution shall be
distributed among the holders of Preferred Stock such that the payment with
respect to each holder of Preferred Stock is a substantially identical
proportion of the full payment then due with respect to each Series. If, upon
the occurrence of a liquidation, dissolution or winding up of the corporation,
after the payment to the holders of Series A Preferred Stock, Series B-Type
Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock,
Series E-Type Preferred Stock and Series F-Type Preferred Stock of the
preferential amounts for each such Series of Preferred Stock, assets remain in
the corporation, such remaining assets and surplus funds that are legally
available for distribution shall be distributed among the holders of Series A
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Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E- Type Preferred Stock and Series F-Type
Preferred Stock and the holders of Common Stock as if all shares of Series A
Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E- Type Preferred Stock and Series F-Type
Preferred Stock had been converted into Common Stock.
For purposes of this Section 3, at the election of holders of a
majority in interest of the Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock and Series F-Type Preferred Stock (voting together as a
single class), a liquidation, dissolution or winding up of the corporation
shall be deemed to be occasioned by, and to include, the corporation's sale of
all or substantially all of its assets or a consolidation or merger of the
corporation with or into any other entity or entities except where the
stockholders of the corporation immediately prior to such event own more than
50% of the outstanding stock (or other equity) of the resulting entity
immediately after such event. No later than 20 days before any event that,
pursuant to Section 7.5, permits a holder of Series A Preferred Stock, Series
B-Type Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred
Stock, Series E-Type Preferred Stock or Series F-Type Preferred Stock to have
each share of Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock or Series F-Type Preferred Stock held by such holder treated for all
purposes as if it had been converted into Common Stock (for purposes of this
Section 3, a "Merger or Sale of Corporation"), the corporation shall deliver a
notice to each holder of Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock and Series F-Type Preferred Stock setting forth the
principal terms of such Merger or Sale of Corporation. Such notice shall be
deemed delivered upon personal delivery or five (5) days after deposit in the
United States mail, by registered or certified mail, addressed to a party at
its address as shown on the stock records of the corporation. Such notice
shall include a description of the amounts that would be paid to holders of
Series A Preferred Stock, each Series B-Type Preferred Stock, each Series
C-Type Preferred Stock, each Series D-Type Preferred Stock, each Series E-Type
Preferred Stock and each Series F-Type Preferred Stock under this Section 3 and
of the consideration that such holders would receive if they exercised their
rights under Section 7.5 to have shares of Series A Preferred Stock, each
Series B-Type Preferred Stock, each Series C-Type Preferred Stock, each Series
D-Type Preferred Stock, each Series E-Type Preferred Stock and each Series
F-Type Preferred Stock treated as if they had been converted into Common Stock.
No later than fifteen days after delivery of the notice, each holder of Series
A Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred
Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock and Series
F-Type Preferred Stock may deliver an election to the corporation notifying the
corporation that the holder desires that such holder's shares of Series A
Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E-Type Preferred Stock and Series F-Type
Preferred Stock be treated, pursuant to Section 7, as if they had been
converted into shares of Common Stock and, if no such notice is delivered, such
holder shall receive such amounts (if any) as are provided for under this
Section 3.
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4. Redemption
4.1 Holder's Right to Require Redemption. Commencing on January
1, 1998, each holder of shares of Designated Preferred Stock shall have the
right to require the corporation to redeem shares of such holder's Designated
Preferred Stock on three separate occasions, each of which shall be at least
twelve months after the most recent date upon which the corporation redeemed
such holder's shares pursuant to this Section 4.1. On the first, second and
third occasions a holder requires the corporation to redeem shares, such holder
shall have the right to sell 33.33%, 50% and 100%, respectively, of the shares
of Designated Preferred Stock such holder then holds. Each such redemption
shall be made by payment in cash (except as provided in Section 4.2) of any
amount equal to the product of (i) the respective Original Issue Price
specified in Section 3 plus all accrued and unpaid dividends, if any (the
"Redemption Price") for the Series A Preferred Stock, each Series B-Type
Preferred Stock, each Series C-Type Preferred Stock, each Series D-Type
Preferred Stock, each Series E-Type Preferred Stock and each Series F-Type
Preferred Stock multiplied by (ii) the number of shares of Series A Preferred
Stock, each Series B-Type Preferred Stock, each Series C-Type Preferred Stock,
each Series D-Type Preferred Stock, each Series E-Type Preferred Stock and each
Series F-Type Preferred Stock held by such holder which are to be redeemed.
If, as a result of the limitation set forth in Section 4.2, the corporation is
not able to redeem all of the shares of Series A Preferred Stock, each Series
B-Type Preferred Stock, each Series C-Type Preferred Stock, each Series D-Type
Preferred Stock, each Series E-Type Preferred Stock and each Series F-Type
Preferred Stock requested by such holder to be redeemed, the corporation shall
redeem on the Redemption Date (as hereinafter defined) the maximum number of
shares of Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock and Series F-Type Preferred Stock which the corporation is able to redeem
(allocated pro rata among holders in accordance with the number of shares which
each such holder is requesting to be redeemed on the Redemption Date). The
Series A Preferred Stock, each Series B-Type Preferred Stock, each Series
C-Type Preferred Stock, each Series D-Type Preferred Stock, each Series E-Type
Preferred Stock and each Series F-Type Preferred Stock shall be treated as pari
passu for purposes of this Section 4 based upon the respective number of shares
of Common Stock into which a share of such Series of Preferred Stock is then
convertible.
4.2 Payment. Payment of the Redemption Price shall be made in
currently available funds except if the corporation determines, in good faith,
that the full payment of the applicable Redemption Price for shares being
redeemed under Section 4.1 would not constitute a prudent business practice in
light of the corporation's then existing financial condition and cash flow
requirements, or if the corporation is prohibited by law or by non-subordinated
debt instruments from so purchasing such shares. In such event, the
corporation shall currently pay the maximum amount for such shares as is
consistent with prudent business practice to the extent such payment does not
violate such other restrictions. For the shares of Designated Preferred Stock
for which the applicable Redemption Price is not currently being paid, to the
extent permitted by law or by non-subordinated debt instruments, the
corporation shall issue to the holder thereof a promissory note providing that
the corporation shall pay to such holder an amount equal to the portion of the
applicable Redemption Price attributable to such shares not currently paid.
Such promissory note shall provide that interest shall accrue on the unpaid
principal portion of such note, commencing upon the Redemption Date, at a rate
per annum equivalent to the prime rate of
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interest from time to time as reported in The Wall Street Journal (Eastern
edition) plus one percent (1%) and the principal shall be paid in 24 equal
monthly installments, together with interest thereon, until paid in full. All
shares purchased with a promissory note as provided herein shall be deemed to
have been purchased on the date the promissory note is issued. The first
payment shall be due on the first day of the first full month following the
Redemption Date, and all subsequent payments shall be made on the first day of
each succeeding month. In the event a payment is not made on any such
promissory note within thirty (30) days of its due date, the holder thereof may
accelerate all amounts owed pursuant to such note and demand full payment
thereof. Payments shall be applied first to accrued interest and the balance,
if any, shall be applied to unpaid principal. The corporation shall be
entitled to prepay, without penalty, any portion of amounts then owed to
holders of all promissory notes issued pursuant to this Section 4.2. All such
prepayments shall be applied first to interest accrued thereon and then to
unpaid principal. All such prepayments shall be made pro rata against amounts
owed at such time to all holders of promissory notes issued pursuant to this
Section 4.2, such that the prepayment amount paid to a holder of a promissory
note will bear the same ratio to the total amount being prepaid, as the
principal amount so owed to such holder under its promissory note(s) bears to
the total principal amounts owed to all holders of all such promissory notes.
4.3 Redemption Procedure. In order to require the corporation to
redeem shares of Designated Preferred Stock under Section 4.1, a holder of such
shares shall provide the corporation with written notice (the "Redemption
Notice") specifying the number of and type (i.e., Series) of shares being
tendered for redemption and the date, not less than sixty (60) days from the
date of the notice, on which such redemption is to occur ("Redemption Date").
Within five (5) days from receipt of the Redemption Notice, the corporation
will provide each holder of Designated Preferred Stock who would be eligible to
redeem shares of Designated Preferred Stock on the Redemption Date (but for the
foregoing sixty (60) days notice requirement) with a copy of the Redemption
Notice sent to the address of such holder at the address shown in the
corporation's records. Any such other holder shall have the right, within ten
(10) days of receipt of a copy of the Redemption Notice, to provide written
notice to the corporation specifying the number of and type (i.e., Series) of
shares such holder shall require the corporation to redeem on the Redemption
Date, whereupon the corporation, subject to the provisions of Section 4.1,
shall be obligated to redeem the shares set forth in the Redemption Notice
along with any such additional shares. Any notice which a holder of Designated
Preferred Stock provides to the corporation upon receipt of a Redemption Notice
shall void any outstanding Redemption Notice of such holder. Provided the
payment of the applicable Redemption Price has been duly made hereunder by
payment of funds and/or delivery of promissory notes, all rights with respect
to the related shares of Designated Preferred Stock shall terminate on the
Redemption Date.
4.4 Retirement of Redeemed Preferred Stock. All shares of
Preferred Stock redeemed pursuant to this Section 4 shall be retired by this
corporation upon such redemption, and the capital of the corporation shall be
reduced accordingly.
5. Voting Rights
5.1 Designated Preferred Stock. Each holder of shares of
Designated Preferred Stock shall be entitled to vote on all matters upon which
stockholders are entitled to vote and, except as
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otherwise expressly provided herein, shall be entitled to the number of votes
equal to the largest whole number of shares of Common Stock into which such
shares of Designated Preferred Stock could be converted, pursuant to the
provisions of Section 7 hereof, on the record date fixed for the determination
of the stockholders entitled to vote on such matters or, if no such record date
is fixed, the record date as established in accordance with the Delaware
General Corporation Law.
5.2 Common Stock. Each holder of shares of Common Stock shall be
entitled to one vote for each share thereof held. Except as otherwise
expressly provided herein or as required by law, the holders of Designated
Preferred Stock and the holders of Common Stock shall vote together and not as
separate classes, nor shall the holders of the various Series of Designated
Preferred Stock vote as separate classes.
5.3 No Cumulation. Each holder of shares of Designated Preferred
Stock and of Common Stock shall not have the right to cumulate shares in voting
for directors.
6. Certain Taxes. The corporation shall pay any and all issuance
and other taxes (excluding any federal or state income taxes) that may be
payable in respect of any issuance or delivery of shares of Common Stock on
conversion of Series A Preferred Stock, any Series B-Type Preferred Stock, any
Series C-Type Preferred Stock, any Series D-Type Preferred Stock, any Series
E-Type Preferred Stock and any Series F-Type Preferred Stock. The corporation
shall not, however, be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of shares of Common Stock
in a name other than that in which the shares of Series A Preferred Stock, any
Series B-Type Preferred Stock, any Series C-Type Preferred Stock, any Series
D-Type Preferred Stock, any Series E-Type Preferred Stock and any Series F-Type
Preferred Stock to which such issuance relates were registered, and no such
issuance or delivery shall be made unless and until the person requesting such
issuance has paid to the corporation the amount of any such tax, or it is
established to the satisfaction of the corporation that such tax has been paid.
7. Conversion to Common Stock. The Series A Preferred Stock,
Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series D-Type
Preferred Stock, Series E-Type Preferred Stock and Series F-Type Preferred
Stock shall be convertible into Common Stock of the corporation as follows:
7.1 Definitions. For purposes of this Section 7, the following
definitions shall apply:
7.1.1. "Common Stock Equivalents" shall mean any Convertible Security
or warrant, option or other right to subscribe for or purchase shares of Common
Stock.
7.1.2. "Common Stock Outstanding" shall mean the aggregate of all
Common Stock outstanding and all Common Stock issuable pursuant to Common Stock
Equivalents.
7.1.3. "Conversion Price" shall mean the price, determined pursuant
to this Section 7, at which shares of Common Stock shall be deliverable upon
conversion of Series A Preferred Stock, Series B Preferred Stock, each other
Series B-Type Preferred Stock, Series C Preferred Stock, each other Series
C-Type Preferred Stock, Series D Preferred Stock, each other Series D-
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Type Preferred Stock, Series E Preferred Stock, each other Series E-Type
Preferred Stock, Series F Preferred Stock and each other Series F-Type
Preferred Stock.
7.1.4. "Convertible Securities" shall mean evidences of indebtedness,
shares or other securities which are or may be convertible into or exchangeable
for Common Stock, including Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock and Series F-Type Preferred Stock.
7.1.5. "Current Conversion Price" shall mean the Conversion Price
immediately before the occurrence of any event, which, pursuant to Section 7.3,
causes an adjustment to the Conversion Price.
7.1.6. "Issuance Date" shall mean, for each of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock, the first date on
which the corporation issues any shares of such Preferred Stock, and for each
other Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series
D-Type Preferred Stock, Series E-Type Preferred Stock and Series F-Type
Preferred Stock, the date immediately preceding the date on which this
corporation issues any shares of such series of Series B- Type Preferred Stock,
Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type
Preferred Stock or Series F-Type Preferred Stock.
7.2 Right to Convert; Initial Conversion Price. Each holder of the
Series A Preferred Stock, Series B-Type Preferred Stock, Series C-Type
Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock
and Series F-Type Preferred Stock may, at any time, convert any or all of such
Preferred Stock into fully-paid and non-assessable shares of Common Stock at
the Conversion Price. Each share of Series A Preferred Stock, Series B-Type
Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock,
Series E-Type Preferred Stock and Series F-Type Preferred Stock shall be
convertible into the number of shares of Common Stock that results from
dividing the Conversion Price in effect at the time of conversion for Series A
Preferred Stock into $10.00 for each share of Series A Preferred Stock, $23.09
for each share of Series B-Type Preferred Stock, $25.40 for each share of
Series C-Type Preferred Stock, $28.58 for each share of Series D-Type Preferred
Stock, $28.58 for each share of Series E-Type Preferred Stock and $28.58 for
each share of Series F-Type Preferred Stock being converted; the Conversion
Price of the Series A Preferred Stock shall initially be $1.00 per share of
Series A Preferred Stock; the Conversion Price of the Series B Preferred Stock
shall initially be $2.30 and 9/10 cent per share of Series B Preferred Stock;
the Conversion Price for the Series C Preferred Stock shall initially be $2.54
per share of Series C Preferred Stock; the Conversion Price for the Series D
Preferred Stock shall initially be $2.85 and 8/10 cent per share of Series D
Preferred Stock; the Conversion Price for the Series E Preferred Stock shall
initially be $2.85 and 8/10 cent per share of Series E Preferred Stock; the
Conversion Price for the Series F Preferred Stock shall initially be $2.85 and
8/10 cent per share of Series F Preferred Stock; the Conversion Price for the
Series B-1 Preferred Stock shall initially be the Conversion Price of the
Series B Preferred Stock on the date preceding the date on which the
corporation issues any Series B-1 Preferred Stock adjusted pursuant to Section
7.3.1(A) as if such Series B-1 Preferred Stock had been Series B-1 Preferred
Stock on the date immediately preceding the issuance of Series B-1 Preferred
Stock; the Conversion Price for the Series C-1 Preferred Stock shall initially
be the
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Conversion Price of the Series C Preferred Stock on the date preceding
the date on which the corporation issues any Series C-1 Preferred Stock
adjusted pursuant to Section 7.3.1(A) as if such Series C-1 Preferred Stock had
been Series C-1 Preferred Stock on the date immediately preceding the issuance
of Series C-1 Preferred Stock; the Conversion Price for the Series D-1
Preferred Stock shall initially be the Conversion Price of the Series D
Preferred Stock on the date preceding the date on which the corporation issues
any Series D-1 Preferred Stock adjusted pursuant to Section 7.3.1(A) as if such
Series D-1 Preferred Stock had been Series D-1 Preferred Stock on the date
immediately preceding the issuance of Series D-1 Preferred Stock; the
Conversion Price for the Series E-1 Preferred Stock shall initially be the
Conversion Price of the Series E Preferred Stock on the date preceding the date
on which the corporation issues any Series E-1 Preferred Stock adjusted
pursuant to Section 7.3.1(A) as if such Series E-1 Preferred Stock had been
Series E-1 Preferred Stock on the date immediately preceding the issuance of
Series E-1 Preferred Stock; and the Conversion Price for the Series F-1
Preferred Stock shall initially be the Conversion Price of the Series F
Preferred Stock on the date preceding the date on which the corporation issues
any Series F-1 Preferred Stock adjusted pursuant to Section 7.3.1(A) as if such
Series F-1 Preferred Stock had been Series F-1 Preferred Stock on the date
immediately preceding the issuance of Series F-1 Stock. The initial Conversion
Price shall be subject to adjustment from time to time in certain instances as
hereinafter provided. No adjustments with respect to conversion shall be made
on account of any dividends that may be declared but unpaid on the Series A
Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E-Type Preferred Stock or Series F-Type
Preferred Stock surrendered for conversion, but no dividends shall thereafter
be paid on the Common Stock unless such unpaid dividends have first been paid
to the holders entitled to payment at the time of conversion of the Series A
Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E-Type Preferred Stock or Series F-Type
Preferred Stock.
Before any holder of Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock or Series F-Type Preferred Stock shall be entitled to
convert the same into Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, to the office of the corporation or any
transfer agent for such Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock or Series F-Type Preferred Stock and shall give written
notice to the corporation at such office that he elects to convert the same.
The corporation shall, as soon as practicable thereafter, issue and deliver at
such office to such holder of Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-
Type Preferred Stock or Series F-Type Preferred Stock, or to his nominee or
nominees, certificates for the number of full shares of Common Stock to which
he shall be entitled, and, if less than all of the shares of Series A Preferred
Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series
D-Type Preferred Stock, Series E-Type Preferred Stock or Series F-Type
Preferred Stock represented by such certificate are converted, a certificate
representing the shares of Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock or Series F-Type Preferred Stock not converted. Such
conversion shall be deemed to have been made as of the date of such surrender
of the certificate for the Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series
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D-Type Preferred Stock, Series E-Type Preferred Stock or Series F-Type
Preferred Stock to be converted, and the person or persons entitled to receive
the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such Common Stock on such date. If
the conversion is in connection with an offer of securities registered pursuant
to the Securities Act of 1933, as amended, the conversion may, at the option of
any holder tendering Series A Preferred Stock, Series B-Type Preferred Stock,
Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type
Preferred Stock or Series F-Type Preferred Stock for conversion, be conditioned
upon the closing of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Series A Preferred Stock, Series B-Type Preferred Stock,
Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type
Preferred Stock or Series F-Type Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
7.3. Adjustments to Conversion Price. Subject to Section 7.3.8,
the Conversion Price in effect from time to time for Series A Preferred Stock,
Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series D-Type
Preferred Stock, Series E-Type Preferred Stock and Series F-Type Preferred
Stock shall be subject to adjustment in certain cases as follows:
7.3.1. Issuance of Securities. (A) Subject to Section 7.3.11, with
respect to the Series A Preferred Stock, all Series B-Type Preferred Stock
other than Series B Preferred Stock, all Series C-Type Preferred Stock other
than Series C Preferred Stock, all Series D-Type Preferred Stock other than
Series D Preferred Stock, all Series E-Type Preferred Stock other than Series E
Preferred Stock and all Series F-Type Preferred Stock other than Series F
Preferred Stock, in case the corporation shall at any time after the Issuance
Date issue or sell any Common Stock without consideration, or for a
consideration per share less than the Current Conversion Price for the Series A
Preferred Stock, Series B-Type Preferred Stock (other than the Series B
Preferred Stock), Series C-Type Preferred Stock (other than Series C Preferred
Stock), Series D-Type Preferred Stock (other than the Series D Preferred
Stock), Series E-Type Preferred Stock (other than the Series E Preferred
Stock), or Series F-Type Preferred Stock (other than the Series F Preferred
Stock), then, and thereafter successively upon each such issuance or sale, the
Current Conversion Price for such Series A Preferred Stock, Series B-Type
Preferred Stock (other than the Series B Preferred Stock), Series C-Type
Preferred Stock (other than Series C Preferred Stock), Series D-Type Preferred
Stock (other than the Series D Preferred Stock), Series E-Type Preferred Stock
(other than the Series E Preferred Stock) or Series F-Type Preferred Stock
(other than the Series F Preferred Stock), shall simultaneously with such
issuance or sale be adjusted to a Conversion Price (calculated to the nearest
cent) determined by multiplying the Current Conversion Price for such Series by
a fraction (1) the numerator of which shall be an amount equal to (x) the total
number of shares of Common Stock Outstanding immediately prior to such
issuance, plus (y) the number of shares of Common Stock which the aggregate of
the amount of all consideration, if any, received (or by express provision
hereof, deemed to have been received) by the corporation for the total number
of additional shares of Common Stock so issued would purchase at the applicable
Conversion Price immediately prior to such issuance and (2) the denominator of
which shall be the total number of shares of Common Stock Outstanding
immediately after such issuance or sale; provided, however, that the Conversion
Price shall at no time exceed (i) $1.00 for the Series A Preferred Stock, (ii)
the initial Conversion Price described
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in Section 7.2 for the Series B-1 Preferred Stock, (iii) the initial Conversion
Price described in Section 7.2 for the Series C-1 Preferred Stock, (iv) the
initial Conversion Price described in Section 7.2 for the Series D-1 Preferred
Stock, (v) the initial Conversion Price described in Section 7.2 for the Series
E-1 Preferred Stock or (vi) the initial Conversion Price described in Section
7.2 for the Series F-1 Preferred Stock, in each case as adjusted for
Recapitalization Events.
(B) Subject to Sections 7.3.11 and 7.3.14, with respect to the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock held by holders who are
not Non- Participating Holders (as defined in Section 7.3.14), in case the
corporation shall, at any time after the Issuance Date for the Series B
Preferred Stock, the Issuance Date for the Series C Preferred Stock, the
Issuance Date for the Series D Preferred Stock, the Issuance Date for the
Series E Preferred Stock or the Issuance Date for the Series F Preferred Stock
issue or sell any Common Stock without consideration, or for a consideration
per share less than the Current Conversion Price for the Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock or Series F Preferred Stock, as the case may be, then, and thereafter
successively upon each such issuance or sale, the Current Conversion Price for
such Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock shall
simultaneously with such issuance or sale be adjusted to a Conversion Price in
an amount equal to the least consideration per share paid for such Common
Stock; provided, however, that the Conversion Price shall at no time exceed
$2.30 and 9/10c. for the Series B Preferred Stock, $2.54 for the Series C
Preferred Stock, or $2.85 and 8/10c. for the Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock, in all cases as adjusted for
Recapitalization Events. In any event, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series
F Preferred Stock held by a Non-Participating Holder (to the extent of the
Refused Percentage) shall be subject to adjustment from time to time as set
forth in Sections 7.3.1(A), 7.3.14 and other related sections in this Section
7, but shall not be subject to this Section 7.3.1(B).
For the purposes of this subsection 7.3.1, the following provisions
shall also be applicable:
7.3.1.1. Cash Consideration. In case of the issuance
or sale of additional Common Stock or Common Stock
Equivalents for cash, the consideration received by
the corporation therefor shall be deemed to be the
amount of cash received by the corporation for such
shares (or, if such shares are offered by the
corporation for subscription, the subscription price,
or, if such shares are sold to underwriters or
dealers for public offering without a subscription
offering, the initial public offering price), without
deducting therefrom any compensation or discount paid
or allowed to underwriters or dealers or others
performing similar services or for any expenses
incurred in connection therewith.
7.3.1.2. Non-Cash Consideration. In case of the
issuance (otherwise than upon exercise, conversion or
exchange of Common Stock
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Equivalents) or sale of additional Common Stock or
Common Stock Equivalents for a consideration other
than cash or a consideration a part of which shall be
other than cash, the fair value of such consideration
as determined by the board of directors of the
corporation in the good faith exercise of its
business judgment, irrespective of the accounting
treatment thereof, shall be deemed to be the value,
for purposes of this Section 7, of the consideration
other than cash received by the corporation for such
securities.
7.3.1.3. Common Stock Equivalents. In case the
corporation shall in any manner issue Common Stock
Equivalents, the total maximum number of shares of
Common Stock issuable upon the exercise, conversion
or exchange of such Common Stock Equivalents at the
time such Common Stock Equivalents first become
exercisable, convertible or exchangeable shall be
deemed to be issued and to be outstanding for the
purpose of this Section 7.3.1 and to have been issued
for the sum of the amount (if any) paid for such
Common Stock Equivalents and the amount (if any)
payable upon the exercise, conversion or exchange of
such Common Stock Equivalents; provided that, subject
to the provisions of Section 7.3.2, no further
adjustment of the Conversion Price shall be made upon
the actual issuance of any such Common Stock upon the
exercise, conversion or exchange of any such Common
Stock Equivalents.
7.3.2. Change in Option Price or Conversion Price. If the purchase
price or the rate at which any shares of Common Stock are issuable upon the
exercise, conversion or exchange of Common Stock Equivalents referred to in
Subject 7.3.1.3 shall change at any time (other than under or by reason of
provisions designed to protect against dilution), the Current Conversion Price
in effect at the time of such event shall forthwith be readjusted to the
Conversion Price that would have been in effect at such time had such Common
Stock Equivalents still outstanding provided for such changed purchase price or
conversion rate, as the case may be, at the time initially issued.
Notwithstanding any other provision hereof, no adjustment to the Conversion
Price of Series A Preferred Stock, Series C Preferred Stock, any Series C-Type
Preferred Stock, Series D Preferred Stock, any Series D-Type Preferred Stock,
Series E Preferred Stock, any Series E-Type Preferred Stock, Series F Preferred
Stock or any Series F-Type Preferred Stock shall be made as a consequence of or
in connection with any adjustment to the Conversion Price of any Series B-Type
Preferred Stock pursuant to Section 7.3.15.
7.3.3. Termination of Common Stock Equivalents. In the event of the
termination or expiration of any right to purchase, exchange or convert any
Common Stock Equivalent, the Current Conversion Price shall, upon such
termination, be changed to the Conversion Price that would have been in effect
at the time of such expiration or termination had such Common Stock Equivalent
never been issued, and the shares of Common Stock issuable thereunder shall no
longer be deemed to be Common Stock Outstanding.
7.3.4. Stock Splits, Dividends, Distributions and Combinations. If
the corporation should at any time or from time to time after the later of the
date of filing this Amended and
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<PAGE> 15
Restated Certificate of Incorporation with the Delaware Secretary of State and
the Issuance Date fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or Common Stock Equivalents, then,
following such record date (or the date of such dividend, distribution, split
or subdivision if no record date is fixed), the Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock issuable
on conversion of each share of Series A Preferred Stock, Series B-Type
Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock,
Series E-Type Preferred Stock and Series F-Type Preferred Stock shall be
increased in proportion to such increase in the number of outstanding shares of
Common Stock (including for this purposes, Common Stock Equivalents) determined
in accordance with Section 7.3.6. If the number of shares of Common Stock
Outstanding at any time after the Issuance Date is decreased by a combination
of the outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Price shall be appropriately increased so that
the number of shares of Common Stock issuable on conversion of each share of
Series A Preferred Stock, Series B-Type Preferred Stock, Series C-Type
Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock
and Series F-Type Preferred Stock shall be decreased in proportion to such
decrease in the number of outstanding shares of Common Stock.
7.3.5. Other Dividends. If the corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by this corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection 7.3.1, then, in each such
case for the purpose of this Section 7.3.5, the holders of Series A Preferred
Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series
D-Type Preferred Stock, Series E-Type Preferred Stock and Series F-Type
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the corporation into which their shares of Series A Preferred Stock,
Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series D-Type
Preferred Stock, Series E-Type Preferred Stock and Series F-Type Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the corporation entitled to receive such
distribution.
7.3.6. Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or a sale of assets transaction provided for elsewhere in
this Section 7) provision shall be made so that the holders of Series A
Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E-Type Preferred Stock and Series F-Type
Preferred Stock shall thereafter be entitled to receive upon conversion of
shares of Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock and Series F-Type Preferred Stock the number of shares of stock or other
securities or property of the corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 7 with respect to the rights
of the holders of Series A Preferred Stock, Series B-Type Preferred Stock,
Series C-Type Preferred Stock, Series D-Type Preferred Stock,
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<PAGE> 16
Series E-Type Preferred Stock and Series F-Type Preferred Stock after the
recapitalization to the end that the provisions of this Section 7 (including
adjustment of the Conversion Price then in effect and the number of shares
purchasable upon conversion of shares of Series A Preferred Stock, Series
B-Type Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred
Stock, Series E-Type Preferred Stock and Series F-Type Preferred Stock) shall
be applicable after that event as nearly equivalent as may be practicable to
their application prior to such event.
7.3.7. Successive Changes. The above provisions of this Section 7
shall similarly apply to successive issuances, changes, sales, dividends or
other distributions, subdivisions and combinations on or of the Common Stock
after the later of the date of filing this Amended and Restated Certificate of
Incorporation with the Delaware Secretary of State and the Issuance Date.
7.3.8. Other Events Altering Conversion Price. Upon the occurrence
of any event not specifically denominated in this Section 7 as altering the
Conversion Price that, in the reasonable exercise of the business judgment of
the Board of Directors, requires, on equitable principles, the alteration of
the Conversion Price, the Conversion Price will be equitably altered.
7.3.9. No Impairment. The corporation will not, by amendment of this
Amended and Restated Certificate of Incorporation, including the filing of a
certificate of designations, or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issuance or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 7 and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights of
the holders of Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock and Series F-Type Preferred Stock against impairment.
7.3.10. Miscellaneous Conversion Price Matters. The corporation shall
at all times reserve and keep available out of its authorized but unissued
Common Stock the full number of shares of Common Stock deliverable upon
conversion of all the then outstanding Series A Preferred Stock, Series B-Type
Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock,
Series E-Type Preferred Stock and Series F-Type Preferred Stock; and shall, at
its own expense, take all such actions and obtain all such permits and orders
as may be necessary to enable the corporation lawfully to issue such Common
Stock upon the conversion of such Series A Preferred Stock, Series B-Type
Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock,
Series E-Type Preferred Stock and Series F-Type Preferred Stock.
7.3.11. Excluded Events. Notwithstanding anything in this Section 7
to the contrary, the Conversion Price shall not be adjusted by virtue of (a)
the conversion of shares of Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock or Series F-Type Preferred Stock into shares of Common
Stock, (b) the repurchase of shares from the corporation's employees,
consultants, officers or directors at such person's cost (or at such other
price as may be agreed to by the corporation's board of directors), or (c) the
issuance and sale of, or the grant of options to purchase, an aggregate of not
more than 2,425,500 shares of Common Stock (including shares or
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<PAGE> 17
options outstanding on the Issuance Date for Series E Preferred Stock and
Series F Preferred Stock) to employees, advisors, directors, officers or
consultants of the corporation and its subsidiaries at a price which is less
than the Conversion Price at the time of such issuance or sale (all as
determined in accordance with this Section 7) as may be approved by the board
of directors, and none of such shares shall be included in any manner in the
computation from time to time of the Conversion Price under subsection 7.3.1 or
in Common Stock Outstanding for purposes of such computation.
7.3.12. No Fractional Shares. No fractional shares shall be issued
upon conversion of shares of Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-
Type Preferred Stock or Series F-Type Preferred Stock and the number of shares
of Common Stock to be issued shall be rounded to the nearest whole share
determined on the basis of the total number of shares of Series A Preferred
Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series
D-Type Preferred Stock, Series E-Type Preferred Stock or Series F-Type
Preferred Stock the holder is at the time converting into Common Stock and the
aggregate number of shares of Common Stock (including the aggregation of all
fractional shares) issuable upon such aggregate conversion.
7.3.13. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 7,
the corporation, at its expense upon request by any holder of Series A
Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E-Type Preferred Stock and Series F-Type
Preferred Stock, shall compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series A
Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock,
Series D-Type Preferred Stock, Series E-Type Preferred Stock or Series F-Type
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment is based. The
corporation shall, upon the written request at any time of any holder of Series
A Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred
Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock and Series
F-Type Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (a) such adjustment and readjustment, (b) the Current
Conversion Price at the time in effect, and (c) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of any series of Series A Preferred
Stock, Series B-Type Preferred Stock, Series C-Type Preferred Stock, Series
D-Type Preferred Stock, Series E-Type Preferred Stock and Series F-Type
Preferred Stock.
7.3.14. Special Mandatory Conversion.
(i) If (a) at any time following (v) the Series B
Preferred Stock Issuance Date a holder of shares of Series B Preferred Stock is
entitled to exercise the right of first refusal set forth in Section 7.11 of
the Convertible Preferred Stock Purchase Agreement dated January 3, 1992 among
the corporation and the purchasers and prior investors named therein (the
"Series B Right of First Refusal") with respect to an equity financing of the
corporation at an effective price per share (i.e., based upon, if such share is
a convertible security, the conversion price of such security) which is less
than the Conversion Price then in effect for
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the Series B Preferred Stock (the "Series B Equity Financing") or (w) the
Series C Preferred Stock Issuance Date a holder of shares of Series C Preferred
Stock is entitled to exercise the right of first refusal set forth in Section
7.11 of the Convertible Preferred Stock Purchase Agreement relating to Series C
Preferred Stock between the corporation and the purchaser named therein (the
"Series C Right of First Refusal") with respect to an equity financing of the
corporation at an effective price per share (i.e., based upon, if such share is
a convertible security, the conversion price of such security) which is less
than the Conversion Price then in effect for the Series C Preferred Stock (the
"Series C Equity Financing"), or (x) the Series D Preferred Stock Issuance Date
a holder of shares of Series D Preferred Stock is entitled to exercise the
right of first refusal set forth in Section 7.11 of the Convertible Preferred
Stock Purchase Agreement relating to Series D Preferred Stock among the
corporation and the purchasers named therein (the "Series D Right of First
Refusal") with respect to an equity financing of the corporation at an
effective price per share (i.e., based upon, if such share is a convertible
security, the conversion price of such security) which is less than the
Conversion Price then in effect for the Series D Preferred Stock (the "Series D
Equity Financing"), or (y) the Series E Preferred Stock Issuance Date a holder
of Shares of Series E Preferred Stock is entitled to exercise the right of
first refusal set forth in Section 7.11 of the Convertible Preferred Stock
Purchase Agreement relating to Series E Preferred Stock among the corporation
and the purchasers named therein (the "Series E Right of First Refusal") with
respect to an equity financing of the corporation at an effective price per
share (i.e., based upon, if such share is a convertible security, the
conversion price of such security) which is less than the Conversion Price then
in effect for the Series E Preferred Stock (the "Series E Equity Financing") ,
or (z) the Series F Preferred Stock Issuance Date a holder of Shares of Series
F Preferred Stock is entitled to exercise the right of first refusal set forth
in Section 7.11 of the Convertible Preferred Stock Purchase Agreement relating
to Series F Preferred Stock among the corporation and the purchaser named
therein (the "Series F Right of First Refusal," which along with the Series B
Right of First Refusal, the Series C Right of First Refusal, the Series D Right
of First Refusal and the Series E Right of First Refusal is generally referred
to as the "Right of First Refusal") with respect to an equity financing of the
corporation at an effective price per share (i.e., based upon, if such share is
a convertible security, the conversion price of such security) which is less
than the Conversion Price then in effect for the Series F Preferred Stock (the
"Series F Equity Financing," which along with the Series B Equity Financing,
the Series C Equity Financing, the Series D Equity Financing and the Series E
Equity Financing is generally referred to as the "Equity Financing"), (b) the
corporation has complied with its obligations under each Right of First Refusal
with respect to each such Equity Financing, and (c) such holder (a
"Non-Participating Holder") does not by exercise of such holder's Right of
First Refusal acquire one hundred percent (100%) of such holder's Proportionate
Percentage (as hereinafter defined) of the New Securities (as defined in
Section 7.11(a) of such Convertible Preferred Stock Purchase Agreements)
offered in such Equity Financing (a "Mandatory Offering"), then to the extent
of the percentage of the Proportionate Percentage not so acquired by the
Non-Participating Holder (the "Refused Percentage") the number of outstanding
shares of such Non-Participating Holder's Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock, as the case may be, determined by multiplying the Refused
Percentage by all outstanding shares of such Non-Participating Holder's Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock, as the case may be, shall each
automatically and without further action on the part of such holder be
converted effective upon,
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subject to and concurrently with, the consummation of the Mandatory Offering
(the "Mandatory Offering Date") as follows: each share of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock or Series F Preferred Stock, as the case may be, that is automatically
converted shall be converted into one share of Series B-1 Preferred Stock, one
share of Series C-1 Preferred Stock, one share of Series D-1 Preferred Stock,
one share of Series E-1 Preferred Stock or one share of Series F-1 Preferred
Stock, respectively (each, a "Special Mandatory Conversion"); provided however,
that no such conversion shall occur in connection with a particular Equity
Financing if, pursuant to the written request of the corporation, each holder
of shares of Series B Preferred Stock, each holder of Series C Preferred Stock,
each holder of Series D Preferred Stock, each holder of Series E Preferred
Stock or each holder of Series F Preferred Stock, as the case may be, agrees in
writing to waive such holder's Right of First Refusal with respect to such
Equity Financing. Upon conversion pursuant to this Section 7.3.14, the shares
of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock or Series F Preferred Stock, as the case may
be, so converted shall be canceled and not subject to reissuance.
(ii) The holder of any shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock converted pursuant to this Section 7.3.14 shall
deliver to the corporation during regular business hours at the office of any
transfer agent of the corporation for the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock, as the case may be, or at such other place as may be
designated by the corporation, the certificate or certificates for the shares
so converted, duly endorsed or assigned in blank or to the corporation. As
promptly as practicable thereafter, the corporation shall issue and deliver to
such holder, at the place designated by such holder, a certificate or
certificates for the number of full shares of the appropriate Series B-1
Preferred Stock, Series C-1 Preferred Stock, Series D-1 Preferred Stock, Series
E-1 Preferred Stock and Series F-1 Preferred Stock to be issued and, if less
than all of the shares of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock,
represented by such certificate(s) are converted, a certificate or certificates
representing any shares not so converted, and such holder shall be deemed to
have become a stockholder of record on the Mandatory Offering Date as to such
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock unless the transfer books
of the corporation are closed on that date, in which event such holder shall be
deemed to have become a stockholder of record on the next succeeding date on
which the transfer books are open.
(iii) In the event that any shares of Series B-1 Preferred
Stock, Series C-1 Preferred Stock, Series D-1 Preferred Stock, Series E-1
Preferred Stock or Series F-1 Preferred Stock are issued, concurrently with
such issuance, the corporation shall use its best efforts to take all such
action as may be required, including amending its Amended and Restated
Certificate of Incorporation, (a) to cancel all authorized shares of Series B-1
Preferred Stock, Series C-1 Preferred Stock, Series D-1 Preferred Stock, Series
E-1 Preferred Stock or Series F-1 Preferred Stock that remain unissued after
such issuance, (b) to create and reserve for issuance upon Special Mandatory
Conversion of the Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock a new
series of
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Preferred Stock equal in number to the number of shares of Series B-1 Preferred
Stock, Series C-1 Preferred Stock, Series D-1 Preferred Stock, Series E-1
Preferred Stock or Series F-1 Preferred Stock, as the case may be, so canceled
and designated Series B-2 Preferred Stock, Series C-2 Preferred Stock, Series
D-2 Preferred Stock, Series E-2 Preferred Stock or Series F-2 Preferred Stock,
as the case may be, with the designations, powers, preferences and rights and
the qualifications, limitations and restrictions identical to those then
applicable to the Series B-1 Preferred Stock, Series C-1 Preferred Stock,
Series D-1 Preferred Stock, Series E-1 Preferred Stock or Series F-1 Preferred
Stock, as the case may be, except that the initial Conversion Price of such
shares of Series B-2 Preferred Stock, Series C-2 Preferred Stock, Series D-2
Preferred Stock, Series E-2 Preferred Stock or Series F-2 Preferred Stock, as
the case may be, shall be the Series B Conversion Price, Series C Conversion
Price, Series D Conversion Price, Series E Conversion Price or Series F
Conversion Price, respectively, in effect immediately preceding the date of
issuance of the Series B-2 Preferred Stock, Series C-2 Preferred Stock, Series
D-2 Preferred Stock, Series E-2 Preferred Stock or Series F-2 Preferred Stock,
as the case may be, adjusted as if such shares were Series B-1 Preferred Stock,
Series C-1 Preferred Stock, Series D-1 Preferred Stock, Series E-1 Preferred
Stock and Series F-1 Preferred Stock, respectively, in accordance with Section
7.3.1.(A) hereof, and (c) to amend the provisions of this Section 7.3.14 to
provide that any subsequent Special Mandatory Conversion will be into shares of
Series B-2 Preferred Stock, Series C-2 Preferred Stock, Series D-2 Preferred
Stock, Series E-2 Preferred Stock or Series F-2 Preferred Stock, as the case
may be, rather than Series B-1 Preferred Stock, Series C-1 Preferred Stock,
Series D-1 Preferred Stock, Series E-1 Preferred Stock or Series F-1 Preferred
Stock. The corporation shall take the same actions with respect to the Series
B-2 Preferred Stock, Series C-2 Preferred Stock, Series D-2 Preferred Stock,
Series E-2 Preferred Stock and Series F-2 Preferred Stock and each subsequently
authorized series of Preferred Stock upon initial issuance of shares of the
last such series to be authorized. The Series B, Series B-1 and Series B-2
Preferred Stock, the Series C, Series C-1 and Series C-2 Preferred Stock,
Series D, Series D-1 and Series D-2 Preferred Stock, Series E, Series E-1 and
Series E-2 Preferred Stock and Series F, Series F-1 and Series F-2 Preferred
Stock and each series of Preferred Stock subsequently authorized pursuant to
this Section 7.3.14 are hereinafter respectively referred to as "Series B-Type
Preferred Stock," "Series C-Type Preferred Stock," "Series D-Type Preferred
Stock," "Series E-Type Preferred Stock" and "Series F-Type Preferred Stock".
(iv) "Proportionate Percentage" shall mean with respect to
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock, as the case may
be, that number of shares which equals the proportion that the number of shares
of Common Stock issuable upon conversion of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock, as the case may be, then held by such holder bears to the
total number of shares of Common Stock Outstanding immediately prior to the
closing of such Mandatory Offering; provided, however, that if, pursuant to a
written request of the corporation, the holders of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock, as the case may be, are requested to purchase less
than their Proportionate Percentage on a pro rata basis in connection with a
particular Equity Financing, the Proportionate Percentage of each holder of
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock or Series F Preferred Stock,
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as the case may be, shall be reduced to such lesser number of shares that the
corporation requests such holder to purchase.
7.3.15. Net Apache Revenue Adjustments. The corporation shall have an
audit performed for each of the two (2) year periods ending December 31, 1992
and December 31, 1993 by a nationally-recognized firm of certified public
accountants to determine Net Apache Revenues (as hereinafter defined) and shall
deliver to each of the holders of Series B-Type Preferred Stock a copy of such
audited financial statements (the "Financial Statements"). Such Financial
Statements shall be provided to the holders of Preferred Stock together with a
certificate of the certified public accountants that such accountants have
reviewed this Section 7.3.15 and shall detail all calculations made with
respect to the determination of Net Apache Revenues. Not in limitation of any
other adjustments, in the event that the Financial Statements indicate that the
corporation's Net Apache Revenues, as reflected on such Financial Statements
for the two (2) year period ending December 31, 1992 are less than $7,600,000,
the then existing Conversion Price of each Series B-Type Preferred Stock shall
be reduced, as of the Issuance Date of the Series B Preferred Stock, by an
amount determined by multiplying such Conversion Price of such Series B-Type
Preferred Stock by "X" where:
X = $7,600,000 - Net Apache Revenues x 1
-------------------------------- ---
$2,000,0000 3
and where "Net Apache Revenues" shall mean gross revenues of every nature and
kind from:
(a) the sale or licensing of computer hardware and
software which implement portions of the Apache Methodology;
(b) fees and other charges for installation, training,
maintenance, upgrades and other systems supports in connection with any
such computer system;
(c) time sharing and other charges for access to any such
computer system via a network or similar telecommunication basis;
(d) licensing of the corporation's database or databases;
(e) professional consulting and reporting services
related to, or based upon, the Apache Methodology, the corporation's
database or databases, and/or computer implementations thereof.
to the extent such revenues are recurring revenues, in each case less
sales and excise taxes, freight and delivery charges, rebates, trade
discounts and allowances, returns and other like charges; it being
understood that Net Apache Revenues shall be calculated based on the
operations of the corporation as constituted on the Series B Preferred
Stock Issuance Date and shall not include any revenues from any
additional businesses or operations that may be subsequently acquired by
the corporation; provided, that in no event shall Net Apache Revenues
include any revenues derived from other than the on-going business of
the corporation; provided, further, that in the event Net Apache
Revenues are less than
21
<PAGE> 22
$5,600,000 Net Apache Revenues shall be deemed to be $5,600,000 for
purposes of the above calculation; provided, further, in the event that
the Financial Statements indicate that the corporation's Net Apache
Revenues, as reflected on such Financial Statements for the two (2) year
period ending December 31, 1993 equals or exceeds $15,000,000, then any
adjustments made to the Conversion Price of the Series B and Series
B-Type Preferred Stock pursuant to this Section 7.3.15 shall be deemed
null and void ab initio. "Apache Methodology" shall mean the Apache III
prognostic scoring system, including any and all improvements and
extensions to other categories of patients or other modifications,
however designated, provided that the system, as so improved, extended,
modified and designated, scores physiologic and other patient variables
and applies prognostic and other equations thereto. Items of gross
revenue shall be recognized for the purpose of computing Net Apache
Revenue consistent with the recognition principles used in the
corporation's August 1991 five year summary and five year detailed
projections provided to the purchasers of the Series B Preferred Stock
who purchased on the Issuance Date for Series B Preferred Stock.
7.4. Automatic Conversion. Immediately upon the effectiveness of
the corporation's registration statement on Form S-1 pursuant to which Common
Stock is sold to the public by the corporation in a public offering registered
under the Securities Act of 1933, as amended, at an aggregate public offering
price greater than $10,000,000 in which the aggregate value of corporation's
securities, on a fully-diluted, as if converted basis, immediately prior to
such offering is at least $60,000,000, as adjusted for Recapitalization Events,
based upon the per share offering price of such offering, each share of Series
A Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred
Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock or Series
F-Type Preferred Stock shall automatically be converted into shares of Common
Stock at the applicable Conversion Price then in effect. On and after said
conversion date, notwithstanding that any certificates for the shares of Series
A Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred
Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock and Series
F-Type Preferred Stock shall not have been surrendered for conversion, the
shares of such series of Series A Preferred Stock, Series B-Type Preferred
Stock, Series C-Type Preferred Stock, Series D-Type Preferred Stock, Series
E-Type Preferred Stock and Series F-Type Preferred Stock evidenced thereby
shall be deemed to be no longer outstanding, and all rights with respect
thereto shall forthwith cease and terminate, except only the rights of the
holder (i) to receive the shares of Common Stock to which such holder shall be
entitled upon conversion thereof, (ii) to receive the amount of cash payable in
respect of any fractional share of Common Stock to which such holder shall be
entitled, and (iii) with respect to dividends declared but unpaid on the Series
A Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred
Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock or Series
F-Type Preferred Stock prior to such conversion date. In the event that any
holder of Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock or Series F-Type Preferred Stock presents such holder's certificate
therefor for surrender to the corporation or its transfer agent upon such
conversion, a certificate for the number of shares of Common Stock into which
the shares of Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock or Series F-Type Preferred
22
<PAGE> 23
Stock surrendered were convertible on such conversion date promptly shall be
issued and delivered to such holder.
7.5. Merger; Sale of Corporation. In the event, after the Issuance
Date, of any proposed consolidation of the corporation with, or merger of the
corporation with or into another corporation (other than a consolidation or
merger in which the corporation is the continuing corporation and which does
not result in any reclassification of, or change in, the outstanding shares of
Common Stock), or in case of any proposed sale or transfer to another
corporation of all or substantially all of the assets of the corporation, any
holder of Series A Preferred Stock, Series B-Type Preferred Stock, Series
C-Type Preferred Stock, Series D-Type Preferred Stock, Series E-Type Preferred
Stock or Series F-Type Preferred Stock may, by delivery of an election pursuant
to Section 3, elect to have each share of Series A Preferred Stock, Series
B-Type Preferred Stock, Series C-Type Preferred Stock, Series D-Type Preferred
Stock, Series E-Type Preferred Stock or Series F-Type Preferred Stock held by
such holder treated for all purposes as if it had been converted into Common
Stock on the later of (i) the record date, if any, for voting by holders of
Common Stock on such event and (ii) the date of such event.
8. Covenants
8.1. All Preferred Stock. In addition to any other rights provided
by law, so long as fifty percent (50%) of the then authorized shares of Series
A Preferred Stock, Series B-Type Preferred Stock, Series C-Type Preferred
Stock, Series D-Type Preferred Stock, Series E-Type Preferred Stock and Series
F-Type Preferred Stock shall be outstanding, the corporation shall not, without
first obtaining the affirmative vote or written consent of the holders of more
than sixty-six and two/thirds percent (66-2/3%) of the then outstanding shares
of all such Preferred Stock, voting together as a single class:
(a) amend or repeal any provision of, or add any
provision to, this Amended and Restated Certificate of Incorporation
or the corporation's by-laws;
(b) except as provided in Section 4 hereof, apply any of
its assets to the redemption, retirement, purchase or acquisition,
directly or indirectly, through subsidiaries ("Subsidiaries") (as
defined in Section 425 of the Internal Revenue Code of 1986, as
amended) or otherwise, of any shares of any class or series of Common
Stock, except from employees, advisors, officers, directors and
consultants of, and persons performing services for, the corporation
or its Subsidiaries on terms approved by the board of directors upon
termination of employment or association;
(c) sell, lease, convey or otherwise dispose of or
transfer all or substantially all of its assets, properties and
business, or (ii) merge into or consolidate with any other corporation
(other than a wholly owned Subsidiary);
(d) pay any dividend on the outstanding shares of Common
Stock; or
(e) dissolve, liquidate or wind up the affairs of the
corporation.
23
<PAGE> 24
B. COMMON STOCK
1. Voting Rights. Except as otherwise required by law or this
Amended and Restated Certificate of Incorporation, including any certificate of
designations for a Series of Preferred Stock, each holder of Common Stock shall
have one vote in respect of each share of stock held by him of record on the
books of the corporation for the election of directors and on all matters
submitted to a vote of stockholders of the corporation.
2. Dividends. Subject to the preferential rights of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the board of directors, out of the assets of
the corporation which are by law available therefor, dividends payable either
in cash, in property or in shares of capital stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of the corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Preferred Stock, holders of Common Stock shall be
entitled, unless otherwise provided by law or Section 3 of this Amended and
Restated Certificate of Incorporation, including any certificate of
designations for a Series of Preferred Stock, to receive all of the remaining
assets of the corporation of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of Common Stock held
by them respectively.
FIFTH. This corporation shall have perpetual existence.
SIXTH. The private property of the stockholders shall not be subject
to the payment of corporate debts to any extent whatever.
SEVENTH In furtherance and not in limitation of the powers conferred
by the laws of the State of Delaware:
A. The board of directors of the corporation is expressly
authorized:
(i) To make, alter or repeal the by-laws of the
corporation.
(ii) To authorize and cause to be executed mortgages and
liens upon the real and personal property of the corporation.
(iii) To set apart out of any of the funds of the
corporation available for dividends a reserve or reserves for any proper
purpose and to abolish any such reserve in the manner in which it was created.
(iv) By a majority of the whole board, to designate one or
more committees, each committee to consist of one or more of the directors of
the corporation. The board may designate one or more directors as alternate
member of any committee, who may replace any absent or disqualified member of
any committee. The by-laws may provide that in the absence or disqualification
of a member of a committee, the member or members thereof present at any
24
<PAGE> 25
meeting and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors, or in the by-laws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
amending this Amended and Restated Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the General Corporation Law of the State of
Delaware, fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other
class or classes of stock of the corporation), adopting an agreement of merger
or consolidation under Sections 251 or 252 of the General Corporation Law of
the State of Delaware, recommending to the stockholders the sale, lease or
exchange, of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution or by-laws expressly so provide, no such committee shall
have the power or authority to declare a dividend, to authorize the issuance of
stock or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of the State of Delaware.
(v) When and as authorized by the stockholders in
accordance with statute, to sell, lease or exchange all or substantially all of
the property and assets of the corporation, including its good will and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or property
including shares of stock in, and/or other securities of, any other corporation
or corporations, as the board of directors shall deem expedient and for the
best interests of the corporation.
B. Elections of directors need not be by written ballot unless
the by-laws of the corporation shall so provide.
C. The books of the corporation may be kept at such place within
or without the State of Delaware as the by-laws of the corporation may provide
or as may be designated from time to time by the board of directors of the
corporation.
EIGHTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of Section 279 of Title 8
of the Delaware Code, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, to be summoned in
25
<PAGE> 26
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
NINTH.
(a) A director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware, or (iv) for any transaction from which the
director derived an improper personal benefit. If the General Corporation Law
of the State of Delaware, or any other applicable law, is amended to authorize
corporation action further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware, or any other applicable law, as so
amended. Any repeal or modification of this Section (a) by the stockholders of
the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or
modification.
(b) (1) Each person who has or is made a party or is threatened to
be made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she or a person of whom he or she is the legal
representative is or was a director or officer of the corporation or is or was
serving at the request of the corporation as a director, officer or employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is an alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as
a director, officer, employee or agent, shall be indemnified and held harmless
by the corporation to the fullest extent authorized by the General Corporation
Law of the State of Delaware, or any other applicable law, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the corporation to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment), against all expenses, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such
person in connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that except as provided in paragraph (2) of this Section (b)
with respect to proceedings seeking to enforce rights to indemnification, the
corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
26
<PAGE> 27
such proceeding (or part thereof) was authorized by the Board of Directors of
the corporation. The right to indemnification conferred in this Section (b)
shall be a contract right and shall include the right to be paid by the
corporation the expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that if the General Corporation
Law of the State of Delaware, or any other applicable law, requires, the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding shall be made only upon delivery to
the corporation of an undertaking by or on behalf of such director or officer
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section (b) or
otherwise.
(2) If a claim under paragraph (1) of this Section (b) is not paid
in full by the corporation within thirty days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the corporation)
that the claimant has not met the standard of conduct which makes it
permissible under the General Corporation Law of the State of Delaware, or any
other applicable law, for the corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
corporation. Neither the failure of the corporation (including its Board of
Directors, stockholders or independent legal counsel) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the General Corporation Law of the
State of Delaware, or any other applicable law, nor an actual determination by
the corporation (including its Board of Directors, stockholders or independent
legal counsel) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
(3) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition
conferred in this Section (b) shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, provision of this
Certificate of Incorporation, By-Law, agreement, vote of stockholders or
disinterested directors or otherwise.
(4) The corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Law of the State of Delaware, or any other
applicable law.
27
<PAGE> 28
(5) The corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification, and rights to
be paid by the corporation the expenses incurred in defending any proceeding in
advance of its final disposition, to any employee or agent of the corporation
to the fullest extent of the provisions of this Section (b) with respect to the
indemnification and advancement of expenses of directors and officers of the
corporation.
(6) Any repeal or modification of this Section (b) by the
stockholders of the corporation shall not adversely affect any right or
protection of a director, officer, employee or agent of the corporation
existing at the time of such repeal or modification.
TENTH. Simultaneously with the effective date of this amendment and
restatement (the "Effective Date"), each share of Common Stock, par value $.01
per share, issued and outstanding immediately prior to the Effective Date (the
"Old Common Stock") shall automatically and without any action on the part of
the holder thereof be reclassified and changed into a fraction equal to 1
divided by 2.86 of a share of the corporation's Common Stock, par value $.01
per share (the "New Common Stock"), subject to the treatment of fractional
share interests as described below. Each holder of a certificate or
certificates which immediately prior to the Effective Date represented
outstanding shares of Old Common Stock (the "Old Certificates") shall be
entitled to receive upon surrender of such Old Certificates to the
corporation's transfer agent for cancellation a certificate or certificates
(the "New Certificates") representing such number of whole shares of the New
Common Stock into which and for which the shares of the Old Common Stock
formerly represented by such Old Certificates so surrendered are reclassified
under the terms hereof. From and after the Effective Date, Old Certificates
shall represent only the right to receive New Certificates pursuant to the
provisions hereof. No certificates or scrip representing fractional share
interests in New Common Stock will be issued by the corporation as a result of
the reverse stock split contemplated hereby. In lieu thereof, each stockholder
whose shares of Old Common Stock are not evenly divisible by 2.86 will receive
one additional share of New Common Stock for the fractional share that such
stockholder would otherwise be entitled to as a result of such reverse stock
split. If more than one Old Certificate shall be surrendered at one time for
the account of the same stockholder, the number of full shares of New Common
Stock for which new certificates shall be issued shall be computed on the basis
of the aggregate number of shares represented by the Old Certificates so
surrendered. In the event that the corporation's transfer agent determines
that a holder of Old Certificates has not tendered all his certificates for
exchange, the transfer agent shall carry forward any fractional share until all
certificates of that holder have been presented for exchange. If any New
Certificate is to be issued in the name other than that in which the Old
Certificates surrendered for exchange are issued, the Old Certificates so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange shall affix any
requisite stock transfer tax stamps to the Old Certificates surrendered, or
provide funds for their purchase, or establish to the satisfaction of the
transfer agent that such taxes are not payable. From and after the Effective
Date, the amount of capital represented by the shares of the New Common Stock
into which and for which the shares of the Old Common Stock are reclassified
under the terms hereof shall be the same as the amount of capital represented
by the shares of Old Common Stock so reclassified, until thereafter reduced or
increased in accordance with applicable law.
28
<PAGE> 29
ELEVENTH. Except as otherwise provided in Article Fourth, the
corporation reserves the right to amend or repeal any provision contained in
this Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon a stockholder herein are granted subject
to this reservation.
In lieu of a meeting and vote of stockholders, the stockholders have
given written consent to the foregoing Amended and Restated Certificate of
Incorporation in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware, and written notice of the adoption of
such Amended and Restated Certificate of Incorporation has been given as
provided in Section 228 of the General Corporation Law of the State of Delaware
to every stockholder entitled to such notice.
The foregoing Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the applicable provisions of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this Amended and
Restated Certificate of Incorporation on this 18th day of June, 1996.
/s/ Gerald E. Bisbee, Jr.
-------------------------------
GERALD E. BISBEE, JR., Chairman
29
<PAGE> 1
EXHIBIT 5.1
[Gardner, Carton & Douglas Letterhead]
June 21, 1996
APACHE Medical Systems, Inc.
1650 Tysons Boulevard
McLean, Virginia 22012
Re: Registration Statement on Form S-1 (No. 333-4106)
Ladies and Gentlemen:
As special counsel to APACHE Medical Systems, Inc., a Delaware
corporation (the "Company"), we have participated in the legal proceedings and
matters relating to the proposed sale of up to 2,300,000 shares of Common
Stock, $.01 par value per share, of the Company (the "Stock") referred to in
the Registration Statement filed by the Company with the Securities and
Exchange Commission on Form S-1 (Registration No. 333-4106).
In our opinion, the Stock has been duly authorized and, when issued,
delivered and paid for, will be validly issued, fully paid and non-assessable.
We consent to the use of our name in the Registration Statement and to
the filing of this opinion as an Exhibit to such Registration Statement.
Very truly yours,
Gardner, Carton & Douglas
<PAGE> 1
EXHIBIT 10.12
LICENSING AGREEMENT
BETWEEN
APACHE MEDICAL SYSTEMS, INC.
AND
QUALITY INFORMATION MANAGEMENT CORPORATION
MARCH 24, 1994
<PAGE> 2
LICENSING AGREEMENT
This LICENSING AGREEMENT is entered into as of this 24th day of March,
1994, by and between APACHE Medical Systems, Inc., a Delaware corporation
("APACHE") and Quality Information Management Corporation, an Ohio nonprofit
corporation ("QIMC").
WITNESSTH
WHEREAS, QIMC is a nonprofit, membership corporation formed by certain
local business and health care organizations located in and around Cleveland,
Ohio, to encourage and undertake cooperative efforts to improve the quality of
health care available in Cleveland and the surrounding areas, and in that
regard, has instituted and maintained the Cleveland Health Quality CHOICE(SM)
Program (the "Choice Program");
WHEREAS, in connection with the Choice Program, QIMC has collected and
compiled certain data and related information (the "Choice Data") regarding
quality of health care at Participating Hospitals as defined herein, and has
developed and owns specific methodologies, scoring systems, databases,
equations, patient variables, co-efficient codes and supporting documentation
(collectively, together with the Choice Data, and as more specifically
delineated herein, the "Choice System"), which allow the Choice Data to be
analyzed, compared and utilized based upon similar assumptions;
WHEREAS, APACHE has developed an outcome predictive system relating to
hospitals' intensive care units, and has substantial expertise and experience
in developing and marketing similar predictive systems for use in other areas
of health care, such as those addressed through use of the Choice System;
WHEREAS, QIMC and APACHE desire to provide APACHE with access to the
Choice System to allow APACHE to develop further and market the Choice System
and upgraded versions of the Choice System alone or in connection with other
product and service offerings by APACHE;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties hereto do hereby agree
as follows:
1. Licenses. (a) QIMC hereby grants to APACHE, under and subject
to the terms hereof (i) a renewable, ten (10)-year, exclusive (except as
explicitly provided herein), worldwide license (the "System License") to
develop and market the Choice System and Core Choice System, together with
all prior versions thereof and all future modifications, enhancements and
upgrades of the Choice System or Core Choice System undertaken by QIMC under
the terms hereof, including but not limited to all of QIMC's work-in-progress,
including but not limited to that utilizing the UB-82-92 data variables
described in Attachment A hereto (the "UB-82-92 Variables"), and (ii) a
renewable, ten (10)-year, exclusive (except as
<PAGE> 3
explicitly provided herein), worldwide license to use in any legal
manner the name "Choice" and any trademark, service mark, trade secret,
copyrights and any other proprietary rights ("Rights" and, collectively with
the System License, the "Licenses") owned or acquired by QIMC in connection
with the Choice System. The System License shall be renewable at APACHE's
option for successive three (3)-year terms after the termination of the initial
license term by APACHE's providing one hundred eighty (180) day's notice of
such renewal to QIMC. APACHE is authorized to use the Rights for one (1) year
after the termination of this Agreement for any reason upon and subject to the
terms and conditions to such use set forth herein.
(b) QIMC and APACHE hereby acknowledge and agree that QIMC shall
retain and have the following rights and interests with respect to the Choice
System and the Core Choice System (as defined below):
(1) the nonexclusive right, subject to APACHE's first right of
refusal as set forth in Paragraph 2(b) and "second look" rights as set
forth in Paragraph 11 hereof, to (i) continue to develop, enhance and
upgrade the Core Choice System, and (ii) make any products of such
efforts available to all hospitals listed on Schedule 2(c)(1) hereof
(the "Participating Hospitals") or on Schedule 2(c)(2) hereof (the
"Additional Hospitals") upon such terms and conditions as QIMC may deem
appropriate, provided such terms and conditions are not inconsistent
with the terms of this Agreement;
(2) the nonexclusive right to continue to use the name "Choice"
and any Rights associated therewith in connection with QIMC's activities
and relationships with the Participating Hospitals and/or the Additional
Hospitals pursuant to Section 4 of this Agreement, provided that in no
event shall QIMC grant any further licenses or interests in such name or
Rights; and
(3) any and all other rights and interests explicitly granted
to or explicitly retained by QIMC under this Agreement.
2. Development and Enhancement of Choice System. (a) APACHE shall
undertake at its cost reasonable efforts consistent with industry
practice to complete the development of the Choice System to satisfy the
characteristics set forth in Attachment B hereto (the Choice System with any or
all characteristics specified in Attachment B hereto, and together with the
Cleveland Database (as defined below) maintained and updated pursuant to this
Agreement, shall be referred to herein as the "Core Choice System"). In
undertaking its efforts to develop the Core Choice System, APACHE shall
initially use the services of Michael Pine and Associates ("Pine") pursuant to
an agreement in substantial conformance to that attached hereto as Attachment C
(the "Pine Agreement"). If APACHE is unable to enter into the Pine Agreement
with Pine, or terminates the Pine Agreement after its execution under the terms
thereof: (1) APACHE shall be relieved of its obligations set forth in this
2
<PAGE> 4
Paragraph to complete the development of the Core Choice System; (2) QIMC shall
complete the development of the Core Choice System within one year of the date
hereof upon terms and conditions reasonably acceptable to APACHE, including,
without limitation, the provision of acceptable documentation of the Core
Choice System, as described in Paragraph 12(a); (3) APACHE shall reimburse OIMC
for its costs incurred in such completion up to a maximum amount of [* ];
and (4) APACHE shall retain all rights set forth herein to market the Core
Choice System as if it had been developed by APACHE directly. The activities
of Pine in connection with the development of the Core Choice System shall be
directed by the party hereto responsible for developing the Core Choice System
under the terms hereof.
(b) If at any time during the term of the Licenses QIMC shall
decide to expand, upgrade or enhance the Choice System or Core Choice System to
incorporate characteristics beyond those specified for the Core Choice System,
QIMC shall first offer APACHE the opportunity to undertake such development or
enhancement efforts. Such offer shall contain the parameters and goals
(including, without limitation, those related to cost and other economic
factors) of such development or enhancement efforts. For a period of not less
than ninety (90) days after presentation of such offer, QIMC shall work
exclusively with APACHE to refine and develop such parameters and goals with an
intent to enable APACHE, if it so desires, to undertake such development or
enhancement. Should APACHE elect to undertake such development or enhancement
under terms and conditions specified in such offer (or such other terms and
conditions as may be acceptable to QIMC), QIMC shall exclusively retain APACHE
to undertake such development or enhancement efforts and QIMC shall provide
APACHE with all other information reasonably required by APACHE in connection
with its decisions to accept QIMC's offer. Any enhancement, upgrade or
development to or from the Core Choice System developed by APACHE under the
terms hereof shall be considered part of the AMS Choice System as defined
herein. Should APACHE not undertake such development or enhancement efforts,
QIMC shall have access to the Core Choice System for the purposes of such
development or enhancement efforts at QIMC's cost; provided that APACHE shall
retain its first right-of-refusal to further develop, enhance and upgrade the
Choice System as developed or enhanced by QIMC under the terms hereof,
including, but not limited to, the first right of refusal to develop software
or products in support of equations developed by QIMC or any enhancement,
development or upgrade thereof; and provided further that APACHE shall retain
the first right of refusal to market any enhancement, development or upgrade to
the Core Choice System as developed or enhanced by QIMC under the terms hereof.
(c) APACHE shall have the unrestricted right during the term
hereof to modify, upgrade or enhance the Core Choice System in any manner it
determines in its discretion to be appropriate, such as, without limitation,
expanding the database supporting the Core Choice System; altering, modifying
the methodologies, processes, equations, software, marketing procedures or
co-efficients used in the Core Choice System; or adding additional
methodologies, processes, equations, software, marketing procedures or
coefficients to the Core Choice System (the Core Choice System, after any such
modifications,
3
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* Confidential portions omitted and filed separately with the Commission.
<PAGE> 5
upgrades or enhancements by APACHE, shall be referred to herein as the "AMS
Choice System" and the Choice System, Core Choice System and AMS Choice System
shall be collectively referred to herein as the "Choice Systems"); provided
that APACHE shall maintain the Core Choice System, without further
modifications but with a current database containing all information furnished
by the Participating Hospitals and the Additional Hospitals in connection with
their use of any of the Choice Systems (the "Cleveland Database"), available
for license and use by QIMC under the terms hereof with respect to the
Participating Hospitals and/or the Additional Hospitals.
3. Ownership of Choice Systems and AMS Choice Systems. (a)
Subject only to the Licenses granted to APACHE hereunder, QIMC shall retain and
own all patent, copyright, trade secret or other intellectual property or
proprietary rights relating to the Core Choice System and to any enhancement,
modification or upgrade of the Core Choice System developed by QIMC under the
terms hereof. Subject only to APACHE's obligations and QIMC's rights explicitly
granted or retained hereunder, APACHE shall own all patent, copyright, trade
secret or other intellectual property or proprietary rights relating to the AMS
Choice System and to any enhancement, modification or upgrade of the Core
Choice System developed or funded by APACHE under the terms hereof, including,
but not limited to, expanded databases or modified equations supporting or
incorporated into one or more of the Choice Systems. Except as set forth
herein, QIMC shall retain the right to determine the future direction and
characteristics of the Choice Program.
4. Marketing and Use of Choice Systems. (a) Except as provided
herein, APACHE shall have the sole and exclusive right to market (commercially
or non-commercially), license and use for any purpose consistent with this
Agreement the Choice Systems and any enhancement, modification or upgrade of
the Choice Systems developed by APACHE under the terms hereof, and to any and
all products or services generated from such Systems worldwide. APACHE may
market the Choice Systems under another name. QIMC shall retain the
nonexclusive right to utilize at no cost: (i) the Core Choice System and
"Choice" name for (A) development or enhancement efforts declined by APACHE
under the terms of Paragraph 2(b) hereof and (B) making any products or results
of QIMC's development or enhancement efforts undertaken in compliance with
Paragraph 2(b) hereof available to Participating and Additional Hospitals; and
(ii) the Choice Systems and "Choice" name for analysis, research and
publication purposes subject to APACHE standard agreements related to such
efforts. In addition, in the event QIMC desires to utilize any component of the
Choice Systems for any purpose for which QIMC does not have rights under this
Agreement to so utilize such component, QIMC and Apache shall attempt in good
faith to negotiate mutually-acceptable terms and conditions for such
utilization; provided, however, that in no event shall APACHE be obligated to
permit any such utilization in conflict with the provisions of Paragraph 4(b)
hereof.
(b) At no time prior to the third anniversary of the termination
of this Agreement under the terms hereof shall QIMC have the right to develop,
market, sell, license
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<PAGE> 6
or offer for sale or license any of the Choice Systems or any enhancement,
development, or upgrade of the Choice Systems in competition with APACHE's
efforts to market such systems or any substantially similar products, services
or predictive systems; except, however, that in no event shall the foregoing be
deemed to prohibit or restrict the exercise by QIMC of its rights under
Paragraph 1(b) or the third sentence of Paragraph 4(a).
(c) Subject at all time to APACHE's determination as to the
best manner of marketing the Choice Systems, the parties hereto shall in good
faith undertake efforts to publicize the availability and characteristics of,
and market and exploit, the Choice Systems. The specific obligations of the
parties shall be set forth in annual marketing plans to be prepared and updated
by APACHE and QIMC each calendar quarter after the date hereof (the Quarterly
Plans), such Quarterly Plans to set forth obligations on the part of QIMC not
materially greater than those QIMC obligations set forth in Attachment D hereto,
which obligations shall continue for a period of five (5) years after the date
of this Agreement. QIMC's obligations as set forth in the Quarterly Plans in
this regard shall be directed towards achieving the following goals:
(1) Facilitating the availability of laboratory settings for
outcome management research and practical applications, including
sponsorship, support and participation in research projects that advance
the state of knowledge, quality and application of the Choice Systems;
(2) Providing support of national awareness of the Choice
Systems, successes and works-in-progress through publication and
participation in relevant industry, government and other symposia;
(3) Providing active assistance to APACHE with respect to the
promotion of equations and applications relevant to individual physician
groups, including facilitating the provision of research personnel, and
clinicians in key therapeutic disciplines who will promote such
awareness;
(4) Providing continued leadership in outcomes researched
through participation in influential governmental and ad hoc
organizations wherever possible;
(5) Participating in business/medical symposia sponsored by
investment firms responsible for disseminating information on important
initiatives in heath care reform such as the APACHE and QIMC initiatives;
and
(6) Supporting outcomes research that uses the Choice Systems
and APACHE outcome determination systems to study new drugs, devices and
clinical protocols for more efficient and meaningful clinical trials and
cost-effective care.
(d) Any failure of QIMC to perform in good faith its obligations set
forth in
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<PAGE> 7
the Quarterly Plans shall entitle APACHE to make an equitable set-off against
the Service Fees specified herein as payable for such calendar quarter during
which QIMC failed to perform its obligations; provided that the failure of
QIMC's good faith efforts to cause customers to license Choice Systems for a
fee shall not entitle APACHE to make any such set-off. In this regard, the
parties hereto acknowledge and agree that compliance with their obligations to
market the Choice Systems set forth in the Quarterly Plans shall be determined
solely with reference to whether they fulfilled in good faith their obligations
therein and not with reference to whether their efforts to sell and license the
Choice Systems to customers were successful.
(e) APACHE shall pay QIMC's reasonable, prudent and
documented travel expenses incurred by it in fulfilling its obligations set
forth in the Quarterly Plans in conformance with APACHE's standard travel
expense reimbursement policies.
5. Fees and Royalties. APACHE shall pay to QIMC:
(a) In consideration for the Licenses, a License Fee equal to
$300,000 per year for five years, payable monthly starting on the date hereof
(with appropriate proration for the first month of this Agreement) and
thereafter, on the first day of each successive month, for a total payment equal
to $1.5 million;
(b) In consideration for QIMC's good faith effort to market
the Choice Systems as set forth in the Quarterly Plans, a Service Fee for
the performance of QIMC's obligations under Paragraph 4(c), equal to $100,000
per year, payable quarterly in arrears in equal installments of $25,000 within
forty-five (45) days after the end of each respective calendar quarter, for five
years beginning on the date hereof (with appropriate proration for the first
month of this Agreement), for a total Service Fee of $500,000;
(c) In consideration for the Licenses, Royalties ("Royalties")
based upon the number of hospital end-users ("Customers") licensing any, or any
portion, of the Choice Systems directly from APACHE or, with APACHE's consent,
sublicensing such System(s) from APACHE's licensee, and for which APACHE has
received appropriate licensing fees, shall be calculated and paid quarterly in
arrears within forty-five (45) days after the end of each respective calendar
quarter, on a per-Customer basis in accordance with Schedule 5(c) hereto.
6. On-Going Negotiations. (a) QIMC currently has on-going discussions
relating to licensing of the Choice Systems solely with the parties identified
in Schedule 6(a) hereto. APACHE and QIMC shall hereafter jointly undertake such
discussions or any similar discussions with other parties interested in
licensing use of any of the Choice Systems. Any such Agreement to license use of
the Choice Data or Choice Systems after the date hereof shall be on terms
reasonably acceptable to APACHE and shall be executed and entered into by APACHE
instead of QIMC; and any revenue resulting from any such agreement, or any
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<PAGE> 8
agreement assumed by APACHE under the terms hereof, or in connection with the
sale or license of Choice Systems after the date hereof, shall be paid to
APACHE under the terms hereof, with Royalties from such revenues being paid to
QIMC under the terms hereof. Notwithstanding anything to the contrary herein,
APACHE shall not assume or be liable for, and QIMC shall indemnify and hold
APACHE harmless from, any liability, damage, loss or obligation under or in
connection with agreements negotiated or entered into by QIMC and relating to,
or relating to the licensing of, the Choice Program or Choice Systems unless
and until APACHE has explicitly agreed in writing to assume such obligations.
(b) APACHE hereby acknowledges that QIMC is negotiating an
agreement with the Greater St. Louis Health Care Alliance (the "Alliance") to
license to the Alliance the Choice Data to allow the Alliance to develop its own
determination and patient satisfaction measurement system. APACHE and QIMC shall
collaborate to finalize such agreement and such negotiations and agreement shall
be governed by the terms of Paragraph 6(a) hereof.
(c) QIMC shall assign to APACHE (after obtaining all required
consents to assignment), and APACHE shall assume the rights and obligations of
QIMC under, any Beta Site Agreement that is in form and substance materially the
same as Attachment E hereto and meeting the requirements of Paragraph 6 hereof,
with all hospitals listed on Schedule 6(d)(1) hereto (the "Beta Sites");
provided that, for twelve (12) months following the date hereof, QIMC shall
provide all required abstractor training, data cleaning, report production
(subject to APACHE's approval of such reports' presentation and format) required
in connection with services provided to the Beta Sites and APACHE shall pay for
such services in accordance with the Fee Schedule attached hereto as Schedule
6(d)(2).
7. Services to QIMC and Participating Hospitals.
(a) APACHE shall license and allow Participating Hospitals to
use the Choice System and/or Core Choice System at no charge or fee
pursuant to an agreement (the "Choice Service Agreement"), in form reasonably
acceptable to the parties, to be entered into between Apache and the
Participating Hospitals (or a duly-authorized agent thereof). Apache shall
license and allow Additional Hospitals to license and use the Choice System
and/or Core Choice System for the fees set forth in Schedule 7(a) hereto
pursuant to an agreement, in form reasonably acceptable to the parties, to be
entered into between Apache and the Additional Hospitals (or a duly-authorized
agent thereof). If QIMC has adequate authority, it may serve as such agent
for the Participating Hospitals and/or the Additional Hospitals. QIMC shall
provide at no charge to APACHE through the term of this Agreement, data
cleaning and report production in connection with the data obtained from, and
services provided to, Participating and Additional Hospitals, as described in
Schedule 6(d)(2), as part of the QIMC Executive Sales Objective presently
provided to such Hospitals. If QIMC does not provide such services, AMS may
provide such services to the Participating and/or Additional Hospitals and
charge QIMC or the Hospitals for such services.
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<PAGE> 9
(b) If requested and justified by the demand for such software,
APACHE shall provide to the Participating Hospitals or their duly-authorized
agent: (i) Choice ADT/Lab Batch Interface software (the "Interface Software")
as described in Attachment G hereto, for a fee equal to [* ] per-patient
admission processed through the Interface; and (ii) on-site processing software,
as described in Attachment H hereto (the "On-Site Processing Software"), for a
fee equal to [* ] per-patient admission processed through the On-Site
Processing Software.
(c) As a condition to APACHE's obligations hereunder, unless
waived in writing by APACHE: (1) all parties thereto other than APACHE shall
have executed and delivered the Choice Service Agreement; (2) all parties
thereto other than APACHE shall have executed and delivered that certain
Service Agreement in substantial conformance with Attachment I hereto; and (3)
the Participating Hospitals (or a duly-authorized agent thereof) shall have
retained APACHE to develop and provide to the Participating Hospitals Choice
Data collection software as described in Attachment F hereto (the "Data
Collection Software"), for three years starting upon delivery of such software
by APACHE, on terms calling for APACHE to be paid annually a fee equal to
[* ] per-patient admission processed by the Data Collection Software during
the first year of this Agreement, [* ] per-patient admission processed by
the Data Collection Software during the second year of this Agreement, and
[* ] per-patient admission processed by the Data Collection Software during
the third year of this Agreement, with a minimum annual payment to APACHE of
not less than [* ] . If any of the foregoing conditions has not been
satisfied by the Approval Date (as defined in Paragraph 10 below), then APACHE
by notice to QIMC may terminate this Agreement; and, in such event this
Agreement will be of no further force or effect, except that the obligations of
the parties under the provisions of Paragraphs 12(h), 14(a), 14(b), 15 and 17
hereof, and any Confidentiality Agreement executed pursuant to this Agreement,
shall remain in full force and effect.
(d) As a condition to QIMC's obligations hereunder, unless
waived in writing by QIMC, APACHE shall have executed and delivered to QIMC that
certain Service Agreement in substantial conformance with Attachment I hereto.
If any of the foregoing conditions has not been satisfied by the Approval Date,
then QIMC by notice to APACHE may terminate this Agreement; and in such event
this Agreement will be of no further force or effect, except that the
obligations of the parties under the provisions of Paragraphs 12(h), 14(a),
14(b), 15 and 17 hereof, and any Confidentiality Agreement executed pursuant to
this Agreement, shall remain in full force and effect.
8. Future Product Development. APACHE hereby acknowledges its
commitment to maintain a competitive position for the marketing of outcome
determinative database services such as the Core and AMS Choice Systems. In this
regard, APACHE shall research the feasibility of developing and marketing a
three-tier product suite, presently anticipated to include the following
elements:
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*Confidential portions omitted and filed separately with the Commission.
8
<PAGE> 10
(a)[* ] Kit. The proposed product would provide groups
and hospitals with[
*]
(b)[* ] Kit. This product would be marketed as a follow-on
product to the [ * ] Kit, using [* ]. The
product is anticipated to be purchased[*
]
(c) The standard APACHE III Management System product,
expanded to an integrated management system including, if applicable,
APACHE, AMS Choice, and other equations as research initiatives define and
market considerations justify. These equations would support utilization
management, clinical decision support and ad hoc reporting for purposes of
responding to managed care demands, and would allow hospitals concurrently to
manage individual patients and respond to utilization and quality initiatives.
QIMC recognizes, acknowledges and agrees that the exact specifications and
characterizations of the products included within the proposed product suite,
and/or similar products directed at maintaining a competitive position in the
market, may change from time to time at APACHE's discretion.
9. Training. (a) QIMC shall provide at its cost abstractor training
as described in Attachment J hereto Participating and Additional
Hospitals in support of the Choice Program. If QIMC does not provide such
training, AMS may provide such training to the Participating and Additional
Hospitals and charge QIMC or the Hospitals for such training.
(b) For a fee payable by QIMC to APACHE of [* ] per-day,
plus QIMC's payment of APACHE's travel expenses, APACHE shall provide
to Participating and Additional Hospital personnel all software training
required to utilize the Core Data Collection Software, Interface Software and
On-Site Processing Software, provided that no single class of such personnel
shall exceed fifteen (15) persons.
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* Confidential portions omitted and filed separately with the Commission.
<PAGE> 11
10. Review of Choice Data and Intellectual Property. APACHE's
performance hereunder, and all obligations applicable to APACHE herein, are
subject and conditioned upon APACHE's review and approval of, and QIMC shall
grant to APACHE complete access to, all intellectual property incorporated
into, or related to, the Choice System and Choice Data, within QIMC's
possession or control, including but not limited to models, patient variables,
scoring, methodologies, databases, co-efficients and the UB-82-92 Variables,
and all agreements, registrations, patents, documentation, software and all
other materials and information relating to the Choice System or Choice Data
(collectively, the "Choice Information"). QIMC shall provide APACHE with full
and complete access to the Choice Information within five (5) days of the date
hereof, subject to APACHE's compliance with a Confidentiality Agreement in
substantial conformance with Attachment K hereto. In addition, QIMC shall
provide APACHE with reasonable access to all persons within the control of QIMC
having knowledge concerning the Choice Information, and shall use reasonable
efforts to make other persons having knowledge concerning the Choice
Information reasonably accessible to APACHE. APACHE's review and approval
process under this Section shall be completed within sixty (60) days (the
"Approval Date") after QIMC shall have provided to APACHE the CHOICE
Information in conformance with this Paragraph, and APACHE shall notify QIMC in
writing of the results of its review within five (5) days thereafter. If APACHE
so notifies QIMC in writing that it has disapproved any of the Choice Data as a
result of the analysis described in Schedule 10 hereto, or that a material
problem exists with respect to any intellectual property incorporated into, or
related to, the Choice System or Choice Data, APACHE may terminate this
Agreement and, in such event, this Agreement will be of no further force or
effect, except that the obligations of the parties under the provisions of
Paragraphs 12(h), 14(a), 14(b), 15 and 17 hereof, and any Confidentiality
Agreement executed pursuant to this Agreement shall remain in full force and
effect.
11. Attribution. Each party hereto shall (i) give appropriate
credit to the other for its role in developing and marketing the Core and AMS
Choice Systems in a form and manner agreed to by the parties in writing; (ii)
credit the other in any paper or presentation relating to the Core or AMS
Choice Systems. QIMC shall give APACHE the opportunity to review all papers and
presentations to be published by QIMC in advance of their publication or
presentation to assure accuracy of descriptions; shall protect all elements and
results of the Choice Systems in compliance with the terms of a Confidentiality
Agreement in substantial conformance with Attachment K hereto; and shall not
publish any element or result of the Choice Systems without APACHE's prior
written consent, which consent shall not be unreasonably withheld or delayed.
If QIMC desires or is required under the terms of a proposed contract or grant
with or from a third party to make a presentation or publish a paper that would
reveal any confidential information relating to any development or enhancement
described in the first sentence of Paragraph 2(b) after APACHE has failed to
exercise its first right of refusal under Paragraph 2(b), at least ten (10)
days prior to executing such contract or accepting such grant QIMC shall give
APACHE the opportunity to take a second look at undertaking or funding such
development or enhancement under the
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<PAGE> 12
same terms and conditions offered to such third party. If APACHE elects to
undertake or fund such development or enhancement, the provisions of Paragraph
2(b) shall apply. Regardless of whether APACHE undertakes such development or
enhancement, QIMC shall not publish any element or result of the Choice Systems
incorporating or relating to such development or enhancement without first
complying with the terms of this Paragraph 11, including, without limitation,
obtaining APACHE's prior written consent to such publication, which consent
shall not be unreasonably withheld or delayed.
12. Representations. Warranties and Covenants of QIMC. QIMC
represents, warrants and covenants to APACHE as follows:
(a) Within 120 days of the date hereof, all information
relating to the current version of the Choice System shall be presented to
APACHE in a format reasonably acceptable and usable to APACHE, it being
specifically understood by QIMC that the condition of the Choice Data as of the
date hereof does not satisfy this requirement; All programs, datasets and
supporting material shall completely document their purpose, functionality,
means of utilization, operating environment and maintenance procedures
throughout the complete software lifecycle and data processing workflow. If
APACHE determines that this covenant for any reason has been breached, its
exclusive remedy shall be to do one of the following: (i) to terminate this
Agreement by notice to QIMC in writing within five (5) days after expiration of
the 120 day period described above, specifying the nature of the breach,
whereupon this Agreement shall immediately be deemed terminated and of no
further force or effect, except that the obligations of the parties under
Paragraphs 12(h), 14(a), 14(b), 15 and 17 of this Agreement, and any
Confidentiality Agreement executed pursuant to this Agreement, shall remain in
full force and effect; or (ii) to develop its own documentation and charge QIMC
for APACHE's cost to develop the documentation, which cost shall be agreed upon
in advance by APACHE and QIMC; or (iii) to give QIMC an additional 90 days to
comply with its obligations under this Paragraph, provided that if QIMC fails to
so comply, APACHE may terminate this Agreement or develop the documentation, as
provided above. In the event APACHE develops the documentation, it shall pay
such Royalties and License Fees in accordance with Paragraph 5 after deducting
the agreed-upon cost of developing the documentation through the date of such
payment. Any delay in QIMC's performance of its obligations under this
Paragraph 12(a) shall entitle APACHE to extend all deadlines for its performance
under this Agreement by a period of time corresponding to QIMC's delay.
(b) To QIMC's best knowledge, the information and data provided to
APACHE under the terms hereof is, in all material respects, the complete and
accurate information and data currently utilized by QIMC in connection with the
Choice System, and will accurately and completely describe the Choice System
and all its constituting elements thereof, including the Choice Data.
(c) The Choice System includes at least the following elements:
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<PAGE> 13
(1) The CHOICE(SM) Outcome Measurement and Prediction
Methodology, which uses demographic, diagnostic and physiological patient
variables to measure outcomes and to calculate prediction outcomes from groups
of patients in selected diagnostic categories, as set forth in ATTACHMENT L;
(2) The CHOICE(SM) Data Base, containing demographic,
diagnostic and physiological data obtained from individual medical records at
the Participating Hospitals;
(3) The CHOICE(SM) supporting documentation, including
related methodology and data collection materials and procedures as well as
protocols and procedures and materials as set forth in ATTACHMENT M; AND
(4) All trademark, trade name, service mark, trade secret,
copyright and other intellectual property rights owned or held by or licensed to
QIMC and related to the Choice System or "Choice" name.
(d) To the best knowledge of QIMC, all current versions of all
material tangible or intangible data and property that is part of, or related
to, the Choice System is listed on either Attachments L or M hereto, and QIMC
shall update Attachments L and M whenever during the term of this Agreement it
discovers additional elements of the Choice System not specified in such
Attachments. The Choice Data being licensed to APACHE hereunder includes the
entire database related to the Choice System. QIMC's performance of its
obligations, including, without limitation, its licensing of the Choice System
or the Core Choice System and Choice Data to APACHE, shall not conflict with the
rights of any third party, or person or entity, and will not be inconsistent
with or cause a default under agreement to which QIMC is a party or which is
binding upon QIMC or which affects the Choice System, Core Choice System or
Choice Data. The Choice Data have not been published or disseminated to third
parties except as disclosed in Schedule 10 hereto.
(e) The Choice System and Choice Data have been developed and
compiled solely by QIMC and/or its employees, contractors or agents, and QIMC
knows of no basis for any claim that the use of the Choice Data, Choice System,
or Core Choice System if developed by QIMC or its employees, contractors or
agents (other than APACHE), infringes or might infringe the rights of any third
parties; except, however, that the foregoing shall not apply to any rights to or
use of the "Choice" name. There are no pending or threatened claims of
infringement or misappropriation against or involving QIMC relating to the
Choice System, Choice Data, "Choice" name or Choice Program, and QIMC knows of
no such claims against any other third parties. There are no facts known to QIMC
that would support any such claim; except, however, that there are facts known
to QIMC which might support such a claim with respect to the rights to or use of
the "Choice" name, and QIMC therefore makes no representation as to whether the
use of such name by QIMC and/or APACHE might constitute infringement or
misappropriation or result in a claim based thereon. QIMC
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<PAGE> 14
has all consents and approvals from the Participating Hospitals required to
allow it to provide APACHE with access to all currently-existing hospital and
patient-specific information (without patient identifiers) incorporated into
the Choice Data under the terms hereof. QIMC's agreements with Participating
Hospitals permit QIMC to collect hospital and patient-specific information
(without patient identifiers) from the Hospitals on an on-going basis and no
additional consents or approvals are required to allow QIMC to provide APACHE
with access to such information. With respect to all other information
incorporated into the Choice Data that might be created in the future under the
terms hereof, QIMC shall use all reasonable efforts to obtain any such consents
that are required to provide APACHE with access to such information.
(f) All data, equations, products, protocols and data
collection methodologies that are not in the public domain, and similar property
and procedures developed by or for Michael Pine and Associates as an integral
part of the Choice System, are owned by QIMC free from any security interest,
lien, encumbrance, claim or right of Michael Pine or, to the best of QIMC's
knowledge, any third party, and are included in the Choice System being licensed
to APACHE hereunder.
(g) All agreements, understandings or proposals to which QIMC
(or, to QIMC's knowledge, a Participating or Additional Hospital) is a party and
which grant or propose to grant to a party other than APACHE access to the
Choice Data other than as an integral part of the Choice System, are indicated
in Schedule 12(g).
(h) QIMC shall not disclose any confidential or proprietary
information relating to the Choice Systems or their derivatives to Participating
or Additional Hospitals, Michael Pine and Associates or any other third parties
unless such party is bound by a confidentiality agreement protecting such
information, provided that if QIMC makes available to a third party the Choice
System, it shall obtain a confidentiality agreement in substantial conformance
with Attachment K hereto. QIMC shall take all steps reasonably required to
protect the confidentiality of the Choice Systems and its constituting elements.
Nothing in the foregoing shall be deemed to give QIMC any greater rights to use,
market or develop the Choice System than are expressly provided under the terms
of this Agreement.
(i) QIMC is a nonprofit corporation duly organized, validly
existing, and in good standing under the laws of the State of Ohio; it has the
power and authority and the legal right to own or lease, and to operate, its
property, and to conduct the business in which it is currently engaged and in
which it proposes to engage as contemplated by this Agreement; it is in
compliance with all requirements of law except to the extent that the failure to
comply therewith would not, in the aggregate, have a material adverse effect on
the business, operations, assets (taken in the aggregate) or present or
prospective financial condition of it.
(j) Neither the execution, delivery or performance of this
Agreement nor the
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<PAGE> 15
consummation of any of the transactions contemplated hereby or thereby will,
with or without the giving of notice or the passage of time or both, conflict
with, result in a default or loss of rights or give rise to any right of
termination, cancellation or acceleration under, or result in the creation of
any lien, pursuant to the terms of (i) its Certificate of Incorporation or
By-Laws, (ii) any note, bond, indenture, mortgage, contract, deed of trust,
agreement, lease or other instrument or obligation to which it is a party or by
which it or any of its property is bound or affected, or (iii) any law, order,
judgment, ordinance, rule, regulation or decree to which it is a party, or by
which it or its property is bound or affected.
(k) QIMC has all necessary legal and other power, authority and
right to make, deliver and perform this Agreement and has taken all necessary
action to authorize the performance of its undertakings hereunder on the terms
and conditions of this Agreement, and to enter into the transactions
contemplated hereby. This Agreement has been executed on or before the date
hereof, has been duly executed and delivered on behalf of QIMC, and constitutes
a legal, valid and binding obligation of QIMC, enforceable against it in
accordance with its terms, except as enforceability may be limited (i) by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally, and (ii) to the extent
that the remedies of specific performance and injunctive or other forms of
equitable relief are subject to certain equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
13. Representations, and Warranties and Covenants of APACHE. APACHE
represents, warrants and covenants to QIMC that:
(a) It is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Delaware; it has the power and
authority and the legal right to own or lease, and to operate, its property, and
to conduct the business in which it is currently engaged and in which it
proposes to engage as contemplated by this Agreement; it is in compliance with
all requirements of law except to the extent that the failure to comply
therewith would not, in the aggregate, have a material adverse effect on the
business, operations, assets (taken in the aggregate) or present or prospective
financial condition of it.
(b) Neither the execution, delivery or performance of this
Agreement nor the consummation of any of the transactions contemplated hereby or
thereby will, with or without the giving of notice or the passage of time or
both, conflict with, result in a default or loss of rights or give rise to any
right of termination, cancellation or acceleration under, or result in the
creation of any lien, pursuant to the terms of (i) its Certificate of
Incorporation or By-Laws, (ii) any note, bond, indenture, mortgage, contract,
deed of trust, agreement, lease or other instrument or obligation to which it is
a party or by which it or any of its property is bound or affected, or (iii) any
law, order, judgment, ordinance, rule, regulation or decree to which it is a
party, or by which it or its property is bound or affected.
(c) It has all necessary legal and other power, authority and
right to make,
14
<PAGE> 16
deliver and perform this Agreement and has taken all necessary action to
authorize the performance of its undertakings hereunder on the terms and
conditions of this Agreement, and to enter into the transactions contemplated
hereby. This Agreement has been executed on or before the date hereof has been
duly executed and delivered on behalf of it constitutes a legal, valid and
binding obligation of it, enforceable against it in accordance with its terms,
except as enforceability may be limited (i) by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, and (ii) to the extent that the
remedies of specific performance and injunctive or other forms of equitable
relief are subject to certain equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
14. Additional Covenants.
(a) Neither party shall at any time intentionally induce or
attempt to induce any employee, affiliate, agent or other representative or
associate of the other party, to terminate its relationship with such other
party or in any way directly or indirectly interfere with such a relationship or
any relationship between the other party and any of the foregoing.
(b) Within forty-five (45) days after the end of each calendar
quarter, APACHE shall provide QIMC with complete, accurate and certified
statements in a format reasonably acceptable to QIMC (the "Royalty Statements")
showing the names of all hospitals and other customers using any component of
the Choice Systems, together with the revenues received therefrom.
(c) APACHE agrees to keep complete and accurate records of the
transactions underlying the Royalty Statements and, during the term of this
Agreement (including any renewal term) and for a period of two (2) years
thereafter, QIMC or its authorized agent shall be permitted to audit and review
the above-described Royalty Statements and any underlying records, provided that
QIMC may not do so more than twice yearly. Such Statements and records may be
audited during regular business hours upon reasonable prior notice to APACHE.
15. Indemnification; Equitable Remedies. (a) Each party hereto (the
"Indemnifying Party") agrees to indemnify, defend and hold the other party
hereto, and its licensees, customers, successors, assigns, directors, officers,
employees, agents, and independent contractors harmless from and against any and
all liabilities, expenses, losses and claims (including, but not limited to,
reasonable attorneys' fees) resulting from any breach by the Indemnifying Party
of its material representations, warranties and covenants hereunder.
(b) Each of the parties to this Agreement acknowledges that its
failure to perform or comply with its material obligations under Sections 2, 4,
10, 11, 12(h), 14(a), 16 and 17 of this Agreement may result in immediate and
irreparable damage to the other party for which there is no adequate remedy at
law. Accordingly, each of the parties hereby agrees
15
<PAGE> 17
that, in the event of such a failure on its part, the other party hereto shall
be entitled to equitable relief by way of temporary and permanent injunctions
and any further relief as a court of competent jurisdiction may deem just and
proper.
16. Further Assurances. QIMC agrees that it shall duly execute and
deliver any instruments of transfer, license, assignment or conveyance to APACHE
or any other instrument that may be reasonably requested at any time by APACHE
in order to provide a more particular description of the Choice Data, or to
assure or implement the license made hereunder. QIMC further agrees to provide
APACHE with reasonable access to all documentation and records in its possession
regarding any version or component of the Choice Data or System not delivered to
APACHE pursuant to Paragraph 12(a) hereof, and shall reasonably cooperate with
and assist APACHE in providing such additional documentation or information with
respect to such versions or components as APACHE may deem necessary or
appropriate in connection with its development or marketing of the Choice
Systems. Both parties hereto shall duly execute and deliver to the other any
document or agreement reasonably required to (i) apply for or obtain any patent
or copyright in or in connection with any Choice Systems; (ii) to obtain,
evidence or perfect any other intellectual property right in any portion of any
Choice Systems; (iii) to protect or enforce any rights (including but not
limited to trade secret rights) in any Choice Systems; or (iv) otherwise to
carry out any of the terms or purposes of this Agreement.
17. Arbitration and Termination.
(a) In the event any dispute arises hereunder between the
parties hereto, the parties agree that the entire matter shall be referred to
the consideration of an arbitrator mutually agreeable to both parties, or, if no
such arbitrator can be identified, to a panel of three arbitrators appointed as
set forth in Paragraph 17(c) hereof, and agree to be bound absolutely and in all
respects by the determination of such arbitrator or panel with respect to any
such claim. In this regard, the parties hereto irrevocably waive to the fullest
extent permitted by law any right they may have to trial by jury with respect to
any claims under such dispute. The cost of any arbitration shall be allocated by
the arbitrator(s).
(b) The arbitration shall be conducted on a confidential basis,
under the U.S. Arbitration Act, if applicable, and the then current Commercial
Arbitration Rules of the American Arbitration Association ("Association")
strictly in accordance with the terms of this Agreement and the substantive law
of the District of Columbia. The Arbitration shall be conducted at the
Association's closest regional office located equidistant from the parties'
principal places of business. Judgment upon the arbitrator's or panel's award
may be entered and enforced in any Court of competent jurisdiction. Neither
party shall institute a proceeding hereunder unless at least sixty (60) days
prior thereto such party shall have furnished to the other notice of its intent
to do so. Neither party shall be precluded hereby from seeking additional
remedies in the courts of any jurisdiction including, but not limited to,
temporary restraining orders and preliminary injunctions, to protect its rights
and
16
<PAGE> 18
interests, but such shall not be sought as a means to avoid or stay arbitration.
(c) In the event the parties hereto cannot agree upon a
mutually-acceptable arbitrator pursuant to Paragraph 17(a), each party shall
appoint one arbitrator, and such two arbitrators shall in turn appoint a third
arbitrator, and such three arbitrators shall constitute the panel, the
determination of which with respect to claims between the parties shall be
binding upon the parties pursuant to the preceding two Paragraphs. Should either
party fail to appoint an arbitrator and to notify the other party of such
appointment within fifteen (15) days after a demand has been made in writing by
the other party for such appointment, or should either arbitrator so appointed
decline to serve, then the arbitrator duly appointed and willing to serve shall
be the sole arbitrator to consider the dispute.
(d) This Agreement, and all rights and obligations of the
parties hereunder (including, but not limited to, the right of APACHE to use or
market the Choice Systems and the obligation to pay Royalties hereunder), shall
expire and terminate upon expiration of the basic term of the Licenses, or any
renewal term thereof duly exercised, as specified in Paragraph 1(a) hereof;
except, however, that:
(1) APACHE shall have the rights specified in that last
sentence of Paragraph 1(a) for a period of one (1) year, subject to the
provisions of this Agreement (including the provisions relating to payment of
Royalties):
(2) the parties' respective obligations under Paragraph 4(b)
and under the provisions of Paragraphs 14(a), 15, and 17(a) through 17(c) shall
continue for a period of three (3) years after such expiration and termination;
(3) the parties' respective obligations under any
Confidentiality Agreement executed pursuant hereto, and the obligations of QIMC
under Paragraph 12(h) hereof, shall continue for the maximum period provided by
law; and
(4) the parties' respective obligations under the provisions of
Paragraph 17(g) shall continue as provided therein.
(e) Except as otherwise expressly provided in this Agreement,
and subject to the provisions of Paragraphs 17(a)-(c) hereof, in the event of a
material breach by either party of its obligations or representations under this
Agreement, the other party shall be entitle to exercise any and all rights and
remedies available to such party under this Agreement or at law or in equity,
including (but not limited to) those specified in Paragraph 15 hereof.
(f) Subject to the provisions of Paragraphs 17(a)-(c) hereof,
in the event any of the following should occur and not be cured within a period
of sixty (60) days thereafter:
(1) APACHE is adjudicated a bankrupt; or
17
<PAGE> 19
(2) a petition in bankruptcy is filed by or against APACHE; or
(3) APACHE becomes insolvent or discontinues its business; or
(4) APACHE makes an assignment for the benefit of its creditors
or seeks the benefit of any insolvency or bankruptcy law; or
(5) the winding-up, sale, consolidation, merger, or any
sequestration by governmental authority of APACHE; or
(6) the appointment of a receiver for APACHE or a substantial
part of its business or assets;
then QIMC shall be entitled to exercise any of the remedies specified in
Paragraph 17(e) as being available in the event of a material breach of this
Agreement.
(g) Notwithstanding any provision herein to the contrary, in
the event this Agreement expires or is terminated pursuant hereto for any reason
other than a material breach hereof by QIMC, APACHE shall, if requested by QIMC,
license back to QIMC any components of the Choice Systems then owned by APACHE
for use by QIMC with the Participating Hospitals and Additional Hospitals;
provided that: (1) QIMC shall pay to APACHE a fee reasonably acceptable to
APACHE; and (2) QIMC shall remain subject to the non-competition provisions of
Paragraph 4(b) hereof until three years after it ceases use of such components
of the Choice Systems. Such license from APACHE to QIMC shall be upon terms and
conditions granting to each party the rights granted to the other in this
Licensing Agreement, and shall be contained in an agreement to be entered into
at such time. The parties hereby agree to negotiate the terms and conditions of
such agreement in good faith, and that any disputes with respect thereto shall
be subject to the provisions of Paragraph 17(a)-(c) hereof.
18. General
(a) This Agreement, including the Schedules, contains the
entire Agreement between the parties concerning the subject matter hereof and
supersedes all prior and contemporaneous proposals, discussions, understandings
and all other agreements or representations, oral and written, between the
parties relating to the subject matter hereof.
(b) All notices to be sent to a party under this Agreement
shall be in writing, shall be effective upon receipt, and shall be sent to such
party at the address or facsimile number set forth below such party's name on
the signature page, or to such address or facsimile number of which such party
may from time to time give proper notice to the other parties. Notices shall be
sent by (i) hand delivery, (ii) certified mail, return receipt
18
<PAGE> 20
requested, (iii) U.S. Express Mail, (iv) overnight courier service, or (v)
facsimile, provided that any notice sent by facsimile shall also be sent, as
soon as reasonably feasible, by one of the other foregoing means.
(c) If any provision of this Agreement or any portion thereof
is declared invalid or unenforceable, such provision shall be limited and
construed so as to make it enforceable consistent with the parties' manifest
intentions or, if such limitation of construction is not possible, such
provision will be deemed stricken from this Agreement. In such event, all other
provisions of this Agreement will remain in full force and effect, unless such
enforcement would result in an injustice or be inconsistent with the purposes of
this Agreement.
(d) This Agreement may not be assigned by either party without
the prior written consent of the other party, which shall not be unreasonably
withheld. Except for sales, leases or licenses or sublicenses of the Choice
Systems expressly permitted under the terms of this Agreement, neither party
hereto shall sell, lease, license, sublicense, convey or otherwise grant any
right or interest in the Choice Systems without the prior written consent of the
other party. Except as provided herein, this Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective successors
and assigns.
(e) No waiver of any term of this Agreement shall be valid
unless in a writing signed by the party against whom the waiver is sought to be
enforced. The failure of any party at any time to require performance by
another party of any provision hereof shall not affect in any way the right to
require such performance at any time hereafter.
(f) Nothing in this Agreement is intended to create a
relationship between APACHE, on the one hand, and QIMC on the other hand, other
than that of licensee/licensor. No party to this Agreement, nor any employees
or staff of QIMC or APACHE, shall, by virtue of this Agreement, be construed to
be the agent, employee or representative of any other.
(g) This Agreement may not be modified, altered or amended
except by a written instrument executed by the parties hereto.
(h) This Agreement and performance hereunder shall be governed
by and construed in accordance with the laws of the District of Columbia except
for its principles for resolving conflicts of law.
(i) All Attachments, Schedules and Appendices are incorporated
into this Agreement by this reference.
(j) The parties have executed this Agreement by their duly
authorized representatives, effective as of the date of the last to sign as set
forth below.
19
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
APACHE MEDICAL SYSTEMS, INC. QUALITY INFORMATION
MANAGEMENT CORPORATION
By: /s/ Brion D. Umidi By: /s/ SIGNATURE ILLEGIBLE
------------------------------ ---------------------------
Its: Vice President Its: Vice Chairman
------------------------------ --------------------------
And: /s/ Dwain L. Harper
--------------------------
Its: Executive Director
--------------------------
Address: 1901 Pennsylvania Ave, NW Address: Suite 741
-------------------------- ---------------------
Suite 900 1127 Euclid Ave.
-------------------------- ---------------------
Washington, DC 20006 Cleveland, Ohio 44125
-------------------------- ---------------------
Fax No.: (202) 785-6752 Fax No.: 216/696-0002
-------------------------- --------------------
20
<PAGE> 22
LICENSING AGREEMENT BETWEEN
APACHE MEDICAL SYSTEMS, INC., AND
QUALITY INFORMATION MANAGEMENT CORPORATION
SCHEDULES
Schedule 2(c)(1).........................................Participating Hospitals
Schedule 2(c)(2)............................................Additional Hospitals
Schedule 5(c)..........................................................Royalties
Schedule 6(a) ............................................Parties In Negotiation
Schedule 6(d)(1)......................................................Beta Sites
Schedule 6(d)(2)...............................................QIMC Fee Schedule
Schedule 7(a).......................................Fees to Additional Hospitals
Schedule 10...............................................Due Diligence Criteria
Schedule 12(g) .............................Agreements Relating to CHOICE System
<PAGE> 23
<TABLE>
<CAPTION>
LICENSING AGREEMENT BETWEEN Schedule 2(c)(1)
APACHE MEDICAL SYSTEMS, INC., AND Page 1
QUALITY INFORMATION MANAGEMENT CORPORATION
FACT SHEET (12/93)
PARTICIPATING HOSPITALS IN CLEVELAND AND HEALTH QUALITY CHOICE
===================================================================================================================================
<S> <C> <C>
Allen Memorial Hospital Lake Hospital System: Mt. Sinai Medical Center
200 West Lorain street LakeEast Hospital One Mt. Sinai Drive
Oberlin Washington at Liberty Cleveland
Painesville
- -----------------------------------------------------------------------------------------------------------------------------------
Brentwood Hospital LakeWest Hospital Parma Community General Hospital
4110 Warrensville Ctr. Rd. 36000 Euclid Avenue 7007 Powers Boulevard
Cleveland Willoughby Parma
- -----------------------------------------------------------------------------------------------------------------------------------
Cleveland Clinic Foundation Lakewood Hospital Richmond Heights General Hospital
9500 Euclid Avenue 14519 Detroit Avenue 27100 Chardon Road
Cleveland Lakewood Richmond Heights
- -----------------------------------------------------------------------------------------------------------------------------------
Community Hospital of Bedford Lorain Community Hospital Saint Alexis Hospital Medical Center
44 Blaine Avenue 3700 Kolbe Road 5163 Broadway
Cleveland Lorain Cleveland
- -----------------------------------------------------------------------------------------------------------------------------------
Deaconess Hospital of Cleveland Marymount Hospital Saint Luke's Medical Center
4229 Pearl Road 12300 McCracken Road 11311 Shaker Blvd.
Cleveland Garfield Heights Cleveland
- -----------------------------------------------------------------------------------------------------------------------------------
EMH Regional Medical Center Meridia Health System: Sisters of Charity of St. Augustine
630 East River street Meridia Euclid Hospital Health Network
Elyria 18901 Lake Shore Blvd. St. John West Shore Hospital
Euclid 29000 Center Ridge Rd.
Westlake
- -----------------------------------------------------------------------------------------------------------------------------------
Geauga Hospital Meridia Hillcrest Hospital St. Vincent Charity Hospital
13207 Ravenna Road 6780 Mayfield Road 2351 East 22nd Street
Chardon Mayfield Heights Cleveland
- -----------------------------------------------------------------------------------------------------------------------------------
Grace Hospital (1) Meridia Huron Hospital St. Joseph Hospital and Health Center
2307 West 14th street 13951 Terrace Road 205 West 20th Street
Cleveland East Cleveland Lorain
- -----------------------------------------------------------------------------------------------------------------------------------
Health Cleveland: Fairview General Meridia Suburban Hospital Southwest Community Health System
Hospital 4180 Warrensville & Hospital
18101 Lorain Road Ctr. Rd. 18697 East Bagley Road
Cleveland Warrensville Heights Middleburg Heights
- -----------------------------------------------------------------------------------------------------------------------------------
Lutheran Medical Center MetroHealth Medical Center University Hospitals of Cleveland
2609 Franklin Boulevard 2500 MetroHealth Drive 2074 Abington Road
Cleveland Cleveland Cleveland
- -----------------------------------------------------------------------------------------------------------------------------------
Kaiser Foundation Hospitals
12301 Snow Road
Cleveland
===================================================================================================================================
</TABLE>
- -----------------------------------------
1/ Participating hospital; data will appear in future reports.
<PAGE> 24
LICENSING AGREEMENT BETWEEN SCHEDULE 2(c)(2)
APACHE MEDICAL SYSTEMS, INC. AND
QUALITY INFORMATION MANAGEMENT CORPORATION
CHQC ADDITIONAL HOSPITALS
This schedule displays the identity of additional hospitals in the eight-county
area originally defined as the Greater Cleveland Health Quality Choice area.
Cuyahoga County:
Veterans Hospital of Cleveland (Cleveland)
Laurelwood Hospital (specialty)
Lorain County:
Amherst Hospital (Amherst)
Lake County:
Geauga County:
Windsor Hospital (specialty)
Heatherhill Hospital (specialty)
Ashtabula County:
Ashtabula County Hospital (Ashtabula)
Portago County:
Robinson Memorial Hospital (Ravenna)
Medina County:
Medina General Hospital (Medina)
Lodi Community Hospital (Lodi)
Wadsworth Rittman Hospital (Wadsworth)
Summit County:
Akron City Hospital (Akron)
St. Thomas Hospital (Akron)
Akron General Hospital (Akron)
Barberton Citizens Hospital (Barberton)
Cuyahoga Falls General Hospital (Cuyahoga Falls)
Edwin Shaw Hospital (specialty)
<PAGE> 25
LICENSING AGREEMENT BETWEEN SCHEDULE 5(c)
APACHE MEDICAL SYSTEMS, INC. AND
QUALITY INFORMATION MANAGEMENT CORPORATION
ROYALTY SCHEDULE
<TABLE>
<CAPTION>
Criteria/Year 1994-99 1999 2000-2001 2002 on
- ------------- ------- ---- --------- -------
<S> <C> <C> <C> <C>
Base Amount per -
Hospital using Choice
and paying to AMS
at least [* ]
in Choice or Apache
Licensing Fees: [* ] [* ] [* ] [* ]
If more than 25
hospitals are members
of CHQC, additional
per-Hospital fee: [* ] [* ] [* ] [* ]
If Hospitals
Implement Apache-developed
Refinements beyond Core
Choice, additional per- [* ] [* ] [* ] [* ]
Hospital fee:
If QIMC Submits to Apache
Abstracts of at least
three (3) scientific
articles per year,
additional per-
Hospital fee: [* ] [* ] [* ] [* ]
Total Potential fee
Per-Hospital [* ] [* ] [* ] [* ]
</TABLE>
For hospitals using some element of the Choice Systems but paying
Apache, directly or indirectly through sub-licensors, fees less than [* ]
per-year for licenses of Choice or Apache software or licenses ("License
Fees"), Apache shall pay to QIMC a Royalty equal to [*
] of all such License Fees actually received by Apache.
- -----------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 26
LICENSING AGREEMENT BETWEEN SCHEDULE 6(a)
APACHE MEDICAL SYSTEMS, INC. AND
QUALITY INFORMATION MANAGEMENT CORPORATION
PARTIES IN NEGOTIATION
This schedule provides, to the best of our knowledge, represents a listing of
ongoing discussions with parties relating to such parties providing support to,
or licensing usage of, the CHOICE System. [
*]
- ----> In addition, CHQC has presented to community researchers that the CHQC
database will be made available under protocol for research purposes. A
number of grant applications have been filed under this agreement.
Dissemination and Publication of Data:
- - Cleveland Hospital Quality Outcomes Measurements and Patient Satisfaction
Report (Trained, qualified users & subscribers)
- - Cleveland Summary Report
- - Participating CHQC Hospitals
- - QIMC Board of Trustees and specific committees
- - Certain federal, state, local government agencies, consultants, and
health policy analysts.
- - Specific commitment to local academic researchers to utilize CHQC
databases for purposes of research, grants, publications.
- ------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 27
LICENSING AGREEMENT BETWEEN SCHEDULE 6(d)(1)
APACHE MEDICAL SYSTEMS, INC. AND
QUALITY INFORMATION MANAGEMENT CORPORATION
IDENTIFIED POTENTIAL BETA-SITES
Beta-Site Negotiations
[ * ]
Beta-Site Presentations
- Riverside Methodist Hospital (Columbus, Ohio)
- Cuyahoga Falls General Hospital (Cuyahoga Falls, Ohio)
_____________
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 28
LICENSING AGREEMENT BETWEEN SCHEDULE 6(d)(2)
APACHE MEDICAL SYSTEMS, INC. AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION
QIMC FEE SCHEDULE
This fee schedule indicates fees charged to Apache Medical Systems, Inc. for
providing abstractor training, data cleaning, and report production for
Beta-Sites. This schedule will also apply should Apache Medical Systems, Inc.
determine to utilize the services for other CHOICE sites.
<TABLE>
<CAPTION>
===============================================================================
SERVICE RATE PER HOUR ESTIMATED ESTIMATED
HOURS HOURS
(Year One) (Thereafter)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Abstractor [* ] 24/hrs 16/hrs
Training
- -------------------------------------------------------------------------------
2. Data Cleaning [* ] 3 Hrs/1000 Patients 1.6 hrs/1000
Patients
- -------------------------------------------------------------------------------
3. Report Production [* ] 10/1st Report 4/Thereafter
===============================================================================
</TABLE>
Notes:
1. Abstractor Training: The first introduction to the CHOICE abstraction manual
and abstraction forms require significant training time. It has been standard
in Cleveland to hold a two-day (8 hours/day) initiation workshop, followed by
two half-day sessions in the first year. These estimates may vary depending
upon the knowledge of the abstractors. Hourly rates include preparation time
(minimal).
2. Data cleaning is an interactive process which is very labor intensive. All
data received from hospitals is scrutinized for accuracy. Certain data
quality rules are applied to each element for each patient. These rules may
require that specific data elements in question be imputed, be obtained from
the institution, or eliminated. Our experience in Cleveland indicates that
the initial rounds of data cleaning require significantly more effort (250%)
than subsequent rounds. Three years into the project, data cleaning consumes
approximately 2 hours/hospital with an average of 1,140 patients in each
round.
3. The initial outlay of the report, using standardized reporting format adopted
by CHQC, will require an increased effort. These reports will be submitted
in the format utilized in the CHQC program. QIMC will provide six (6) copies
of semi-annual reports for each statistical model including:
- facilities volume of patients in the study;
- ------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 29
LICENSING AGREEMENT BETWEEN SCHEDULE 6(d)(2)
APACHE MEDICAL SYSTEMS, INC. AND PAGE 2
QUALITY INFORMATION MANAGEMENT CORPORATION
- the actual (observed) outcome;
- the predicted (severity-adjusted) outcome;
- the statistical value;
- the 95% confidence interval.
The report will also provide comparisons to the Cleveland mean and one
other normative to be selected by the facility (similar facilities in the
Cleveland database). The report will also include comparison tables and
trends data when available. An ASCI file will also be provided to the
facility.
4. For AMS' consideration, the following is QIMC's experience in providing
data cleaning service for Participating hospitals:
<TABLE>
<CAPTION>
=======================================================================
TABLE 1 TOTAL HOSPITAL
- -----------------------------------------------------------------------
<S> <C> <C>
Number Hospitals 29
- -----------------------------------------------------------------------
Number Patient Records 33,000 1,140
- -----------------------------------------------------------------------
QIMC Hours 60 2.0
- -----------------------------------------------------------------------
Estimated Cost to AMS: [* ] [* ]
Hospital/Study
- -----------------------------------------------------------------------
Estimated [* ] [* ]
Time:Hospital/Study
=======================================================================
</TABLE>
- ---------------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 30
LICENSING AGREEMENT BETWEEN SCHEDULE 7(a)
APACHE MEDICAL SYSTEMS, INC. AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION
FEES TO ADDITIONAL HOSPITALS
Additional Hospitals will be charged an average fee of [* ] month.
This fee will be based off of a standard fee for the average Cleveland hospital
(based upon volume).
- -----------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 31
LICENSING AGREEMENT BETWEEN SCHEDULE 10
APACHE MEDICAL SYSTEMS, INC., AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION
SCHEDULE 10
DUE DILIGENCE CRITERIA
The CHOICE database and CHOICE System will be provided to, and reviewed
by, Apache for purposes of conducting due diligence. Analyses will include:
Variables and Coefficients
1) Review patient selection criteria to confirm clinical relevance of
disease categories
2) Review data variables for each equation to confirm clinical
relevance.
3) Review coefficients for each equation to confirm clinical
relevance.
4) Examine the relative weighing of the coefficients to determine if
they seem clinically and statistically reasonable, as well as if
they are accurate.
5) Determine how data variables values are measured or calculated in
the data collection process.
Database
1) Review missing values.
2) Determine how missing values are handled within the database and
utilized in equation calculations.
3) Run equations, using MPA procedures, to compare ROC results for
mortality and R(2) for length of stay.
4) Split data in half, rerun equations to determine similar results.
<PAGE> 32
LICENSING AGREEMENT BETWEEN SCHEDULE 12(g)
APACHE MEDICAL SYSTEMS, INC., AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION
AGREEMENTS RELATING TO CHOICE SYSTEM
- Agreement between QIMC and Michael Pine & Associates, Inc.
- Service Agreement dated 11/9/93 between QIMC and St. Louis
Healthcare Alliance
<PAGE> 33
LICENSING AGREEMENT BETWEEN
APACHE MEDICAL SYSTEMS, INC., AND
QUALITY INFORMATION MANAGEMENT CORPORATION
ATTACHMENTS
ATTACHMENT A ................................................UB-82-92 VARIABLES
ATTACHMENT B .......................................CORE CHOICE CHARACTERISTICS
ATTACHMENT C ...............PROPOSED AGREEMENT WITH MICHAEL PINE AND ASSOCIATES
ATTACHMENT D ............................................INITIAL QUARTERLY PLAN
ATTACHMENT E ...............................................BETA SITE AGREEMENT
ATTACHMENT F ......................................... DATA COLLECTION SOFTWARE
ATTACHMENT G .................................................INTERFACE SOFTWARE
ATTACHMENT H .......................................ON-SITE PROCESSING SOFTWARE
ATTACHMENT I .................................................SERVICE AGREEMENT
ATTACHMENT J ...........................................TRAINING SPECIFICATIONS
ATTACHMENT K .........................................CONFIDENTIALITY AGREEMENT
ATTACHMENT L ........................................CHOICE OUTCOME MEASUREMENT
ATTACHMENT M ......................................CHOICE SUPPORT DOCUMENTATION
<PAGE> 34
LICENSING AGREEMENT BETWEEN ATTACHMENT B
APACHE MEDICAL SYSTEMS, INC. AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION
CORE CHOICE CHARACTERISTICS
<TABLE>
<CAPTION>
MODELS MODEL SUBGROUP
<S> <C>
Mortality Acute Myocardial Infarction
Congestive Heart Failure
Pneumonia/Obstructive Lung Disease
Stroke
GI Hemorrhage
Coronary Artery Bypass
Lower Bowel Resection
Vascular Repair
Obstructive Lung Disease
Length of Stay Acute Myocardial Infarction
Congestive Heart Failure
Pneumonia
Stroke
GI Hemorrhage
Coronary Artery Bypass
Lower Bowel Resection
Vascular Repair
Lung Resection
Carotid Endarterectomy
Hip Fracture
Hysterectomy
Laminectomy
Prostatectomy
Obstetrics Primary C-Section
Low APGAR
Repeat C-Section
Complications
Adverse Events in Hospital Acute Myocardial Infarction
Nosocomial Infection
Respiratory Failure
Acute Blood Loss
Acute Renal Failure
Cardiac Arrest
</TABLE>
<PAGE> 35
Attachment C
AGREEMENT
This Agreement is made and entered into by and between APACHE Medical
Systems, Inc., ("AMS"), a Delaware corporation ("APACHE") with principal
offices at 1901 Pennsylvania Avenue, Suite 900, Washington, D.C., 20006, and
Michael Pine and Associates, Inc. ("MPA"), a corporation with principal offices
at 5020 South Lake Shore Drive, Suite 304-N, Chicago, Illinois 60615.
In consideration for the mutual promises set forth herein, the receipt and
adequacy of which is hereby acknowledged, the parties hereto do agree as
follows:
1. SCOPE OF WORK
MPA shall assist APACHE and other work groups assigned by APACHE and
other work groups assigned by APACHE (collectively, the "Committees") to
develop, modify and implement a monitoring system to assess the quality
of health care (the "System") provided in the Greater Cleveland
metropolitan area (the "Primary Area"). In consultation with APACHE, MPA
shall perform those services identified below and as identified on
Exhibit A attached hereto and made a part hereof:
a. assist in the continued development of [* ]
b. unless otherwise requested by APACHE, continue to [* ]
c. continue to [* ] and
d. shall continue to develop [* ]
_____________
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 36
[* ]
2. DURATION
This Agreement shall commence upon execution by both parties and, unless
terminated earlier under terms of this Agreement, shall continue until
December 31, 1994. Notwithstanding anything contained herein to the
contrary, Paragraphs 5, 6, 7, 9, and 10 shall survive the termination of
this Agreement.
3. COMPENSATION
QIMC shall pay MPA $______ each month for the months of January 1994
through December 1994. In addition, APACHE shall pay MPA an additional
amount as shall be negotiated between the parties for any work performed
for APACHE outside of the Primary Area.
In addition, MPA shall be reimbursed by APACHE for reasonable, ________
and documents via receipts, costs incurred in any travel required,
by mutual agreement, of MPA staff members or consultants in conformance
with Apache's standard travel reimbursement policy. (Reasonable cash
expenditures of less than $10 for such items as tips, brief taxi rides,
bus fare, or local phone calls shall not require a receipt as a condition
for reimbursement.) Travel expenses shall be submitted within 30 days
after the travel date.
4. REVIEW OF WORK
All work performed by MPA shall be of the highest quality consistent with
industry standards. The Chief Executive Officer of APACHE shall review
the work performed under this Agreement and shall determine whether the
services and work products substantially conform to the terms of this
Agreement. If APACHE is dissatisfied with the work produced under this
Agreement, APACHE will notify MPA within ten (10) days of receipt of the
product, and the parties will attempt to resolve the problem through
negotiation. Within ten (10) days of receipt of such notice, MPA shall
make all reasonable efforts to satisfactorily supply the services in
question. If a solution satisfactory to both parties is not reached
within thirty (30) days of MPA receipt of APACHE's notice, APACHE shall
provide written notice to MPA, specifying APACHE's objections to the work
and reasons for withholding or delaying payment. Within ten (10) days
following MPA's receipt of such written notice, the matter shall be
submitted for arbitration to a third party agreeable to both APACHE and
MPA, and the decision of third party shall be considered binding.
Withholding or delay of payment must be based on a
2
_________
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 37
failure of MPA to meet the terms of this Agreement in a timely and
professional manner. Payment may be withheld for disputed services only
and shall not affect payment for travel or for other work performed in a
satisfactory manner.
5. OWNERSHIP RIGHTS
All products and materials prepared under this Agreement shall become and
remain the sole and exclusive property of APACHE, including but not
limited to, those described in Exhibit B attached. The parties agree
that any work or draft prepared pursuant to this Agreement is and shall
be considered "work for hire" under the Copyright Act, 17 U.S.C. Sec. 201
(b), and that any and all copyrights to such work or draft prepared
pursuant to this Agreement shall vest in APACHE by operation of law and
agreement of the parties. APACHE acknowledges and agrees that the
foregoing applies to work, products, drafts, and other documents
(including any software programs) created by MPA under this Agreement and
specifically identified in Exhibit A attached hereto. However, subject
to the restrictions set forth in Section 8 below, it shall not apply to
similar items, definitions, forms, or instructions that may be used in
some other combination or context, nor to any other manuscript,
analyses, instruments or monitoring system not related (directly or
indirectly) to the System or possible applications for the System.
MPA warrants to APACHE that any work or draft prepared pursuant to this
Agreement does not infringe the rights, including these under the U.S.
Copyright Act, of any third party.
6. CONFIDENTIALITY
For purposes of the Agreement, the term "trade secrets and proprietary
information" shall include information, whether written or oral, that has
not been made available to the public through means not in breach of this
Agreement. Proprietary information shall include but not be limited to
______________________: deliberations of and communications from APACHE,
QIMC and their officers, agents, employees, representatives, task force
and committee members ("APACHE representatives"); data about individual
patients, providers, or hospitals; and results of analyses performed for
APACHE.
MPA shall hold in strict confidence all trade secrets and proprietary
information received directly and indirectly from APACHE or QIMC
representatives while performing services pursuant to this Agreement,
until such information is in the public domain through means not in
breach with the Agreement. Any proprietary information given to MPA
shall not be used by
3
<PAGE> 38
MPA in any work product other than APACHE's or for other than the sole
benefit and at the request of APACHE. MPA shall not provide, disclose, or
otherwise make available any trade secrets and proprietary information to
any third party without the consent of APACHE.
7. LIMITATION OF LIABILITY
MPA shall provide competent and reliable services pursuant to this
Agreement. MPA shall have the right to rely on reasonable data provided to
it to provide its services.
MPA shall notify APACHE promptly of any data which, in MPA's professional
opinion, appear to be in error, inadequate or incomplete. However, MPA
makes no warranties, representations, or guarantees, expressed or
implied, to APACHE with respect to the accuracy or adequacy of any data
or other information delivered to MPA by APACHE or QIMC, its members or
affiliates, agents, task force or committee members, representatives of
other contractors, or participating hospitals, so long as these data
appear reasonable and complete.
MPA shall be liable for actual damages arising from negligence or neglect
of performance by MPA's employees or agents.
MPA shall not be liable for incidental or consequential damages or for
actions arising from the negligence or omissions of parties other than
employees or agents of MPA, including APACHE employees, QIMC
representatives, QIMC affiliates or members, participants in task forces
or committees, representatives of other contracts, or participating
hospitals.
MPA shall have no liability for any default or failure or delay in
performance resulting from circumstances beyond its reasonable control,
including acts of God, fire, flood, public enemy, and incapacitation of
MPA officers or employees performing substantive functions for MPA under
this Agreement.
APACHE shall defend, indemnify, and hold MPA harmless from any third
party lawsuits or claims arising from MPA's work in compliance with this
Agreement, except for claims or liability that result, directly or
indirectly, from the failure of MPA to perform its duties under this
Agreement, including, without limitation, work performed in breach of the
rights of third parties, and work performed in connection with the
development of the Core Choice System or resulting from the negligence of
MPA.
4
<PAGE> 39
8. NONINTERFERENCE
8.1 Throughout the term of this Agreement and for three (3) years
thereafter, MPA shall not, without the prior written consent of APACHE,
either directly or indirectly, operate or perform any advisory or consulting
services for, market or invest in (other than the ownership of not more than
one percent (1%) of the outstanding stock of a publicly-held corporation
which is traded on a recognized securities exchange or over-the-counter), or
otherwise become associated with in any capacity, any company, partnership,
organization, proprietorship, or other entity which develops, manufactures,
prepares, sells or distributes systems or otherwise performs services then
in competition with APACHE, regardless of whether such systems or services
are performed in the Primary Area or in any Additional Area.
8.2 MPA shall not, at any time, without the prior written consent of
APACHE, directly or indirectly induce or attempt to induce any employee,
agent or other representative or associate of QIMC to terminate its
relationship with APACHE, or in any way directly or indirectly interfere
with such a relationship or any relationship between APACHE and any of its
suppliers, customers or clients, employees or agents.
8.3 MPA shall not, and shall cause each employee, agent or other
representative of MPA to agree not to, without the prior written consent of
APACHE, develop, sell, distribute or perform services in competition with
APACHE, to directly or indirectly use the System in any manner whatsoever,
including without limitation, in a manner which is competitive to APACHE or
to take any other action which is intended to be competitive with APACHE.
8.4 MPA acknowledges that the restrictions on its or his activities under
this Section 9 and Sections, 6 and 7 hereof are required for the reasonable
protection of APACHE. MPA further acknowledges and agrees that a breach of
any of those obligations and agreements will result in irreparable and
continuing damage to APACHE for which there will be no adequate remedy at
law and agrees that in the event of any breach of said obligations and
agreements, APACHE and its successors and assigns, shall be entitled to
injunctive relief and to such other and further relief as is proper in the
circumstances. In the event that any part of this Section 8, Sections 5 or
6 shall be found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy, such court shall exercise its
discretion in reforming such provisions to the end that MPA, its employee,
agents and representatives shall be subject to nondisclosure, noncompetition
and noninterference covenants that are reasonable under the circumstances
and enforceable by APACHE. In the event that any other provision or term
of this Agreement is found to be void or unenforceable to any extent for any
reason, it is the
5
<PAGE> 40
agreed-upon intent of the parties hereto that all remaining provisions or
terms of the Agreement shall remain in full force and effect to the maximum
extent permitted and that the Agreement shall be enforceable as if such
void or unenforceable provision or term had never been a part hereof.
9. COMPLETE AGREEMENT
This Agreement constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes any and all other
agreements, written or oral, with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
_____ day of_______, 1994.
APACHE MEDICAL SYSTEMS, INC. MICHAEL PINE & ASSOCIATES, INC.
1901 Pennsylvania Avenue 5020 S. Lake Shore Drive
Suite 900 Suite 304-N
Washington, D.C. 20006 Chicago, Illinois 60615
By:______________________ By: _________________________
Title:___________________ Title:_______________________
Date:____________________ Date:________________________
6
<PAGE> 41
APACHE MEDICAL SYSTEMS, INC.
MICHAEL PINE AND ASSOCIATES, INC.
DELIVERABLE SERVICES :1994
EXHIBIT A
1. Transition of Data Cleaning and Report Production responsibilities to
QMIC
2. Transition of completed Abstractor Glossary to QIMC (hardcopy & disc)
3. Transition of Abstraction Instrument to QIMC (hardcopy & disc)
4. Complete the refinement and transfer ownership of the following models to
QIMC
<TABLE>
==========================================================================
<S> <C> <C>
Mortality [* ] November 1993
--------------------------------------------------------------------------
Mortality [* ] November 1993
--------------------------------------------------------------------------
Mortality [* ] April 1994
--------------------------------------------------------------------------
Length of Stay [* ] November 1993
--------------------------------------------------------------------------
Obstetrics [* ] November 1993
--------------------------------------------------------------------------
Obstetrical [* ] November 1993
==========================================================================
</TABLE>
5. Complete the development, testing, validation, and implementation of
models yet to be completed.
<TABLE>
===========================================================================
<S> <C> <C>
Obstetrical [* ] April 1994
---------------------------------------------------------------------------
Obstetrical [* ] April 1994
---------------------------------------------------------------------------
Adverse Events in Hospital [* ] November 1994
---------------------------------------------------------------------------
Adverse Events in Hospitals [* ] November 1994
---------------------------------------------------------------------------
Adverse Events in Hospital [* ] November 1994
---------------------------------------------------------------------------
Adverse Events in Hospitals [* ] November 1994
---------------------------------------------------------------------------
Adverse Events in Hospitals [* ] November 1994
===========================================================================
</TABLE>
_________
* Confidential portions omitted and filed separately
with the Commission.
7
<PAGE> 42
EXHIBIT B TO AGREEMENT
LIST OF PRODUCTS AND MATERIALS OWNED BY AMS
PURSUANT TO PARAGRAPH 6 OF AGREEMENT
All written materials and computer materials created under this Agreement
(including final work products, drafts, notes, memoranda, and workpapers;
software programs and stored data), specifically:
Risk-Adjusted Reports of Outcomes
Validation Studies and Reports
Abstract Report Forms and Responses
Lists or Descriptions of Variable Co-Efficients
Data Abstraction Manuals and Instructions
8
<PAGE> 43
MARKETING OBJECTIVES FOR QIMC
MARCH 1994
GENERAL MARKETING
- - Assist in the preparation and distribution of an APACHE/CHOICE press
release announcing licensing agreement and joint marketing efforts
- - Develop [* ] for leads
- [* ]
- [* ]
- [* ]
- [* ]
- - Assist in preparation of sales presentation for [* ]
- - Assist in developing sales plan for [* ]
- - Assist in developing sales plan for [* ]
- - Conduct a minimum for 3 joint sales calls, to include:
- [* ]
- [* ]
- - Follow up with [* ] to determine next steps related to [* ]
- - Assist in developing [* ]
- - Revise Q2 Marketing Plan as required
[* ] INITIATIVE
- - Meet with [* ] to determine plan for marketing to [* ]
- ----------
* Confidential portions omitted and filed
separately with the Commission.
<PAGE> 44
MARKETING OBJECTIVES FOR QIMC
Q2 1994
GENERAL MARKETING
- - Assist in development of [* ]
- - Coordinate [* ] meeting(s) with hospitals regarding [* ]
- - Form a Marketing Advisory Board consisting of representatives from the
following:
- [* ]
- [* ]
- [* ]
- [* ]
- [* ]
- [* ]
- [* ]
- [* ]
- [* ]
- - Form an Applications Advisory Board consisting of:
- Physician advocates in the following disciplines:
- [* ] - [* ]
- [* ] - [* ]
- [* ] - [* ]
- Nurse advocates in the following disciplines:
- [* ] - [* ]
- [* ] - [* ]
- [* ] - [* ]
- Quality Assurance advocate
- - Identify annual plan for [* ]
- - Meet with [* ] to determine plan for marketing to Hospital
Associations
- ----------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 45
- - Meet with [* ] to determine plan for marketing to Coalitions
- - Meet with potential Beta Sites
- [* ]
- [* ]
- [* ]
- - Conduct a minimum of 5 joint sales calls
- - Assist in planning 4 regional presentations
- North
- South
- East
- West
- - Revise Q3 Marketing Plan as required
[* ] INITIATIVE
- - Assist in developing sales plan for selling to [* ]
- - Conduct a minimum of 3 joint sales calls related to the [* ]
- ----------
* Confidential portions omitted and filed
separately with the Commission.
2
<PAGE> 46
MARKETING OBJECTIVES FOR QIMC
Q3 1994
GENERAL MARKETING
- - Form a CHOICE(SM) Users Group
- - Prepare 1 case study on how CHOICE(SM) is used / benefits realized,
etc.
- - Find an RFP to respond to
- - Identify states introducing health reform legislation
- - Submit for publication one or more academic or commercial articles
- - Conduct a minimum of 5 joint sales calls
- - Conduct Marketing Advisory Board meeting
- - Conduct Application Advisory Board meeting
- - Revise Q4 Marketing Plan as required
[* ] INITIATIVE
- - Conduct a minimum or 3 joint sales calls related to the
[* ]
- - Identify legislative process in the [* ] i.e., determine
if RFP to be issued, who makes decision, length of legislation,
etc.
- - Prepare Competitive Analysis for competition in [* ]
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 47
MARKETING OBJECTIVES FOR QIMC
Q4 1994
GENERAL MARKETING
- - Develop and implement quarterly marketing plan
- - Participate in 4 regional presentations
- North
- South
- East
- West
- - Conduct Users Group Meeting
- - Submit for publication an article specifically related to
CHOICE(SM) cost savings
- - Prepare one case study on how CHOICE is used / benefits realized,
etc.
- - Prepare 1995 sales plan
- - Conduct Marketing Advisory Board meeting
- - Conduct Application Advisory Board meeting
- - Conduct a minimum of 2 joint sales calls
[* ] INITIATIVE
- - Conduct a minimum of 4 joint sales calls related to the
[* ]
OTHER 1994 OBJECTIVES
- - Participate, as a speaker or panelist, at a minimum of three relevant
industry or government conferences
- - Sponsor a minimum of one poster paper for conference review
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 48
ATTACHMENT E
BETA SITE
AGREEMENT
<PAGE> 49
Attachment E
DRAFT
November 30, 1993
CHOICE(SM) BETA-SITE SERVICE AGREEMENT
This Agreement is made as of this ________ day of _______________, 1993, between
and among Quality Information Management Corporation ("QIMC"), an Ohio nonprofit
corporation with principal offices at Statler Office Tower, Suite 741, 1127
Euclid Avenue, Cleveland, Ohio 44115 and Shawnee Mission Medical Center, a
Kansas corporation, with principal offices at ____________ (the "Beta-Site
Hospital").
WHEREAS, QIMC owns or holds exclusive commercial rights to the CHOICE(SM)
System, a severity-adjustment outcome prediction system for general medicine,
general surgery, and obstetrical patients (as further defined below, the
"CHOICE(SM) System");
WHEREAS, QIMC and the Beta-Site Hospital wish to enter into an agreement
whereby the Beta-Site Hospital will license the services provided by QIMC,
including, without limitation, training, data collection, error checking,
database management, analysis and report generation using the CHOICE(SM)
System, (the "Project");
NOW THEREFORE, in consideration of the mutual undertakings and promises
described herein, the parties agree as follows:
1. CHOICE(SM) System.
1.1 QIMC owns or holds among other things exclusive commercial rights to
the following works:
(a) The CHOICE(SM) Outcome Measurement and Prediction System (designed to
measure outcomes and calculate predicted outcomes for groups of
patients in selected medical, surgical, and obstetrical diagnostic
categories, based on demographic, diagnostic, and physiologic
variables);
(b) The CHOICE(SM) Representative Database (a community database of adult
medical, surgical, and obstetrical patients containing descriptive
information about each patient together with observed outcomes and
predicted values assigned them by The CHOICE(SM) Outcome Measurement
and Prediction System);
(c) The CHOICE(SM) System Software (a software package using a proprietary
statistical and mathematical analysis of The CHOICE(SM) Database for,
among other uses, to compare data on unrelated groups of patients with
the data) in The CHOICE(SM) Representative Database;
<PAGE> 50
(d) The CHOICE(SM) Abstraction Software (designed to assist in data
abstraction, data transmittal, data editing, data audit, and data
analysis); and
(e) The CHOICE(SM) Support Materials (designed to support operation and
use of The CHOICE(SM) Outcome Measurement and Prediction System,
including related methodology and data collection materials and
procedures, as well as ancillary protocols, procedures, and
materials).
1.2 The CHOICE(SM) Outcome Measurement and Prediction System,
CHOICE(SM) Representative Database, CHOICE(SM) System Software, CHOICE(SM)
Abstraction Software, the CHOICE(SM) Support Materials, all related
methodology and data collection procedures, ancillary protocols, procedures
and materials, are hereafter collectively referred to herein as the
"CHOICE(SM) System."
2. Services and Products To Be Provided.
QIMC agrees to provide the services and deliver the products
as each is further identified on Exhibit A appended hereto and hereafter
collectively referred to as the "Core Beta-Site Program Features" and actual
and predicted outcome information as described on Exhibit B appended hereto and
hereafter referred collectively as the "CHOICE(SM) Outcome Measurement and
Prediction Models" and the Beta-Site Hospital agrees to purchase such services
related to the CHOICE(SM) System as defined on Exhibits A and B of this
Agreement.
3. Training.
3.l As part of the Project, each Beta-Site Hospital shall have at least
two (2) individuals trained by QIMC in data collection procedures in
order to ensure that the Beta-Site Hospital personnel enter accurate and
complete data in connection with the Project. QIMC will provide the
Beta-Site Hospital with two (2) one-day data collection training programs
per each year during the term of this Agreement. The fee charged by QIMC
for the initial training sessions for each Beta-Site Hospital shall be
included in the core price for the Project (as defined below in Section 9
and as outlined on Exhibit C attached hereto and made a part hereof).
Notwithstanding the foregoing QIMC shall receive reimbursement for all
reasonable expenses incurred in connection with the data collection
training, including but not limited to transportation, lodging, meals,
and ancillary expenses directly related to preparation for such training
session. Training sessions will be held at a location chosen by QIMC on
dates mutually agreed-upon between QIMC and the Beta-Site Hospital.
3.2 Each Beta-Site Hospital shall, at all times during the term of this
Agreement, have at least two (2) individuals trained by QIMC in data
collection, and shall be responsible
2
<PAGE> 51
for having additional individuals trained by QIMC as necessary to perform
its responsibilities under this Agreement. To accommodate the Beta-Site
Hospital's continued training needs, additional training sessions will be
made available by QIMC at such times and at such locations mutually
agreed upon between QIMC and the Beta-Site Hospital. Additional data
collection training sessions beyond the two annual training sessions to
be provided by QIMC per Paragraph 3.1 shall be priced according to the
fee schedule provided on Exhibit C. Notwithstanding the foregoing QIMC
shall receive reimbursement for all reasonable expenses incurred in
connection therewith, including but not limited to transportation,
lodging, meals, and ancillary expenses directly related to preparation
for such training session. QIMC shall not be required to conduct a
training session at which fewer than five (5) individuals are to be
trained.
3.3 Each Beta-Site Hospital shall, upon the completion of the initial
data collection training sessions described in Paragraph 3.1, prepare
and submit to QIMC a list of Beta-Site Hospital personnel trained by QIMC
in the data collection procedures. The Beta-Site Hospital agrees to
notify QIMC within five (5) business days whenever a listed data
collector is no longer involved in data collection for the Project, or if
a new data collector is appointed.
4. Delivery and Use of Materials.
4.1 Following the successful completion of the initial data collection
training sessions described in Paragraph 3.1, the Beta-Site Hospital
shall be supplied with the materials necessary to collect data for
submission to QIMC. These materials shall include, but are not limited
to:
a. CHOICE(SM) data collection manuals; and
b. CHOICE(SM) data collection templates and forms.
The manuals, templates and forms listed above, as well as any copies
thereof, whether or not authorized by this Agreement (the "Materials"), contain
confidential information of QIMC and will at all times be owned by QIMC. The
Materials are protected by the copyright laws of the United States. QIMC
reserves the right to supplement, revise, or amend any of the materials, or to
substitute new materials for existing Materials, by delivering revisions,
amendments or substitute materials to the Beta-Site Hospital. All materials so
delivered will constitute "Materials" under this Agreement. Significant changes
to the Materials may require supplemental training by QIMC; provided, however,
that additional training required due to changes in the Materials (other than
changes specifically requested by the Beta-Site Hospital) shall be provided by
QIMC at no additional charge to the Beta-Site Hospital. QIMC hereby grants to
the Beta-Site Hospital a
3
<PAGE> 52
revocable, non-exclusive, nontransferable, limited term license to use the
Materials only in connection with data collection in furtherance of the
Project.
4.2 The Beta-Site Hospital shall, and shall use its best efforts to
cause its respective employees to, hold in strict confidence QIMC's
proprietary or confidential information, including the methodologies,
procedures, protocols, techniques and approaches contained in the
Materials or communicated by QIMC to the Beta-Site Hospital, or its
respective employees. Upon reviewing notice of the same, the Beta-Site
Hospital agrees to notify QIMC of any unauthorized possession,
reproduction, copying or use of the Materials, and to cooperate in all
reasonable manner with QIMC in protecting or enforcing QIMC's rights in
the Materials.
4.3 The Beta-Site Hospital may distribute the Materials only to its own
employees and only for the purposes set forth in this Agreement. The
Beta-Site Hospital shall use the Materials only in accordance with QIMC's
methods. Except as set forth herein, the Materials may not be used by the
Beta-Site Hospital to train any employee or any third party. The
Beta-Site Hospital shall use all best efforts to require each terminating
employee to return to it any Materials under the control of such employee.
In addition, any Beta-Site Hospital that ceases to participate in the
Project shall promptly return to QIMC all Materials under its control.
5. Data Collection and Quality Assurance.
5.1 Each Beta-Site Hospital agrees to collect data strictly according to
the protocols and procedures established by QIMC, and to submit to QIMC
all data required by the Materials. Data collection which is both
accurate and strictly follows QIMC's coding instructions is critical to
the success of the Project. Each Beta-Site Hospital shall be responsible
for collecting, coding, inputting and assuring the quality of its own
patient records, in each case following protocols and procedures supplied
by QIMC. Each Beta-Site Hospital shall be responsible for transmitting
the data collected in furtherance of the Project to QIMC, in an
agreed-upon format. QIMC shall have the sole discretion to set all data
collection protocols and procedures, and shall reserve the right to amend
or supplement such procedures at any time upon reasonable notice thereof
to the Beta-Site Hospital.
5.2 QIMC reserves the right to monitor the Beta-Site Hospital's data
collection and entry. In the event QIMC determines that data has been
improperly collected or entered, it may report the problem to the
Beta-Site Hospital, and QIMC shall, upon request, provide an estimate of
the likely cost to re-edit and analyze such data, on a time and materials
basis at QIMC's appropriate then-current standard rates, plus any
4
<PAGE> 53
incidental costs. If requested, QIMC, as appropriate, shall perform the
necessary re-editing and analysis to correct the noted deficiencies, if
possible. The costs of such corrective measures shall be borne by the
Beta-Site Hospital that submitted the inaccurate data. In the event QIMC
is not asked to correct such improper data, QIMC shall have no obligation
to include such data in any Report (as defined in Paragraph 6.2)
6. Reports; Limitations; Data Compilation.
6.1 QIMC shall prepare reports each quarter commencing on ______________
and continuing on ________________, ________________, __________________,
and _________________, ("Quarterly Reports") utilizing the CHOICE(SM)
System, based upon the data collected and transmitted to QIMC and the
Beta-Site Hospital. Semiannual Reports will contain information believed
by QIMC to identify, within the limits of statistical significance, where
the data transmitted to QIMC indicates mean mortality rates or lengths of
stay which are greater or lesser than predicted using the CHOICE(SM)
System. Concurrent with each Quarterly Report QIMC shall prepare and
shall provide a status report indicating an update of key information with
written analysis ("Quarterly Updates").
6.2 In addition to the Quarterly Reports and Quarterly Updates, QIMC
shall, upon request by the Beta-Site Hospital and without additional
charge, prepare up to two (2) Ad Hoc reports ("Ad Hoc Reports") per
calendar year during the term of this Agreement. Upon request by the
Beta-Site Hospital, and subject to the terms of this Agreement, QIMC may
produce additional Ad Hoc Reports during any calendar year, based upon
QIMC's then-current standard hourly rates as the same shall be modified
from time to time, plus any incidental costs.
6.3 The Beta-Site Hospital shall submit data collected for the Project no
later than forty-five (45) days following the close of each calendar
quarter or at such other dates as approved by QIMC which coincide with
data compilation for the QIMC Report (the "Reporting Deadline"). Should
the Beta-Site Hospital submit data late, after the Reporting Deadline,
QIMC shall charge the Beta-Site Hospital a fifty dollar ($50) per day
late fee provided, however, there shall be no late fee if the data is
submitted late due to a malfunction of the CHOICE(SM) Software. QIMC
shall use its best efforts to provide, but in no way can guarantee, that
data submitted after the Reporting Deadline will be included in the
subsequent Report. Beta-Site Hospital data excluded from Reports due to a
failure to meet the Reporting Deadline will be so indicated in such
Reports. Notwithstanding anything contained herein to the contrary QIMC
shall have the right to approve the data submitted by a Beta-Site
Hospital and the analysis of the data to be included in
5
<PAGE> 54
any Report. No such data or data analysis shall be included in any
Report without the prior consent of QIMC.
6.4 Reports will be delivered by QIMC only to the Executive Director of
the Beta-Site Hospital or to another representative appointed in writing
by the Beta-Site Hospital.
6.5 QIMC hereby licenses the Beta-Site Hospital to use the Reports for
the sole purpose of conducting the Project and for such research and other
purposes as set forth on Exhibit A. Except as set forth herein or in a
writing signed by both parties, the Beta-Site Hospital shall not develop
or publish, nor shall it cooperate with or authorize the development or
publication of, any works based upon or derived from any of the Reports,
or the Materials, in any manner or media whatsoever, without the prior
written consent of QIMC. QIMC will not unreasonably withhold consent to
the publication of the Project results in scholarly journals or to the
presentation of the results of the Project in scientific meetings and to
regulatory bodies with appropriate jurisdiction; provided, however, that
any such activities do not disclose confidential information of QIMC, and
subject to the right of QIMC: (i) to participate in and comment upon any
such activities; and (ii) to require that the author(s) grant appropriate
attribution to QIMC for the analytical support provided during the Project
in any such publication or presentation.
6.6 Upon the issuance of a Report, the Beta-Site Hospital may request
that data submitted by it be returned to it in ASCII text, on a computer
disk in an agreed-upon format. Such requests: (i) must be submitted in
writing at least annually and at any other time requested by QIMC; (ii)
shall be signed by an officer of the Beta-Site Hospital; and (iii) must
specify the purpose of the request, the intended use of the data, and the
identity of those to whom the data will be disclosed. QIMC shall release
ASCII data pursuant to this Paragraph only upon the receipt of a
satisfactory request, as set forth herein, and only by delivery of one (1)
disk per Report. QIMC shall be relieved of any confidentiality
obligations, as set forth in this Agreement or otherwise, with respect to
the data contained in such disk, upon its release to the Beta-Site
Hospital.
7. Data Ownership and Access.
7.1 Except as provided in this Agreement, each Beta-Site Hospital shall
retain ownership of its own data, but shall not own the Reports, which
shall remain the property of QIMC. QIMC shall not provide any Beta-Site
Hospital access to data relating to other Beta-Site Hospitals on a
hospital-specific basis. QIMC will maintain the security and
confidentiality of all Beta-Site Hospital-specific data, as well as
individually identifiable patient data under its control. QIMC will not
be
6
<PAGE> 55
responsible for hospital-specific data that may become available to other
Beta-Site Hospitals other than through release by QIMC.
7.2 Notwithstanding anything contained herein to the contrary, QIMC shall
have the right to (i) use all data transmitted by the Beta-Site Hospital
in any manner consistent with the terms of this Agreement, and to analyze
and incorporate such data in databases, reports, scores or scoring systems
generated therefrom, (ii) publish the results of analyses performed by
QIMC, and (iii) create and distribute works and derivative works based on
such data.
8. Term; Termination.
8.1 The term of this Agreement shall be for a period of thirty-six (36)
months. The initial term of this Agreement will begin on ______________
and end on ___________________ for data collection ("Data Collection
Term"), and continue for one hundred twenty (120) days thereafter for
purposes of the final Report ("Report Term"). This Agreement shall
automatically be renewed for two (2) successive one (1) year Data
Collection Terms and related Report Terms (each, "Renewal Terms") unless
either QIMC or the Beta-Site Hospital gives the other party written
notice at least sixty (60) days prior to the end of any Data Collection
Term that it will not renew this Agreement, whereupon this Agreement
shall terminate, with respect to the party that gave notice, at the end
of the next Report Term.
8.2 QIMC may, in addition to the termination rights provided for in
Paragraph 8.1, terminate this Agreement with respect to the Beta-Site
Hospital on at least twenty (20) days' written notice to the Beta-Site
Hospital if the Beta-Site Hospital (i) breaches the provisions of
Paragraphs 4.1, 4.2 or 4.3 and such breach is not remedied within thirty
(30) days of the Beta-Site Hospital's receipt of notice from QIMC of such
breach, or (ii) fails to pay any invoice for a period of thirty (30) days
when due unless the Beta-Site Hospital cures such breach prior to such
longer termination date specified by QIMC in its notice of termination.
8.3 QIMC or the Beta-Site Hospital may terminate this Agreement upon
written notice to the other if the other files a petition in bankruptcy or
is adjudicated as bankrupt or insolvent, or makes an assignment for the
benefit of creditors, or an arrangement pursuant to bankruptcy law, or if
a receiver is appointed for the other party, or for the other party's
business.
8.4 Upon termination or non-renewal of this Agreement, the Beta-Site
Hospital with respect to which the Agreement is terminated shall, as
soon as is reasonable, but in any event
7
<PAGE> 56
not more than thirty (30) days from the date of termination, return to
QIMC all Materials under its control.
8.5 The Beta Site Hospital may terminate its participation in this
Agreement, on thirty (30) days' written notice to QIMC if the State of
Kansas shall mandate (under statute) that all similar facilities in the
State of Kansas must submit to the purchase and participation in a program
that employs a severity-adjustment outcome measurement system, and QIMC
agrees to provide outcomes data to the Beta Site Hospital prior to the
termination of this Agreement.
9. Payment.
9.1 By signing this Agreement, the Beta-Site Hospital agrees to pay QIMC
an amount which shall be no less than the rates set forth in Paragraph
9.2, for the following periods: (i) if this Agreement is terminated
pursuant to Paragraph 8.1, through the end of the next Report Term, and
(ii) if this Agreement is terminated pursuant to any other Paragraph
hereof, through the date of such termination.
9.2 The rates at which the Beta-Site Hospital shall pay QIMC, as
described in Paragraph 9.1, shall, through the initial Report Term, be the
rates set forth in this Paragraph 9.2. Upon execution of this Agreement,
the Beta-Site Hospital shall pay QIMC a fee of Thirty Thousand Dollars
($30,000) for the Core Beta-Site Program Features as outlined on Exhibit C
attached hereto. As of the date of this Agreement, thereafter during the
following two years of the term of this Agreement, the annual fee shall
increase by the percentage increase, if any, in the Consumer Price Index
(All Cities, All Urban Wage Earners and Clerical Workers, Revised
1982-84=100). Payment will be made in quarterly installments due and
payable at the beginning of each quarter of the Agreement. The Beta-Site
Hospital shall compensate QIMC for any additional services not
inclusive to this agreement at the rates displayed in Exhibit C (attached
hereto) and shall reimburse QIMC for all reasonable expenses incurred by
QIMC in the performance of these services. QIMC shall furnish the
Beta-Site Hospital with the appropriate documents required by the Internal
Revenue Code and the regulations thereunder in connection with such
expenses.
9.3 Any rates so adjusted according to Paragraph 9.2 will become
effective at the beginning of the next Data Collection Term; provided,
however, that with respect to any party that tenders an effective notice
of nonrenewal in accordance with the provisions of Paragraph 9.1, the
rate payable by such party through the next Data Collection Term shall be
the rate in effect during the prior period.
8
<PAGE> 57
9.4 Payments shall be due thirty (30) days after receipt of any invoice,
with amounts unpaid forty-five (45) days after receipt of any invoice
bearing interest at the rate of 1.5 percent per month (not to exceed the
maximum rate permitted by applicable law). QIMC reserves the right to
withhold the statistics of the Beta-Site Hospital from inclusion in
Reports if any sum is unpaid sixty (60) days after delivery of a proper
invoice, or where data transmitted by the Beta-Site Hospital to QIMC does
not meet QIMC's standards.
10. Miscellaneous.
10.1 This Agreement does not constitute a partnership or joint venture
between QIMC or the Beta-Site Hospital. The Beta-Site Hospital shall have
no right or authority to obligate or bind QIMC in any manner whatsoever.
10.2 The rights and obligations set forth in Sections 4 and 10 shall
survive the termination or expiration of this Agreement and termination
of the Beta-Site Hospital's participation in this Agreement.
10.3 If any one or more of the provisions of this Agreement is held to be
unenforceable, such provision shall be limited and construed so as to
make it enforceable consistent with the parties' manifest intentions or,
if such limitation or construction is not possible or would be
inconsistent with the parties' manifest intentions, such provision will be
deemed stricken from this Agreement. In any such event, all other
provisions of this Agreement will remain in full force and effect, unless
such enforcement would result in an injustice or be inconsistent with the
purposes of this Agreement.
10.4 This Agreement is made in the State of Ohio, and shall be governed
and construed by the internal laws of the State of Ohio. The parties
agree that exclusive jurisdiction over any legal action arising out of or
in connection with this Agreement will be in state or federal courts
located in the State of Ohio, and the parties hereby agree to such
jurisdiction and venue.
10.5 No party to this Agreement shall be deemed in default or otherwise
liable hereunder due to its inability to perform by reason of cause
beyond the reasonable control of such Party ("Force Majeure"). Any delay
in performance shall be of no greater duration than the Force Majeure
event causing the delay. If a Force Majeure event continues uninterrupted
for a period exceeding six (6) calendar months, any party may elect to
terminate this Agreement upon notice to the other, but such right of
termination, if not exercised, shall expire immediately upon the
discontinuance of the Force Majeure event.
9
<PAGE> 58
10.6 No waiver of any term of this Agreement shall be valid unless in a
writing signed by the party against which the waiver is sought to be
enforced. No waiver by any party of any breach of or failure of
performance under this Agreement shall be deemed a continuing waiver or a
waiver as to any subsequent or similar breach. This Agreement contains
the entire agreement between the parties with regard to its subject
matter, and supersedes all prior agreements between them pertaining to its
subject matter. This Agreement may be altered or amended only in a
writing executed by an authorized agent for each party. Neither QIMC nor
the Beta-Site Hospital may assign its rights or obligations hereunder, and
any such purported assignment shall be void.
10.7 Any notice under this Agreement shall be sent by U.S. Express Mail,
postage prepaid, by express or overnight courier service, or by facsimile
(confirmed by U.S. Express Mail, express or overnight courier service);
shall be deemed given on the earlier of the date of confirmed receipt; and
shall be sent to the addresses given below, or such other addresses of
which any party may give notice:
To QIMC:
Quality Information
Management Corp.
Statler Office Tower, Suite 741
1127 Euclid Avenue
Cleveland, Ohio 44115
Attention: Dwain Harper
Facsimile No.:__________________
To the Beta-Site Hospital:
Name: __________________________
Address: _______________________
________________________________
Attention: _____________________
Facsimile No.: _________________
10.8 The paragraph titles are intended solely for convenience and shall in
no event affect the interpretation of this Agreement.
10
<PAGE> 59
The parties have executed this Agreement by their duly authorized
representatives on the dates set forth below.
Quality Information Management ______________________________
Corp.
By:____________________________ By:___________________________
Title:_________________________ Title:________________________
Dated:_________________________ Dated:________________________
11
<PAGE> 60
Chief Executive Officer
<TABLE>
<CAPTION>
Exhibit A
Core Beta-Site Program Features
<C> <C>
License The fee for use of the CHOICE(SM) System is waived for Beta-Site
facilities
Data Cleaning Data cleaning is an interactive process which is very labor
intensive. All data received from hospitals is scrutinized
for accuracy. Certain data quality rules are applied to each
data element for each patient. These rules may require that
specific data elements in question be imputed, be obtained
from the institution, or eliminated. The established fee is
based upon an annual Beta-Site facility volume of 2000 patients
per year. The fee structure for volumes over 2000 each year
is defined.
Report Production The Quality Information Management Corporation will provide 6
copies of semi-annual reports for each/all causes statistical
model and that includes the facilities volume of patients in
the study, the actual (observed) outcome, the predicted
(severity-adjusted) outcome, the statistical value, and the
95% confidence interval. The report will also provide com-
parisons to the Cleveland mean, and one other normative to
be selected by the Beta-Site (similar facilities in the
Cleveland database). The report will also include
comparison tables and trends data when available. An
ASCI file will be provided to the Beta-Site facility.
Ad Hoc Reports Two Ad Hoc Reports, to be mutually agreed upon by the
QIMC and the Beta-Site will be provided each year. These
reports will be estimated to consume approximately 15
hours of computer time. Additional ad-hoc reports may be
provided at rates defined in this document.
Abstractor Training The Quality Information Management Committee will
provide (on-site) two 1-day abstractor training programs
each year. This program will include the inaugural
training program and one update program each year.
additional abstractor training will be provided at hourly
rates defined in this document. This service includes
a glossary of rules pertaining to abstraction and the
abstraction instrument.
Abstraction Software Software will be provided which may be used for the
purpose of transmitting abstracted data. This software
will include data edits and help windows that specify
the abstraction rules for each data element. The service
includes onsite software maintenance (2 days per year)
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit C
Beta-Site Pricing Structure
<S> <C> <C>
Service Core Price Additional Costs
Core Beta-Site Services $30,000/Year(1)
Data Cleaning Increases $2,500 for each increment
of 500 included admissions above
2000 per year.
Report Production N/A
Ad Hoc Reports $250/hour (estimate 6 hours per additional
ad hoc report)
Abstractor Training $150/hour + expenses
Abstraction Software N/A
Data Analyses and Review $275/hour + expenses
External Audit (Optional) $75.00/hour + expenses
(estimate 8-10 hours for an
audit).
All fees quoted are for services performed on site and in preparation. Incurred expenses for travel will be billed in addition to
the stated fees.
1. The Beta-Site fee will increase in accordance with the CPI annually for a period of 3 years.
</TABLE>
<PAGE> 62
LICENSING AGREEMENT BETWEEN ATTACHMENT F
APACHE MEDICAL SYSTEMS, INC. AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION.
DATA COLLECTION SOFTWARE
PRODUCT DESCRIPTION
The data collection software consists of five primary features:
1. Data Model and Database
2. Data Entry
3. Data Editing and Base Reports
4. Data Export
5. System Security
These features are described below.
1. DATA MODEL AND DATABASE
[* ]
2. DATA ENTRY PROCESS
[* ]
[* ]
___________
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 63
LICENSING AGREEMENT BETWEEN ATTACHMENT F
APACHE MEDICAL SYSTEMS, INC. AND PAGE 2
QUALITY INFORMATION MANAGEMENT CORPORATION.
[* ]
3. DATA EDITING AND BASE REPORTS
[* ]
[* ]
4. DATA EXPORT
[* ]
5. SYSTEM SECURITY
[* ]
[* ]
____________
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 64
LICENSING AGREEMENT BETWEEN ATTACHMENT F
APACHE MEDICAL SYSTEMS, INC. AND PAGE 3
QUALITY INFORMATION MANAGEMENT CORPORATION.
[* ]
[* ]
[* ]
_____________
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 65
LICENSING AGREEMENT BETWEEN ATTACHMENT G
APACHE MEDICAL SYSTEMS, INC. AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION
ADT/LAB BATCH INTERFACE
PRODUCT DESCRIPTION
The use of existing hospital systems to collect patient data whenever
possible eases use by hospital personnel and the time and burden of manual data
entry, and improves data entry accuracy and quality. Because the CHOICE model
uses patient data retrospectively, a real-time interface is not required, thus
allowing for a lower-cost approach using a batch file transfer. [* ]
[* ]
___________
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 66
LICENSING AGREEMENT BETWEEN ATTACHMENT H
APACHE MEDICAL SYSTEMS, INC. AND PAGE 1
QUALITY INFORMATION MANAGEMENT CORPORATION
CHOICE ON-SITE REPORT GENERATION SOFTWARE
PRODUCT DESCRIPTION
The Choice On-Site Report Generating Software will consist of three
primary features:
1. CHOICE Predictive Model
2. Audit Utility
3. User-Defined Reports
i. CHOICE PREDICTIVE MODEL
This feature would provide an implementation of the CHOICE predictive
model for generating outcomes predictions, as well as new graphic screens and
reports for reviewing the predictions. Together, these features will provide
an individual hospital with the ability to analyze their own performance on an
ongoing basis, comparing their actual outcomes to those predicted by the CHOICE
model.
The model provided by QIMC will be converted into the appropriate "C"
language code to automate the generation of predictions. The predictions will
be stored in the database along with the other patients data. New reports will
provide information similar to that found in existing QIMC quarterly reports so
that hospitals may follow their own progress. Other reports will list more
detailed patient data as appropriate with the CHOICE model to provide further
insight. In addition, new interactive graphic screens will enable a hospital
to analyze their data.
ii. AUDIT UTILITY
This enhanced product option will include a utility to automate the process
of auditing process, the purpose of which would be to provide a tool for
conducting internal and external validation of the data collection and entry
processes.
The first function of the audit utility is to select the patient cases to
be audited. A number of rules can be applied for this purpose; random sample or
every "Nth" case; percentage of sample coverage; and time frame. From these
parameters, a list of cases to be audited may be generated so that the records
can be collected.
A second function of the audit utility will allow re-abstracted data to be
entered into a separate database. This prevents the audit function from causing
duplicate records in the database for the audited cases.
<PAGE> 67
LICENSING AGREEMENT BETWEEN ATTACHMENT H
APACHE MEDICAL SYSTEMS, INC. AND PAGE 2
QUALITY INFORMATION MANAGEMENT CORPORATION
A third function of the audit utility will compare cases in the audit
database with cases in the regular database, and identify differences between
the two versions. A report which documents the differences can then be
generated.
iii. USER-DEFINED REPORTS
The basic product includes standard reports; the enhanced product option
will add additional reports, all of which provide pre-defined information and
formats. Although basic reports will be easily-generated by a hospital, they
will not always provide all of the desired information. Furthermore, it is not
practical to anticipate every report preference or requirement. Therefore, a
utility generating user-defined reports will be part of this enhancement.
User-defined reports will be generated using a commercial off-the-shelf
reporting tool that is compatible with the ODBC database access method employed
by the product. A set of "starter templates" will be provided to facilitate
the initial creation of user-defined reports. The reporting tool will allow
users to select data items, define search criteria, set sort orders, and define
the formatting of the information. Reports which are created by the user may
be saved and reused again at a later time.
AMS also will provide technical support of this reporting tool as part of
the product. In addition, a hospital may select its own commercial reporting
tool so long as it is compatible with ODBC. In this case, however, AMS will
not provide technical support.
<PAGE> 68
DRAFT 2/16/94
SERVICE AGREEMENT
Agreement made this _____ day of ___________, 1994, between and among
Quality Information Management Corp. ("QIMC"), an Ohio corporation, APACHE
Medical Systems, Inc. ("AMS"), a Delaware corporation, and certain hospitals as
further described below.
WHEREAS, QIMC is a corporation formed by business and health care groups,
including the Greater Cleveland Hospital Association, to encourage cooperative
efforts to improve the quality of healthcare available in the greater Cleveland
metropolitan area;
WHEREAS, AMS owns or holds exclusive commercial rights to certain
severity-of-illness scoring systems and related databases and computer software
useful in evaluating certain aspects of the quality of health care;
WHEREAS, AMS and QIMC have previously entered into a letter agreement dated
November 30, 1990 (the "Letter Agreement"), and certain hospitals have joined
the Letter Agreement, as further described below;
WHEREAS, the parties wish to restate and clarify certain terms of the
Letter Agreement and to extend the term of the services provided by AMS,
including training, data collection, error checking, database management,
analysis and report generation using the APACHE(1) III System, as described
below (the "Project").
NOW THEREFORE, in consideration of the mutual undertakings and promises
described herein, the parties agree as follows:
1. APACHE III SYSTEM.
1.1. AMS owns or holds exclusive commercial rights to the following
works, among other things:
a. The APACHE III Prognostic Scoring System, which is a system designed
to rate the severity of illness, and predicted outcomes for
individual patients, as well as groups of patients, based on acute
and chronic health status and symptoms.
b. The APACHE III Database, which is a national database (which includes
several subsets, e.g., teaching hospitals, and several number-of-bed
categories) of adult intensive care unit ("ICU") patients, the scores
assigned them pursuant to the APACHE III Prognostic Scoring System,
their length of stay in the ICU, outcome and other factors;
___________________________
(1) APACHE is a trademark and service mark of AMS.
<PAGE> 69
c. The APACHE III Software, which embodies the results of a proprietary
statistical and mathematical analysis of the APACHE III Database and
which can be used, among other things, to compare data on individual
patients or groups of patients with that contained in the APACHE III
Database, and to establish expected outcomes for such patients; and
d. The Materials, as described in Paragraph 4.1.
1.2. The APACHE III Prognostic Scoring System, APACHE III Database, APACHE
III Software, Materials, related methodology and data collection
procedures, as they presently exist and as they may be modified or
enhanced in the future, and ancillary protocols, procedures and materials,
are hereafter collectively referred to as the APACHE III System.
2. PARTICIPATING HOSPITALS.
Any hospital that is a member of the Greater Cleveland Hospital
Association, is represented to QIMC, and wishes to participate in the Project
may join this Agreement by executing a copy of the Memorandum attached hereto as
Exhibit 1. For the purposes of this Agreement, a hospital that has executed such
Memorandum shall be referred to as a "Hospital." Each Hospital shall be subject
to all the terms and conditions of this Agreement, including but not limited to
the license restrictions, confidentiality, and reporting and payment obligations
described below.
3. TRAINING.
3.1. Each Hospital, upon joining this Agreement, shall have two (2) or
more individuals trained by AMS in data collection procedures; provided,
however, that any Hospital that also joined the earlier Letter Agreement
need not have additional personnel trained if the requisite number of
people currently on the Hospital's staff have already been trained by AMS.
The purpose of such training shall be to ensure that Hospital personnel
enter data to be used in connection with the Project accurately and
completely. The fee for each training session for Hospital personnel
shall be [* ] per day, plus AMS' reasonable expenses incurred in
connection therewith, including but not limited to transportation,
lodging, meals, and ancillary expenses directly related to preparation for
such training session. Each training session shall consist of no more
than forty (40) people for sessions covering methodology and no more than
fifteen (15) people for sessions covering data collection. Such training
sessions will be held at a location chosen and provided by QIMC on dates
mutually agreed upon between QIMC and AMS.
3.2. Each Hospital shall, at all times, have at least two (2) individuals
trained by AMS in data collection, and shall be responsible for having
additional individuals trained by AMS as necessary to perform such
Hospital's responsibilities under this Agreement. To accommodate
Hospitals' continued training needs, additional training sessions will be
_______________
* Confidential portions omitted and filed separately
with the Commission.
-2-
<PAGE> 70
made available by AMS for the fee, plus expenses, and subject to the
limitations on class size, described in Paragraph 3.1. If no subsequent
training sessions are likely to be scheduled within a ninety (90) day
period, and one or more individuals needs to be trained to maintain the
requisite number of trained individuals at each Hospital, QIMC shall
schedule such a training session.
3.3. Each Hospital shall prepare and submit to AMS a list of Hospital
personnel trained by AMS in the data collection procedures. Each Hospital
agrees to notify AMS within five (5) days whenever a listed data collector
is no longer involved in data collection for the Project, or if a new data
collector is appointed.
3.4. QIMC shall pay AMS' training fees and expenses no later than thirty
(30) days after receipt of AMS' invoice therefor. QIMC shall be solely
responsible for AMS' training fees and expenses and for allocating them,
if it so chooses, among the Hospitals. QIMC shall not withhold payment on
any invoice received from AMS on account of the failure of any Hospital to
pay training fees or expenses to QIMC. QIMC shall not charge any Hospital
a training fee that exceeds AMS' training fee described in Paragraph 3.1.
4. DELIVERY AND USE OF MATERIALS; CONFIDENTIALITY.
4.1. Following the successful completion of the initial training session
described in Paragraph 3, each Hospital shall be supplied with the materials
necessary to collect data for submission to AMS for processing. These
materials may include, but are not limited to:
a. APACHE III data collection software:
b. APACHE III data collection manuals; and
C. APACHE III data collection templates and forms.
The software (including any disks or tapes on which it may be supplied, and
related documentation), manuals, templates and forms listed above, as well
as any copies thereof, whether or not authorized by this Agreement (the
"Materials"), the Reports (as defined in Section 6.4) and the Patient
Files and Results (as defined in Section 6.3), contain confidential
information of AMS and will at all times be owned by AMS. The Materials,
Reports, Patient Files and Results are protected by the copyright laws of
the United States and other countries, and by international treaties. AMS
reserves the right to supplement, revise, or amend any of the Materials,
Reports, Patient Files and Results, or to substitute new materials for
existing Materials, Reports, Patient Files and Results, by delivering
revisions, amendments or substitute materials, reports or files to QIMC and
the Hospitals.
4.2. All materials so delivered will constitute "Materials" under this
Agreement. Significant changes to the Materials may require supplemental
training by AMS, which would in such event be mandatory for QIMC and all
Hospitals. The cost of such training shall be based on AMS' then-current
standard rates, plus any incidental costs, and shall be borne by QIMC, which
may allocate such-expenses among Hospitals, as agreed between
-3-
<PAGE> 71
QIMC and the Hospitals. AMS hereby grants to QIMC and the Hospitals a
revocable, non-exclusive, non-transferable, limited term license to use
the Materials only in connection with data collection in furtherance of
the Project. Each Hospital may make one archival or back-up copy of the
APACHE III data collection software, as well as ephemeral copies
necessary to normal operations, and shall not modify, decompile,
disassemble, reverse-engineer or otherwise attempt to obtain the source
code for such software.
4.3. QIMC and the Hospitals shall, and shall cause their respective
employees to, hold in strict confidence AMS' proprietary or confidential
information, including the methodologies, procedures, protocols,
techniques and approaches contained in the Materials, Reports, Patient
Files or Results, or communicated by AMS to QIMC, the Hospitals, or
their respective employees. QIMC and the Hospitals agree to notify AMS
of any unauthorized possession, reproduction, copying or use of the
Materials, Reports, Patient Files or Results, and to cooperate with AMS
in protecting or enforcing AMS' rights in the Materials, Reports, Patient
Files or Results.
4.4. QIMC and each Hospital may distribute the Materials, Reports,
Patient Files and Results only to its own employees and only for the
purposes set forth in this Agreement, except to the extent AMS has
authorized other disclosure in writing. At AMS' request, a Hospital
shall provide AMS with the names of all employees who will have access to
the Materials, Patient Files or Results and, upon AMS' written request,
require such employees to execute and deliver to AMS a confidentiality
and limited use agreement provided by AMS, relating to the Materials or
the Patient Files and Results (or all of these), as a condition to such
employees having access to the Materials, Patient Files or Results. Each
Hospital shall use the Materials only in accordance with AMS' methods.
The Materials may not be used by QIMC or any Hospital to train any
employee or any third party. QIMC and each Hospital shall require each
terminating employee to return to it any Materials, Reports, Patient
Files or Results under the control of such employee. In addition, any
Hospital that ceases to participate in the Project shall promptly return
to AMS all Materials under its control.
5. DATA COLLECTION AND QUALITY ASSURANCE.
5.1. After initial training of its personnel and the delivery of the
Materials, each Hospital shall conduct a pilot study of all ICU patients
admitted consecutively to include fifty (50) patients; provided, however,
that Hospitals successfully participating in the Project under the Letter
Agreement need not conduct such a pilot study. In the pilot study, AMS
shall, with the cooperation of the Hospital participating in the pilot
study, compare data collection and entry reports submitted by the Hospital
to patient records, to verify accuracy and consistent coding of admission
and chronic health history. Until a successful pilot study demonstrates
mastery of data entry, coding and quality assurance to the satisfaction of
AMS, no data from such Hospital will be used in compiling any Reports (as
defined in Paragraph 6.2). After the successful conclusion of a pilot
study (and immediately for those Hospitals that successfully participated
in the Project under
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the Letter Agreement), verification of the accuracy of all data entered
will be the sole responsibility of each Hospital and QIMC.
5.2. Each Hospital agrees to collect data strictly following AMS
procedures, and to submit all data required by the Materials. Data
collection which is both accurate and strictly follows AMS' coding
instructions is critical to the success of the Project. Each Hospital
shall be responsible for collecting, coding, inputting and assuring the
quality of its own adult, ICU patient records, in each case following
protocols and procedures supplied by AMS. Each Hospital shall be
responsible for transmitting the data collected in furtherance of the
Project to AMS on diskette in an agreed-upon format unless an alternative
delivery mechanism is agreed to in writing between the Hospital and
AMS. AMS shall have the sole discretion to set all data collection
protocols and procedures, and reserves the right to amend or supplement
such procedures at any time upon reasonable notice thereof to the
Hospitals and to QIMC.
5.3. AMS reserves the right to monitor Hospital data collection and
entry. In the event AMS determines that data has been improperly
collected or entered, it may report the problem to QIMC and the affected
Hospital, and shall, upon request, provide an estimate of the likely cost
to re-edit and analyze such data, on a time and materials basis at AMS'
then-current standard rates, plus any incidental costs. If requested,
AMS shall perform the necessary re-editing and analysis to correct the
noted deficiencies, if possible. The costs of such corrective measures
shall be borne by the Hospital that submitted the inaccurate data. In the
event AMS is not asked to correct such improper data, it shall have no
obligation to include such data in any Report (as defined in Paragraph
6.2).
6. REPORTS; LIMITATIONS.
6.1. AMS shall prepare reports twice yearly ("Semiannual Reports")
utilizing the APACHE III System, based upon the data collected and
transmitted to AMS by the Hospitals. Semiannual Reports will contain
information believed by AMS to identify, within the limits of statistical
significance, Hospitals where the data transmitted to AMS indicates mean
mortality rates or lengths of stay which are greater or lesser than
predicted using the APACHE III System. Promptly after each September 30
and March 31 AMS shall prepare and shall provide a status report
indicating an update of key information without written analysis
("Quarterly Updates").
6.2. The Semiannual Reports described in Paragraph 6.1 shall include
predicted and observed Hospital mortality rates and lengths of stay in
comparison to the aggregate experience of the other Hospitals (the mean
ICU mortality rates and lengths of stay for the Hospitals are referred to
herein as the "Cleveland Norm" and the portion of the Reports containing
this information is referred to as the "Choice Project Cleveland Hospital
Comparison"). AMS shall conduct an annual review of the Cleveland Norm
to evaluate whether updates are needed in the software generating the
Choice Project Cleveland Hospital Comparison to reflect changes in the
Cleveland Norm.
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6.3. In addition to the reports described in Sections 6.1 and 6.2, upon
written approval from the Hospitals and a written request from QIMC, AMS
shall provide QIMC a file in ASCII text, on a computer disk in an
agreed-upon format, containing raw patient data as collected from Hospital
records, such as patients' physiology, age and chronic health, on a
patient-by-patient basis ("Raw Data"), APACHE III score, observed and
predicted hospital mortality, and observed and predicted ICU length of
stay (collectively, the "Patient Files"). The portion of the Patient
Files consisting of the APACHE III score, predicted hospital mortality,
and predicted ICU length of stay is referred to herein as the "Results".
The Patient Files and Results shall be used by QIMC solely to perform, on
behalf of Hospitals, in support of the Project, certain low level
functions involving audit of the contents of Reports or analysis of or
research into the contents of Reports, as listed in Exhibit 2 ("Permitted
Uses"). The Patient Files and Results shall not be used for purposes
other than Permitted Uses and, in particular, shall not be used for
sophisticated research or analysis, or to create new reports. QIMC will
charge Hospitals no more than QIMC's reasonable costs for work performed
by QIMC employees relating to the Permitted Uses. The Permitted Uses
listed in Exhibit 2 may be changed upon written request by QIMC and
written consent by AMS, which consent will not be unreasonably withheld.
6.4. In addition to the reports described in Sections 6.1 - 6.3, AMS
shall, upon request by QIMC and without additional charge, prepare up to
three (3) Ad Hoc reports ("Ad Hoc Reports") per calendar year during the
term of this Agreement. Upon request by QIMC, and subject to the terms
of this Agreement, AMS may produce additional Ad Hoc Reports during any
calendar year, based upon AMS' then-current standard rates, plus any
incidental costs. AMS also anticipates having the capacity, beginning in
1994, to prepare the following reports ("Supplemental Reports") upon
request by QIMC and subject to the terms of this Agreement: (a) Organ
system specific or diagnostic specific outcome reports (requires that at
least 200 cases exist in a category for a Hospital); and (b) Active
treatment/low risk monitor reports outlining the results of data
collected using the APACHE III System and TISS. There will be no
additional fee for the Supplemental Reports. Semiannual Reports,
Quarterly Updates, Ad Hoc Reports and Supplemental Reports are referred
to in this Agreement, collectively, as "Reports."
6.5. Hospitals shall submit data collected for the Project no later than
forty-five (45) days following the close of each calendar quarter.
Hospitals which submit data late but wish to be included in the
subsequent Report may be subject to a fifty dollar ($50) per day late fee.
AMS shall make reasonable efforts to provide, but in no way can guarantee,
that data submitted after the reporting deadline will be included in the
subsequent Report. Hospital data excluded from Reports due to a failure
to meet the reporting deadline will be so indicated in such Reports.
6.6. Reports and Patient Files (if released) will be delivered by AMS only
to the Executive Director of QIMC or to another representative appointed
in writing by QIMC.
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6.7. Title to the Reports, Patient Files and Results will remain with
AMS. AMS hereby licenses QIMC and the Hospitals to use the Reports for
the sole purpose of conducting the Project, and to use the Patient Files
and Results solely for Permitted Uses. QIMC and the Hospitals shall not
develop or publish, nor shall they cooperate with or authorize the
development or publication of, any works based upon or derived from any
of the Reports, the Patient Files, the Results or the Materials, in any
manner or media whatsoever, without the prior written consent of AMS.
AMS will not unreasonably withhold consent to the publication of the
Project results in scholarly journals or to the presentation of the
results of the Project in scientific meetings and to regulatory bodies
with appropriate jurisdiction; provided, however, that any such
activities do not disclose confidential information of AMS, and subject
to the right of AMS: (i) to participate in and comment upon any such
activities; and (ii) to require that the author(s) grant appropriate
attribution to AMS for the analytical support provided during the Project
in any such publication or presentation.
6.8. Upon the issuance of a Report, a Hospital may request that data
submitted by such individual Hospital be returned to it in ASCII text, on
a computer disk in an agreed-upon format. Such requests: (i) must be
submitted in writing at least annually and at any other time requested by
AMS; (ii) shall be signed by an officer of the Hospital; and (iii) must
specify the purpose of the request, the intended use of the data, and the
identity of those to whom the data will be disclosed. AMS shall release
ASCII data pursuant to this Paragraph only upon the receipt of a
satisfactory request, as set forth herein, and only by delivery of one
(1) disk per Report. AMS shall be relieved of any confidentiality
obligations, as set forth in this Agreement or otherwise, with respect to
the data contained in such disk, upon its release to the submitting
Hospital.
6.9. The significance and use of any of the Reports, Patient Files or
Results is wholly within the judgment of QIMC and the Hospitals. AMS
shall have no responsibility or liability to any person based on or
related to the use of any of the Reports, Patient Files or Results by
QIMC or any Hospital. QIMC and any Hospital involved in any claim by any
third party based on or related to the use of any of the Reports, Patient
Files or Results or the release by AMS of the Patient Files or Results to
QIMC shall defend and indemnify AMS against any such claim. AMS makes no
representation or warranty with respect to the APACHE III System or any
part thereof, or with respect to any of the Reports, Patient Files or
Results, other than as expressly set forth in this Agreement, and AMS
DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
7. DATA OWNERSHIP AND ACCESS.
7.1. Each Hospital shall retain ownership of its Raw Data, but shall not
own the Reports, Patient Files or Results, which shall remain the property
of AMS, as provided in this Agreement. AMS shall not provide any Hospital
access to data relating to other Hospitals on a hospital-specific basis.
AMS will use reasonable commercial efforts to
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maintain the security and confidentiality of all Hospital-specific data,
as well as individually identifiable patient data, under its control.
Upon the mutual written request of QIMC and a Hospital, AMS may release
to QIMC the data relating to such Hospital or the Patient Files relating
to such Hospital, or both, as agreed to between QIMC and such Hospital.
Upon such authorized release of Hospital data or Patient Files to QIMC,
AMS is released from responsibility for data security with respect to the
data or Patient Files released to QIMC. In addition, AMS will not be
responsible for hospital-specific data that may become available to other
Hospitals other than through release by AMS.
7.2. In consideration for its performance under this Agreement, AMS
shall have a perpetual, world-wide, royalty-free right and license (i) to
use all data transmitted to it by Hospitals in any manner consistent with
the terms of this Agreement, and to analyze and incorporate such data in
databases, reports, scores or scoring systems generated therefrom, (ii) to
publish the methods and general results of the Project, and (iii) to
create and distribute works and derivative works based on such data, in
each case provided that the confidentiality of individual Hospitals and
patients is protected.
8. TERM; TERMINATION.
8.1. The initial term of this Agreement will begin on the date hereof and
end on December 31, 1994 for data collection ("Data Collection Term"), and
one hundred twenty (120) days thereafter for purposes of the final Report
("Report Term"). This Agreement shall automatically be renewed for
successive one (1) year Data Collection Terms and related Report Terms
unless either AMS, QIMC or any Hospital gives the other parties written
notice at least sixty (60) days prior to the end of any Data Collection
Term that it will not renew this Agreement, whereupon this Agreement shall
terminate, with respect to the party that gave notice, at the end of the
next Report Term.
8.2. Notwithstanding the provisions of Paragraph 8.1, in the event that at
any time fewer than twenty-two (22) Hospitals are participating in the
Project, AMS shall have the right to terminate this Agreement on ninety
(90) days' prior written notice to QIMC and each Hospital.
8.3. AMS may, in addition to the termination rights provided for in
Paragraphs 8.1 and 8.2, terminate this Agreement with respect to QIMC or
with respect to both QIMC and the Hospitals on at least twenty (20) days'
written notice to QIMC or, in the event of termination with respect to
QIMC and the Hospitals, to QIMC and the Hospitals, if QIMC (i) breaches
the provisions of Paragraphs 4.1, 4.3 or 4.4, or (ii) fails to pay any
invoice when due, unless QIMC cures such breach prior to the termination
date specified by AMS in its notice of termination.
8.4. AMS may terminate the participation of any Hospital in this Agreement
on at least twenty (20) days' written notice to such Hospital and QIMC if
such Hospital (i) breaches the provisions of Paragraphs 4.1, 4.3 or 4.4,
or (ii) fails to pay any invoice
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when due, unless the Hospital cures such breach prior to the termination
date specified by AMS in its notice of termination.
8.5. QIMC and any Hospital may terminate such party's participation in
this Agreement, on twenty (20) days' written notice to AMS if AMS
repeatedly and materially fails to perform its obligations under this
Agreement, unless AMS brings its performance into compliance with this
Agreement prior to the termination date specified by QIMC or the Hospital
in its notice of termination.
8.6. Upon termination or non-renewal of this Agreement, QIMC and the
Hospital(s) with respect to which the Agreement is terminated shall
immediately stop using and return to AMS all Materials, Patient Files and
Results under their respective control. QIMC and the Hospitals shall
have the right to use the Reports following termination of this Agreement
solely in connection with the CHOICE Project (a separate analytical and
predictive project in which AMS and QIMC are engaged that involves major
medical surgery) and in accordance with Paragraph 6.7.
9. PAYMENT.
9.1. By joining this Agreement, each Hospital agrees to pay AMS the
rates set forth below, for the following periods: (i) if this Agreement is
terminated pursuant to Paragraph 8.1, through the end of the next Report
Term, and (ii) if this Agreement is terminated pursuant to any other
Paragraph hereof, through the date of such termination.
9.2. The rates at which Hospitals shall pay AMS, as described in
Paragraph 9.1, shall, through the initial Data Collection Term, be the
rates set forth in this Paragraph 9.2.
9.2.1. Upon execution of the Memorandum, each Hospital that did not
participate in the Project under the Letter Agreement shall pay to
AMS an initial entry fee of [* ]. In addition, each such
Hospital shall pay AMS [* ] per month for the first ICU, and
[* ] per month for each additional ICU, payable annually in
accordance with Section 9.4., pro-rated through December 31 of the
year in which the Hospital executes the Memorandum.
9.2.2. Each Hospital that participated in the Project under the Letter
Agreement and that renews its participation by executing and
delivering the Memorandum shall pay AMS [* ] per month for the
first ICU, and [* ] per month for each additional ICU, payable
annually in accordance with Section 9.4., pro-rated for the 1994
calendar year.
9.2.3. Should QIMC or a Hospital request additional reporting functions,
or should other factors result in an increase in the AMS workload
in connection with this Agreement, the parties agree to negotiate
a mutually acceptable rate increase.
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* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 77
9.3. The rates set forth herein may be adjusted by AMS, effective after
the close of any Data Collection Term, by giving QIMC and each Hospital
written notice of the new rates at least ninety (90) days before the end
of the Data Collection Term. Rate adjustments will not exceed the annual
percentage change in the Consumer Price Index for all urban consumers for
the preceding year published by the Bureau of Labor Statistics for the
greater of (a) all items covered by the Index and (b) the medical care
portion of such Index. Any rates so adjusted will become effective at the
beginning of the next Data Collection Term; provided, however, that with
respect to any party that tenders an effective notice of non-renewal in
accordance with the provisions of Paragraph 8.1, the rate payable by such
party through the next Report Term shall be the rate in effect during the
prior period.
9.4. The initial entry fee (if required in accordance with Paragraph
9.2.1.) and the monthly fees for the calendar year in which the Memorandum
is executed are due upon execution of the Memorandum. All other monthly
fees shall be due annually in advance, on January 1 of each year. Amounts
unpaid forty-five (45) days after their due dates shall bear interest at
the rate of 1.5 percent per month (not to exceed the maximum rate
permitted by applicable law). AMS reserves the right to withhold the
statistics of any Hospital from inclusion in Reports if any sum is unpaid
sixty (60) days after its due date, or where data transmitted by such
Hospital to AMS does not meet AMS' standards.
10. MISCELLANEOUS.
10.1. This Agreement does not constitute a partnership or joint venture
between AMS and QIMC or any Hospital. Neither QIMC nor any Hospital shall
have any right to obligate or bind AMS in any manner whatsoever.
10.2. The rights and obligations set forth in Paragraphs 4.1.-4.4., 6.7.
(to the extent described in Paragraph 8.6.), 7.2., 8.6. and 9 shall
survive the termination or expiration of this Agreement and termination of
any Hospital's participation in this Agreement.
10.3. If any one or more of the provisions of this Agreement is held to be
unenforceable, such provision shall be limited and construed so as to make
it enforceable consistent with the parties' manifest intentions or, if
such limitation or construction is not possible or would be inconsistent
with the parties' manifest intentions, such provision will be deemed
stricken from this Agreement. In any such event, all other provisions of
this Agreement will remain in full force and effect, unless such
enforcement would result in an injustice or be inconsistent with the
purposes of this Agreement.
10.4. This Agreement is made in the District of Columbia, and shall be
governed and construed by the internal laws of the District of Columbia.
The parties agree that exclusive jurisdiction over any legal action
arising out of or in connection with this Agreement will be in state or
federal courts located in the District of Columbia, and the parties hereby
agree to such jurisdiction and venue.
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10.5. No party to this Agreement shall be deemed in default or otherwise
liable hereunder due to its inability to perform by reason of cause beyond
the reasonable control of such party ("Force Majeure"). Any delay in
performance shall be of no greater duration than the Force Majeure event
causing the delay. If a Force Majeure event continues uninterrupted for a
period exceeding six (6) calendar months, any party may elect to terminate
this Agreement upon notice to the other, but such right of termination, if
not exercised, shall expire immediately upon the discontinuance of the
Force Majeure event.
10.6. No waiver of any term of this Agreement shall be valid unless in a
writing signed by the party against which the waiver is sought to be
enforced. No waiver by any party of any breach of or failure of
performance under this Agreement shall be deemed a continuing waiver or a
waiver as to any subsequent or similar breach. This Agreement contains
the entire agreement between the parties with regard to its subject
matter, and supersedes all prior agreements between them pertaining to its
subject matter (including, but not limited to, the Letter Agreement
between AMS and QIMC dated November 30, 1990, and all memoranda executed
by Hospitals pursuant to that Letter Agreement). This Agreement may be
altered or amended only in a writing executed by an authorized agent for
each party. Neither QIMC nor any Hospital may assign its rights or
obligations hereunder, and any such purported assignment shall be void.
10.7. Any notice under this Agreement shall be sent by U.S. Express Mail,
postage prepaid, by express or overnight courier service, or by facsimile
(confirmed by U.S. Express Mail, express or overnight courier service);
shall be deemed given on the earlier of the date of confirmed receipt; and
shall be sent to the addresses given below, or such other addresses of
which any party may give notice:
To AMS:
APACHE Medical Systems, Inc.
1901 Pennsylvania Avenue
Suite 900
Washington, D.C. 20006
Attention:_____________________
Facsimile No.: ________________
To QIMC:
Quality Information
Management Corp.
_______________________________
_______________________________
Attention:_____________________
Facsimile No.:_________________
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To a Hospital: at the address specified in the Memorandum executed on
behalf of such Hospital.
10.8. The paragraph titles are intended solely for convenience and shall
in no event affect the interpretation of this Agreement.
The parties have executed this Agreement by their duly authorized
representatives on the dates set forth below.
Hospitals are invited to join this Agreement by completing, signing and
returning to AMS the Memorandum, which will become effective upon acceptance
by AMS.
Quality Information Management Corp. APACHE Medical Systems, Inc.
By: ________________________________ By:_____________________________
Gerald E. Bisbee, Jr., Ph.D.
Title:______________________________ Chairman and CEO
Dated:______________________________
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EXHIBIT 1
MEMORANDUM
To: APACHE Medical Systems, Inc. ("AMS")
From:
cc: Quality Information Management Corp. ("QIMC")
Date:
Re: Joining the Service Agreement between AMS and QIMC dated
____________________, 1994 (the "Agreement")
Gentlemen:
This institution elects to join the above-captioned Agreement as a
Hospital, assuming all the rights and obligations of such a party. This
institution has been provided with a copy of the Agreement, and has read and
understands it. All terms and conditions contained in the Agreement are
incorporated herein by reference, and are agreed to and accepted by this
institution. The signature below constitutes a representation that this
institution has authorized the execution of this Memorandum and is bound by the
terms of the Agreement.
Please address any and all notices to the following officer at the stated
address (with telephone and facsimile numbers):
Name of Institution: __________________________________
Address: __________________________________
__________________________________
Attention: __________________________________
Facsimile: __________________________________
Accepted:
APACHE Medical Systems, Inc. _________________________________
Name of Institution
By: ____________________________ By:______________________________
Title: __________________________ Title:___________________________
Date: ___________________________ Date:____________________________
<PAGE> 81
EXHIBIT 2
PERMITTED USES OF PATIENT FILES
<PAGE> 82
ATTACHMENT J
OUTLINE & SUPPORT MATERIALS
FOR
CHOICE(SM) ABSTRACTOR TRAINING
<PAGE> 83
[CLEVELAND HEALTH QUALITY CHOICE LETTERHEAD]
CHOICE(SM) ABSTRACTOR TRAINING
DAY 1
8:30am - 4:00pm
MEDICAL/SURGICAL
OUTLINE
I. Introduction
II. Review of Section I:
Description of the Cleveland Health Quality Choice Program
III. Review of Section II:
General Information and Instructions
IV. Review of Section III:
Criteria for Inclusion of Patients
V. Review of Section V:
Medical/Surgical Data Abstraction Forms and Data Collection
Guidelines
VI. Closing
<PAGE> 84
[CLEVELAND HEALTH QUALITY CHOICE LETTERHEAD]
CHOICE(SM) ABSTRACTOR TRAINING
DAY 2
8:30am - 12:00pm
OBSTETRICAL
OUTLINE
I. Introduction
II. Review of Section II:
General Information and Instructions
III. Review of Section III:
Criteria for Inclusion of Patients and Rules for Abstraction
Form Selection
IV. Review of Section IV:
Obstetrical Data Abstraction Forms and Data Collection Guidelines
V. Closing
<PAGE> 85
ATTACHMENT J
CHOICE
ABSTRACTOR
TRAINING
See Attachment M. Manuals Used For Training Sessions.
<PAGE> 86
ATTACHMENT J
CHOICE
ABSTRACTOR
TRAINING
TYPES OF SESSIONS:
1. Training For New Abstractors
Objective: To review the abstraction protocols in a very
detailed manner.
Frequency: Quarterly.
Duration: 6-8 hours, depending on the number and complexity
of the questions raised.
Staff: QIMC Staff; Michael Pine and Associates Staff as
needed.
Materials: CHOICE Abstraction Manual and Form.
2. Update Sessions
Objective: To highlight and discuss changes to the abstraction
form and/or manual.
These sessions are geared to those individuals who
have already attended a formal training session as
described in #1 above.
Frequency: Semi-annually.
Duration: 3-4 hours, depending on the number and complexity
of the questions raised.
Staff: QIMC Staff; Michael Pine and Associates Staff as
needed.
Materials: CHOICE Abstraction Manual and/or Form.
3. User's Group Sessions
Objective: To raise and discuss issues related to the CHOICE
abstraction protocols.
Frequency: As requested by the abstractors.
Duration: 3 hours or less.
Staff: CHOICE abstractors serve as facilitators, selected
either through self-appointment or peer-appointment.
Representatives from Quality Information Management
Corporation and Michael Pine and Associates (as
needed) also attend.
Materials: Agenda prepared by facilitators.
<PAGE> 87
THE QUALITY INFORMATION MANAGEMENT CORPORATION STAFF:
Dwain Harper, D.O., the QIMC's first Executive Director and chief operating
officer, first became involved in the program in the summer of 1990 as chairman
of the newly formed Systems Advisory Committee. He has chaired all subsequent
technical committees (Interim Technical Group and Quality Information Managment
Committee). Dr. Harper is a board certified osteopathic pediatrician. Dr.
Harper's professional career spans twenty-five years; sixteen of which he
devoted to the private practice of pediatrics in Columbus, Ohio. In 1981, he
left private practice to begin a career in medical administration. His initial
position as Vice President for Professional Affairs in a multi-hospital
university medical center in New Jersey exposed him to the pioneering
prospective program (DRGs) which eventually became the basis for federal
reimbursement to hospitals. He has served as Assistant Dean and Professor of
Pediatrics at the College of Osteopathic Medicine, Ohio University, and
Assistant Professor of Pediatrics, College of Medicine, Ohio State University;
and has been a senior executive administrator in three large health care
systems. Before assuming his present position, Dr. Harper served as Executive
Vice President and Chief Medical Officer for the Sisters of Charity of St.
Augustine Health Network in Cleveland. He is a published author, medical
educator, noted national speaker and lecturer on such topics as prospective
reimbursement, medical staff/hospital relations, quality assessment, physician
leadership, and healthcare reform.
Patricia Hammar, R.N., serves as the Program Manager and has been involved with
the project since August 1991. As liaison among the participating hospitals'
data abstractors and the three vendors, she has overseen the development and
standardization of data abstraction. She developed and implemented the data
auditing process that ensures the quality of data submitted through the
program. She also oversees the coordination of periodic training programs for
data abstractors. Previously, she served as a Registered Nurse at MetroHealth
Medical Center in Cleveland, one of the leading county facilities in the
country. Patricia has served as a member of the Quality Management Department
where her focus was proper utilization of resources and quality of care at the
facility. Ms. Hammar received her license in nursing in 1985 and her
Bachelor's Degree in Business Administration from Baldwin-Wallace College in
1990. She is actively pursuing her Master's Degree in Business Administration
at Kent State University.
Charlene Kolz, R.N., serves as a Data Quality Specialist for the program. Her
responsibilities include the evaluation of the quality of data abstraction at
the participating hospitals through medical record audits and assisting in the
coordination and conduction of training and update sessions for abstractors.
Previous to this position, she served as a Registered Nurse at Mt. Sinai Medical
Center in various clinical areas. She also served as coordinator of a pilot
program which focused on improving the utilization of transport and radiology
services throughout the facility.
Charlotte Malkut, CLPN, CPHQ, serves as a Data Quality Specialist for the
program. Her responsibilities include the evaluation of the quality of data
abstraction at the participating hospitals through medical record audits and
assisting in the coordination and conduction of training and update sessions
for abstractors. Previous to this position, she was employed in the Quality
Management Department at Meridia Huron Hospital where she supervised all
activity related to both the CHOICE and APACHE components of the Cleveland
Health Quality Choice Program. As Coordinator of Special Projects, Mrs. Malkut
was also responsible for all activity related to JCAHO monitoring, medical
staff QA for the Department of Medicine and served as the PRO liaison for the
facility. She is currently serving as President-Elect of the Region IX
association affiliate of the Ohio Association for Health Quality.
Gary Rosenthal, M.D., provides technical support to the staff, physician
advisory panels, technical committees, and governing body. As the program's
outcomes research consultant, he has overseen the development and
implementation of newly designed risk-adjustment systems and has been
instrumental in developing formats for the comparative reports. Dr. Rosenthal
possesses expertise in outcomes research methodologies, hospital quality
improvement, and in clinical medicine. He is a full-time faculty member of the
Case Western Reserve University School of Medicine and a practicing internist
at the Cleveland VA Medical Center. He is the author of 10 peer-reviewed
publications in the area of clinical Epidemiology and health service research.
His research includes the development of severity of illness measures,
identification of patient characteristics affecting hospital mortality and
resource utilization, and the reorganization of health care delivery systems to
optimize patient outcomes. He is a principle investigator on research studies
funded by the NIH and the Robert Woods Johnson Foundation.
Lynne Way, M.B.A., is the program's chief data analyst and is responsible for
management and reporting of the project's data. Ms. Way was previously
employed as a statistician and systems consultant at the Case Western Reserve
University School of Medicine. In this position, she was responsible for data
analysis, project management, and quality improvement initiatives. She also
assisted researchers in publishing scientific findings, as well as serving as
co-author on some scientific papers. She has earned her B.S. in Mathematics
and Statistics from Miami University and her M.B.A. from Weatherhead School of
Management, Case Western Reserve University, concentrating in Health Systems
Management and Management Policy.
<PAGE> 88
MICHAEL PINE AND ASSOCIATES' QUALITY MANAGEMENT CONSULTANTS
Michael Pine, M.D., M.B.A., President of the firm, is a Fellow of the American
College of Physicians and the American College of Cardiology. He has been on
the medical faculties of Harvard, the University of California at Irvine, the
University of Cincinnati, and the University of Chicago. Before founding
Michael Pine and Associates, Dr. Pine was Project Manager for Clinical
Indicators for the Joint Commission on Accreditation of Healthcare
Organizations' Agenda for Change. He also has directed a statewide pilot peer
review organization for the Veterans Administration and served as chief of
cardiology at a 350-bed tertiary care center. He is a graduate of Harvard
Medical School and the University of Cincinnati School of Business.
Richard R. Balsamo, M.D., J.D., Vice-President, Medical Quality, has
successfully applied a variety of state-of-the art quality monitoring
techniques and strategies to both inpatient and ambulatory care. Dr. Balsamo
is board-certified in internal medicine and a member of the Illinois Bar. A
practicing physician for twelve years, he also has been the medical director
responsible for quality of care in a large metropolitan area HMO. His
management responsibilities have included supervising a large multispecialty
teaching clinic and developing clinical policies and procedures to reduce
liability risk.
Marija J. Norusis, Ph.D., M.P.H., Consultant in Data Analysis and Systems
Design, has extensive practical experience in applying sophisticated mathematic
techniques to difficult problems in the health care field. She is nationally
prominent as the author of more than a dozen manuals on statistical methods and
on the statistical software SPSS, which she helped to develop. Dr. Norusis has
been Associate Professor and Senior Biostatistician in the Section of
Epidemiology and Biostatistics of Rush-Presbyterian St. Luke's Medical Center
in Chicago and Senior Statistician and Technical Director of SPSS, Inc. She
earned her graduate degrees at the University of Michigan.
Barbara L. Jones, M.A., Director of Data Systems Development, is expert both in
developing new systems for data collection and processing and in maximizing
the usefulness of clinical outcome data from current sources. She has
developed data processing formats and programs for special studies of public
and institutional data for a variety of clients of Michael Pine and Associates.
She has been Senior Research Associate and Project Director for the Annual
Survey of Dental Practice at the American Dental Association. She was Data
Management Coordinator for the Department of Endocrinology, Northwestern
Medical School, and Chief of Data Management of the Social Psychiatry Study
Center at the University of Chicago. She also was an applications
programmer/analyst at the National Opinion Research Center.
<PAGE> 89
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this ___ day of
_____ 199_, between [Owner of Data], a _________________ ("[Owner]"), and [User
of Data, a________________________ ("[User]").
WITNESSETH:
WHEREAS, Owner is a________________, and owns or has all required
rights to use certain data, methodologies, scoring systems, databases,
equations, patient variables, co-efficient codes and supporting documentation
incorporated into an outcome determination predictive system (collectively, the
"System");
WHEREAS Owner and User have agreed pursuant to that certain Licensing
Agreement dated concurrently herewith (the "Licensing Agreement") to allow User
access to the System under certain terms and conditions, including User's
execution and delivery to Owner of this Confidentiality Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. User and its officers, directors, agents,
employees and representatives (collectively, "Representatives"), hereby agree
that the System, and all incorporated elements and data therein (collectively,
the "Confidential Information"), will be kept confidential and will not,
without the prior written consent of Owner, be disclosed, directly or
indirectly, to any third party, in any manner whatsoever, in whole or in part,
unless (i) User reasonably determines that such individuals have a need to know
such Confidential Information for the purposes of performing their
responsibility as allowed under the Licensing Agreement; and (ii) such
individuals agree in writing to be bound by the terms of this Agreement. User
will be responsible for any breach of this Agreement by its Representatives,
and agrees, at its expense, to take all reasonable measures to restrain its
Representatives from unauthorized disclosure or use of the System.
2. Disclosure of Confidential Information. Without the prior
written consent of Owner, neither User nor any of its Representatives will
disclose to any other person or entity that the System has been made available
or any of the terms, conditions or other facts with respect to the System.
3. Limitation. The obligations imposed upon User herein shall
not apply to Confidential Information that becomes generally available or known
to the public
Page 1
<PAGE> 90
through no act of User or a Representative, or which is released pursuant to
the binding order of a government agency or a court.
4. Enforcement of Agreement. User agrees that Owner shall be
entitled to equitable relief, including, without limitation, by injunction or
specific performance, User agrees further to reimburse Owner for any expenses,
attorneys fees and other costs incurred by Owner in connection with the
enforcement of this Agreement if Owner is successful in such action. Such
remedies shall not be deemed to be exclusive, but shall be in addition to all
other remedies available at law or in equity, including a claim for lost
profits and other actual and consequential damages suffered by Owner.
5. Noninterference. User agrees not to interfere with the
relationship between Owner and any hospital or any other third party.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to Owner, to:
[Name]
[Address]
[City, State Zip Code]
with a copy to:
[Attorney]
[Firm]
[Address]
[City, State Zip Code]
(b) If to User:
[Name]
[Address]
[City, State Zip Code]
Page 2
<PAGE> 91
with a copy to:
[Attorney]
[Firm]
[Address]
[City, State Zip Code]
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute on and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of _________ applicable
to contracts made and to be performed entirely within such State.
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by Owner and User and the parities have
taken all necessary corporation action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto.
6.9 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
Page 3
<PAGE> 92
6.10 Reformation of Agreement. If any provision of this Agreement
is found by a court of competent jurisdiction to be invalid or unenforceable as
against public policy or for any other reason, such court shall exercise its
discretion in reforming such provision to the end that User shall be subject to
nondisclosure and noninterference covenants that are reasonable under the
circumstances and enforceable by Owner.
6.11 Waiver. Failure by any party to enforce any rights under this
Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by Owner from User shall not constitute a waiver of any
default except as to the payment of the particular payment or performance so
received.
6.12 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.13 Integration. The parties hereto acknowledge that they have
read this agreement in its entirely and understand and agree to be bound by all
of its terms and conditions, and further agree that this Agreement and any
exhibits or schedules hereto constitute a complete and exclusive statement of
the understanding between the parties with respect to the subject matter hereof
which supersede any and all other communications between the parties, whether
written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date and year first above written.
[OWNER]
BY:___________________________
Its:__________________________
Page 4
<PAGE> 93
[USER]
BY:
----------------------
Its:
-------------------
<PAGE> 94
ATTACHMENT K
CONFIDENTIALITY
REGARDING
PUBLISHING
<PAGE> 95
Attachment K
Hospitals with CHOICE Coefficients:
Cleveland Clinic Foundation
EMH Regional Medical Center
Geauga Hospital
Health Cleveland (Fairview General Hospital & Lutheran Medical Center)
Lake Hospital System
Lakewood Hospital
Meridia Health System
MetroHealth Medical Center
Parma Community General Hospital
Southwest Community Health System & Hospital
St. Vincent Charity Hospital
University Hospitals of Cleveland
<PAGE> 96
CLEVELAND
HEALTH January 28, 1994
QUALITY
CHOICE
Floyd D. Loop, M.D.
Chairman, Board of Governors
Cleveland Clinic Foundation
9500 Euclid Avenue
Cleveland, Ohio 44195
Dear Fred:
You have requested the custody and use of the coefficients for the CHOICE(SM)
and NCG Risk-Adjustment Models developed for the Cleveland Health Quality
Choice Program.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- - The Coefficients for CHOICE(SM) Medical/Surgical Models;
- - The Coefficients for NCG Medical/Surgical Models;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Robert Kay, M.D.
John Clough, M.D.
Thomas Keys, M.D.
Gerry Beck, Ph.D.
Eric Christiansen
<PAGE> 97
CLEVELAND
HEALTH March 17, 1993
QUALITY
CHOICE
Floyd D. Loop, M.D.
Chairman, Board of Governors
The Cleveland Clinic Foundation
9500 Euclid Avenue
Cleveland, Ohio 44195
RE: CHOICE(SM) Coefficients
Dear Fred:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the CHOICE(SM)
Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution
pertaining to the release and use of the coefficients;
- - The Greater Cleveland Health Quality Choice Mortality
Models Analysis (including coefficients and
patient variables) of Wave I & II Combined Data;
- - The Greater Cleveland Health Quality Choice Length
of Stay Models Analysis (including coefficients and
patient variables) of Wave I & II Combined Data;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Robert Kay, M.D.
Thomas Keys, M.D.
<PAGE> 98
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 16th Day of
March, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS; the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS; QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 99
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 100
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Floyd D. Loop, M.D.
Executive Vice President
The Cleveland Clinic Foundation
9500 Euclid Ave.
Cleveland, OH. 44195
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 101
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 102
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
THE CLEVELAND CLINIC FOUNDATION
-------------------------------
/s/[Signature Illegible] By: /s/ Floyd D. Loop, M.D.
- ------------------------ ---------------------------
---------------------------
Executive Vice President
-5-
<PAGE> 103
EXHIBIT A
HOSPITAL NAME: The Cleveland Clinic Foundation
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Floyd D. Loop, M.D.
----------------------------------
2. Robert Kay, M.D.
----------------------------------
3. Thomas Keys, M.D.
----------------------------------
4.
----------------------------------
/s/ Floyd D. Loop
----------------------------------
Chief Executive Officer
<PAGE> 104
CLEVELAND
HEALTH February 11, 1994
QUALITY
CHOICE
Mr. James Keegan
President & CEO
EMH Regional Medical Center
630 East River Street
Elyria, Ohio 44035
Dear Jim:
You have requested the custody and use of the coefficients for the CHOICE(SM)
and NCG Risk-Adjustment Models developed for the Cleveland Health Quality
Choice Program.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- - The Coefficients for CHOICE(SM) Medical/Surgical Models;
- - The Coefficients for NCG Medical/Surgical Models;
- - The Coefficients for NCG Obstetrical Models;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
---------------------
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Mary Wnek
Kathy O'Connor
<PAGE> 105
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 24 day of
January, 1994, between Quality Information Management Corporation, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS, QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 106
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 107
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
James L. Keegan CEO
EMH Regional Medical Center
630 E. River Street
Elyria, Ohio 44035
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 108
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 109
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith Spada By: /s/ Dwain L. Harper
- ---------------- ---------------------------
Its: Executive Director
---------------------------
-------------------------------
/s/ Katy Arcaro By: /s/ James L. Keegan
- --------------- ---------------------------
Its: President & CEO
---------------------------
-5-
<PAGE> 110
EXHIBIT A
HOSPITAL NAME:
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Dr. Richard Kepple - Medical Director
--------------------------------------
2. Mrs. Mary Wnek, Director - DA
--------------------------------------
3.
--------------------------------------
4.
--------------------------------------
-------------------------------------
Chief Executive Officer
<PAGE> 111
CLEVELAND
HEALTH January 4, 1994
QUALITY
CHOICE
Mr. Richard Frenchie
President & CEO
Geauga Hospital
13207 Ravenna Road
Chardon, Ohio 44024
Dear Mr. Frenchie:
You have requested the custody and use of the coefficients for the CHOICE(SM),
NCG Medical/Surgical and NCG Obstetrical Risk-Adjustment Models developed for
the Cleveland Health Quality Choice Program.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- - The Coefficients for CHOICE(SM) Medical/Surgical Models;
- - The Coefficients for NCG Medical/Surgical Models;
- - The Coefficients for NCG Obstetrical Models;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
---------------------
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Sally Klock
<PAGE> 112
CLEVELAND
HEALTH
QUALITY
CHOICE
March 14, 1993
Mr. Richard J. Frenchie
President and CEO
Geauga Hospital
13207 Ravenna Road
Chardon, Ohio 44024
RE: CHOICE(SM) Coefficients
Dear Richard:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the CHOICE(SM) Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- - The Greater Cleveland Health Quality Choice Mortality Models Analysis
(including coefficients and patient variables) of Wave I & II Combined Data;
- - The Greater Cleveland Health Quality Choice Length of Stay Models Analysis
(including coefficients and patient variables) of Wave I & II Combined
Data;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
---------------------
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Dr. Bruce Andreas
Jeff Driver
<PAGE> 113
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 5th day of
March, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS, QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 114
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 115
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Mr. Jeff Driver
Director, Risk Management
Geauga Hospital
13207 Ravenna Road
Chardon, Ohio 44024
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 116
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 117
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- --------------------------------------
Its: Executive Director
--------------------------------------
THE CLEVELAND CLINIC FOUNDATION
------------------------------------------
By: /s/ Richard Frenchie
- ------------------- --------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
3-5-93
-5-
<PAGE> 118
EXHIBIT A
HOSPITAL NAME: GEAUGA HOSPITAL
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Mr. Richard Frenchie
----------------------------------
2. Dr. Bruce Andreas
----------------------------------
3. Mr. Jeff Driver
----------------------------------
4.
----------------------------------
/s/ Richard Frenchie
Mr. Richard Frenchie
----------------------------------
Chief Executive Officer
<PAGE> 119
CLEVELAND
HEALTH January 4, 1994
QUALITY
CHOICE
Mr. Thomas LaMotte
President & CEO
Health Cleveland
18101 Lorain Avenue
Cleveland, Ohio 44111
Dear Mr. Lamotte:
You have requested the custody and use of the coefficients for the CHOICE(SM),
NCG Medical/Surgical and NCG Obstetrical Risk-Adjustment Models developed for
the Cleveland Health Quality Choice Program.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- - The Coefficients for CHOICE(SM) Medical/Surgical Models;
- - The Coefficients for NCG Medical/Surgical Models;
- - The Coefficients for NCG Obstetrical Models;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Carmen Santin
Mary Coon
Patricia Kach
Sandy Richards
Kathy George
Anita Woodward
<PAGE> 120
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 6th Day of
JANUARY, 1994, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS; the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS; QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 121
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 122
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Thomas LaMotte, Pres. & CEO
Health Cleveland, Inc.
18101 Lorain Avenue
Cleveland, Ohio 44111
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 123
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 124
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/Judith M. Spada By: /s/ Dwain L. Harper
- ------------------ -----------------------------------
Its: Executive Director
------------------------------------
HEALTH CLEVELAND INC.
----------------------------------------
/s/ [Signature Illegible] By: /s/ Thomas LaMotte
- ------------------------ -----------------------------------
-----------------------------------
-5-
<PAGE> 125
EXHIBIT A
HOSPITAL NAME: Fairview General Hospital/Lutheran Medical Center
---------------------------------------------------
(Health Cleveland, Inc.)
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Carmen Santin, Assoc. VP Quality Mgmt.
-----------------------------------------------------------
2. Mary Coon, Director-Quality Mgmt.
-----------------------------------------------------------
Patricia Kach, Director-Health Information Services
3. Sandy Richards, Asst. Director-Health Information Services
-----------------------------------------------------------
Kathy George, Director-Medical Records
4. Anita Woodward, Director-Customer Relations
-----------------------------------------------------------
/s/ Thomas LaMotte
----------------------------------
Chief Executive Officer
Thomas LaMotte
<PAGE> 126
CLEVELAND
HEALTH May 24, 1993
QUALITY
CHOICE
Mr. Gary Campbell
President and CEO
Lake Hospital System
Washington at Liberty
Painesville, Ohio 44077
RE: CHOICE(SM) Coefficients
Dear Gary:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the CHOICE(SM) Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- - The Greater Cleveland Health Quality Choice Mortality Models Analysis
(including coefficients and patient variables) of Wave I & II Combined Data;
- - The Greater Cleveland Health Quality Choice Length of Stay Models Analysis
(including coefficients and patient variables) of Wave I & II Combined Data;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
---------------------
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Vicki Edick
Ferole Minns
Ben Orris
Lynette Becks
<PAGE> 127
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 25th day of
March, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS, QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 128
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 129
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Vicki L. Edick
Corporate Information & Quality Officer
10 E. Washington Street
Painesville, Ohio 44077
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 130
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 131
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written; for as long as Lake
Hospital System participates in the Cleveland Health Quality Choice Program.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Spada By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
LAKE HOSPITAL SYSTEM
-------------------------------
/s/ Lillian E. Garry By: /s/ Gary Campbell
- -------------------- ---------------------------
Its: CEO
---------------------------
-5-
<PAGE> 132
EXHIBIT A
HOSPITAL NAME: LAKE HOSPITAL SYSTEM, INC.
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
NAME:
1. Vicki Edick
----------------------------------
2. Ferole Minns
----------------------------------
3. Ben Orris
----------------------------------
4. Lynette Becks
----------------------------------
I HAVE REVIEWED THE CONTRACT AND AGREE TO ABIDE BY
ITS TERMS:
1. /s/ Vicki Edick
----------------------------------
2. /s/ Ferole Minns
----------------------------------
3. /s/ Ben Orris
----------------------------------
4. /s/ Lynette Becks
----------------------------------
/s/ Gary Campbell
----------------------------------
Chief Executive Officer
<PAGE> 133
CLEVELAND
HEALTH January 4, 1994
QUALITY
CHOICE
Mr. Jules Bouthillet
President & CEO
Lakewood Hospital
14519 Detroit Avenue
Lakewood, Ohio 44107
Dear Mr. Bouthillet:
You have requested the custody and use of the coefficients for the CHOICE(SM),
NCG Medical/Surgical and NCG Obstetrical Risk-Adjustment Models developed for
the Cleveland Health Quality Choice Program.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- - The Coefficients for CHOICE(SM) Medical/Surgical Models;
- - The Coefficients for NCG Medical/Surgical Models;
- - The Coefficients for NCG Obstetrical Models;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Paul Sahney
James Stewart, M.D.
Joan Novak
Robert Sousek
Virginia Ledger
<PAGE> 134
CLEVELAND
HEALTH August 2, 1993
QUALITY
CHOICE
Mr. Jules Bouthillet
President and CEO
Lakewood Hospital
14519 Detroit Avenue
Lakewood, Ohio 44107
RE: CHOICE(SM) Coefficients
Dear Mr. Jules:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality
Choice Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following:
- Requirements for Receipt of the CHOICE(SM) Coefficients;
- A signed copy of the Confidentiality Agreement;
- A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- The Greater Cleveland Health Quality Choice Mortality Models Analysis
(including coefficients and patient variables) of Wave I & II Combine
Data;
- The Greater Cleveland Health Quality Choice Length of Stay Models
Analysis (including coefficients and patient variables) of Wave I &
II Combined Data;
- Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Paul Sahney
James Stewart, M.D.
Joan Novak
Robert Sousek
Virginia Ledger
<PAGE> 135
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this __ day of
July, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS, QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 136
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 137
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Paul Sahney, VP/CFO
Lakewood Hospital
14519 Detroit Avenue
Lakewood, OH 44107
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 138
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 139
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
LAKEWOOD HOSPITAL
-------------------------------
By: /s/ Paul Sahney
- -------------- ---------------------------
Its: VP/CFO 7/29/93
---------------------------
-5-
<PAGE> 140
EXHIBIT A
HOSPITAL NAME: LAKEWOOD HOSPITAL
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Paul Sahney, V.P./C.F.O.
----------------------------------
2. James L. Stewart M.D., V.P./Medical Affairs
----------------------------------
3. Joan Novak, Director Quality Assurance
----------------------------------
4. Robert L. Sousek, Director Business Analysis & Planning
----------------------------------
5. Virginia Ledger, Financial Analyst
----------------------------------
/s/ Jules Bouthillet
----------------------------------
Chief Executive Officer
<PAGE> 141
[CLEVELAND HEALTH QUALITY CHOICE LETTERHEAD]
January 13, 1994
Mr. Michael McMillan
Sr. V.P., Planning & Marketing
Meridia Health System
6700 Beta Drive
Mayfield Village, Ohio 44143
Dear Mr. McMillan:
Per Katie Wilson's request, I am forwarding to you copies of the coefficients
for the CHOICE(SM), NCG Medical/Surgical and NCG Obstetrical Risk-Adjustment
Models developed for the Cleveland Health Quality Choice Program. If you have
any questions, please do not hesitate to contact us.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Gary Robinson
Katie Wilson
<PAGE> 142
CLEVELAND
HEALTH March 12, 1993
QUALITY
CHOICE
Mr. Richard J. McCann
President and CEO
Meridia Health System
6700 Beta Drive
Mayfield Village, Ohio 44143
RE: CHOICE(SM) Coefficients
Dear Richard:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- Requirements for Receipt of the CHOICE(SM)
Coefficients;
- A signed copy of the Confidentiality Agreement;
- A copy of the QIMC Board of Trustees' Resolution
pertaining to the release and use of the coefficients;
- The Greater Cleveland Health Quality Choice Mortality
Models Analysis (including coefficients and
patient variables) of Wave I & II Combined Data;
- The Greater Cleveland Health Quality Choice Length
of Stay Models Analysis (including coefficients and
patient variables) of Wave I & II Combined Data;
- Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Michael McMillan
Lori Zindel
Dr. Edward Sivak
Judy Malasky
<PAGE> 143
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 9th day of
March, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS, QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 144
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 145
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Michael C. McMillan
Meridia Health System
6700 Beta Drive
Mayfield Village, OH 44143
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 146
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 147
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
Meridia Health System
-------------------------------
/s/ Richard J. McCann
By: Richard J. McCann
- -------------- ---------------------------
Its: President and Chief Executive Officer
---------------------------------------
-5-
<PAGE> 148
EXHIBIT A
HOSPITAL NAME:
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Michael C. McMillan
----------------------------------
2. Lori Zindel
----------------------------------
3. Dr. Edward Sivak
----------------------------------
4. Judy Malasky
----------------------------------
/s/ Richard J. McCann
----------------------------------
Chief Executive Officer
<PAGE> 149
[CLEVELAND HEALTH QUALITY CHOICE LETTERHEAD]
March 12, 1993
Mr. Henry E. Manning
President and CEO
The MetroHealth System
2500 MetroHealth Drive
Cleveland, Ohio 44109-1998
RE: CHOICE(SM) Coefficients
Dear Henry:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality
Choice Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following:
- Requirements for Receipt of the CHOICE(SM) Coefficients;
- A signed copy of the Confidentiality Agreement;
- A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- The Greater Cleveland Health Quality Choice Mortality Models
Analysis (including coefficients and patient variables) of
Wave I and II Combined Data;
- The Greater Cleveland Health Quality Choice Length of
Stay Models Analysis (including coefficients and patient
variables) of Wave I & II Combined Data;
- Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Dr. Thomas Helmrath
Jan Hoffman
<PAGE> 150
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 5 Day of
March, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS, QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 151
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 152
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Thomas Helmrata, M.D.
The MetroHealth System
2500 MetroHealth Drive
Cleveland, Ohio 44109-1998
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 153
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 154
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
THE METROHEALTH SYSTEM
-------------------------------
/s/[Signature illegible] By: /s/ Henry Manning
- ------------------------ ---------------------------
Its: Pres./CEO
-------------------------
-5-
<PAGE> 155
EXHIBIT A
HOSPITAL NAME: MetroHealth Medical Center
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Jan Hoffman
----------------------------------
2. Dr. Thomas Helmrata M.D.
----------------------------------
3.
----------------------------------
4.
----------------------------------
/s/ Henry Manning
----------------------------------
Chief Executive Officer
<PAGE> 156
CLEVELAND
HEALTH January 4, 1994
QUALITY
CHOICE
Mr. Thomas Selden
President & CEO
Parma Community General Hospital
7007 Powers Boulevard
Parma, Ohio 44129
Dear Mr. Selden:
You have requested the custody and use of the coefficients for the CHOICE(SM),
NCG Medical/Surgical and NCG Obstetrical Risk-Adjustment Models developed for
the Cleveland Health Quality Choice Program.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the release
and use of the coefficients;
- - The Coefficients for CHOICE(SM) Medical/Surgical Models;
- - The Coefficients for NCG Medical/Surgical Models;
- - The Coefficients for NCG Obstetrical Models;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Pat Ruflin
Rick Floyd
Paul Schneider
<PAGE> 157
CLEVELAND
HEALTH April 27, 1993
QUALITY
CHOICE
Mr. Thomas Selden
Administrator/CEO
Parma Community General Hospital
7007 Powers Boulevard
Parma, Ohio 44129
RE: CHOICE(SM) Coefficients
Dear Tom:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following:
- Requirements for Receipt of the CHOICE(SM) Coefficients;
- A signed copy of the Confidentiality Agreement;
- A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- The Greater Cleveland Health Quality Choice Mortality Models Analysis
(including coefficients and patient variables) of Wave I & II Combined
Data;
- The Greater Cleveland Health Quality Choice Length of Stay Models
Analysis (including coefficients and patient variables) of Wave I & II
Combined Data;
- Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Richard Floyd
Sheryl Roller
Patricia Moore
<PAGE> 158
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 27th Day of
April, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS; the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS; QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 159
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 160
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
PATRICIA MOORE
PARMA COMMUNITY GENERAL HOSPITAL
7007 POWERS BOULEVARD
PARMA, OHIO 44129
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 161
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 162
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Spada By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
PARMA COMMUNITY GENERAL HOSPITAL
--------------------------------
/s/ Kathleen N. Leickly By: /s/ THOMAS SELDEN
- ----------------------- ---------------------------
Its: ADMINISTRATOR/CHIEF EXECUTIVE OFFICER
--------------------------------------
-5-
<PAGE> 163
EXHIBIT A
HOSPITAL NAME: Parma Community General Hospital
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. PLEASE LIST
THE NAMES OF EACH REPRESENTATIVE BELOW:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
PARMA COMMUNITY GENERAL HOSPITAL
1. THOMAS SELDEN
----------------------------------------
2. RICHARD FLOYD
----------------------------------------
3. SHERYL L. ROLLER
----------------------------------------
4. PATRICIA MOORE
----------------------------------------
/s/ Thomas L. Selden
----------------------------------
Chief Executive Officer
<PAGE> 164
CLEVELAND
HEALTH March 12, 1993
QUALITY
CHOICE
Mr. Jon L. Schurmeier
President and CEO
Southwest Community Health System
& Hospital
18697 East Bagley Road
Middleburg Heights, Ohio 44130
RE: CHOICE(SM) Coefficients
Dear Jon:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following:
- Requirements for Receipt of the CHOICE(SM) Coefficients;
- A signed copy of the Confidentiality Agreement;
- A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- The Greater Cleveland Health Quality Choice Mortality Models Analysis
(including coefficients and patient variables) of Wave I & II Combined
Data;
- The Greater Cleveland Health Quality Choice Length of Stay Models
Analysis (including coefficients and patient variables) of Wave I & II
Combined Data;
- Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: Arvind Salvekar
<PAGE> 165
CLEVELAND
HEALTH January 4, 1994
QUALITY
CHOICE
Mr. L. Jon Schurmeier
President & CEO
Southwest General Hospital
18697 Bagley Road
Middleburg Heights, Ohio 44130-3497
Dear Mr. Schurmeier:
You have requested the custody and use of the coefficients for the CHOICE(SM),
Risk-Adjustment Models developed for the Cleveland Health Quality Choice
Program.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following documents:
- - Requirements for Receipt of the Coefficients;
- - A signed copy of the Confidentiality Agreement;
- - A copy of the QIMC Board of Trustees' Resolution pertaining to the release
and use of the coefficients;
- - The Coefficients for CHOICE(SM) Medical/Surgical Models;
- - Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
DLH/jms
Enclosures
cc: Arvind Salvekar
<PAGE> 166
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 8th Day of
March, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS; QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 167
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 168
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to: Southwest General
/s/ L. Jon Schurmeier
-----------------------------
President/CEO
-----------------------------
18697 Bagley Road
-----------------------------
Middleburg Hts. 44130
-----------------------------
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 169
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 170
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
QUALITY INFORMATION MANAGEMENT CORPORATION
WITNESS:
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
SOUTHWEST GENERAL HOSPITAL
-------------------------------
By: /s/ L. John Schurmeier
- -------------- ---------------------------
Its: President/CEO
---------------------------
-5-
<PAGE> 171
EXHIBIT A
HOSPITAL NAME: SOUTHWEST GENERAL
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. /s/ Arvind Salvekar, [Title Illegible]
----------------------------------------
2.
----------------------------------
3.
----------------------------------
4.
----------------------------------
/s/ L. Jon Schurmeier
----------------------------------
Chief Executive Officer
<PAGE> 172
CLEVELAND
HEALTH August 25, 1993
QUALITY
CHOICE
Mr. Samuel Turner
President and CEO
St. Vincent Charity Hospital
2351 East 22nd Street
Cleveland, Ohio 44115
RE: CHOICE(SM) Coefficients
Dear Mr. Turner:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following:
- Requirements for Receipt of the CHOICE(SM) Coefficients;
- A signed copy of the Confidentiality Agreement;
- A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- The Greater Cleveland Health Quality Choice Mortality Models Analysis
(including coefficients and patient variables) of Wave I & II Combine
Data;
- The Greater Cleveland Health Quality Choice Length of Stay Models
Analysis (including coefficients and patient variables) of Wave I & II
Combined Data;
- Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
DLH/jmw
Enclosures
cc: Joseph Sopko, M.D.
Catherine Keating, M.D.
Benjamin Reichstein, M.D.
Rosemary Pinczuk, R.N.
Debbie Billie
<PAGE> 173
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 25 day of
August, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS, the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 174
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 175
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Mr. Samuel H. Turner
St. Vincent Charity Hospital
2351 E. 22nd Street
Cleveland, OH 44115
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 176
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 177
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- --------------------------------------
Its: Executive Director
--------------------------------------
St. Vincent Charity Hospital
------------------------------------------
By: /s/ Samuel H. Turner
- ------------------- --------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
-5-
<PAGE> 178
EXHIBIT A
HOSPITAL NAME: St. Vincent Charity Hospital
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. Dr. J. Sopko, Dir., Dept. of Medicine
---------------------------------------
2. Dr. C. Keating, Assoc. Dir., Dept. of Medicine
------------------------------------------------
3. Dr. E. Reichstein, Dir. Gen. & Trauma Surgery
-----------------------------------------------
4. R. Pinczuk, R.N. Admin. Qual. Management
-----------------------------------------
D. Billie, Dir. Medical Records
/s/ Samuel H. Turner
----------------------------------
Chief Executive Officer
<PAGE> 179
CLEVELAND
HEALTH March 15, 1993
QUALITY
CHOICE
Ms. Farah Walters
President and CEO
University Hospitals
2074 Abington Road
Cleveland, Ohio 44106
RE: CHOICE(SM) Coefficients
Dear Farah:
You have requested the custody and use of the coefficients for the CHOICE(SM)
risk adjustment system developed for the Cleveland Health Quality Choice
Program by Michael Pine and Associates, Inc.
Our records indicate that your organization has met all of the obligations
required by the Board of Trustees of the Quality Information Management
Corporation to receive the coefficients.
This packet contains the following:
- Requirements for Receipt of the CHOICE(SM) Coefficients;
- A signed copy of the Confidentiality Agreement;
- A copy of the QIMC Board of Trustees' Resolution pertaining to the
release and use of the coefficients;
- The Greater Cleveland Health Quality Choice Mortality Models Analysis
(including coefficients and patient variables) of Wave I & II Combined
Data;
- The Greater Cleveland Health Quality Choice Length of Stay Models
Analysis (including coefficients and patient variables) of Wave I & II
Combined Data;
- Information regarding the QIMC Data Analyses Services.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Dwain L. Harper
Dwain L. Harper, D.O.
Executive Director
Enclosures
cc: M. Orry Jacobs
Terry Hammons, M.D.
Robert Post, M.D.
Manny Balmore, Ph.D.
<PAGE> 180
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this 15th Day of
March, 1993, between Quality Information Management Systems, Inc., an Ohio
not-for-profit corporation ("QIMC"), and the hospital signatory hereto (the
"Hospital").
WITNESSETH:
WHEREAS, QIMC is a corporation formed by certain local businesses and
hospitals and other health care providers, including, without limitation, the
Hospital (together, the "Participating Hospitals"), to encourage cooperative
efforts to improve the quality of health care available in Cleveland and
surrounding areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and the Participating
Hospitals are collecting and compiling data and related information regarding
quality of care and patient satisfaction at the Participating Hospitals, and
QIMC has developed or licensed from third parties specific co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-Efficients"); and
WHEREAS, the parties hereto desire that QIMC continue to receive
directly from the Hospital all data as may be required in connection with the
Project (the "Data") and QIMC has and shall retain title to the Data; and
WHEREAS; the Hospital has requested QIMC provide the Hospital copies of
the Co-Efficients to permit the Hospital to analyze information specific to its
operations; and
WHEREAS; QIMC is willing to share the Co-Efficients with the Hospital
subject to the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. The Hospital, and the Hospital's agents,
employees and representatives (the "Representatives"), hereby agree that the
Co-Efficients and the Data interpreted with the use of the Co-Efficients will
be kept confidential and will not, without the prior written consent of QIMC,
be disclosed directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by the Hospital or its
Representatives for any purpose other than evaluating the Co-Efficients and all
Data produced by the Co-Efficients. More-
<PAGE> 181
over, the Hospital agrees to provide the Co-Efficients only to Representatives
who need to know the Co-Efficients for the purpose of evaluating the Data, who
are informed of the confidential nature of the Co-Efficients and who are
provided with a copy of, and agree to be bound by the terms of, this Agreement.
The Hospital agrees to notify QIMC prior to delivery or disclosure of the
Co-Efficients to its Representatives, as to the identity of such
Representatives. The Hospital will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients.
2. Disclosure of Confidential Information.
(a) Without the prior written consent of QIMC, neither the
Hospital nor any of its Representatives will disclose to any other person or
entity that the Co-Efficients have been made available or any of the terms,
conditions or other facts with respect to the Project, except as required by
law and then only with written notice to QIMC.
(b) This Agreement shall not apply in the event the Co-Efficients
are or become generally available to the public other than as a result of any
breach of this Agreement by the Hospital or its Representatives.
3. Enforcement of Agreement. The undersigned agrees that QIMC shall
be entitled to equitable relief, including, without limitation, by injunction
or specific performance, removal from the Project and the right to participate
in the Project in the future. The Hospital agrees further to reimburse QIMC
for any expenses, attorneys fees and other costs incurred by QIMC in connection
with the enforcement of this Agreement. Such remedies shall not be deemed to
be exclusive, but shall be in addition to all other remedies available at law
or in equity, including a claim for lost profits and other actual and
consequential damages suffered by QIMC.
4. Title to Data. QIMC shall at all times retain, and the Hospital
hereby grants to QIMC, all right, title and interest in and to the Data. The
Hospital agrees to take all action necessary or appropriate to transfer title
in and to the Data to QIMC. Notwithstanding anything contained herein to the
contrary, QIMC shall provide the Hospital access to the Data supplied by the
Hospital.
5. Noncompetition/Noninterference.
5.1 Noncompetition. The Hospital agrees, without the prior
written consent of QIMC, not to (A) develop, sell, distribute or perform
services in competition with QIMC or the Project or to directly or indirectly
use the Co-Efficients in a manner which is not in the best interest of the
Project; or
-2-
<PAGE> 182
(B) directly or indirectly own, manage, operate or control any entity or
person that performs services in direct or indirect competition with the
Project or QIMC.
5.2 Noninterference. The Hospital agrees not to interfere
with the relationship between QIMC and any other Participating Hospital or any
other third party.
6. Miscellaneous Provisions.
6.1 Notices. All notices and other communications required by
this Agreement shall be in writing and shall be deemed given if delivered by
hand or mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, Ohio 44115
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
Suite 1800
800 Superior Avenue
Cleveland, Ohio 44114
(b) If to the Hospital, to:
Mr. M. Orry Jacobs
Senior Vice President - Strategic Planning
University Hospitals of Cleveland
2074 Abington Road
Cleveland, Ohio 44106
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
6.4 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Ohio applicable to
contracts made and to be performed entirely within Ohio.
-3-
<PAGE> 183
6.5 Severability. If any provision of this Agreement shall be
held unenforceable, invalid or void to any extent for any reason, such
provision shall remain in force and effect to the maximum extent allowable, if
any, and the enforceability or validity of the remaining provisions of this
Agreement shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by QIMC and the Hospital and the
parties have taken all necessary corporate action required hereunder.
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Indemnification. The Hospital agrees to protect, defend,
indemnify and hold harmless QIMC and its officers, trustees, employees and
other representatives from and against any and all costs (including all
reasonable attorneys' fees), expenses, claims, demands, causes of action,
damages and judgments arising from the distribution by the Hospital or its
agents, employees or representatives of the Co-Efficients.
6.9 Assignment. This Agreement may not be assigned by either
party without the prior written consent of the other party hereto, which such
consent shall not be unreasonably withheld.
6.10 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.11 Reformation of Agreement. If any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable as against public policy or for any other reason, such court
shall exercise its discretion in reforming such provision to the end that the
Hospital shall be subject to nondisclosure and noninterference covenants that
are reasonable under the circumstances and enforceable by QIMC.
6.12 Waiver. Failure by any party to enforce any rights under
this Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from the Hospital shall not constitute a waiver
of any default except as to the payment of the particular payment or
performance so received.
-4-
<PAGE> 184
6.13 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.14 Integration. The parties hereto acknowledge that they
have read this Agreement in its entirety and understand and agree to be bound
by all of its terms and conditions, and further agree that this Agreement and
any exhibits or schedules hereto constitute a complete and exclusive statement
of the understanding between the parties with respect to the subject matter
hereof which supersede any and all other communications between the parties,
whether written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
WITNESS: QUALITY INFORMATION MANAGEMENT
CORPORATION
/s/ Judith M. Werle By: /s/ Dwain L. Harper
- ------------------- ---------------------------
Its: Executive Director
---------------------------
/s/ M. Orry Jacobs
-------------------------------
/s/ Elaine L. Allen By: M. Orry Jacobs
- -------------------- ---------------------------
Its: Senior Vice President
---------------------------
Strategic Planning
-5-
<PAGE> 185
EXHIBIT A
HOSPITAL NAME: University Hospitals of Cleveland
-----------------------------------------------
The Confidentiality Agreement requires hospital's to disclose to the QIMC the
identity of representatives who have received the coefficients. Please list
the names of each representative below:
COEFFICIENTS DISCLOSED
TO THE FOLLOWING HOSPITAL REPRESENTATIVES
1. M. Orry Jacobs
----------------------------------
2. Terry Hammons, M.D.
----------------------------------
3. Robert Post, M.D.
----------------------------------
4. Manny Bellmore, Ph.D.
----------------------------------
/s/ M. Orry Jacobs
----------------------------------
for Chief Executive Officer
<PAGE> 186
ADDENDUM #1
AMS-QIMC
CONFIDENTIALITY
AGREEMENT
<PAGE> 187
CONFIDENTIALITY AGREEMENT
THIS CONFIDENTIALITY AGREEMENT is entered into as of this ___ day of
January, 1994, between Quality Information Management Corporation, an Ohio
nonprofit corporation ("QIMC"), and APACHE Medical Systems, Inc., a Delaware
corporation ("APACHE").
WITNESSETH:
WHEREAS, QIMC is a membership corporation formed by certain local
businesses and health care organizations to encourage cooperative efforts to
improve the quality of health care available in Cleveland, Ohio and surrounding
areas (the "Project"); and
WHEREAS, in connection with the Project, QIMC and hospitals
participating in the Project ("Participating Hospitals") are collecting and
compiling data and related information regarding quality of care and patient
satisfaction at the Participating Hospitals, and QIMC has developed or
licensed from third parties specific patient variables and co-efficients codes
allowing the data collected from the Participating Hospitals to be analyzed and
compared based upon similar assumptions (the "Co-efficients");
WHEREAS QIMC and Apache are presently negotiating the terms of a
prospective business relationship and, in connection with such negotiations,
APACHE has requested QIMC to provide copies of the Co-Efficients, patient
variables, and certain other information and data (all of which are
collectively referred to herein as the "Data") to permit APACHE to analyze
information specific to the models developed by QIMC in connection with the
Project; and
WHEREAS, QIMC is willing to share the Data with APACHE subject to the
terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Confidentiality. APACHE and its agents, employees and
representatives (the "Representatives"), hereby agree that the Data will be
kept confidential and will not, without the prior written consent of QIMC, be
disclosed by them directly or indirectly to any third party, in any manner
whatsoever, in whole or in part, and will not be used by APACHE or its
Representatives for any purpose other than evaluating the Co-Efficients and
models. Moreover, APACHE agrees to provide the Co-Efficients and Data only to
Representatives who APACHE reasonably believes need
Page 1
<PAGE> 188
to know the Co-Efficients and Data for the purpose of evaluating the models,
who are informed of the confidential nature of the Co-Efficients and Data and
who are provided with a copy of, and agree in writing to be bound by the terms
of, this Agreement. APACHE will be responsible for any breach of this
Agreement by its Representatives, and agrees, at its expense, to take all
reasonable measures to restrain its Representatives from unauthorized
disclosure or use of the Co-Efficients or Data.
2. Disclosure of Confidential Information. Without the prior
written consent of QIMC, neither APACHE nor any of its Representatives will
disclose to any other person or entity that the Co-Efficients or Data have been
made available or any of the terms, conditions or other facts with respect to
the Project.
3. Limitation. The obligations imposed upon Apache herein shall
not apply to Confidential Information that becomes generally available or known
to the public through no act of Apache or a Representative, or which is
released pursuant to the binding order of a government agency or a court.
4. Enforcement of Agreement. APACHE agrees that QIMC shall be
entitled to equitable relief, including, without limitation, by injunction or
specific performance, APACHE agrees further to reimburse QIMC for any expenses,
attorneys fees and other costs incurred by QIMC in connection with the
enforcement of this Agreement if QIMC is successful in such action. Such
remedies shall not be deemed to be exclusive, but shall be in addition to all
other remedies available at law or in equity, including a claim for lost
profits and other actual and consequential damages suffered by QIMC.
5. Noninterference. APACHE agrees not to interfere with the
relationship between QIMC and any Participating Hospital or any other third
party.
6.1 Notices. All notices and other communications required by this
Agreement shall be in writing and shall be deemed given if delivered by hand or
mailed by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by notice
pursuant hereto):
(a) If to QIMC, to:
Dr. Dwain L. Harper
Quality Information Management Corporation
1127 Euclid Avenue, Suite 741
Cleveland, OH 44115
Page 2
<PAGE> 189
with a copy to:
John P. Batt, Esq.
Calfee, Halter & Griswold
800 Superior Avenue, Suite 1800
Cleveland, OH 44114
(b) If to APACHE Medical Systems, Inc., to:
Mr. Gary Bisbee
APACHE Medical Systems, Inc.
1901 Pennsylvania Ave., N.W., #900
Washington, D.C. 20006
with a copy to:
David C. Main, Esq.
Gardner, Carton & Douglas
1301 K Street, N.W., Suite 900 East
Washington, D.C. 20005
6.2 Binding Effect. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
6.3 Execution in Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute on and the same document.
6.4 Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Ohio applicable to contracts made
and to be performed entirely within Ohio.
6.5 Severability. If any provision of this Agreement shall be held
unenforceable, invalid or void to any extent for any reason, such provision
shall remain in force and effect to the maximum extent allowable, if any, and
the enforceability or validity of the remaining provisions of this Agreement
shall not be affected thereby.
6.6 Authorization. The execution, delivery and performance of this
Agreement has been duly authorized by QIMC and APACHE and the parties have
taken all necessary corporation action required hereunder.
Page 3
<PAGE> 190
6.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings of the
parties. No supplement, modification, amendment or termination of this
Agreement shall be binding unless executed in writing by the party or parties
to be bound thereby.
6.8 Assignment. This Agreement may not be assigned by either party
without the prior written consent of the other party hereto.
6.9 Further Acts. The parties agree to execute such other
documents and perform such further acts as may be necessary or desirable to
carry out the purposes of this Agreement.
6.10 Reformation of Agreement. If any provision of this Agreement
is found by a court of competent jurisdiction to be invalid or unenforceable as
against public policy or for any other reason, such court shall exercise its
discretion in reforming such provision to the end that APACHE shall be subject
to nondisclosure and noninterference covenants that are reasonable under the
circumstances and enforceable by QIMC.
6.11 Waiver. Failure by any party to enforce any rights under this
Agreement shall not be construed as a waiver of such rights. Any waiver,
including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other instance. Any acceptance of money
or other performance by QIMC from APACHE shall not constitute a waiver of any
default except as to the payment of the particular payment or performance so
received.
6.12 Third Parties. The parties intend to confer no benefit or
right on any person or entity not a party to this Agreement and no third party
shall have the right to claim the benefit of any provision hereof as a third
party beneficiary of any such provision.
6.13 Integration. The parties hereto acknowledge that they have
read this agreement in its entirely and understand and agree to be bound by all
of its terms and conditions, and further agree that this Agreement and any
exhibits or schedules hereto constitute a complete and exclusive statement of
the understanding between the parties with respect to the subject matter hereof
which supersede any and all other communications between the parties, whether
written or oral. Any prior agreements, promises, negotiations or
representations related to the subject matter hereof not expressly set forth in
this Agreement or any exhibits or schedules hereto are of no force and effect.
Page 4
<PAGE> 191
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
QUALITY INFORMATION
MANAGEMENT CORPORATION
BY:
-----------------------------
Its:
----------------------------
APACHE MEDICAL SYSTEMS, INC.
BY: /s/ Brion D. Umidi
-----------------------------
Its: Vice President
----------------------------
Page 5
<PAGE> 192
Agenda Item 4.A
September, 1993
EXECUTIVE DIRECTOR'S REPORT
September, 1993
Gary Rosenthal and I have held meetings with the following individuals. We
have reached agreement in principle to collaborate with them to seek grant
funding for research projects.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPLE AFFILIATION GRANT SUBJECT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
J.B. Silvers, Treuhart Weatherhead School of Evaluation of impact of
Professor of Management, Management, CWRU CHQC Program and Use of
and Director, Health Systems data by Purchasers...RWJ &
Management Center AHCPR
- ------------------------------------------------------------------------------------------------------
Alfred Rimm, Ph.D., School of Medicine, CWRU Comprehensive grant.
Professor and Chairman, and MetroHealth Medical Establish an Analysis Center
Department of Epidemiology Center at CHQC to use CHQC data
and Biostatistics and develop other
applications and uses of the
data...Cleveland Foundation
- ------------------------------------------------------------------------------------------------------
Randy Cebul, MD, Head, CWRU School of Medicine Examine appropriateness of
Dev. of Internal Medicine and and MetroHealth Medical care for specific procedures
Assoc. Professor Center (hysterectomy) and measure
inhospital complications...AHCPR
- ------------------------------------------------------------------------------------------------------
Seth Landerfeld, MD, Head, Cleveland VA and CWRU Analysis of existing data.
Section of Medicine and
Assoc. professor
- ------------------------------------------------------------------------------------------------------
Meetings scheduled: Tom Keys, CCF,
Terry Hammons, UH
- ------------------------------------------------------------------------------------------------------
Carl Sirio, MD, Assoc. University of Pittsburgh, Use of Apache ICU data by
Professor of Emergency School of Medicine hospitals to improve quality
Medicine of care...AHCPR
- ------------------------------------------------------------------------------------------------------
Invite Others
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 193
ATTACHMENT L
CHOICE OUTCOME
MEASUREMENT &
PREDICTION
SYSTEM
<PAGE> 194
CONFIDENTIAL
Mortality Models
Variable Descriptions and Coefficients
<PAGE> 195
MORTALITY ANALYSIS - LOGISTIC REGRESSION
CONDITION: [* ]
Total Eligible Cases: [* ]
Regression Cases: [* ]
<TABLE>
<CAPTION>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
*Confidential portions omitted and filed separately
with the Commission.
<PAGE> 196
[ *]
The LOGISTIC Procedure
Analysis of Maximum Likelihood Estimates
<TABLE>
<CAPTION>
Parameter Standard Wald Pr > Standardized Odds
Variable DF Estimate Error Chi-Square Chi-Square Estimate Ratio
<S> <C> <C> <C> <C> <C> <C> <C>
[ *]
</TABLE>
Association of Predicted Probabilities and Observed Responses
Concordant = [ *] Somers' D = [ *]
Discordant = [ *] Gamma = [ *]
Tied = [ *] Tau-a = [ *]
[ *] c = [ *]
-------
*Confidential portions omitted
and filed separately with
the Commission.
<PAGE> 197
[* ]
The LOGISTIC Procedure
Analysis of Maximum Likelihood Estimates
<TABLE>
<CAPTION>
Parameter Standard Wald Pr > Standardized Odds
Variable DF Estimate Error Chi-Square Chi-Square Estimate Ratio
<S> <C> <C> <C> <C> <C> <C> <C>
[* ]
</TABLE>
Association of Predicted Probabilities and Observed Responses
<TABLE>
<S> <C> <C> <C>
Concordant = [* ] Somers' D = [* ]
Discordant = [* ] Gamma = [* ]
Tied = [* ] Tau-a = [* ]
[* ] c = [* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 198
MORTALITY ANALYSIS - LOGISTIC REGRESSION
CONDITION: [ *]
Total Eligible Cases: [ *]
Regression Cases: [ *]
<TABLE>
<CAPTION>
Grouping Variable Name* Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[ *]
</TABLE>
[ *]
--------------
*Confidential portions omitted and
filed separately with the Commission.
<PAGE> 199
MORTALITY ANALYSIS - LOGISTIC REGRESSION
CONDITION: [* ]
Total Eligible Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name* Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 200
[* ]
The LOGISTIC Procedure
Analysis of Maximum Likelihood Estimates
<TABLE>
<CAPTION>
Parameter Standard Wald Pr > Standardized Odds
Variable DF Estimate Error Chi-Square Chi-Square Estimate Ratio
<S> <C> <C> <C> <C> <C> <C> <C>
[* ]
</TABLE>
Association of Predicted Probabilities and Observed Responses
<TABLE>
<S> <C> <C> <C>
Concordant = [* ] Somers' D = [* ]
Discordant = [* ] Gamma = [* ]
Tied = [* ] Tau-a = [* ]
[* ] c = [* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 201
MORTALITY ANALYSIS - LOGISTIC REGRESSION
CONDITION: [* ]
Total Eligible Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 202
[* ]
The LOGISTIC Procedure
Analysis of Maximum Likelihood Estimates
<TABLE>
Parameter Standard Wald Pr > Standardized Odds
Variable DF Estimate Error Chi-Square Chi-Square Estimate Ratio
<S> <C> <C> <C> <C> <C> <C> <C>
[* ]
</TABLE>
Association of Predicted Probabilities and Observed Responses
<TABLE>
<S> <C> <C> <C>
Concordant = [* ] Somers' D = [* ]
Discordant = [* ] Gamma = [* ]
Tied = [* ] Tau-a = [* ]
[* ] c = [* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 203
MORTALITY ANALYSIS - LOGISTIC REGRESSION
CONDITION: [* ]
Total Eligible Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 204
[* ]
The LOGISTIC Procedure
Analysis of Maximum Likelihood Estimates
<TABLE>
Parameter Standard Wald Pr > Standardized Odds
Variable DF Estimate Error Chi-Square Chi-Square Estimate Ratio
<S> <C> <C> <C> <C> <C> <C> <C>
[* ]
</TABLE>
Association of Predicted Probabilities and Observed Responses
<TABLE>
<S> <C> <C> <C>
Concordant = [* ] Somers' D = [* ]
Discordant = [* ] Gamma = [* ]
Tied = [* ] Tau-a = [* ]
[* ] c = [* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 205
MORTALITY ANALYSIS - LOGISTIC REGRESSION
CONDITION:
[* ]
Total Eligible Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 206
[* ]
Analysis of Maximum Likelihood Estimates
<TABLE>
Parameter Standard Wald Pr > Standardized Odds
Variable DF Estimate Error Chi-Square Chi-Square Estimate Ratio
<S> <C> <C> <C> <C> <C> <C> <C>
[* ]
</TABLE>
Association of Predicted Probabilities and Observed Responses
<TABLE>
<S> <C> <C> <C>
Concordant = [* ] Somers' D = [* ]
Discordant = [* ] Gamma = [* ]
Tied = [* ] Tau-a = [* ]
[* ] c = [* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 207
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
<TABLE>
Grouping Variable Description
-------- ---------------------
<S> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 208
[* ] (Continued)
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 209
LENGTH OF STAY MODELS
VARIABLE DESCRIPTIONS AND COEFFICIENTS
<PAGE> 210
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 211
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for HO:
Variable DF Estimate Error Parameter = 0 Prob > T
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 212
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
<CAPTION>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 213
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 214
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 215
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 216
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 217
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 218
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 219
CONDITION: [* ]
<TABLE>
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 220
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
<TABLE>
Parameter Estimates
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 221
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 222
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<C> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 223
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <S> <S> <S>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 224
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 225
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 226
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 227
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
<TABLE>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 228
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj. R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
Parameter Standard T for H0:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 229
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
<TABLE>
<S> <C>
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
</TABLE>
<TABLE>
<CAPTION>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 230
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
<CAPTION>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
<CAPTION> Parameter Standard T for HO:
Variable DF Estimate Error Parameter=0 Prob > /T/
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
- ---------
*Confidential portions omitted and filed separately
with the Commission.
<PAGE> 231
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
<TABLE>
<S> <C>
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
</TABLE>
<TABLE>
<CAPTION>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 232
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
<CAPTION>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
<CAPTION>
Parameter Standard T for HO:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 233
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
<TABLE>
<S> <C>
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
</TABLE>
<TABLE>
<CAPTION>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 234
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
<CAPTION>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
<CAPTION>
Parameter Standard T for HO:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 235
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
<TABLE>
<S> <C>
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
</TABLE>
<TABLE>
<CAPTION>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 236
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
<CAPTION>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
<CAPTION>
Parameter Standard T for HO:
Variable DF Estimate Error Parameter=0 Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 237
LENGTH OF STAY ANALYSIS - REGRESSION
CONDITION: [* ]
<TABLE>
<S> <C>
Total Cases: [* ]
Total Eligible LOS Cases: [* ]
Regression Cases: [* ]
</TABLE>
<TABLE>
<CAPTION>
Grouping Variable Name Variable Description Missing Values
- -------- ------------- -------------------- --------------
<S> <C> <C> <C>
[* ]
</TABLE>
[* ]
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 238
LENGTH OF STAY - [* ]
Model: MODEL1
Dependent Variable: LOGLOS
Analysis of Variance
<TABLE>
<CAPTION>
Sum of Mean
Source DF Squares Square F Value Prob>F
<S> <C> <C> <C> <C> <C>
Model [* ] [* ] [* ] [* ] [* ]
Error [* ] [* ] [* ] [* ] [* ]
C Total [* ] [* ]
</TABLE>
<TABLE>
<S> <C> <C> <C>
Root MSE [* ] R-square [* ]
Dep Mean [* ] Adj R-sq [* ]
C.V. [* ]
</TABLE>
Parameter Estimates
<TABLE>
<CAPTION>
Variable DF Parameter Standard T for HO:
Estimate Error Parameter=O Prob > / T /
<S> <C> <C> <C> <C> <C>
[* ]
</TABLE>
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 239
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 240
[* ](continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 241
[* ](continued)
<TABLE>
<S> <C> [* ]
[* ]
(continued)
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 242
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
<TABLE>
<CAPTION>
<S> <C>
Grouping Variable Description
- -------- --------------------
[* ]
</TABLE>
- ---------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 243
[* ](continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 244
[* ](continued)
<TABLE>
<S> <C> [* ]
[* ]
(continued)
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 245
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
<TABLE>
<CAPTION>
<S> <C>
Grouping Variable Description
- -------- --------------------
[* ]
</TABLE>
- ---------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 246
[* ](continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 247
[* ](continued)
<TABLE>
<S> <C> [* ]
[* ]
(continued)
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 248
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- ----------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 249
[* ] (continued)
[* ]
- ----------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 250
[* ](continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 251
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
Grouping Variable Description
- -------- --------------------
[* ]
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 252
[* ](continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 253
[* ] (continued)
[* ]
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 254
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- ---------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 255
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 256
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- ---------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 257
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 258
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 259
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 260
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 261
<TABLE>
<S> <C>
[* ](continued)
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 262
[* ](continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 263
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- ------- --------------------
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 264
<TABLE>
<S> <C>
[* ](continued)
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 265
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 266
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 267
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- ---------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 268
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 269
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 270
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 271
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 272
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- ---------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 273
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 274
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 275
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
<TABLE>
<CAPTION>
Grouping Variable Description
- -------- --------------------
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 276
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 277
[* ] (continued)
<TABLE>
<S> <C>
[* ]
</TABLE>
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 278
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 279
[* ](continued)
[* ]
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 280
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 281
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 282
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 283
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 284
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 285
[* ](continued)
[* ]
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 286
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 287
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 288
[* ](continued)
[* ]
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 289
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 290
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 291
[* ](continued)
[* ]
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 292
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 293
LENGTH OF STAY - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 294
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 295
[* ](continued)
[* ]
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 296
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 297
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 298
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 299
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 300
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 301
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 302
MORTALITY ANALYSIS - [* ]
VARIABLES INCLUDED IN INITIAL STEPWISE LOGISTIC REGRESSION
GROUPING VARIABLE DESCRIPTION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 303
[* ](continued)
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 304
ATTACHMENT M
CHOICE SYSTEM
SUPPORT
DOCUMENTS
<PAGE> 305
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
MEDICAL/SURGICAL DATA ABSTRACTION FORM
VERSION 2
SECTION A: ADMINISTRATIVE INFORMATION
HOSPITAL ID NUMBER:__ __ DATE RECORD ABSTRACTED __ __ / __ __ / __ __
ABSTRACTOR ID NUMBER: __ __ __ TOTAL ABSTRACTION TIME: __ __ __ minutes
SECTION B:
GENERAL PATIENT INFORMATION
ID NUMBER: __ __ __ __ __ __ __ __ __ __
SOCIAL SECURITY NUMBER:
__ __ __ - __ __ - __ __ __ __
ZIP CODE: __ __ __ __ __ - __ __ __ __
BIRTHDATE: __ __ / __ __ / __ __
AGE: __ __ __
RACE: (check one)
/ /1 White
/ /2 Black
/ /3 Other
/ /4 Not documented
SEX: (check one)
/ /1 Male
/ /2 Female
/ /3 Not documented
ADMISSION DATE: __ __ / __ __ / __ __
DISCHARGE DATE: __ __ / __ __ / __ __
HOSPITAL INTERVAL BEGAN: __ __ / __ __ / __ __
PRIMARY INSURANCE: (check one)
/ /1 Commercial insurance
/ /2 Medicare
/ /3 Medicaid
/ /4 County aid (GAM)
/ /5 Workers compensation
/ /6 Self pay
/ /7 Uninsured
/ /8 Other
/ /9 Not documented
SECTION C:
PATIENT STATUS ON HOSPITALIZATION
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
1
<PAGE> 306
===============================================================================
DIAGNOSIS CODES (ICD-9-CM):
Record ALL documented ICD-9-CM diagnostic codes.
Principal: __ __ __ __ . __ __
Secondary:
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
__ __ __ __ . __ __
/ / Additional diagnostic codes documented
PROCEDURE CODES (ICD-9-CM) AND DATE
OF PROCEDURE:
Record ALL documented ICD-9-CM procedure codes and the date each procedure was
performed.
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
__ __ . __ __ __ __ / __ __ / __ __
/ / Additional procedure codes documented
===============================================================================
2
<PAGE> 307
MEDICAL CONDITIONS CONFIRMED OR
SUSPECTED ON HOSPITALIZATION:
(check ALL that apply)
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
CHRONIC OR PAST DISEASES:
(check ALL that apply)
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
CURRENTLY USED MEDICATIONS:
(check ALL that apply)
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
SUBSTANCE USE: (past or present)
No Past Not
Use Use Use Documented
[* ] / /1 / /2 / /3 / /4
[* ] / /1 / /2 / /3 / /4
[* ] / /1 / /2 / /3 / /4
MEDICAL DEVICES PRESENT ON
HOSPITALIZATION: (check ALL that apply)
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
SECTION D:
PATIENT STATUS ON DISCHARGE
DISCHARGE STATUS: (check one)
/ /1 [* ]
/ /2 [* ]
/ /3 [* ]
PRESENCE OF MEDICAL DEVICES ON
DISCHARGE: (check ALL that apply)
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
/ / [* ]
3
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 308
DISCHARGE DISPOSITION: [* ]
/ /1 [* ]
/ /2 [* ]
/ /3 [* ]
/ /4 [* ]
/ /5 [* ]
/ /6 [* ]
/ /7 [* ]
/ /8 [* ]
/ /9 [* ]
SECTION E: PHYSICAL EXAMINATION
HEIGHT & WEIGHT: [* ]
Height: / /1 Not documented
/ /2 Documented __ __ __ Inches
__/__ __ Feet/inches
__ __ __ Centimeters
Unit of measurement used: / /1 Inches
/ /2 Feet/inches
/ /3 Centimeters
Weight: / /1 Not Documented
/ /2 Documented __ __ __ Pounds
__ __ __ . __ Kilograms
Unit of measurement used: / /1 Pounds
/ /2 Kilograms
PULSE, RESPIRATION, & BLOOD PRESSURE:
[* ]
PULSE: (check one)
/ /1 Yes, __ __ __ / minute
/ /2 Zero pulse
/ /3 Not documented
RESPIRATORY RATE: (check one)
/ /1 Yes, __ __ / minute
/ /2 Zero respiratory rate
/ /3 Not documented
BLOOD PRESSURE:
Systolic: (check one)
/ /1 Yes, __ __ __ mmHg
/ /2 Zero systolic BP
/ /3 Not documented
Diastolic: (check one)
/ /1 Yes, __ __ __ mmHg
/ /2 Zero diastolic BP
/ /3 Not documented
TEMPERATURE: [* ]
/ /1 Not documented
/ /2 Documented
[* ] [* ]
Temperature Temperature
----------- -----------
o
Fahrenheit __ __ __ . __ __ __ __ . __ F
o
Centigrade __ __ . __ __ __ . __ C
4
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 309
NEUROLOGICAL STATUS: [* ]
[* ]
SECTION F: HOSPITAL COURSE
[* ]
5
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 310
[* ]
6
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 311
SECTION G: RADIOLOGY AND EKG
[* ]
- -------
* Confidential portions omitted and filed separately
with the Commission.
7
<PAGE> 312
[* ]
8
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 313
SECTION H: LABORATORY
[* ]
- --------
*Confidential portions omitted and filed
separately with the Commission.
9
<PAGE> 314
SECTION H: LABORATORY
[* ]
9
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 315
[* ]
10
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 316
[* ]
11
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 317
[* ]
SECTION I: DISEASE OR PROCEDURE - SPECIFIC INFORMATION
[* ]
12
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 318
[* ]
13
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 319
[* ]
14
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 320
[* ]
15
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 321
[* ]
16
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 322
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
DATA ABSTRACTION MANUAL
Data Abstraction Forms
Data Collection Guidelines
(c) 1993, Quality Information Management Corporation
all rights reserved
<PAGE> 323
TABLE OF CONTENTS
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
DATA ABSTRACTION MANUAL
Page
----
SECTION I: DESCRIPTION OF THE CLEVELAND HEALTH
QUALITY CHOICE PROGRAM (CHQCP) ............. I-1
SECTION II: GENERAL INFORMATION AND INSTRUCTIONS ......... II-1
A. Definitions
[* ]................................ II-1
[* ]................................ II-1
[* ]................................ II-1
[* ]................................ II-1
[* ]................................ II-2
[* ]................................ II-2
[* ]................................ II-2
[* ]................................ II-2
[* ]................................ II-2
[* ]................................ II-2
[* ]................................ II-3
[* ]................................ II-4
[* ]................................ II-4
[* ]................................ II-5
[* ]................................ II-6
[* ]................................ II-6
B. Intervals
[* ]................................ II-7
[* ]................................ II-8
[* ]................................ II-10
[* ]................................ II-10
[* ]................................ II-11
C. General Abstracting Rules ................. II-13
D. Hospital Indentification (ID) Codes ....... II-17
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 324
Page
----
SECTION III: CRITERIA FOR INCLUSION OF PATIENTS
AND RULES FOR ABSTRACTION FORM SELECTION
A. Obstetrics................................. III-1
B. Medical/Surgical........................... III-3
[* ]................................ III-4
[* ]................................ III-8
SECTION IV: OBSTETRICAL DATA ABSTRACTION FORMS
AND DATA COLLECTION GUIDELINES
Obstetrical Data Abstraction Long Form Front
Obstetrical Data Abstraction Short Form Front
Data Collection Guidelines:
A. Administractive Information
[* ]................................ IV-1
[* ]................................ IV-1
[* ]................................ IV-1
[* ]................................ IV-1
[* ]................................ IV-1
B. Maternal Information
[* ]................................ IV-2
[* ]................................ IV-2
[* ]................................ IV-3
[* ]................................ IV-3
[* ]................................ IV-4
[* ]................................ IV-5
[* ]................................ IV-6
[* ]................................ IV-7
[* ]................................ IV-8
[* ]................................ IV-9
[* ]................................ IV-10
C. Information About Prior Pregnancies
[* ]................................ IV-12
[* ]................................ IV-13
[* ]................................ IV-14
[* ]................................ IV-15
[* ]................................ IV-17
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 325
Page
----
D. Obstetrical Conditions With Current Pregnancy
[* ]................................ VI-19
[* ]................................ VI-21
E. Other Information About Current Pregnancy
[* ]................................ IV-24
[* ]................................ IV-27
[* ]................................ IV-28
[* ]................................ IV-29
[* ]................................ IV-30
F. Delivery Information
[* ]................................ IV-31
[* ]................................ IV-31
[* ]................................ IV-31
[* ]................................ IV-31
[* ]................................ IV-31
[* ]................................ IV-33
[* ]................................ IV-35
G. Transfusions............................... IV-36
H. Infant Information
[* ]................................ IV-38
[* ]................................ IV-38
[* ]................................ IV-38
[* ]................................ IV-38
[* ]................................ IV-39
[* ]................................ IV-40
[* ]................................ IV-40
[* ]................................ IV-42
[* ]................................ IV-43
SECTION V: MEDICAL/SURGICAL ABSTRACTION FORM
DATA COLLECTION GUIDELINES
A. Administrative Information
[* ]................................ V-1
[* ]................................ V-1
[* ]................................ V-1
[* ]................................ V-1
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 326
Page
----
B. General Patient Information
[* ]................................ V-2
[* ]................................ V-2
[* ]................................ V-3
[* ]................................ V-3
[* ]................................ V-3
[* ]................................ V-4
[* ]................................ V-5
[* ]................................ V-5
[* ]................................ V-5
[* ]................................ V-6
C. Patient Status on Hospitalization.......... V-7
[* ]................................ V-7
[* ]................................ V-8
[* ]................................ V-9
[* ]................................ V-10
[* ]................................ V-11
[* ]................................ V-12
[* ]................................ V-13
[* ]................................ V-14
[* ]................................ V-15
[* ]................................ V-18
[* ]................................ V-21
[* ]................................ V-22
[* ]................................ V-24
[* ]................................ V-25
D. Patient Status at Discharge................ V-28
[* ]................................ V-28
[* ]................................ V-29
[* ]................................ V-32
E. Physical Examination....................... V-34
[* ]................................ V-34
[* ]................................ V-35
[* ]................................ V-37
[* ]................................ V-38
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 327
Page
----
F. Hospital Course............................ V-41
[* ]................................ V-41
[* ]................................ V-42
[* ]................................ V-45
[* ]................................ V-48
[* ]................................ V-51
G. Radiology and EKG.......................... V-53
[* ]................................ V-53
[* ]................................ V-58
[* ]................................ V-59
[* ]................................ V-62
[* ]................................ V-66
H. Laboratory................................. V-67
[* ]................................ V-67
[* ]................................ V-68
[* ]................................ V-71
[* ]................................ V-73
[* ]................................ V-75
[* ]................................ V-77
I. Disease- or Procedure-Specific Information. V-79
[* ]................................ V-79
[* ]................................ V-81
[* ]................................ V-89
[* ]................................ V-91
[* ]................................ V-91
[* ]................................ V-93
[* ]................................ V-94
[* ]................................ V-95
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 328
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
SECTION I
DESCRIPTION OF THE
CLEVELAND
HEALTH QUALITY CHOICE
PROGRAM
<PAGE> 329
GREATER CLEVELAND HEALTH QUALITY CHOICE COALITION
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
The Cleveland Health Quality Choice (CHQC) Program is the first
healthcare market-reform plan of its kind in the country to bring
together businesses, hospitals and physicians in a voluntary,
collaborative effort to measure and help improve the quality and
efficiency of health care services community-wide.
The program is based on the strategy that if Cleveland-area businesses
can reliably identify the highest quality, cost-effective hospital
services, then this information can be used to encourage their
employees to choose these institutions for their hospital care. In
turn, with the incentive of more patient volume, hospitals will strive
to maintain or improve their quality of care and to keep their costs
in line through better efficiency and administration of the care.
HOW WAS THE CHQC PROGRAM INITIATED?
Cleveland has a heritage of community-wide collaborative efforts which
have been formed to solve social, civic and economic problems -- from
the very first United Way organization early in the century to the
private-public partnerships begun in the 1980s.
In 1989, another partnership was formed called the Greater Cleveland
Health Quality Choice Coalition. It is a unique alliance of the
business community and the medical community, born out of the
frustration of dealing with rapidly rising health care costs and out
of the necessity to work together to bring them under control. The
product of their collaboration is a market reform strategy called the
Cleveland Health Quality Choice Program.
The GCHQC Coalition includes:
* Cleveland Tomorrow - a group of chief executive officers from 50
major business organizations in the city.
* The Greater Cleveland Hospital Association - representing area
hospitals.
* The Health Action Council of Northeast Ohio - as association of
business health care purchasers.
* The Academy of Medicine of Cleveland - representing 4,000 physicians.
* The Council of Smaller Enterprises (COSE), a division of the
Greater Cleveland Growth Association - representing over 8,000
smaller businesses.
I-1
<PAGE> 330
HOW DOES THE CHQC PROGRAM WORK?
The Cleveland Health Quality Choice Program has developed the means
to measure and compare the quality of selected services at the
participating hospitals throughout the Greater Cleveland area. The
evaluation system measures two dimensions of hospital service: 1)
patient care outcomes or the results of the medical treatment, and 2)
patient satisfaction or how the patient reacted to the treatment and
the hospital stay.
Cleveland-area businesses in the CHQC Program use this information to
identify high quality hospital services and to restructure their
benefit plans to provide incentives for their employees to choose
those cost effective services and facilities with the best quality evaluations.
Cleveland-area hospitals use this information to compare their
services to other area hospitals. With the prospect of gaining more
patients through this program, hospitals have the incentive to
improve their quality of care while striving to keep costs in line
through better efficiency.
HOW IS THE INFORMATION GATHERED?
A committee of physicians, nurses, other healthcare professionals,
and business representatives performed an in-depth analysis of the
state-of-the-art hospital service assessment methods currently in use
throughout the country. The committee chose a three-pronged approach
to data collection, which includes:
1. A system known as the APACHE (Acute Physiology and Chronic Health
Evaluation) III System for patients who are in adult medical and
surgical intensive care unit (ICUs). This system has been endorsed
by the American Society of Critical Care Medicine and is considered
the most scientifically-validated ICU risk-adjusted method currently available.
2. A customized system, designed by Michael Pine & Associates, Inc.
with input by local hospital, medical and business advisory groups to
evaluate patients in the areas of medical, surgical and obstetrical
services. This system collects information about patients at
participating hospitals and compares how they fared as a result of
their hospitalization.
3. Patient satisfaction surveys which cover 11 categories related to
hospital systems (e.g., admission procedure) and the care by
physicians, nurses and other hospital staff. An independent
consulting firm, NCG Research, Inc. collects, codes and analyzes the
information. The survey instrument has been used by more than 200
hospitals across the country.
I-2
<PAGE> 331
WHAT SERVICES ARE BEING MEASURED?
Four service areas are being evaluated:
Surgery -- for instance, large bowel resection
General medicine -- such as treatment for pneumonia
Intensive care -- such as treatment for respiratory failure
Obstetrics and gynecology -- including childbirth
The quality of each service is "risk-adjusted" to account for
variables beyond the control of the hospitals, such as the age of the
patient, the severity of the illness, and the presence of other
medical problems that naturally would affect the outcome of the
patient's care. This enables a fair comparison of services by hospital.
HOW WAS THE PROGRAM IMPLEMENTED?
The quality assessment data was first validated by a stringent review
process before being released to participating companies for use in
restructuring their benefit plans. The businesses in the program are
prepared to receive the information and provide incentives for their
employees to choose the selected high-quality hospital services.
The first data was coded and reported on a trial basis to the
hospitals during 1991 and 1992. This provided an opportunity for the
system to be checked before uncoded data was reported. The first
report of actual data was released to the business community in April
of 1993.
WHAT ARE THE EXPECTED CHQC PROGRAM BENEFITS?
Benefits are expected for all parties involved in the Program:
HOSPITALS that provide the highest quality services and most efficient
care will be rewarded with more patients, and those that do not will
have a powerful incentive to improve.
PHYSICIANS will have objective, comparative data to help them
appropriately work with the hospitals where they practice to
improve quality and efficiency.
BUSINESSES can expect better quality health care for their employees
in addition to potential health-related cost savings.
PATIENTS should benefit from more efficient, consistent and higher
quality hospital care.
The Greater Cleveland community will have a new and better approach
to choosing health care.
I-3
<PAGE> 332
Because of its broad-based organization and its collaborative nature, the
Cleveland Health Quality Choice Program has an excellent chance of successfully
making a positive impact on the cost and quality of healthcare in Cleveland --
and it well could become a model for other communities across the country to
follow.
I-4
<PAGE> 333
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
SECTION II
GENERAL INFORMATION
AND
INSTRUCTIONS
<PAGE> 334
SECTION II: GENERAL INFORMATION AND INSTRUCTIONS
OUTLINE
A. Definitions
1. [* ]
2. [* ]
3. [* ]
4. [* ]
5. [* ]
6. [* ]
7. [* ]
8. [* ]
9. [* ]
10. [* ]
11. [* ]
12. [* ]
13. [* ]
14. [* ]
15. [* ]
16. [* ]
B. Intervals
1. [* ]
2. [* ]
3. [* ]
4. [* ]
5. [* ]
C. General Abstracting Rules
D. Hospital Identification (ID) Codes
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 335
SECTION II
GENERAL INFORMATION AND INSTRUCTIONS
A. DEFINITIONS
[* ]
II-1
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 336
[* ]
II-2
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 337
[* ]
II-3
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 338
[* ]
II-4
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 339
[* ]
II-5
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 340
[* ]
II-6
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 341
B. INTERVALS
[* ]
II-7
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 342
[* ]
II-8
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 343
[* ]
II-9
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 344
[* ]
II-10
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 345
[* ]
II-11
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 346
[* ]
II-12
- --------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 347
C. GENERAL ABSTRACTING RULES
[* ]
II-13
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 348
[* ]
II-14
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 349
[* ]
II-15
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 350
[* ]
II-16
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 351
D. HOSPITAL IDENTIFICATION (ID) CODES
ID# HOSPITAL NAME LOCATION
[* ]
II-17
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 352
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
SECTION III
CRITERIA FOR INCLUSION OF PATIENTS
AND
RULES FOR ABSTRACTION FORM SELECTION
<PAGE> 353
GREATER CLEVELAND HEALTH QUALITY CHOICE PROGRAM
OBSTETRICS
CRITERIA FOR INCLUSION OF PATIENTS
AND RULES FOR SELECTION OF ABSTRACTION FORM
A. CRITERIA FOR INCLUSION
[* ]
B. RULES FOR ABSTRACTION FORM SELECTION
[* ]
III-1
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 354
[* ]
III-2
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 355
GREATER CLEVELAND HEALTH QUALITY CHOICE PROGRAM
MEDICINE/SURGERY
CRITERIA FOR INCLUSION OF PATIENTS
AND RULES FOR SELECTION OF ABSTRACTION FORM
A. CRITERIA FOR INCLUSION
[* ]
B. RULES FOR ABSTRACTION FORM SELECTION
[* ]
III-3
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 356
GREATER CLEVELAND HEALTH QUALITY CHOICE PROGRAM
QUALIFYING PRINCIPAL DIAGNOSES
ICD-9-CM GLOSSARY
[* ]
III-4
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 357
[* ]
III-5
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 358
[* ]
III-6
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 359
GREATER CLEVELAND HEALTH QUALITY CHOICE PROGRAM
QUALIFYING SURGICAL PROCEDURES
ICD-9-CM GLOSSARY
[* ]
III-7
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 360
[* ]
III-8
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 361
[* ]
III-9
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 362
[* ]
III-10
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 363
[* ]
III-11
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 364
[* ]
III-12
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 365
[* ]
III-13
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 366
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
SECTION IV
OBSTETRICAL
DATA ABSTRACTION FORMS
AND
DATA COLLECTION GUIDELINES
<PAGE> 367
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
OBSTETRICAL DATA ABSTRACTION LONG FORM
VERSION 2
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECTION A: ADMINISTRATIVE INFORMATION
<S> <C>
HOSPITAL ID NUMBER: DATE RECORD ABSTRACTED: / /
------------ ------ ------ -------
ABSTRACTOR ID NUMBER: TOTAL ABSTRACTION TIME: minutes
--------- -------------
REASON FOR LONG FORM SELECTION: / / Routine / / Adverse outcome / / Sample
- -----------------------------------------------------------------------------------------------------------------------------------
SECTION B: MATERNAL INFORMATION DIAGNOSIS CODES (ICD-9-CM):
Principal: .
ID NUMBER: ---------- --------
(left-justify) ------------------------------------ Secondary:
. .
---------- ----- ----------- -----
. .
---------- ----- ----------- -----
. .
SOCIAL SECURITY NUMBER: ---------- ----- ----------- -----
- - . .
--------- ----- ---------- ---------- ----- ----------- -----
/ / Additional diagnosis code documented
ZIP CODE: -
------------- ----------
PROCEDURE CODES (ICD-9-CM) AND DATE OF
PROCEDURE:
BIRTHDATE: / /
--------- ---- -------- . / /
---------- ----- ------ ----- -----
RACE: (check one) . / /
/ /1 White ---------- ----- ------ ----- -----
/ /2 Black . / /
/ /3 Other ---------- ----- ------ ----- -----
/ /4 Not documented . / /
---------- ----- ------ ----- -----
. / /
---------- ----- ------ ----- -----
. / /
---------- ----- ------ ---- -----
ADMISSION SOURCE: (check one) . / /
/ /1 Home ---------- ----- ------ ----- -----
/ /2 Other acute care hospital . / /
/ /3 Other ---------- ----- ------ ----- -----
/ /4 Not documented / / Additional procedure codes documented
MATERNAL DISCHARGE DISPOSITION:
[* ]
ADMISSION DATE: / /
------ ------ ------ / /1 [* ]
/ /2 [* ]
/ /3 [* ]
/ /4 [* ]
/ /5 [* ]
/ /6 [* ]
/ /7 [* ]
/ /8 [* ]
/ /9 [* ]
/ /10 [* ]
DISCHARGE DATE: / /
------ ------- -----
PRIMARY INSURANCE: (check one)
/ /1 Commercial insurance
/ /2 Medicare
/ /3 Medicaid
/ /4 County aid (GAM)
/ /5 Workers compensation
/ /6 Self Pay
/ /7 Uninsured
/ /8 Other
/ /9 Not documented
</TABLE>
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 368
SECTION C:
INFORMATION ABOUT PRIOR PREGNANCIES
[* ]
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 369
SECTION D: OBSTETRICAL CONDITIONS WITH SECTION E: OTHER INFORMATION ABOUT
CURRENT PREGNANCY CURRENT PREGNANCY
[* ] [* ]
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 370
SECTION F: DELIVERY INFORMATION SECTION G: TRANSFUSION(S)
[* ] [* ]
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 371
SECTION H: INFANT INFORMATION
[* ]
- --------------
* Confidential portion omitted and filed separately
with the Commission.
<PAGE> 372
SECTION H: INFANT INFORMATION (CONT.)
[* ]
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 373
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
OBSTETRICAL DATA ABSTRACTION SHORT FORM
VERSION 2
SECTION A: ADMINISTRATIVE INFORMATION
HOSPITAL ID NUMBER DATE RECORD ABSTRACTED: / /
------- ------- ----- -----
ABSTRACTOR ID NUMBER: TOTAL ABSTRACTION TIME: minutes
------ --------
SECTION B: MATERNAL INFORMATION SECTION C: INFORMATION ABOUT
PRIOR PREGNANCIES
ID NUMBER
(left-justify) -------------
SOCIAL SECURITY NUMBER: [* ]
/ /
----- ---- ------
ZIP CODE:
- -
----- ---- ------
BIRTHDATE:
/ /
----- ---- ------
ADMISSION SOURCE: (check one) There are no Sections D and E.
/ /1 Home
/ /2 Other acute care hospital
/ /3 Other
/ /4 Not documented
ADMISSION DATE:
/ /
----- ---- ------
DISCHARGE DATE:
/ /
----- ---- ------
MATERNAL DISCHARGE DISPOSITION:
[* ]
/ /1 [* ]
/ /2 [* ]
/ /3 [* ]
/ /4 [* ]
/ /5 [* ]
/ /6 [* ]
/ /7 [* ]
/ /8 [* ]
/ /9 [* ]
/ /10 [* ]
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 374
SECTION F: DELIVERY INFORMATION SECTION G: TRANSFUSION(S)
[* ] [* ]
SECTION H: INFANT INFORMATION
[* ]
* If box is checked, complete the Long Form instead of this form.
** If the [* ] for any infant is [* ], complete the Long Form
instead of this form.
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 375
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
Data Collection Guidelines for the Obstetrical Data Abstraction Form
--------------------------------------------------------------------
SECTION A: ADMINISTRATIVE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
HOSPITAL ID NUMBER: DATE RECORD ABSTRACTED: / /
-------- ---- ---- ----
ABSTRACTOR ID NUMBER: TOTAL ABSTRACTION TIME: minutes
------- -----------------
REASON FOR LONG FORM SELECTION: [* ]
</TABLE>
HOSPITAL INDENTIFICATION (ID) NUMBER:
Each participating hospital has a unique two digit identification
number. This ID number must be recorded on each data abstraction form.
ABSTRACTOR IDENTIFICATION (ID) NUMBER:
Every abstractor should have a unique personal three digit
identification number assigned by CHQCP (for example, 0 0 5, 0 2 8,
1 5 7). Record this number.
DATE RECORD ABSTRACTED:
Record the date you fill out the form. If the form completion takes
more than one day, record the day the form was completed.
TOTAL ABSTRACTION TIME:
Record how much time it took to abstract the medical record using the
CHQCP Data Abstraction Form. Only the time spent on chart abstraction
should be recorded; time spent on chart retrieval and other related
tasks should not be included. Time should be recorded in minutes and
must be right-justified.
REASON FOR LONG FORM SELECTION:
[* ]
IV-1
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 376
SECTION B: MATERNAL INFORMATION
IDENTIFICATION NUMBER
ID NUMBER:
---------------------------
Each hospital determines the patient Identification (ID) Number used for this
Program. This field is a maximum of ten characters in length. The letters A-Z
and numbers 0-9 are allowed. There should not be any embedded blanks or special
characters in the field. Data should be LEFT-justified. Three correct and
three incorrect examples follow:
examples:
correct: 4 4 5 2 3 4 4 incorrect: 6 6 2 3
- - - - - - - - - - - - - - - - - - - -
A C 3 5 9 A 2 6 8
- - - - - - - - - - - - - - - - - - - -
4 0 9 6 3 5 8 2 3 A 5 1 1 & 3 2
- - - - - - - - - - - - - - - - - - - -
Recommended source of data: Admission Face Sheet
SOCIAL SECURITY NUMBER:
- --------------------------------------------------------------------------------
SOCIAL SECURITY NUMBER:
- -
------ ----- ------
Enter the patient's Social Security Number.
Recommended source of data: Admission Face Sheet
IV-2
<PAGE> 377
ZIP CODE
ZIP CODE: -
----- ----
Enter the patient's zip code. If only the 5 digit zip code is available, enter
that in the spaces to the left of the dash. If the 4 digit zip code extension
is also available, enter those numbers to the right of the dash; if the zip
code extension is not available, leave the space to the right of the dash blank.
RECOMMENDED SOURCE OF DATA: Admission face sheet
BIRTHDATE
BIRTHDATE: / /
-- -- --
Enter the patient's birthdate.
RECOMMENDED SOURCE OF DATA: Admission Face Sheet
IV-3
<PAGE> 378
RACE
RACE (check one):
/ / 1 White
/ / 2 Black
/ / 3 Other
/ / 4 Not documented
Check the box that best describes the patient's race. Do not check more than
one box. If race is designated on the face sheet, use this information. Check
"Other" if race other than black or white is documented (see below). If race is
not documented on the face sheet, review the patient's admitting history and
physical for this information. If racial designation is absent or unclear, check
"Not documented."
TERM EQUIVALENT TERMS
---- ----------------
White Caucasian
Hispanic (if not clarified further)
Black African American
Afro-American
Negro
Other American Indian
(includes, but is Arab
not limited to:) Asian/Pacific Islander
Indian
Oriental
Not Documented Patient's race is not documented on the
admission face sheet and is absent or
unclear in the patient's admitting
history and physical.
RECOMMENDED SOURCES OF DATA: Admission Face Sheet
Admitting History and Physical
IV-4
<PAGE> 379
ADMISSION SOURCE
ADMISSION SOURCE: (check one)
/ / 1 Home
/ / 2 Other acute care hospital
/ / 3 Other
/ / 4 Not documented
The admission source is the location where the patient spent the last night
prior to hospital admission. Check one admission source only.
ADMISSION SOURCES:
HOME:
- Private home - includes houses, apartments, and foster homes.
- Ambulatory centers (when patient was living at home) - includes
physician offices, surgicenters, and ambulatory/urgent care centers.
- Group living arrangements - includes college dormitories, halfway
houses, and residential treatment settings.
OTHER ACUTE CARE HOSPITAL: Patient was transferred directly to current
facility after being an inpatient at another acute care hospital, college
health center, or prison infirmary/hospital.
OTHER: (includes but is not limited to the following)
- Nursing homes - inpatient hospital or free-standing skilled,
intermediate, or assisted living facilities
- Psychiatric facility - inpatient hospital unit (at same or different
hospital) or a free-standing facility (private psychiatric facility)
- Rehabilitative facility - inpatient hospital unit (at same or different
hospital) or a free-standing facility
- Chronic Care Facility - sheltered care facility
- Jail or prison
- Homeless shelter, orphanage, etc.
NOT DOCUMENTED: Admission source cannot be clearly determined from
information available in the medical record.
RECOMMENDED SOURCES OF DATA: Admission Face Sheet
Admitting History & Physical
IV-5
<PAGE> 380
ADMISSION DATE AND DISCHARGE DATE
ADMISSION DATE: / /
-- -- --
DISCHARGE DATE: / /
-- -- --
Enter the dates of admission and discharge as recorded on the hospital's
admission face sheet or record. If the patient expired during the
hospitalization, record the date of death as the date of discharge.
RECOMMENDED SOURCE OF DATA: Admission Face Sheet or Record
IV-6
<PAGE> 381
PRIMARY INSURANCE
PRIMARY INSURANCE (check one):
/ / 1 Commercial insurance
/ / 2 Medicare
/ / 3 Medicaid
/ / 4 County aid (GAM)
/ / 5 Workers compensation
/ / 6 Self pay
/ / 7 Uninsured
/ / 8 Other
/ / 9 Not documented
Enter the primary source of payment used by the patient during this
hospitalization. If multiple insurance sources are listed, check the source
designated as primary on the face sheet, or the first source listed if a primary
source is not designated. Choose only one of the following:
TERM EQUIVALENT TERMS
---- ----------------
Commercial insurance Major Medical Plans
HMOs
PPOs
Medicare None
Medicaid AABD (Aid to the Aged, Blind, & Disabled)
AFDC (Aid to Families with Dependent Children)
MANG (Medical Assistance, No Grant)
General Assistance Recipients
County aid Recipients of public aid money from Cuyahoga
County
Workers compensation None
Self pay None
Uninsured None
Other Non-traditional and foreign third-party health
care coverage (for example, VA transfer with
bill to be paid by the VA for services not
available at a VA hospital)
CHAMPUS
Not documented None
RECOMMENDED SOURCE OF DATA: Admission Face Sheet
IV-7
<PAGE> 382
DIAGNOSIS CODES (ICD-9-CM):
DIAGNOSIS CODES (ICD-9-CM):
Principal: .
---- --
Secondary:
. .
---- -- ----- --
. .
---- -- ----- --
. .
---- -- ----- --
. .
---- -- ----- --
/ / Additional diagnosis codes documented
Record the diagnosis ICD-9-CM codes listed on the Physician Attestation and on
the UB-82 form. List the principal (primary) ICD-9-CM diagnosis code and the
first eight (8) secondary ICD-9-CM diagnosis codes. If a principal ICD-9-CM
code is not indicated, list all codes as "Secondary." If more diagnosis codes
are documented than can be listed, check "Additional diagnosis codes
documented."
Record ICD-9-CM codes by ALWAYS filling in the three spaces before the decimal
point. If a code contains a fourth digit, or a fourth and fifth digit, record
those digits after the decimal point. Otherwise, leave these spaces blank.
The first space is reserved for "E" codes ONLY. If an "E" code is not present,
this space should remain blank. The second space (space immediately adjacent to
the "E" code) is reserved for either a "V" code or a numeral from 0 to 9. The
two spaces to the left of the decimal must contain a numeral from 0 to 9.
EXAMPLES:
CORRECT: E926.3 INCORRECT: E92.63
---- -- ---- --
V23.0 V23 .
---- -- ---- --
650. 6.50
---- -- ---- --
012.90
---- --
RECOMMENDED SOURCES OF DATA: Physician Attestation
Physician Discharge Summary
UB-82 Form
IV-8
<PAGE> 383
PROCEDURE CODES (ICD-9-CM):
PROCEDURE CODES (ICD-9-CM) AND DATE
OF PROCEDURE:
. / /
-- -- -- -- --
. / /
-- -- -- -- --
. / /
-- -- -- -- --
. / /
-- -- -- -- --
. / /
-- -- -- -- --
. / /
-- -- -- -- --
. / /
-- -- -- -- --
. / /
-- -- -- -- --
/ / Additional procedure codes documented
Record the ICD-9-CM procedure codes listed on the Physician Attestation and on
the UB-82 form. List the first eight (8) ICD-9-CM procedure codes and their
corresponding dates on the form. If more than eight (8) codes are documented,
check "Additional procedure codes documented."
When entering ICD-9-CM codes, begin with the first space on the left. Always
fill in both spaces before the decimal point. If a code has only one digit
before the decimal, place a zero in the first space (07. ). If a code has two
-- --
digits only, leave both spaces blank after the decimal point (77. ). If a code
-- --
has three digits only, leave the right-hand space blank (77.7 ). If a code has
-- --
four digits, fill in all blanks (77.77).
-- --
EXAMPLE:
CORRECT: 73.59 INCORRECT: 73. 6
-- -- -- --
72.6 7.26
-- -- -- --
07. 7.
-- -- -- --
For each procedure code, enter the date on which the procedure was performed.
If the corresponding dates for procedures do not appear on either the Physician
Attestation, UB-82 form, or medical record, enter 99/99/99. If the date cannot
-- -- --
be read, enter 99/99/99.
-- -- --
RECOMMENDED SOURCES OF DATA: Physician Attestation
Physician Discharge Summary
UB-82 Form
IV-9
<PAGE> 384
MATERNAL DISCHARGE DISPOSITION
MATERNAL DISCHARGE DISPOSITION
[* ]
/ /1 [* ]
/ /2 [* ]
/ /3 [* ]
/ /4 [* ]
/ /5 [* ]
/ /6 [* ]
/ /7 [* ]
/ /8 [* ]
/ /9 [* ]
/ /10 [* ]
[* ]
IV-10
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 385
[* ]
IV-11
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 386
SECTION C: INFORMATION ABOUT PRIOR PREGNANCIES
[* ]
IV-12
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 387
[* ]
IV-13
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 388
[* ]
IV-14
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 389
[* ]
IV-15
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 390
[* ]
IV-16
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 391
[* ]
IV-17
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 392
[* ]
IV-18
- --------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 393
SECTION D: OBSTETRICAL CONDITIONS WITH CURRENT PREGNANCY
[* ]
IV-19
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 394
[* ]
IV-20
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 395
[* ]
IV-21
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 396
[* ]
IV-22
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 397
[* ]
IV-23
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 398
SECTION E: OTHER INFORMATION ABOUT CURRENT PREGNANCY
[* ]
IV-24
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 399
[* ]
IV-25
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 400
[* ]
IV-26
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 401
[* ]
IV-27
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 402
[* ]
IV-28
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 403
[* ]
IV-29
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 404
[* ]
IV-30
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 405
SECTION F: DELIVERY INFORMATION
[* ]
IV-31
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 406
[* ]
IV-32
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 407
[* ]
IV-33
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 408
[* ]
IV-34
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 409
[* ]
IV-35
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 410
SECTION G: TRANSFUSIONS
[* ]
IV-36
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 411
[* ]
IV-37
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 412
SECTION H: INFANT INFORMATION
[* ]
IV-38
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 413
[* ]
IV-39
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 414
[* ]
IV-40
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 415
[* ]
IV-41
- ------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 416
[* ]
IV-42
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 417
[* ]
IV-43
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 418
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
SECTION V
MEDICAL/SURGICAL
DATA ABSTRACTION FORM
AND
DATA COLLECTION GUIDELINES
<PAGE> 419
CLEVELAND HEALTH QUALITY CHOICE PROGRAM
MEDICAL/SURGICAL ABSTRACTION FORM DATA COLLECTION GUIDELINES
VERSION 2
SECTION A: ADMINISTRATIVE INFORMATION
HOSPITAL ID NUMBER: DATE RECORD ABSTRACTED: / /
-- -- -- --
ABSTRACTOR ID NUMBER: TOTAL ABSTRACTION TIME: minutes
--- ---
HOSPITAL IDENTIFICATION (ID) NUMBER:
Each participating hospital has a UNIQUE two digit identification number.
This ID number must be recorded on EACH data abstraction form.
ABSTRACTOR IDENTIFICATION (ID) NUMBER:
Every abstractor should have a UNIQUE PERSONAL three digit identification
number assigned by CHQCP (for example, 0 0 5, 0 2 8, 1 5 7). Record this
number. - - - - - - - - -
DATE RECORD ABSTRACTED:
Record the date you fill out the form. If the form completion takes more
than one day, record the day the form was completed.
TOTAL ABSTRACTION TIME:
Record how much time it took to abstract the medical record using the CHQCP
Data Abstraction Form. Only the time spent on chart abstraction should be
recorded; time spent on chart retrieval and other related tasks should not
be included. Time should be recorded in minutes.
V-1
<PAGE> 420
SECTION B: GENERAL PATIENT INFORMATION
IDENTIFICATION (ID) NUMBER
ID NUMBER:
----------
Each hospital determines the patient Identification (ID) Number used for this
program. This field is a maximum of ten characters in length. The letters A-Z
and numbers 0-9 are allowed. There should not be any embedded blanks or special
characters in the field. Data should be LEFT-JUSTIFIED. Three correct and
three incorrect examples follow:
EXAMPLES:
CORRECT: 4452344 INCORRECT: 6623
---------- ----------
AC359 A268
---------- ----------
409635823A 511 &32
---------- ----------
RECOMMENDED SOURCE OF DATA: Admission Face Sheet
SOCIAL SECURITY NUMBER
SOCIAL SECURITY NUMBER:
- -
--- -- ----
Enter the patient's Social Security Number:
RECOMMENDED SOURCE OF DATA: Admission Face Sheet
V-2
<PAGE> 421
ZIP CODE
ZIP CODE: -
----- ----
Enter the patient's zip code. If only the 5 digit zip code is available, enter
that in the spaces to the left of the dash. If the 4 digit zip code extension
is also available, enter those numbers to the right of the dash; if the zip
code extension is not available, leave the space to the right of the dash blank.
RECOMMENDED SOURCE OF DATA: Admission face sheet
BIRTHDATE
BIRTHDATE / /
-- -- --
Enter the patient's birthdate.
RECOMMENDED SOURCE OF DATA: Admission face sheet
AGE
AGE:
---
Enter the patient's age in years.
RECOMMENDED SOURCE OF DATA: Admission face sheet
V-3
<PAGE> 422
RACE
RACE (check one):
/ / 1 White
/ / 2 Black
/ / 3 Other
/ / 4 Not documented
CHECK THE BOX that best describes the patient's race. Do not check more than
one box. If race is designated on the face sheet, use this information. Check
"Other" if race other than black or white is documented (see below). If race is
not documented on the face sheet, review the patient's admitting history and
physical for this information. If racial designation is absent or unclear, check
"Not documented."
TERM EQUIVALENT TERMS
---- ----------------
White Caucasian
Hispanic (if not clarified further)
Black African American
Afro-American
Negro
Other American Indian
(includes, but is Arab
not limited to:) Asian/Pacific Islander
Indian
Oriental
Not Documented Patient's race is not documented on the
admission face sheet and is absent,
unclear, or contradictory in the
patient's admitting history and
physical.
RECOMMENDED SOURCES OF DATA: Admission Face Sheet
Admitting History and Physical
V-4
<PAGE> 423
SEX
SEX: (check one)
/ /1 Male
/ /2 Female
/ /3 Not documented
Check whether the patient is listed as male or female. If the sex is not clear
(that is, patient named Chris, with no designation of gender) or the patient's
sex cannot be determined from the medical record, check "Not documented." If
the patient has had a sex change operation, record the patient's gender prior
to the operation.
Check only one box.
RECOMMENDED SOURCES OF DATA: Admission Face Sheet
Admitting History & Physical
ADMISSION DATE AND DISCHARGE DATE
ADMISSION DATE: __/__/__/
DISCHARGE DATE: __/__/__/
Enter the dates of admission and discharge as recorded on the hospital's
admission face sheet or record. If the patient expired during the
hospitalization, record the date of death as the date of discharge.
RECOMMENDED SOURCE OF DATA: Admission Face Sheet or Record
HOSPITAL INTERVAL BEGAN:
HOSPITAL INTERVAL BEGAN: __/__/__
Enter the date the Hospital Interval (Hospitalization) began.
RECOMMENDED SOURCES OF DATA: Admission History and Physical
Emergency Room Record
Nurse Assessment Form
Discharge Summary
PRIMARY INSURANCE
V-5
<PAGE> 424
PRIMARY INSURANCE (check one):
/ /1 Commercial insurance
/ /2 Medicare
/ /3 Medicaid
/ /4 County aid (GAM)
/ /5 Workers compensation
/ /6 Self pay
/ /7 Uninsured
/ /8 Other
/ /9 Not documented
Enter the primary source of payment used by the patient during this
hospitalization. If multiple insurance sources are listed, check the source
designated as primary on the face sheet, or the first source listed if a primary
source is not designated. Choose only one of the following:
TERM EQUIVALENT TERMS
- ---- ----------------
Commercial insurance Major Medical Plans
HMOs
PPOs
Medicare None
Medicaid AABD (Aid to the Aged, Blind, & Disabled)
AFDC (Aid to Families with Dependent Children)
MANG (Medical Assistance, No Grant)
General Assistance Recipients
County aid Recipients of public aid money from Cuyahoga County
Workers compensation None
Self pay None
Uninsured None
Other Non-traditional and foreign third-party health care
coverage (for example, VA transfer with bill to be
paid by the VA for services not available at a VA
hospital)
CHAMPUS
Not documented None
RECOMMENDED SOURCE OF DATA: Admission Face Sheet
V-6
<PAGE> 425
SECTION C: PATIENT STATUS ON HOSPITALIZATION
[* ]
V-7
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 426
[* ]
V-8
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 427
[* ]
V-9
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 428
[* ]
V-10
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 429
[* ]
V-11
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 430
[* ]
V-12
- -------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 431
DIAGNOSIS CODES (ICD-9-CM):
DIAGNOSIS CODES (ICD-9-CM):
Record all documented ICD-9-CM diagnosis codes.
Principal: .
- - - - - -
Secondary:
.
- - - - - -
.
- - - - - -
.
- - - - - -
.
- - - - - -
.
.
.
.
- - - - - -
.
- - - - - -
.
- - - - - -
/ / Additional diagnosis codes documented
Record the diagnosis ICD-9-CM codes listed on the Physician Attestation and on
the UB-82 form. List the principal (primary) ICD-9-CM diagnosis code and
the first twenty five (25) secondary ICD-9-CM diagnosis codes. If a principal
ICD-9-CM code is not indicated, list all codes as "Secondary." If more
diagnosis codes are documented than can be listed, check "Additional diagnosis
codes documented."
Record ICD-9-CM codes by ALWAYS filling in the three spaces before the decimal
point. If a code contains a fourth digit, or a fourth and fifth digit, record
those digits after the decimal point. Otherwise, leave these spaces blank.
The first space is reserved for "E" codes ONLY. If an "E" code is not present,
this space should remain blank. The second space (space immediately adjacent
to the "E" code) is reserved for either a "V" code or a numeral from 0 to 9.
The two spaces to the left of the decimal must contain a numeral from 0 to 9.
EXAMPLES:
CORRECT: E 9 2 6 . 3 INCORRECT: E 9 2 . 6 3
- - - - - - - - - - - -
V 2 3 . 0 V 2 3 .
- - - - - - - - - - - -
6 5 0 . 6 . 5 0
- - - - - - - - - - - -
0 1 2 . 9 0
- - - - - -
RECOMMENDED SOURCES OF DATA: Physician Attestation
Physician Discharge Summary
UB-82 Form
V-13
<PAGE> 432
PROCEDURE CODES (ICD-9-CM):
PROCEDURE CODES (ICD-9-CM) AND DATE OF
PROCEDURE:
Record all documented ICD-9-CM procedure codes and
the date each procedure was performed.
. / /
- - - - - - - - - -
. / /
- - - - - - - - - -
. / /
- - - - - - - - - -
. / /
- - - - - - - - - -
. .
. .
. .
. / /
- - - - - - - - - -
. / /
- - - - - - - - - -
. / /
- - - - - - - - - -
[ ] Additional procedure codes documented
Record the ICD-9-CM procedure codes listed on the Physician Attestation and on
the UB-82 form. List the first twenty seven (27) ICD-9-CM procedure codes and
their corresponding dates on the form. If more than twenty seven (27) codes
are documented, check "Additional procedure codes documented."
When entering ICD-9-CM codes, begin with the first space on the left. Always
fill in both spaces before the decimal point. If a code has only one digit
before the decimal, place a zero in the first space (0 7. _ _). If a code has
two digits only, leave both spaces blank after the decimal point (7 7. _ _).
If a code has three digits only, leave the right-hand space blank (7 7 . 7 _).
If a code has four digits, fill in all blanks (7 7. 7 7).
For each procedure code, enter the date on which the procedure was performed.
Be sure to enter a date for each procedure. If the dates for procedures do not
appear on the Physician Attestation, the UB-82 form, or the medical record, or
if the date cannot be read, enter 9 9/9 9/9 9.
EXAMPLES:
correct: 0 7 . incorrect: 7 .
- - - - - - - -
1 4 . 6 1 4 . 6
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0 9 . 0 1 9 . 0 1
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RECOMMENDED SOURCES OF DATA: Physician Attestation
Physician Discharge Summary
UB-82 Form
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SECTION D: PATIENT STATUS AT DISCHARGE
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SECTION E: PHYSICAL EXAMINATION
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SECTION F: HOSPITAL COURSE
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SECTION G: RADIOLOGY AND EKG
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SECTION H: LABORATORY
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SECTION I: DISEASE OR PROCEDURE - SPECIFIC INFORMATION
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[* ] ANALYSIS LOGISTIC REGRESSION
CONDITION: [* ]
Total Eligible Cases: [* ]
Regression Cases: [* ]
GROUPING VARIABLE NAME VARIABLE DESCRIPTION MISSING VALUES
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[* ]
The LOGISTIC Procedure
Analysis of Maximum Likelihood Estimates
Variable DF Parameter Standard Wald Pr > Standardized Odds
Estimate Error Chi-Square Chi-Square Estimate Ratio
[* ]
Association of Predicted Probabilities and Observed Responses
Concordant = [* ] Somers' D = [* ]
Discordant = [* ] Gamma = [* ]
Tied = [* ] Tau-a = [* ]
[* ] c = [* ]
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[* ]ANALYSIS LOGISTIC REGRESSION
CONDITION:[* ]
Total Eligible Cases:[* ]
Regression Cases: [* ]
GROUPING VARIABLE NAME VARIABLE DESCRIPTION MISSING VALUES
[* ]
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[* ]
The LOGISTIC Procedure
Analysis of Maximum Likelihood Estimates
<TABLE>
<CAPTION>
Parameter Standard Wald Pr > Standardized Odds
Variable DF Estimate Error Chi-Square Chi-Square Estimate Ratio
<S> <C> <C> <C> <C> <C> <C> <C>
[* ]
</TABLE>
Association of Predicted Probabilities and Observed Responses
Concordant = [* ] Somers' D = [* ]
Discordant = [* ] Gamma = [* ]
Tied = [* ] Tau-a = [* ]
[* ] c = [* ]
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ADDENDUM #2
EXPERT PANEL
REVIEW OF
CHOICE
<PAGE> 518
Henry Krakauer 16 December 1992
Analysis Plan for Patient Outcomes by Michael Pine Associates.
Summary:
The Greater Cleveland Health Quality Choice Project (GCHQCP) commissioned
Michael Pine and Associates (MPA) to develop a plan for the analysis of
indicators of the quality of the care provided by the Cleveland hospitals.
Consultation with clinicians and allied professionals led to the identification
of selected surgical and diagnostic categories into which hospitalized patients
are to be grouped, and of the indicators (mortality, length of stay and several
inpatient events) to be evaluated. The panels also developed a preliminary
identification of sets of patient risk factors whose presence might increase the
probability of death, prolonged stay or inpatient events and which, therefore,
must also be taken into account.
On the basis of this guidance, MPA prepared detailed forms specifying the data
elements to be abstracted by members of staffs the participating hospitals, and
provided the necessary training. Upon completion of the first phase of data
collection, MPA developed an analytic plan which has been, at this point,
applied to two indicators, in-patient mortality and length of stay. The plan
entails extensive review and "cleaning" of the collected data. This process
results in the removal of records with missing key data items, the imputation
of values for cases in which variable values were missing, and the
identification of variables through univariate techniques and through stepwise
regressions that were substantial predictors of the indicators. Logistic
regression was used for the analysis of mortality rates and ordinary
least-squares (OLS) for length of stay. A technique for the computation of the
variance of the residual mortality rate for the hospital was developed to
identify those with distinctly unexpected adverse outcomes.
The technique chosen for testing the stability of the modeling process was
split-sample cross-validation. Its purpose is to confirm the reliability of
predictor variables to be included in the final regressions and the stability
of the predictions.
The goodness of fit statistics selected were the area under the ROC curve
(alias the proportion of concordant pairs of C-statistic) and the
Hosmer-Lemeshow test for mortality rates and the R-squared for the lengths of
stay.
Four medical conditions and one combined surgical condition were analyzed in
terms of the probability of death, and fourteen for length of stay. Extensive
preliminary analyses of the collected data were performed to identify the
variables suitable for inclusion in the initial stepwise regressions. The final
models appear to substantially distinguish among patients in terms of the
probability of death (with C-statistics in the range 0.81-0.90) and to account
for modest proportions of the variances in length of stay (R-squared of
0.16-0.46). The predicted mortality rates at the hospitals span a substantial
range (5.3-9.9%) of the observed rates (2.5-10.2%) for the combined
populations. The length of stay ranges are rather smaller, both in terms of the
observed and the predicted.
Critique:
<PAGE> 519
This project represents the GCHQC Program's attempt to assess the performance
of hospitals through the use of outcomes as indicators of the quality of care.
The recognition that outcomes, i.e. the impact of care on the health of the
patient, are the proper measures of the quality of health care services, marks a
substantial conceptual advance in the field of quality assessment/assurance.
The difficulties and limitations of conventional approaches which entail the
determination by reviewers whether the process of care in individual cases has
met specified criteria are well-known. They are being replaced by approaches of
the type adopted by the GCHQC Program by agencies as varied as the Joint
Commission, the Department of Defense and the Medicare Peer Review
Organizations. The one fundamental flaw of the present effort is the very
limited time horizon of the analyses: only the events in a given
hospitalization are available for assessment. A sounder approach to the
evaluation of a hospital's impact on the health of the patient would address
the evolution of the patient's condition over time even beyond discharge.
This, however, would require the collection of a unique patient identifier to
permit linkage of hospitalizations and to other sources of information such as
State death certificate data. The collection of unique patient identifiers,
although carried out by Medicare and other insurers, is perceived as
threatening and generally resisted by the providers of care.
The techniques adopted by MPA are consistent with those of others who have
undertaken similar analyses. The use of panels of experts to define the scope
and focus of the analyses, to select the outcome indicators, and to and provide
initial specifications of the risk factors is appropriate. The analytic
methodologies (logistic regression for mortality and OLS for length of stay) are
the generally accepted ones and do represent the state-of-the-art. The basic
approaches to the selection of cases, variables, validation of the models and
stratification of hospitals by performance, are basically sound. However,
specific steps in these processes chosen by MPA do require comment.
Case Selection:
Cohorts were defined by means of ICD-9-CM diagnostic and procedure codes. To
achieve sufficient size to permit stable estimation of risk-adjusted outcomes,
considerable heterogeneity of the cohorts had to be tolerated. In some
instances, this may call the correctness of the designation of the cohort into
question. For example, the inclusion of all the patients with the diagnostic
code 433 in the cohort "Stroke" may be misleading because this code includes
patients with stenosis of precerebral vessels whose admission may have been for
diagnostic studies or carotid endarterectomy. Similar clinically striking
heterogeneity exists, for example, in the "Combined Surgery" and "GI
Hemorrhage" categories. As the distribution of the cases in specific
subcategories with different levels of presumed risk may differ among the
hospitals, it is imperative that, if greater homogeneity cannot be achieved as
a practical matter, the consequences of the heterogeneity be clearly recognized
in the analyses. This is best achieved by including in the initial stepwise
regressions covariates for ICD-9-CM code principal diagnosis and procedure
groups that appear clinically to represent different levels of risk (e.g. codes
that include precerebral vascular stenosis or occlusion vs codes for cerebral
thrombosis vs codes for cerebral hemorrhages. If the
<PAGE> 520
detailed clinical data also included in the variable lists adequately represent
the levels of risk embodied in the diagnostic codes so that the latter are not
retained in the stepwise regressions, so be it. It may be that the code groups
were considered in the initial univariate cross-tabs of risk factors vs
outcomes, did not appear to be significantly correlated, and were, therefore,
dropped from subsequent analyses. If such results are counterintuitive, they
are not a sufficient reason for exclusion of these variables from the initial
stepwise regressions. Clinicians will not accept analyses in which obvious risk
heterogeneity appears to have been overlooked.
The reconstitution of a "Combined Medical/Surgical" group for feedback to
hospitals raises a point that might be useful in future analyses. The current
analyses focused on specific conditions and procedures because of the impression
that, to be most useful to hospitals as guides to specific areas where
improvement could be achieved, such specificity is needed. The consequence of
the narrow focus is limited sample size and resolving power in the analyses. The
reassembly of a combined group still fails to provide a clear insight into the
overall performance of the hospital because the case-mix may not be accurately
reflected in the combination of the selected categories. I would recommend
that, if the intent is to continue to release data on the combined population,
there be included in the analyses a random sample of the overall hospital
population. Oversampling of the specific categories would still be carried out,
but the sampling design would permit a valid reconstruction through weighting
of the overall experience of the hospital.
Variable Selection and Specifications
The objective of this phase of the work is to identify the set of variables
that accurately and stably distinguish among individual patients in terms of
the probability of occurrence of the specified indicators. The criteria for
inclusion in the final model must be both statistical power and clinical
plausibility. The fundamental reason to undertake the selection of variables to
be included in final model rather than simply construct a model containing all
the variables identified by the panels of clinicians as potentially important
predictors of the outcome is that clinical data tend to be redundant, with
multiple descriptors addressing similar aspects of a physiologic or functional
abnormality. The statistical consequence is multicollinearity, an undesirable
feature of regression models when it is extensive. The preliminary screening
of the variables by means of univariate cross-tabs vs. the outcome variable,
while useful, is neither a necessary nor a sufficient criterion for inclusion
or exclusion. As noted above, clinical plausibility must also be considered,
certainly at this stage of the project. Similarly, the results of stepwise
regressions should also be reviewed from the perspective of clinical
plausibility because of the potentially peculiar effects of confounding and
collinearity. It may well be preferable to include the more clinically
plausible member of a pair of variables which address the same finding,
even though, when entered together, the other tends to be retained in the
stepwise regressions. Of course, if the clinically plausible variable does not
survive when entered without its alternative, the verdict of the stepwise
should not be overridden. That is, clinically plausible predictors of outcome
that are shown empirically not to be so should not be retained solely for
<PAGE> 521
"political" reasons.
The fact that a finding is not consistently recorded by all hospitals is not a
sufficient reason for its exclusion from the analyses. Evidently, at
least a segment of the community believes that it is important to the care of
the patient, i.e. that it is an important predictor of outcome. For such a
variable, the fact that it was not collected can be identified by a new binary
variable assigned a value of 1. Its value would be 0 if it was collected. The
value of the variable for the finding itself can then be assigned a value of 0
or some other default value if it was not collected. The pair, the variable for
the finding and for whether it was recorded, must then be run as a pair in the
regressions and in the predictions. The imputation of normal values in
instances when a value was not recorded for a variable should be done only if
there is a strong presumption that the test is not performed only in the face a
high probability that its results would fall in the normal range. Certainly, a
variable should not be dropped, nor should it be assigned a normal value when
missing, if it appears that its inconsistent collection is due to differing
technologic capabilities or philosophies among the hospitals.
The objective of the stepwise regressions is the final construction of a set of
variables that accurately account for the contribution of the patient's
condition to the probability of the occurrence of the indicator in the patient.
The criteria for the retention of a variable should be somewhat different than
if the objective had been the identification of the risk factors that are
independent and statistically significant predictors of the outcome. It is
more important to retain an substantial predictor (one whose coefficient is
large in magnitude) even if the P value of its coefficient does not quite fall
below .05 (or .02 or .01 as the case may be). The reason is that the
predictions for the individuals with that risk factor will be poor, and those
individuals may cluster at one or a few hospitals. Of course, if in the
validation tests, that variable is a source of considerable instability of the
predictions, it may well be preferable to drop the variable. But the effect can
and should be tested. It may be wise to consider a cutoff P < 0.1 in the
stepwise regressions, so long as the predictions remain stable. The impact of
omitting variables on the predictions can be tested by comparing the observed
and predicted outcomes in cohort stratified according to the values of the
omitted variables. If good agreement between the observed and predicted
outcomes is obtained for in cohorts stratified on variables contained in the
model (i.e., if the model intrinsically works well, as the MPA models do), and
the agreement remains good for the cohorts stratified on the omitted variables,
then they are indeed safely omitted. (For an example of this approach, see the
accompanying MS "Predicting the Course of Disease".) This concept carries over
to the estimates of the hospital effects because the current regressions do not
contain covariates for the hospitals the effect of the hospital on the outcome
is substantial if a large difference exists between the observed and predicted
experience of its patients. (Of course, whether that effect is due to hospital
practices or to patient risk factors not included in the model is the crucial
issue.)
Computation of Variance:
This is the most troublesome component of the analyses because of the
complexity of the computation of the uncertainty of the estimate
<PAGE> 522
of the effect of the hospital on the probability of the occurrence. The
procedure proposed by MPA is based on a theoretical development by David Smith
whose details I do not have. The uncertainty in the residual mortality rate (the
difference between the observed and the predicted) for a hospital is given as
less than that due to the binomial variance (SQRT(PQ/N)). The theoretical
development due to Clift Bailey and used in the Medicare Hospital Mortality
Information, on the other hand, bases the uncertainty in the hospital effect on
4 components of variance, the two that are of non-negligible magnitude being
the binomial variance and an added term for interhospital differences not
accounted for by the patient-level model. The formulation is presented in
detail in Volume 25 (the Technical Supplement) of the 1990 Medicare Hospital
Mortality Information (Section A and Appendix C). Briefly, this added component
is V(3) = (1-1/n) M(THETA), where
2 2
M(THETA) = (A-B) /(R/SIGMA)
A = prediction on the basis of a model containing patient and hospital effects
B = prediction on the basis of a model containing patient effects only
(A-B) is, therefore, the residual, R, and OMEGA is the standard deviation of the
2
hospital effect. Consequently, M(THETA) = SIGMA .
The quantity (R/SIGMA) is obtained in a complicated way. If the model is run
with and without a covariate for the hospital, twice the difference of the log
likelihoods of the models is the chi-squared.
This translates into a P value and back into a z-score = R/SIGMA.
Some of the complexity of Clift Bailey's approach results form the fact that
the chi-squared obtained from the regressions refer to the experience over the
182 days of followup use by HCFA. The main point, however, is the presence of
the added component of variance.
In the case of logistic regressions on inpatient death, a more direct approach
may be possible. One possibility is to form the linear sum (LS) of coefficients
and covariaties for each observation and treat it as a covariate in a logistic
regression containing in addition a hospital indicator variable. (Indeed, LS =
log(p/(1-p)), where p = the predicted probability of death, a product of the
prior regressions.) (Note also that the regressions could each be limited to
the populations of each hospital, with the intercept term giving the hospital
effect.) The result of the regression would be (l) a direct estimate of the
hospital effect in the form of a (log) odds ratio, and (2) a direct estimate
of the P-value of the hospital effect. The resource costs are not great. Using
(Intercooled) Stata, a logistic regression on over 3000 observations and 28
covariates converges in less than a minute. Predictions and ROC and Brier
statistics are readily computed thereafter.
(I must confess considerable curiosity about the result of such an exploration,
although, not being a trained statistician, I cannot vouch for its theoretical
validity. I am, however, quite concerned about the construction of the variance
of the hospital residual in view of the different approaches taken by Clift
Bailey and David Smith).
Validation:
The approach proposed by MPA, split sample cross-validation, is inherently
sound, especially if sample sizes are large. Somewhat
<PAGE> 523
different questions are addressed by splitting by random sampling or in a
systematic process such as by time frame. The latter is also subject to
variation due to adaptations of the hospitals to the study itself, as well as
that due to systematic changes in hospital practices due to other factors such
as changes in staff or policies. The former directly addresses the stability of
the estimates and predictions. In view of the impending availability of newly
abstracted data (Wave II) as well as of the set on which the previously
submitted analyses were based (Wave I), both tests are advisable.
Models should be routinely subjected to conventional analyses of residuals
(observed-predicted) to test the validity of the specification of the
composition of the models and the specification of the form of the continuous
covariates. The test of the consequence of omission of specific variables was
described above.
Consideration should be given to an approach using recreation of populations by
random sampling with replacement (bootstrap sampling). Given the population
sizes, creation of a few (5-10) replicate populations of equal size but varying
case mix, would produce useful estimates of the stability (standard deviations)
of the estimates of the regression coefficients and, more importantly, of the
predictions (see also "Predicting the Course of Disease").
The goodness-of-fit statistic that appears to be most appropriate to the
assessment of the logistic regression models is the proportion of concordant
pairs or area under the ROC curve. The rank order correlation coefficient of
the observed events and predicted probabilities (Somer's Dyx) is linearly
related to it and fully equivalent. the Hosmer-Lemeshow test is not anchored at
the end of poor fit. The Brier score has one substantial defect: it measures
principally the accuracy of the prediction on average rather than the
discrimination between the individuals provided by the model. The score is
nearly the same if individual predictions spanning a substantial range are
used, or if the average of the predictions (or of the observed, they are the
same in the model in question) is used. The component "reliability-in-the-small"
provides somewhat better discrimination.
Data Presentation:
The presentation of ranges of predicted values (confidence intervals) invites
misuse of the data by prompting the simple question of whether the observed
rate is inside or outside the interval. Presentation of the observed and
predicted rates along with a measure of uncertainty (standard error) and, if
desired, a P value would be preferable.
Comments from Hospitals:
The comments fall into five categories:
(1) Appeal to the anecdote. Individual cases are cited to point out that a
variable that the clinician feels is important has been left out. the criticism
is valid if that variable was overlooked and is important. However, most
commonly it was considered but was dropped in the stepwise regressions. It is,
therefore, very important that the initial lists of variables for the stepwise
regressions be distributed along with the final results. The response that a
variable was not abstracted because it is not collected consistently
<PAGE> 524
or because abstracting is too burdensome is not acceptable. The first can be
dealt with with a covariate for "missing", and the second is no excuse at all
if the variable is important.
(2) The recently "discovered" important predictor. This is a variant of the
variable not consistently collected, but the excuse for its absence is more
solid. Because experience with it is limited, it may in fact not pan out. But
most importantly, because it is new, future analyses can include it and result
in an objective, empirical assessment of it importance.
(3) The clinically astute but statistically naive. The problem here is a
failure to appreciate how multiple regressions function. The best response is a
clinical one - there is much redundancy in clinical data and just because a
particular finding is not represented in the final regressions does not mean
that the physiologic problem it describes is not accounted for. This can be
strongly backed up by the lists of variables for the initial stepwise
regressions. It should also be emphasized that the purpose of the regressions
is prediction, not the identification of specific important predictors.
Therefore, what is important is that the physiologic aberration be accounted
for, not that a particular single best reporter of it be present in the final
regression.
(4) The thoughtful but too demanding. The best example is the response
containing the graphs of the observed vs. the predicted mortality rates. If the
quality of care is to have a bearing on outcome, models containing only patient
characteristics cannot be completely predictive. In addition, the "noise"
(variability) is expected to be highest at the extremes of mortality and LOS
because of the low number of cases (as the Figures show) and because breakdowns
in care are likely to show up there. What is striking about Figures 3 and 4 is
how closely the predicted tracks the observed. A very poor model would result
in the predicted values crowding in the vicinity of the average mortality rate
and quite unable to predicted extremely high or low rates. These Figures are
great ads for the MPA models.
(5) The very helpful. This includes the Kilroy letter and those from the
Cleveland Clinic, especially from Furlan.
MPA Responses:
The most telling point is made by the very substantial goodness of fit
measures. However, the most serious criticisms addressed not the technical
aspects of the modeling but the choice (and absence) of specific risk factors,
i.e. issues of clinical plausibility. The responses of MPA tended to give as
reasons for the absence of variables the difficulty or inconsistency in
abstraction. As indicated above, such reasons are not entirely satisfactory
because mechanisms that would permit the evaluation of inconsistently collected
variables are available and their use should be attempted. If some variables
are indeed not recorded in a consistent manner, their predictive power will be
very limited and they will drop out in the analyses.
Summary Evaluation and Recommendations:
(1) The MPA models using logistic regression for the analyses of inpatient
mortality are state-of-the-art and display impressive
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performance. The predictions clearly span nearly the range of observed
probabilities of death in stratified cohorts (Figures 3 and 4 mentioned above).
A further major improvement would result from assessment of mortality rates
within fixed but extended periods, but the necessary data are not available to
MPA.
(2) The utility of the length of stay analyses is uncertain. It is unclear what
the length of stay reports. It is not necessarily a surrogate for expense
unless payment to hospitals is on a per diem basis. Nor is the length of stay
necessarily a marker for the proficiency of the care because it is affected by
many factors dependent on hospital or regulatory policy or availability of
places to which to discharge patients and not only patient characteristics and
provider skills.
(3) The specification of the components of variance is the one fundamentally
troubling component. A sound theoretical basis for the approach taken should be
provided. An alternative approach, as suggested, using estimation of hospital
regression coefficients should perhaps be considered.
(4) Careful attention must be paid to the issue of the heterogeneity of the
patient categories. I would not accept the recommendation that high-risk
patients be analyzed separately. However, more extensive use of covariates
associated, in the opinions of clinicians, with elevated risk should be made.
(5) The discarding of variables whose collection varies among hospitals and the
imputation of normal values to variables whose values were not recorded must be
carried out very carefully to avoid undermining the clinical plausibility of
the analyses. The presentation of the results of the analyses should be
accompanied by lists of the variables initially considered with an
explanation of why those that were deemed important by clinicians failed to
appear in the final models. It is important to emphasize to the community that
model building is an iterative/learning process. The composition of the model
will change as medical technology advances providing new data on patient risks,
as clinical insights sharpen, and as the empirical testing of presumed risk
factors in the modeling process identifies the arrays of risk factors that
carry the predictive power and the data that are redundant. The input of the
community is needed continually in this process of ongoing refinement.
(6) The split-sample validation with use of training and test data sets is an
important confidence-building exercise. The prediction into an independent,
newly collected data set is the ultimate test, but should not be the only
validation because of possible changes over time in hospital
practices, technologies and staffing patterns which may result in reduced
predictability. Thus, training and test cohorts costructed by random sampling
should also be used.
The usual tests of the adequacy models involving analysis of residuals should
also be carried. The stratification of cohorts in whom comparisons of observed
and predicted outcomes are made should be on the basis of variables contained
in the model, as well as variables omitted from the models.
Overall, the achievements of the project to data are very substantial and
reflect much thought and work and represent and
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impressive first iteration. The use of measures of the condition or health of
the patient resulting from the care provided as indicators of the quality of
that care is correct and to be commended. The analytic approach is highly
sophisticated. A number of the shortcomings represent compromises with
practical limitations. As is always the case with compromises, alternative
choices can be argued and have been suggested.
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AN INITIAL REVIEW OF MORTALITY AND LENGTH-OF-STAY RISK
ADJUSTMENT METHODOLOGY DEVELOPED FOR GREATER CLEVELAND
HEALTH QUALITY CHOICE PROJECT
J. WILLIAM THOMAS, PH.D.
THE UNIVERSITY OF MICHIGAN
DECEMBER 27, 1992
PURPOSE AND APPROACH
The purpose of this report is to provide Greater Cleveland Health Quality
Choice (GCHQC) with an objective assessment of the methods being used for the
development and release of data on risk-adjusted outcomes experienced at
Cleveland area hospitals. The data are intended to provide Cleveland's health
care purchasers and consumers with information on the relative quality of
services provided by area hospitals. This review is based on documents,
provided by Dr. Gary Rosenthal, that describe the objectives, methods, and
findings of the risk-modeling analyses being carried out by Michael Pine and
Associates (MPA) for GCHQC; and on information obtained during a meeting held
on December 11, 1992, that I attended along with Drs. Harper, Krakauer,
Rosenthal, and Pine, and Dr. Pine's staff.
EVALUATION FRAMEWORK
In preparing and releasing risk-adjusted mortality statistics, Greater Cleveland
Health Quality Choice is seeking to provide consumers and purchasers of hospital
care with data describing the relative quality of services available from area
hospitals; the data are also intended to be useful for hospitals' own quality
improvement efforts. The approach to health care quality measurement being used
in this effort is based on the assumption that observed variation in mortality
rates across hospitals is composed of three components:
1. Systematic differences in the clinical characteristics (casemix,
severity) of patients treated;
2. Differences in quality, and hence effectiveness, of care provided
to patients; and
3. Randomness, resulting from factors that remain unexplained or
unmeasurable given the current state-of-the-art.
Because of the first of these components, we would expect the number of
patients who die to vary from provider to provider, even if quality of care
were uniformly excellent. Thus, before drawing inferences about provider
quality-of-care performance based on differences in observed mortality rates,
we first must control for differences across providers in the clinical
characteristics of their patients. Any remaining variability then can then be
attributed to some combination of quality differences and randomness; and using
appropriate statistical methods we can identify outlier providers, those whose
risk-adjusted mortality rates are so much higher (or lower) than expected that
the differences are unlikely to have occurred by chance. These outlier
hospitals are presumed to be delivering care of poorer (or better) than average
quality.
When evaluating methodologies that base quality-of-care inferences on rates of
adverse outcomes, I find it useful to use the framework above in order to
identify sources of possible
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measurement error -- reasons why the measures might be wrong. If we then can
assure ourselves that the measurement methodology is free of all of the
identified problems, we can be reasonably confident that indicated quality
differences are real and that provider quality-of-care is portrayed accurately.
There are four such problems that come readily to mind.
First, the chosen outcome indicator (e.g., death, early readmission) might be
irrelevant to the objectives of the care being delivered or may be highly
insensitive to variations in quality. This might be the case, for example, if
we chose to evaluate the quality of orthopedic surgery based on hospital
mortality rates. In this situation, outcome rate differences that remain after
controlling for patients' clinical characteristics represent random error only,
and providers identified as outliers are likely to be unfairly criticized
(praised) for delivering poor (good) quality care.
The second way in which we can reach inaccurate conclusions about provider
quality is to use an incorrectly specified risk model when controlling for
differences in patients' clinical characteristics. Erroneous inferences about
quality are likely if the risk model fails to adjust adequately for factors
related significantly to outcome risks, and if these factors vary
systematically across providers. This can occur if important risk predictors
are not considered or if functional relationships are misspecified. It also can
occur if data used for model estimation are flawed -- e.g., if significant
measurement errors are present or if the data are otherwise not representative
of the population of patients to be analyzed. (Omission of patient
characteristics that do not vary systematically across providers will not
necessarily compromise the accuracy of conclusions about quality, even if they
relate significantly to risks of adverse outcomes.) In addition to omission or
incorrect specification or significant variables, the usefulness of a risk
model can be compromised by inclusion of inappropriate factors. For example, if
iatrogenic pneumonia were a common and early occurring result of substandard
care, inclusion of elevated temperature in a mortality risk model would likely
lead to higher estimated risks for cases involving poor quality. As a
consequence, when using these risk estimates to control for provider
differences, we would be removing not only the influence of systematic
differences in patients' clinical characteristics (component 1 above), but
those resulting from quality of care variations (component 2). Again, the
residual variation in risk-adjusted mortality would represent only random
error, and inferences about provider quality of care would likely be erroneous.
The third area of potential difficulty when using risk-adjusted outcomes as a
basis for inferences about provider quality is the data to which a previously
estimated risk model is applied. Even if the model were found to include all
(and only) appropriate risk predictors and to have been correctly estimated
using accurate data, conclusions about provider quality may be inaccurate if
subsequent data collection procedures are flawed. Data errors can occur because
of problems with reliability (due, for example, to ambiguities in data item
definitions), because of poor data collection procedures and quality control,
and because of intentional manipulation of data by persons or organizations
whose performance is being monitored.
A fourth area of concern in the use of risk-adjusted outcomes for assessing
provider quality is the appropriateness of the statistical procedures used when
interpreting findings. For example, do the indicator statistics incorporate
sample size adjustments when necessary, and are the confidence limits used for
identification of outliers calculated appropriately?
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EVALUATION OF QUALITY ASSESSMENT METHODOLOGY
At this point in time, there is a reasonable body of evidence in the health
services literature that risk-adjusted mortality rates can represent valid
indicators of hospital quality of care (e.g., Park et al. 1990; Kahn et al.
1990a; Hannan et al., 1990). My own research supports this conclusion (Thomas
et al., in press). To my knowledge, however, there is no comparable evidence
to suggest that risk-adjusted length-of-stay (LOS) can be interpreted as an
indicator for quality. In a recent study, I and my colleagues examined
relationships between quality and risk-adjusted length-of-stay using Medicare
claims data (Thomas et al., 1992). We observed that length-of-stay is
significantly greater for cases judged by peer review as involving poor quality.
However, we also noted that because of other factors, which vary systematically
across hospitals (e.g., efficiency, teaching) and appear to influence mean
length-of-stay to a greater degree than quality, risk-adjusted length-of-stay
differences do not reflect hospital quality differences. Because the MPA
risk-adjusted LOS models are based on detailed clinical findings, they are
likely to be more sensitive to quality-of-care differences than those examined
in the Thomas et al. (1992) study, which were based on administrative data
elements. Nevertheless, the interpretation of risk-adjusted length-of-stay
remains ambiguous, and without further evidence to the contrary these data
should not be presented to the Cleveland community as indicators of quality.
In presenting more specific observations about the MPA study, I will use the
framework above, starting with the fourth issue and working back to the first.
APPROPRIATENESS OF STATISTICAL PROCEDURES USED WHEN INTERPRETING FINDINGS. The
basic question here is whether the confidence limits used for classifying
hospitals as outliers were correctly calculated. In my view, the statistical
procedures used by MPA in calculating confidence limits for hospital-level
risk-adjusted mortality or risk-adjusted length-of-stay appear appropriate.
Nevertheless, I do agree with Dr. Krakauer's suggestion that standard errors
for individual hospital confidence limits could be obtained directly if
hospital dummy variables were incorporated in the model estimation equations.
The relatively large number of cases available in each of the model estimation
samples and the relatively small number of hospitals to be considered
makes this a feasible approach, one that may also help avoid future questions
about the appropriateness of standard error calculations. In using this
approach, however, the entire model (patient clinical and demographic
variables, as well as hospital dummies) should not be re-estimated each time a
new round of data is to be analyzed, since relative weights of individual
clinical and demographic factors may be altered. Instead, hospital-level
standard errors may be estimated in case-level analyses by regressing hospital
dummies on the residuals of the clinical/demographic equations; i.e., on the
difference between the value of the dependent variable for each patient and the
model estimate calculated using a stable set of coefficients for
patient-related variables.
QUALITY OF DATA TO WHICH MODELS WILL BE APPLIED. This issue concerns data to be
collected during future periods. If individual data elements are not defined
with sufficient precision or if data collection procedures are lax, the data to
which the risk-models will be applied and the model-derived indicators of
hospital performance will both be unreliable. Further, since hospital
reputations may be enhanced or diminished by the results of analyses that are
based on these data, incentives exist for individual providers to attempt to
portray their own performance favorably, perhaps by manipulating the data
abstraction process. Such manipulation could occur simply because of hospitals
biasing data recording in "friendly" directions, similar to the widely
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observed phenomenon of "DRG creep," or it could take the form of intentionally
fraudulent reporting.
To protect the integrity of risk-adjusted outcome data to be released, GCHQC
should:
-- conduct inter-rater reliability analyses on individual data elements
used in the MPA models and on model-derived estimates;
-- develop and administer a uniform program for training and certification
of hospital data abstracters; and
-- develop and administer an audit program to discourage intentional
manipulation of data
If inter-rater reliability results are positive, it should be necessary to
repeat the analyses only if and when modifications are made to the models. If
the analyses show some data items to be unreliable, these should be redefined
as necessary and the analyses repeated until an acceptable level of reliability
is reached; data items that cannot be collected reliability should be excluded.
(I should note that unreliable data elements are unlikely to be good
predictors, and thus variables previously identified for inclusion in the MPA
models will probably be found to be reliable since unreliable data elements
will have been excluded by the model estimation procedure. However, it is
possible that a data element previously excluded from the models, if redefined
to improve reliability, might later be identified as a significant predictor.)
It is my understanding that GCHQC is aware of each of these issues, and that it
has a data collection audit program already in place. A similar program for
certification and periodic recertification of data abstracters should be
developed as well (if not already in existence).
Adequacy of RISK-ADJUSTMENTS. This issue focuses on the modeling process used
by MPA, and it represents one of the principal concerns of GCHQC. In
commenting on the modeling efforts of MPA, I will focus on three areas:
condition group definition (patient selection), predictor variable
identification/selection,and methods of analysis.
1. Definition of Condition Groups. Before meeting at MPA in Chicago, Dr.
Krakauer and I were provided by Dr. Rosenthal with documentation
listing specific sets of ICD-9-CM codes used to define each condition
group for mortality and LOS analyses. With one exception, I am unaware
a priori of problems with the particular sets of codes chosen for group
definitions. The one exception, which we discussed at our meeting, is
the inclusion of cases with principal diagnoses of 410.x2 (AMI,
subsequent episodes of care) in the Acute Myocardial Infarction group.
The 5th digit was added to the 410 code (in 1990, I believe)
specifically to allow identification of cases being admitted for care
after the acute phase of AMI. For example, patients being admitted for
cardiac catheterization, with or without PCTA or surgery will often
have this as the principal diagnosis. In terms of mortality risk, these
patients are quite different from those with a principal diagnosis of
410.x1, which refers to the initial episode of care. In our
discussions, we were told that data obtained during the Wave I phase of
data collection were coded prior to the definition of the 5th digit for
this group. Given the significance of the distinction represented by
this 5th digit, the AMI models should be re-estimated using data that
exclude 410.x2 cases. This can be done by excluding data on cases coded
prior to the ICD-9-CM change (perhaps using Wave II data only), or by
having hospitals go back to previously abstracted 410.x cases and
recoding to obtain the 5th digit.
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Although this is the only such definitional problem that is readily
apparent to me based on inspection of ICD-9-CM codes, I would expect
that at least some of the other condition groups might suffer from
similarly undesirable heterogeneity. Differences in mortality risks or
expected LOS among specific ICD-9-CM codes included in a group do not
necessarily represent a problem, however. A condition group
definitional problem will exists only when:
-- model predictive accuracy differs significantly among ICD-9-CM
codes included in the group's definition; and
-- distributions of included ICD-9-CM codes are not uniform across
hospitals.
Only when both of these are true are group definition problems likely
to bias the accuracy of hospital performance estimates. To the degree
possible (because of potential analytical problems resulting from small
numbers of cases), MPA should examine each condition group definition,
checking model performance in terms of fit to the data on a diagnosis
by diagnosis basis. If model discrimination and calibration are similar
across all included diagnoses no problem exists. If model performance
is significantly poorer for some diagnoses than others, but these
diagnoses are distributed randomly across hospitals, it is still
unlikely that bias in measures of hospital performance will occur.
However, for a particular condition group if significant differences
in model performance exist across diagnoses and if the diagnoses are
not randomly distributed across hospitals, MPA should either (a) alter
the model to achieve a uniform level of performance across all
ICD-9-CM codes included in the group definition, or (b) exclude codes
as necessary from the group's definition. As discussed below, one
method for addressing this issue is to include dummy variables,
representing individual or subsets of ICD-9-CM codes, as independent
variables in the mortality and/or LOS models.
Since cases are selected for analysis based on ICD-9-CM codes assigned
at discharge by medical records staff in individual hospitals, and
since a number of research studies have demonstrated questionable
reliability with ICD-9-CM coding, GCHQC should consider establishing a
program of periodic coding audits (if such a program does not already
exist). The Ohio Peer Review Organization routinely reviews Medicare
cases for coding accuracy, and a similar process might be established
for patients covered by other payers. In addition to coding accuracy,
any such review should examine coding precision. NOS ("not otherwise
specified") codes (e.g., 410.9x, AMI, site unspecified) contain less
precise diagnostic information than other related codes (e.g., 410.7x,
Subendocardial AMI). If GCHQC risk models are subsequently modified to
include specific diagnoses as risk variables, inappropriate NOS coding
could lead to misclassification of patients. Even if such model changes
are not made or anticipated, higher than average proportions of NOS
codes at some hospitals may be indicative of generally lax coding
practices. Reviews of coding precision would help identify such
hospitals and could help promote coding improvements.
2. Identification and Selection of Predictor Variables. Most of the
concerns expressed by clinical reviewers of MPA's preliminary modeling
results relate to omission of potentially important risk predictors. It
is my understanding that the process used for selection of variables
involved four phases. The first two, construction by MPA staff of
initial lists of variables based on clinical and health services
literature, and critique and modification of initial lists during
meetings with clinical advisory panels (physicians, nurses, quality
assurance, utilization review),
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were designed to yield a comprehensive set of candidate risk predictors
that could be evaluated statistically. The last two phases involved
statistical analysis of data relationships, the first focusing on
bivariate relationships between individual risk factors and the outcome
variables (inhospital mortality and log LOS), and the second involving
multivariate analysis to select final sets of predictors for each
model. This general approach to model construction represents standard
procedure for constructing such models. If the preliminary models were
treated as final, with no consideration given to subsequent refinement,
I could still criticize the general model construction process.
However, this is not the case. Preliminary multivariate findings were
submitted for additional review by individual clinical experts in
Cleveland, and it is clear that the clinical reviewers comments are
receiving careful consideration by GCHQC and MPA. I understand that
subsequent analyses to address relevant criticisms will be performed.
Considering all aspects of the process, I believe the methodology used
for selecting risk adjusters in this study to be generally consistent
with accepted scientific practice.
Nevertheless, I have three suggestions. First, I believe that it is
essential to analyze the models for bias associated both with risk
factors included in the models and with potential risk adjusters
omitted from, or excluded during, the analyses. Bias is considered to
exists if the accuracy of model-predicted mortality (or log LOS) varies
significantly as a function of a patient-related variable. For example,
if a model provides accurate mortality estimates for middle-age
patients, but less accurate estimates for younger and/or older
patients, the model is biased in terms of patient age. If bias exists
for a variable that is included in the model, either the variable's
functional form is inappropriate (e.g., the variable's relationship to
mortality may be quadratic instead of linear) or its effect is modified
by (i.e., it interacts with) some other variable. Both of these
problems can be addressed relatively easily. If bias analyses show a
model's predictive accuracy to vary as a function of an omitted
variable, the problem can often be corrected by adding the variable to
the model. In some cases, for example when significant interactions
exist between the omitted variable and other risk predictors, the most
appropriate solution may be to develop multiple models, one for each
separate stratum of the variable's values. Among the variables to be
considered during these bias analyses should be, as noted in item 1
above, dummy variables representing individual ICD-9-CM codes, or sets
of these codes, used for defining condition groups. Also, source of
admission (e.g., nursing home, other) should be evaluated for bias,
particularly in the LOS models.
When significant bias is detected, three courses of action can be
considered. The first and most desirable is to modify the model to
eliminate the bias. A second feasible alternative is to leave the model
unchanged, but demonstrate that the distribution of the biased variable
does not differ across hospitals. In this case, model-derived estimates
may be inaccurate, but the effects are unlikely to penalize any one
hospital more than others. A third alternative, and the least
desirable, is to leave the model unchanged even if hospitals differ
systematically in terms of the distribution of the biased variable.
This alternative might be best, for example, if inclusion of the
variable in the model would allow hospitals easily to misreport data
(perhaps fraudulently) or if its inclusion would provide incentives
detrimental to good patient care.
My second suggestion is related to the one above and it concerns both
the actual and perceived integrity of the MPA risk models. Some risk
variables identified by clinical reviewers as potentially important had
actually been evaluated by MPA, but were excluded during the 3rd or 4th
phases of model construction (as described above). Variables excluded
during the 3rd phase (bivariate analyses) would have been found
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actually not to relate significantly to outcome; variables excluded during
the 4th phase (multivariate analyses) would have been dropped because of
strong correlation with one or more other included variables. I suspect
that at least some of the concerns about model completeness could be
alleviated by releasing the preliminary set of risk variables that were
considered for inclusion in the models, along with correlation matrices for
the considered variables and results of the bivariate analyses. Results of
the bias analyses recommended above will, when negative, provide further,
and very convincing, evidence that excluded variables are not important
(Positive results during analyses of bias presumably will lead to model
refinement.)
My final suggestion regarding variable identification and selection goes
back to the general modeling process. We have sufficient experience with
outcomes modeling at this point in time to know that no model should ever
be considered "finished" or complete. New scientific findings may suggest
other risk variables not previously considered, or advances in diagnostic
instrumentation or data collection procedures may allow for assessment and
inclusion of previously unmeasured patient characteristics. Thus, any risk
model, even if used operationally for data analysis and reporting, should
be subjected to a process of continual evaluation and refinement. It would
be desirable for this process to provide for small scale studies, perhaps
involving special data collection efforts, that would allow periodically
for the examination of additional clinical variables suggested, in the
literature or by Cleveland clinicians, as being potentially important. The
process should also provide for occasional modification of the standard
data collection instruments to allow for accumulation over time of suitably
large amounts of data to support more detailed analyses of variables
identified during the small-scale studies.
3. Methods of Analysis. The statistical procedures used by MPA for model
construction, logistic regression for mortality and least squares
regression for log LOS, are the most widely accepted and commonly used
approaches for these types of analyses. I have no criticism of MPA's
analytical methods, but I do have three suggestions.
First, I note that there are no interaction terms in any of the MPA models,
and I believe that such interactions may improve the performance of at
least some of the models. Because of the very large number of possible
interaction terms to be considered, even when relatively few independent
variables are present, it is common for analysts to evaluate only the main
effects of predictor variables and to ignore possible interactions among
the variables. An approach that I have used in the past (e.g., Holloway and
Thomas 1989) and found to work quite well is to make an initial pass
through model estimation samples using a recursive partitioning algorithm
such as CART (Brierman et al. 1984) or AID (Sonquist et al. 1973). These
algorithms empirically identify important interactions, if any are present,
and they indicate optimal cutpoints for rescaling independent variables
(e.g., age <50, 51-69, >= 70) when defining the interaction terms. Once
potentially important interactions have been identified, they can be
considered, along with risk factor main effects, as independent variables
in stepwise regression analyses for model construction. If interactions are
relatively unimportant, they will be eliminated during this last step.
My second suggestion does not concern the analytical procedure itself, but
the fit statistics used when describing modeling results. At a Spring 1992
risk modeling conference, sponsored by HCFA Office of Research and
organized by Rand Corp. staff, a number of respected researchers were asked
to consider various methodological issues related to risk model performance
and validity. One focus of this meeting was the statistic(s) to be used for
describing model performance, an issue
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this meeting was the statistic(s) to be used for describing model
performance, an issue of interest because the many different statistics
reported in the literature make performance comparisons difficult. The
consensus of the group (which I understand is to be published in JAMA as a
set of recommendations for researchers) was that performance should be
described in terms of two properties: discrimination, which refers
essentially to overall predictive accuracy, and calibration, which relates
to the degree to which predictive accuracy varies along the scale of
predicted values (Hadorn et al. 1992). For binary outcomes such as
mortality, discrimination typically is indicated by the C-index.
Calibration may be described appropriately by either the Hosmer-Lemeshow
statistic (Lemeshow et al. 1982) or the Brier Score (Brier 1950).
My final suggestion, which I recognize to be consistent with MPA and GCHQC
intentions, but which I repeat for emphasis and completeness, is that each
of the models be tested for statistical stability -- i.e., its
performance be assessed using a data set different from the estimation
set. Such statistical validation is an essential step. It could conceivably
be performed using Wave I data and bootstrap procedures, or it could be
accomplished using Wave II data.
Validity of the Selected Outcome Indicators. The issue here is whether or not
the chosen outcome measure, even if appropriately adjusted to control for
differences across providers in patient risk characteristics, will represent a
valid indicator of quality of care. I have commented above that my own research
suggests that length-of-stay, as an outcome of care, does not meet this
criterion. It is conceivable that additional research, employing more complete
data and/or improved risk adjustment procedures, will be able to demonstrate
different findings. However, at this point in time to my knowledge there is no
evidence in the literature that hospital mean LOS, even if risk-adjusted, can be
used as an indicator or quality. It could conceivably be interpreted as a
measure of resource efficiency.
While evidence exists in the literature that at least some risk-adjusted
mortality measures are valid as indicators of hospital quality of care, there
are still questions that must be addressed for any newly proposed measure. One
such question relates to the appropriate definition of mortality. Several of the
more widely cited successful validations of risk-adjusted mortality utilized
Medicare data and defined mortality as death within 30 days of hospital
admission. Jencks et al. (1988) documented the extreme bias in initial Medicare
studies of inhospital mortality arising from regional differences in
length-of-stay, and Chassin et al. (1989) demonstrated the poor correlation
between hospital mortality outliers identified based on inhospital mortality and
those identified using 30-day mortality (i.e., death within 30 days of
admission). The conventional wisdom at this point favors the 30-day over the
inhospital definition of mortality. I believe that within relatively small
geographic areas, the definitional distinction is unlikely to have any
important consequences for the validity of risk-adjusted mortality measures.
Nevertheless, I believe that this represents a minority view among researchers,
and thus those who choose to use inhospital mortality (MPA and GCHQC) must be
able to demonstrate either that within the relevant geographic area there are
no systematic differences across hospitals between inhospital and 30-day
mortality rates, or that, independent of any such differences, risk-adjusted
inhospital mortality rates do lead to valid conclusions about hospital quality
of care. A study to demonstrate the former point could be carried out
reasonably easily it the focus is limited to Medicare discharges. In this case,
the MEDPAR data tapes could be used to correlate number of 30-day deaths and
number of inhospital deaths for Cleveland hospitals, using hospital as the unit
of analysis.
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The latter type of study is much more difficult, since it requires an
independent indicator for hospital quality that is credible and can be related
to risk-adjusted inhospital mortality. If hospital-level correlations between
the two indicators are observed to be positive and significant, the findings
constitute evidence for the validity of both the risk-adjusted mortality measure
and the independent measure. In my own work, I have used Medicare Peer Review
findings to test the validity of risk-adjusted outcomes as quality indicators,
and in a recent paper (Thomas et al., in press) I outline some of the
methodological considerations in carrying out such a validation study. To date,
probably the most comprehensive and methodologically sophisticated validation
study of this type is the Rand Prospective Payment System evaluations conducted
for HCFA (Kahn et al. 1990a). In this study, case level process-of-care
judgments served as independent measures of quality; and these process
evaluation methodologies, an explicit criteria review (Kahn et al. 1990b) and a
structured implicit review (Rubenstein et al. 1990), are considered to represent
the state-of-the-art for this type of quality measurement.
While a process-outcome validation study is likely to be difficult, and may be
time consuming and expensive, it also provides a very strong benefit -- in one
study, a successful finding can effectively answer all questions about
appropriate methodology. If risk-adjusted mortality can be shown to relate
significantly to process judgments of quality at the hospital level, then
issues of condition group definition, risk variable identification, analytic
process and definition of outcome variable (30-day or inhospital mortality)
become essentially irrelevant. Further, without such a validation study, some
questions about the validity, or lack thereof, of the risk-adjusted outcome
measure as an indicator of hospital quality will always be present.
Conclusions
To summarize, based upon this brief evaluation of available information I find
the methods being employed in this study to become consistent with good
scientific practice. I have included a number of suggestions for changes that I
believe may improve the likelihood that risk-adjusted mortality rates developed
for Cleveland area hospitals will indeed relate to the quality performance of
those facilities. With these changes, and with the inclusion of appropriately
worded caveats, I believe the Cleveland community will benefit from the public
release of the project findings. I feel particularly strong that a future
validation study, one designed to test for relationships between risk-adjusted
mortality rates and process-of-care judgments, is needed, and that such a study
represents the most straightforward approach for simultaneously answering all
of the important questions raised about methods used in this project. If such a
study is not carried out before public release of the data, I recommend that
the data release contain an explicit statement to the effect that although
good scientific practices have been utilized in collecting the data and
carrying out the risk-adjusted outcome analyses, the results have not been
validated in terms of an independent measure of quality. I would also suggest
that the release state explicitly that the risk-adjustment process is not
considered perfect and that GCHQC intends to seek continuing improvement over
time in these data.
Citations
Brieman L. et al. Classification and Regression Trees.. Belmont, CA: Wadsworth
International Group, 1984.
Brier GW. Verification of forecasts expressed in terms of probability. Monthly
Weather Review. 75(1950);1-3
9
<PAGE> 536
Chassin MR, Park RE, Lohr KN, Keesey J, Brook RH. Differences among hospitals
in Medicare patient mortality. Health Services Research 1989;24:1-31.
Hadorn D, Keeer E. Rogers W, Brook R. Revised draft final report for HCFA
severity project. Santa Monica, CA: Rand Corp., August 10, 1992.
Hannan EL, Kilburn H, O'Donnell JF, et al. Adult open heart surgery in New
York State: an analysis of risk factors and hospital mortality rates.
Journal of the American Medical Association 1990;264:2768-2774.
Holloway JJ, Thomas JW. Factors influence readmission risk: implications for
quality monitoring. Health Care Fin Review. 11(1989):19-32
Jencks SF, Williams DK, Kay TL. Assessing hospital-associated deaths from
discharge data: the role of length of stay and comorbidities. Journal of
the American Medical Association 1988;260:2240-2246.
Kahn KL, Rubenstein LV, Draper D, et al. The effects of the DRG-based
prospective payment system on quality of care for hospitalized Medicare
patients. Journal of the American Medical Association 1990a;264:1953-1955.
Kahn KL, Rogers WH, Rubenstein LV, et al. Measuring quality of care with
explicit process criteria before and after implementation of the DRG-based
prospective payment system. Journal of the American Medical Association
1990b;264:1969-1973.
Lemeshow S., Hosmer DW. A review of goodness of fit statistics for use in the
development of logistic regression models. American Journal of
Epidemiology. 115(1982);92-106.
Park RE, Brook RH, Kosecoff J, et al. Explaining variations in hospital death
rates: randomness, severity of illness, quality of care. Journal of the
American Medical Association 1990;264:484-490.
Rubenstein LV, Kahn KL, Reinish EJ, et al. Changes in quality of care for five
diseases measured by implicit review, 1981 to 1986. Journal of the American
Medical Association 1990;264:1974-1979.
Sonquist JA, Baker EL, Morgan JN. Searching for structure. Ann Arbor: Survey
Research Center, Institute for Social Research, the University of Michigan,
1973.
Thomas JW, Holloway JJ, Guire KE. Validating risk-adjusted mortality as an
indicator for quality of care. Inquiry (in press).
10
<PAGE> 537
MPA AND QIMC ACTIONS AND RESPONSES TO THE RECOMMENDATIONS OF THE
CLEVELAND PHYSICIAN ADVISORY PANELS AND THE EXTERNAL EXPERT PANEL
Recommendation 1: Consideration should be given to examining 30-day hospital
mortality, as well as in-hospital mortality.
Action/Response: Because of concerns about provider and patient
confidentiality, the Project made a decision, at its outset, not to collect
patient identifiers (e.g., social security numbers) that would permit the
linking of episodes of hospital care to specific patients and/or subsequent
health care outcomes. As noted by Dr. Thomas, for small geographic regions,
analysis of in-hospital mortality probably yields similar conclusions as
analysis of 30-day mortality. The QIMC will re-examine this issue after the
release of the initial report.
Recommendation 2: Consideration should be given to conducting a process of care
validation study (proposed by Dr. Thomas).
Action/Response: Again, the Project made a decision, at its outset to
measure outcomes as a measure of quality and not to measure process
directly. As Dr. Krakauer emphasizes, the difficulties and limitations of
process of care studies are well-known and are, thus, being replaced by
outcomes studies by numerous organizations, including the Joint Commission
and Medicare PROs. Furthermore, the QIMC feels that conducting a process
of care validation study would add considerable expense and yield
questionable benefits.
Recommendation 3: The statistical methodology for determining the 95%
confidence intervals (i.e., statistical variance) around predicted estimates
should be further examined.
Action/Response: No single methodology is universally accepted as being
correct. Different methodologies will likely give approximately similar
confidence intervals. Nevertheless, this issue will be further studied, in
detail, by the QIMC. Advice and recommendations from local and national
experts in the area will be solicited. MPA will employ the statistical
methodology that is deemed as being most appropriate.
Recommendation 4: Diagnostic heterogeneity within individual categories should
be examined.
Action/Response: MPA will conduct detailed analyses of the impact of
specific ICD-9-CM codes and/or groups of codes on biasing hospital results.
Where statistically appropriate, these codes will be used in the
risk-adjustment models as variables and/or excluded from the analysis. This
should further improve model accuracy and lessen the potential for biased
results. In addition, because of physician concerns, the combined surgical
category will not be reported in the initial report. When sample sizes for
individual diagnostic categories become large enough to permit statistical
risk-adjustment, data for those categories will be analyzed and reported.
Recommendation 5: Bias analyses for variables included in the models, as well
as excluded from the models could be performed.
Action/Response: MPA will continue to conduct bias analyses and will
report the results to the QIMC. Where bias is found, models will be
redeveloped to eliminate the bias. Such analyses are currently being
<PAGE> 538
completed for transfer patients. In addition, hospitals have been given the
opportunity to submit patient variables which could potentially bias
results. Analyses are currently being conducted of these variables.
Recommendation 6: Additional effort should be given to including variables
identified by clinicians as being important and/or feeding back to clinicians
empiric data that such variables are not statistically appropriate.
Action/Response: Both MPA and the QIMC are extremely sensitive to this
issue and are committed to developing models that gain the confidence
of participating physicians. Several additional explicit steps will be
taken. First, variables considered important be clinicians, but in whom a
high proportion of patients had missing values, will be analyzed, using a
statistical technique proposed by Dr. Krakauer and the physician groups.
Second, lists of candidate variables (i.e., all variables considered for the
models, including variables which proved not to be statistically
significant) will be fed back to clinicians. Third, in addition to
statistical significance, clinical significance and effect size will be used
as a new criteria for constructing models. Fourth, future data collection
efforts will be modified to more reliably collect variables considered
clinically important.
Recommendation 7: The risk-adjustment models developed in Wave I must be
validated prior to reporting Wave II (live) hospital data.
Action/Response: Prior to any data release, risk-adjustment models
developed in one survey wave will be tested in patients from another survey
wave to ensure validity. Validity will be assessed using standard
statistical techniques to determine discrimination (e.g., ROC curve ares,
explained variance) and goodness of fit (e.g., Hosmer-Lemishow statistic,
analysis of residuals). Models that do not validate well will be
redeveloped.
Recommendation 8: No matter how accurate a risk-adjustment model is,
improvements should always be looked for in subsequent data reporting periods.
Action/Response: The continual improvement of the Health Quality Choice
risk-adjustment models is a primary focus of the Project. Suggestions for
improvement from Coalition members will always be solicited. Data reporting
will be accompanied by appropriate caveats for data interpretation and by
potential limitations of the data. Reports will also reflect: i) the
philosophy that the analyses represent work in progress; and ii) that the
goal of the Project is to continually improve the accuracy and
appropriateness of the analyses being report.
<PAGE> 539
ADDENDUM #3
STATUS REPORT
CORE CHOICE
SYSTEM
<PAGE> 540
<TABLE>
<CAPTION>
CHOICE Matrix
Revised January 10, 1994
File: PATTY\MPA\MATRIX2.XLS
CHOICE PERFORMANCE MODELS TO M.D. PROJECTED MODELS
MODEL SUBGROUP STATISTICS DEVELOPED PANELS PANEL MTG VALIDATED
<S> <C> <C> <C> <C> <C> <C>
MORTALITY ROC
Combined Medical [* ] [* ] [* ] [* ] [* ]
Acute Myocardial Infarction [* ] [* ] [* ] [* ] [* ]
Congestive Heart Failure [* ] [* ] [* ] [* ] [* ]
Pneumonia/Obstructive Lung Disease [* ] [* ] [* ] [* ] [* ]
Stroke [* ] [* ] [* ] [* ] [* ]
GI Hemorrhage [* ] [* ] [* ] [* ] [* ]
Coronary Artery Bypass Graft [* ] [* ] [* ] [* ] [* ]
Lower Bowel Resection [* ] [* ] [* ] [* ] [* ]
Vascular Repair [* ] [* ] [* ] [* ] [* ]
LENGTH OF STAY R2
Combined Medical [* ] [* ] [* ] [* ] [* ]
Combined Surgical [* ] [* ] [* ] [* ] [* ]
Acute Myocardial Infarction [* ] [* ] [* ] [* ] [* ]
Congestive Heart Failure [* ] [* ] [* ] [* ] [* ]
Pneumonia [* ] [* ] [* ] [* ] [* ]
Obstructive Lung Disease [* ] [* ] [* ] [* ] [* ]
Stroke [* ] [* ] [* ] [* ] [* ]
GI Hemorrhage [* ] [* ] [* ] [* ] [* ]
Coronary Artery Bypass Graft [* ] [* ] [* ] [* ] [* ]
Lower Bowel Resection [* ] [* ] [* ] [* ] [* ]
Vascular Repair [* ] [* ] [* ] [* ] [* ]
Reduction of Fracture [* ] [* ] [* ] [* ] [* ]
Hysterectomy [* ] [* ] [* ] [* ] [* ]
Laminectomy [* ] [* ] [* ] [* ] [* ]
Prostatectomy [* ] [* ] [* ] [* ] [* ]
Carotid Endarterectomy [* ] [* ] [* ] [* ] [* ]
*ADVERSE EVENTS ROC
ACUTE RENAL FAILURE [* ] [* ] [* ] [* ] [* ]
RESPIRATORY FAILURE [* ] [* ] [* ] [* ] [* ]
ACUTE BLOOD LOSS (MED VS. SURG) [* ] [* ] [* ] [* ] [* ]
ACUTE MYOCARDIAL INFARCTION [* ] [* ] [* ] [* ] [* ]
CARDIAC ARREST [* ] [* ] [* ] [* ] [* ]
***ANTIBIOTIC USE [* ] [* ] [* ] [* ] [* ]
OBSTETRICS ROC
PRIMARY C-SECTION [* ] [* ] [* ] [* ] [* ]
LOW APGAR [* ] [* ] [* ] [* ] [* ]
REPEAT C-SECTION -- RAW RATES ONLY [* ] [* ] [* ] [* ] [* ]
COMPLICATIONS [* ] [* ] [* ] [* ] [* ]
<CAPTION>
CHOICE TEST DATA PROJECTED LIVE DATA PROJECTED
MODEL SUBGROUP APPD/RPTD TEST DATA REPORTED LIVE REPORT
<S> <C> <C> <C> <C> <C>
MORTALITY ROC
Combined Medical [* ] [* ] [* ] [* ]
Acute Myocardial Infarction [* ] [* ] [* ] [* ]
Congestive Heart Failure [* ] [* ] [* ] [* ]
Pneumonia/Obstructive Lung Disease [* ] [* ] [* ] [* ]
Stroke [* ] [* ] [* ] [* ]
GI Hemorrhage [* ] [* ] [* ] [* ]
Coronary Artery Bypass Graft [* ] [* ] [* ] [* ]
Lower Bowel Resection [* ] [* ] [* ] [* ]
Vascular Repair [* ] [* ] [* ] [* ]
LENGTH OF STAY R2
Combined Medical [* ] [* ] [* ] [* ]
Combined Surgical [* ] [* ] [* ] [* ]
Acute Myocardial Infarction [* ] [* ] [* ] [* ]
Congestive Heart Failure [* ] [* ] [* ] [* ]
Pneumonia [* ] [* ] [* ] [* ]
Obstructive Lung Disease [* ] [* ] [* ] [* ]
Stroke [* ] [* ] [* ] [* ]
GI Hemorrhage [* ] [* ] [* ] [* ]
Coronary Artery Bypass Graft [* ] [* ] [* ] [* ]
Lower Bowel Resection [* ] [* ] [* ] [* ]
Vascular Repair [* ] [* ] [* ] [* ]
Reduction of Fracture [* ] [* ] [* ] [* ]
Hysterectomy [* ] [* ] [* ] [* ]
Laminectomy [* ] [* ] [* ] [* ]
Prostatectomy [* ] [* ] [* ] [* ]
Carotid Endarterectomy [* ] [* ] [* ] [* ]
*ADVERSE EVENTS ROC
ACUTE RENAL FAILURE [* ] [* ] [* ] [* ]
RESPIRATORY FAILURE [* ] [* ] [* ] [* ]
ACUTE BLOOD LOSS (MED VS. SURG) [* ] [* ] [* ] [* ]
ACUTE MYOCARDIAL INFARCTION [* ] [* ] [* ] [* ]
CARDIAC ARREST [* ] [* ] [* ] [* ]
***ANTIBIOTIC USE [* ] [* ] [* ] [* ]
OBSTETRICS ROC
PRIMARY C-SECTION [* ] [* ] [* ] [* ]
LOW APGAR [* ] [* ] [* ] [* ]
REPEAT C-SECTION -- RAW RATE ONLY [* ] [* ] [* ] [* ]
COMPLICATIONS [* ] [* ] [* ] [* ]
*TO BE REPORTED IN AGGREGATE DUE TO LOW VOLUMES
**TO BE FORTHCOMING
***STATUS REPORT EXPECTED MARCH 15, 1994
</TABLE>
- ---------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 541
AMENDMENT NO. 1 TO LICENSING AGREEMENT
This AMENDMENT NO. 1 TO LICENSING AGREEMENT ("Amendment") is entered
into as of the __ day of January, 1995, by and between APACHE Medical Systems,
Inc. ("APACHE") and Quality Information Management Corporation ("QIMC").
RECITALS
A. APACHE and QIMC entered into a certain Licensing Agreement
dated as of the 24th day of March, 1994 (the "Licensing Agreement").
B. APACHE and QIMC now desire to amend certain of the terms of the
Licensing Agreement, as set forth in this Amendment. All capitalized terms
used in this Amendment as not defined herein shall have the meanings ascribed
to such terms in the Licensing Agreement.
TERMS OF AMENDMENT
In consideration of the foregoing, and of the mutual covenants and
agreements contained herein, APACHE and QIMC agree that the Licensing Agreement
shall be amended as follows:
1. License Fee. Paragraph (a) of Section 5 of the Licensing
Agreement shall be deleted and replaced by the following provision:
(a) IN CONSIDERATION FOR THE LICENSES, A LICENSE FEE EQUAL TO THE
ANNUAL AMOUNTS SHOWN BELOW FOR EACH OF THE FIRST FIVE (5) YEARS OF THE
LICENSE AGREEMENT:
YEAR 1 [* ]
YEAR 2 [* ]
YEAR 3 [* ]
YEAR 4 [* ]
YEAR 5 [* ]
WHICH ANNUAL AMOUNTS SHALL BE PAYABLE IN EQUAL MONTHLY INSTALLMENTS,
STARTING ON THE DATE OF THE LICENSE AGREEMENT (WITH APPROPRIATE PRORATION
FOR THE FIRST MONTH OF THIS AGREEMENT) AND THEREAFTER, ON THE FIRST DAY OF
EACH SUCCESSIVE MONTH, FOR A TOTAL PAYMENT EQUAL TO $1,000,000;
2. St. Louis Alliance Revenues. In addition to such other
payments as may be received by QIMC under the terms of the Licensing Agreement,
QIMC and APACHE each shall be entitled to receive one-half of all revenues
received by APACHE and/or QIMC under the terms of that certain License
Agreement dated as of July 1, 1994, between The Greater St. Louis Healthcare
Alliance (the "Alliance") and QIMC (the "St. Louis Agreement"). Each of the
- ----------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 542
parties hereby agrees that, in the event such party receives any payment from
the Alliance pursuant to the St. Louis Agreement, such party promptly shall
disburse to the other party one-half of such payment.
3. Reconciliation of Amounts Owed. APACHE and QIMC hereby agree
that, on or before January 31, 1995, they shall: (a) jointly prepare a
reconciliation of amounts due for the period from the date of the Licensing
Agreement through December 31, 1994, based upon the Licensing Agreement as
amended hereby; and (b) pay any amounts due as shown by such reconciliation.
4. Effect Upon Licensing Agreement. Except as expressly amended
or modified by this Amendment, the Licensing Agreement, and each and every
provisions thereof, shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed and delivered as
of the day and year set forth above.
APACHE MEDICAL SYSTEMS, INC.
By: /s/ Brion D. Umidi
-----------------------------
Title: Vice President
-------------------------
QUALITY INFORMATION MANAGEMENT CORPORATION
By: /s/ Dwain H. Harper
----------------------------
Title: Executive Director
-------------------------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 543
ADDENDUM TO THE LICENSING AGREEMENT
This Addendum to the Licensing Agreement by and between APACHE Medical Systems,
Inc., ("APACHE") and the Quality Information Management Corporation ("QIMC")
dated March 24, 1994 ("Licensing Agreement"), incorporates all of the terms and
conditions of the Licensing Agreement.
WHEREAS Section 7(b) and 7(c) of the Licensing Agreement states if the
Hospitals request, APACHE shall provide additional software ("Software") that
will provide the following three components: (i) data collection ("Data
Collection Tool"), (ii) on-site processing ("On-Site Processing Tool") and
(iii) interface capability ("Interface") according to the terms defined in the
Licensing Agreement.
WHEREAS The Hospitals signed a Software Authorization Agreement
authorizing QIMC to execute an agreement with APACHE to develop and implement
the Data Collection Tool.
WHEREAS This Addendum to the Licensing Agreement ("Addendum"), for mutual
consideration, the receipt of which is acknowledged, modifies and shall serve
as the agreement that will confirm authorization and further define the terms
under which APACHE shall develop and implement such software.
1. FEE STRUCTURE: APACHE is providing two options to the Hospitals in
fulfilling its' obligation to provide software to the Hospitals. APACHE shall
provide the Hospitals with one of the following software tools (described in
detail below):
A) APACHE Acute Care Enterprise Information System ("APACHE EIS Tool")
and the Data Collection Tool; or
B) the Data Collection Tool only
Because APACHE is providing two options, those Hospitals that signed the
Software Authorization Agreement must indicate in writing to APACHE which
option shall be exercised no later than February 29, 1996. If the Hospitals do
not indicate their selection within the stated timeframe, APACHE shall deliver
the Data Collection Tool (Option B) under the terms defined in the License
Agreement and this Addendum. After the established deadline, the APACHE EIS
Tool (Option A) will be available to Hospitals for a one-time fee of [* ]
upgrade fee) and the [* ] Transaction Fee described below.
OPTION (A) APACHE EIS and Data Collection Tool: APACHE agrees to provide the
APACHE EIS Tool and the Data Collection Tool for the following reduced pricing:
One Time Fee for the APACHE EIS Tool: [* ]
Transaction Fee per hospital discharge: [* ] per hospital discharge
(increases to the transaction fee shall occur no more than
annually and shall be tied to the medical component of the CPI)
The Transaction Fee for the APACHE EIS Tool includes quarterly updates and is
calculated based upon the number of discharges which are reported through the
APACHE EIS Tool. More frequent updates are [* ] per update per Hospital.
The quarterly updates will be delivered to the Hospitals no later than 30 days
following receipt by APACHE of complete, accurate and clean data from QIMC,
with the exception of the first wave of data, which shall be delivered no later
than 60 days following receipt by APACHE of complete, accurate and clean data
from QIMC. If APACHE fails to comply with this committed schedule for one
quarter, QIMC may provide APACHE with written notice of non-compliance within
ten days after the data is due to QIMC. If, after receipt of such notice,
APACHE does not meet the committed schedule for the succeeding quarter, the
transaction fees for all cases submitted during the succeeding quarter shall be
reduced to [* ] percent of the contracted transaction fee.
OPTION (B) The Data Collection Tool only: Hospitals that elect not to utilize
the APACHE EIS Tool may choose to utilize only the Data Collection Tool for the
fees listed in the Licensing Agreement.
Data Collection Tool: [* ] per transaction for the first year
[* ] per transaction for the second year
[* ] per transaction for the third year
- -------
* Confidential portions omitted and filed separately
with the Commission.
<PAGE> 544
Beyond year three, increases of the transaction fees will be limited to the
medical component of the CPI.
Payment for purchase of the APACHE EIS Tool shall be between the respective
Hospitals and APACHE. Transaction Fees will be submitted to QIMC by each
Hospital and submitted by QIMC to APACHE quarterly according to the following
schedule. The Transaction Fees shall be due to QIMC from the Hospitals within
30 days of the end of the quarter. QIMC shall collect the Transaction Fees
from the Hospitals and shall submit fees collected during the month to APACHE
at the end of each month.
Hospitals have the option of requesting that APACHE load historical data on the
APACHE EIS Tool for the fee of [* ] per six month study per Hospital.
APACHE shall make available an APACHE EIS Tool for analysis of Hospitals
utilizing the APACHE EIS Tool to QIMC or GCHA for a one-time license fee of
[* ] and a quarterly update fee of [* ] contingent upon QIMC or GCHA
signing APACHE's standard licensing terms and conditions.
2. PRODUCT DESCRIPTION: The Data Collection Tool being provided to the
Hospitals will collect data variables required for the QIMC risk adjustment
methodologies for existing medical surgical models, the existing C-Section
model and data variables for the proposed Adverse Event Models. As an
important research and development laboratory (as referenced in the License
Agreement) for the continuing development and refinement of the CHOICE and
APACHE Systems, QIMC will continue to identify and test patient-level variables
that enhance the performance of these systems.
The Data Collection Tool incorporates four components, including: (i) UB-92
batch tape processing; (ii) laboratory batch tape processing; (iii) a PC based
data collection software application for entry of data variables not available
electronically; and (iv) data merge software for integration of data from these
three sources. The Data Collection Tool will provide range checking and
missing variable audit functions as described in the Licensing Agreement.
The APACHE EIS Tool is an analytical and reporting software application tool
having the characteristics and functionality as described in the APACHE EIS
Tool documentation.
3. DATA FLOW: Currently, QIMC receives raw data from the Hospitals, cleans and
edits the data and risk adjusts the data with the CHOICE methodology. QIMC
receives raw data from Hospitals through data collection forms. After the
APACHE EIS Tool and/or Data Collection Tool is implemented, QIMC shall receive
the raw data from the Data Collection Tool and UB-92 and Lab Tapes, all of
which shall be submitted by the Hospitals. APACHE shall provide QIMC with
software to merge the data provided by the Data Collection Tool and UB-92 and
Lab Tapes.
APACHE will provide QIMC the necessary methodologies, variables, weights or
other items pertaining to the APACHE Acute Care methodology that are reasonably
requested and required to clean, edit and risk-adjust the data. QIMC shall
continue to clean, edit, severity adjust the data and provide to APACHE the raw
and severity adjusted data as defined in the Licensing Agreement. The data
provided to APACHE by QIMC shall include all data elements required for the
APACHE Acute Care methodology.
4. TRAINING AND TECHNICAL SUPPORT:
A) TRAINING: APACHE shall provide software training at no charge during the
implementation, testing and start-up phases ("Initial Training Phase"). The
Initial Training Phase shall be as defined in the attached Training Schedule.
Training beyond that required in the Initial Training Phase is available to
QIMC and the Hospitals from APACHE at the rate of [* ] per hour or as
otherwise agreed in writing.
B) TECHNICAL SUPPORT: APACHE shall provide technical support as follows:
APACHE EIS Tool -- technical support is included in the Transaction Fee
Data Collection Tool -- technical support is included in the
Transaction Fee
- -------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 545
Data Merge Software for QIMC -- technical support is free of charge for
the first six months after implementation. Thereafter Technical Support for
the Data Merge Software is available to QIMC from APACHE as the rate of [* ]
per hour or as otherwise agreed in writing.
APACHE will modify or enhance the software for the Adverse Events Models for no
charge up to the date when the Technical Committee (QIM Committee) gives its
final endorsement. Any modifications or enhancements after that date may be
provided by APACHE at a rate of [* ] per hour.
APACHE will provide to the Hospitals free of charge any enhancements or
upgrades to the Data Collection Tool or APACHE EIS Tool which are generally
made available for no fee to its other Acute Care clients. APACHE will provide
to the Hospitals free of charge any software changes required to make either
the Data Collection Tool or the APACHE EIS Tool (or both) compatible with the
Ohio Department of Health acute care data collection and reporting project (the
"Ohio Project"), provided that the Ohio Project licenses from APACHE either the
APACHE Data Collection Tool or APACHE EIS Tool (or both) incorporating the
APACHE Acute Care methodology for all acute care patients included in the Ohio
Project.
QIMC shall reimburse APACHE for all reasonable out of pocket travel and living
expenses incurred by APACHE in fulfilling its obligations or to further develop
or enhance the Data Collection Tool or the APACHE EIS Tool. After the
activities described in this Addendum have occurred, a party shall reimburse
reasonable out of pocket travel and living expenses of the other party if such
travel has been approved in writing.
5. LICENSING TERMS AND CONDITIONS FOR THE HOSPITALS: QIMC shall review and
approve APACHE's standard licensing terms and conditions for the Hospitals to
join before use of either software product.
The parties have executed this Addendum by their duly authorized
representatives, effective as of the date first written below.
QUALITY INFORMATION MANAGEMENT APACHE MEDICAL SYSTEMS, INC.
CORP.
By:/s/ Dwain L. Harper By: /s/ Sherrie L. Jones
------------------------ ------------------------
Print Name: Dwain L. Harper Print Name: Sherrie L. Jones
---------------- -----------------
Title: Executive Director Title: Vice President, Sales
--------------------- & Marketing
---------------------
Date: 12/29/95 Date: 12/29/95
--------------------- ----------------------
- ------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE> 1
EXHIBIT 10.13
MARKETING AGREEMENT
MARKETING AGREEMENT, dated as of June 3, 1996 (the "Agreement") by and
between APACHE Medical Systems, Inc., a Delaware corporation (the "Company"),
and American Healthcare Systems Purchasing Partners, L.P., a California limited
partnership ("Purchasing Partners").
RECITALS
A. Purchasing Partners provides purchasing services primarily to
a group of not for profit hospitals and healthcare providers in purchasing
products and services.
B. The Company desires that Purchasing Partners name the Company
to be the exclusive provider of outcomes data systems for high-risk, high-cost
patients, including critical care, cardiovascular care and medical-surgical
care patients, to hospitals and other healthcare providers that are currently
members of or affiliated with Purchasing Partners or that become members of or
affiliated with Purchasing Partners during the term of this Agreement.
C. Purchasing Partners desires that the Company offer products
and services to hospitals that are members of or affiliated with Purchasing
Partners on the price terms provided for in this Agreement.
D. Purchasing Partners desires to receive from the Company, and
the Company desires to grant to Purchasing Partners, options to purchase shares
of the Company's common stock, $0.01 per share par value ("Common Stock"), on
the terms and subject to the conditions set forth below.
E. The Company desires that Purchasing Partners assist the
Company in marketing its products and services, and Purchasing Partners desires
that the Company reimburse Purchasing Partners for a portion of Purchasing
Partners' expenses in conducting such marketing, all on the terms and subject
to the conditions set forth in this Agreement.
I. GRANT OF OPTIONS
1.1. Capitalization. The Company represents and warrants to
Purchasing Partners that upon the consummation of the sale of shares of Common
Stock by the Company pursuant to the Company's Registration Statement on Form
S-1 (Registration No. 333-4106) (the "IPO") and prior to the issuance of any
options to purchase Common Stock pursuant to this Agreement, the authorized
capital stock of the Company, as of the Closing Date, will consist of
30,000,000 shares of Common Stock, of which (i) 6,548,764 shares will be issued
and outstanding (assuming that the IPO is consummated on June 30, 1996), (ii)
477,205 shares are reserved for issuance upon exercise of outstanding warrants,
(iii) 1,770,000 shares are reserved for issuance pursuant
<PAGE> 2
to stock purchase or stock option ownership plans which have been adopted by
the Company for key employees, directors and key consultants and advisors, and
(iv) 65,735 shares are reserved for issuance pursuant to other outstanding
options to purchase Common Stock.
1.2. Exclusivity Option. Immediately following the consummation of
the IPO, the Company shall issue to Purchasing Partners an option to purchase
65,488 shares of Common Stock at an exercise price of $8.18 per share, such
option to be in the form attached as Exhibit A hereto (the "Exclusivity
Option").
1.3. Benchmark Option. Immediately following the consummation of
the IPO, the Company shall issue to Purchasing Partners an option to purchase
50,000 shares of Common Stock at an exercise price of $13.00 per share, such
option to be in the form attached as Exhibit B hereto (the "Benchmark Option").
1.4. Non-Benchmark Options. Immediately following the consummation
of the IPO, the Company shall issue to Purchasing Partners an option to
purchase 250,806 shares of Common Stock at an exercise price of $13.00 per
share, such option to be in the forms attached as Exhibit C hereto (the
"Non-Benchmark Option", the Exclusivity Option, the Benchmark Option and the
Non-Benchmark Option are hereinafter referred to as the "Options").
1.5. Registration Rights. The Company shall grant to Purchasing
Partners registration rights with respect to shares of Common Stock issuable
upon exercise of the Options on the terms and subject to the conditions set
forth in the Registration Agreement attached hereto as Exhibit D (the
"Registration Agreement").
II. SALES OF PRODUCTS AND SERVICES TO MEMBER HOSPITALS
2.1. Member Hospitals. Purchasing Partners hereby represents and
warrants to the Company that the name, address and contact person of the
hospitals and other healthcare providers that are currently members of or, to
the knowledge of Purchasing Partners, affiliated with a limited partner of
Purchasing Partners or are otherwise utilizing the services of Purchasing
Partners are set forth on Exhibit E hereto. The entities identified on Exhibit
E hereto are referred to as the "Member Hospitals". The parties hereto agree
that from time to time Purchasing Partners shall supply to the Company an
updated list of Member Hospitals, which shall highlight any addition or
deletion from the prior list and shall include the date that each added entity
became a Member Hospital, and that each such updated list shall have the effect
of amending and restating Exhibit E hereto as of thirty days prior to the date
such updated list is delivered to the Company.
2.2. Identified Products and Services. The Company hereby
represents and warrants as of the date hereof that the products and services
described on Exhibit F hereto are products and services currently offered by
the Company (the "Identified Products and Services"). The parties hereto agree
that from time to time Exhibit F shall be amended to include products and
services then offered by the Company that Purchasing Partners agrees in writing
to include among the Identified Products and Services. Purchasing Partners
shall give reasonable consideration to the inclusion among the Identified
Products and Services of any newly offered product or service of the Company
and shall, where reasonably in the opinion of the management
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<PAGE> 3
of Purchasing Partners, allow the Company an opportunity to develop products or
services to be included among the Identified Products and Services before
Purchasing Partners agrees to become an exclusive distributor of new products
or services that do not compete with Identified Products and Services and that
relate to clinically based outcomes data systems for high-risk, high-cost
patients, including critical care, cardiovascular care and medical-surgical
care patients.
2.3. Discount. If the conditions set forth in Section 2.4 below
are satisfied, during the term of this Agreement, the Company shall offer the
Identified Products and Services to Member Hospitals at discounts from the
Company's standard pricing as set forth on Exhibit G hereto (the "Discounts").
Member Hospitals shall have the right to enforce the obligation of the Company
to sell Identified Products and Services to Member Hospitals at the applicable
Discounts.
2.4. Applicability of Discounts.
(a) 1996. The Discounts shall apply to all Sales of
Identified Products and Services made by the Company to Member
Hospitals between the date of this Agreement and December 31, 1996.
(b) 1997. If the dollar value of all Sales of products
and services by the Company to Member Hospitals from the date of this
Agreement through December 31, 1996 is greater than or equal to
[ * ], then the Discounts shall apply to all Sales of Identified
Products and Services made by the Company to Member Hospitals from
January 1, 1997 through December 31, 1997.
(c) 1998. If the dollar value of all Sales of products
and services by the Company to Member Hospitals from the date of this
Agreement through December 31, 1997 is greater than or equal to
[ * ], then the Discounts shall apply to all Sales of Identified
Products and Services made by the Company to Member Hospitals from
January 1, 1998 through December 31, 1998.
(d) 1999. If the dollar value of all Sales of products
and services by the Company to Member Hospitals from the date of this
Agreement through December 31, 1998 is greater than or equal to
[ * ], then the Discounts shall apply to Sales of Identified
Products and Services made by the Company to Member Hospitals from
January 1, 1999 through December 31, 1999.
(e) Sales. As used in this Agreement, the term "Sales"
shall mean the total net dollar amount of sales of products and
services sold by the Company to Member Hospitals reflected in binding
and enforceable written sales contracts or any amendment or supplement
thereto signed by authorized officers of Member Hospitals and of the
Company as of the applicable date(s) referenced in this Section 2. A
"Sale" shall be considered to have been made for purposes of this
Agreement as of the date, on or after the execution of such contract,
amendment or supplement, on which the customary, required down payment
has been received by the Company, or if such down payment is
__________________________________
* Confidential portions omitted and filed separately with the
Commission.
- 3 -
<PAGE> 4
not required or is waived, on the date of the execution by the Company
of such contract, amendment or supplement.
2.5. Other Terms and Conditions. All sales of products and
services by the Company to Member Hospitals shall be made pursuant to the same
form of contract and on the same general terms and conditions, other than
price, as sales made by the Company to other similarly situated
non-governmental or other commercial customers, as appropriate.
2.6. Yearly Review by the Company; Audit by Purchasing Partners.
(a) Yearly Review. At the end of each calendar year, the
Company shall have the right to review the Sales made during that year
to Member Hospitals. If the Company determines that it has
overcharged any Member Hospital during such calendar year, within
forty-five (45) days of the end of that year, the Company can effect
any necessary adjustments to the prices given to Member Hospitals
during that year so as to be in compliance with the terms of Section
2.3.
(b) Right to Audit. Purchasing Partners shall have the
right, on behalf of the Member Hospitals, to cause the Sales records
of the Company for any calendar year to be audited by a public
accounting firm of national reputation reasonably acceptable to the
Company to determine whether or not the Member Hospitals who have
purchased Identified Products or Services during such calendar year
have received pricing on the terms required by Section 2.3 (including,
but not limited to, any applicable Discount from the most favorable
prices charged by the Company to customers other than Member
Hospitals). Purchasing Partners' audit right may be exercised anytime
after 45 days after the end of the calendar year in question as long
as such audit is initiated within 120 days of the end of such calendar
year. The Company agrees to provide such auditor access to its books
and records for the foregoing purpose, and further agrees to cooperate
in connection with any such audit.
(c) Excess Charges. In the event that any audit
conducted pursuant to this Section 2.4 discloses that one or more
Member Hospitals, which purchased Identified Products or Services
during the immediately preceding calendar year and which at the time
of such purchase or purchases were Member Hospitals and were listed on
Exhibit E, as amended, or became listed on Exhibit E, as amended,
within 30 days after the date of such purchase or purchases or were
otherwise known to the Company to be a Member Hospital on the date of
sale, were charged a price in excess of the amount required pursuant
to Section 2.3, such audit shall set forth for each such Member
Hospital the amount by which the actual price charged by the Company
to such Member Hospitals with respect to each sale made during the
calendar year exceeded the price, inclusive of all price discounts,
that should have been charged by the Company to such Member Hospital
pursuant to the provisions of Section 2.3 (an "Excess Charge") and the
aggregate amount of all Excess Charges paid by all Member Hospitals
during the calendar year (the "Aggregate Excess Charges"). "Excess
Charges" shall not include any amounts charged to any Member Hospital
which was not identified on the initial Exhibit E hereto or, after the
date hereof, was not identified on any amendment thereof within 30
days after the
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<PAGE> 5
date of sale or which was not otherwise known to the Company to be a
Member Hospital on the date of sale (an "Unidentified Member
Hospital"). To the extent that any price charged to a Member Hospital
has been adjusted by the Company pursuant to paragraph (a) of this
Section 2.6, the amount of such adjustment shall not be considered an
Excess Charge. The Company shall have a period of thirty (30) days
from the date the results of the audit are made available to the
Company (the "Audit Review Period") to review the results of such
audit and to supply additional information to the auditor and request
that the auditor consider revising the audit to reflect such
additional information.
(i) If, after the expiration of the Audit Review
Period and the consideration of any changes proposed by the
Company, an audit discloses the existence of Aggregate Excess
Charges in an amount equal to or less than the greater of
[ * ] of the dollar amount of all Sales made by the
Company to Member Hospitals during the calendar year in
question, then the Company shall, within forty-five (45) days
after the expiration of the Audit Review Period, pay to each
Member Hospital that was overcharged an amount equal to
[ * ] disclosed by the audit with respect to such
Member Hospital.
(ii) If, after the expiration of the Audit Review
Period, an audit discloses the existence of Aggregate Excess
Charges in an amount greater than the greater of (A) $100,000,
or (B) five percent (5%) of the dollar amount of all Sales
made by the Company to Member Hospitals during the calendar
year in question, then:
(a) the Company shall within forty-five
(45) days after the expiration of the Audit Review
Period, pay to each Member Hospital an amount equal
to twice the Excess Charges disclosed by the audit
with respect to such Member Hospital;
(b) any unexercised portions of the Options
shall immediately become fully vested and
exercisable; and
(c) Purchasing Partners shall have the
right for a period of sixty (60) days following the
expiration of the Audit Review Period to terminate
this Agreement effective upon ten (10) days' written
notice to the Company.
(iii) In the event that Aggregate Excess Charges
exceed [ * ], the Company shall also pay the reasonable
costs of the audit.
2.7. Products Under Development. The provisions of Sections 2.3
and 2.4 and Exhibit G notwithstanding, the Company shall not be required to
apply any Discount to the Sale of any product or service or new version of a
product or a service that is under development by the Company and not yet
generally available for purchase by the Company's customers ("New Products").
However, the Company shall, where reasonable in the opinion of the Company's
__________________________________
* Confidential portions omitted and filed separately with the
Commission.
- 5 -
<PAGE> 6
management, make a reasonable, good faith effort to offer Purchasing Partners
and the Member Hospitals the opportunity to participate in programs related to
New Products on the same terms and subject to the same conditions that the
Company would make such an opportunity available to other customers.
III. PURCHASING PARTNERS MARKETING ACTIVITIES
3.1. Exclusive Supplier. Purchasing Partners shall designate the
Company as its exclusive supplier to the Member Hospitals of the Identified
Products and Services and covenants and agrees not to promote, endorse or
market to Member Hospitals products or services that compete with any of the
Identified Products and Services.
3.2. Press Release. Within ten (10) days after the execution of
this Agreement, Purchasing Partners shall issue a press release, through the
channels of distribution generally used by Purchasing Partners for the issuance
of press releases, announcing the designation of the Company as its exclusive
supplier to the Member Hospitals of outcomes- based data systems for high-risk,
high-cost patients, including critical care, cardiovascular care and
medical-surgical care patients.
3.3. Recommendation to Member Hospitals. Purchasing Partners shall
recommend the Identified Products and Services to the Member Hospitals.
Purchasing Partners shall use reasonable, good faith efforts to promote and
reference the Company's products and services in Purchasing Partners'
promotional communications and literature and use its reasonable, good faith
efforts to provide the Company with introductions to Member Hospitals,
including management, clinical and purchasing personnel.
3.4. Purchasing Partners Direct Marketing. Subject to the
provisions of Sections 3.5 and 3.6 below, Purchasing Partners shall use
reasonable, good faith efforts to market directly the Identified Products and
Services to the Member Hospitals. To the extent deemed reasonable by the
management of the Company, the Company shall provide Purchasing Partners with
marketing and promotional material for use in Purchasing Partners' direct
marketing activities. Purchasing Partners shall not use any marketing or
promotional material in connection with the marketing of the Identified
Products and Services unless such material has been supplied or otherwise
approved in writing by the Company. Purchasing Partners shall not make any
false or misleading representations to the Member Hospitals or others regarding
the Company or the Company's products or services.
3.5. Reimbursement of Marketing Expenses.
(a) Annual Marketing Budget.
(i) 1996-1997 Budget. Within thirty (30) days
after the date of this Agreement, Purchasing Partners and the
Company shall agree on a budget for direct marketing to be
conducted by Purchasing Partners pursuant to Section 3.4 from
the date of this Agreement through June 30, 1997.
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<PAGE> 7
(ii) 1997-1998 Budget. By May 1, 1997, Purchasing
Partners and the Company shall agree on a budget for direct
marketing to be conducted by Purchasing Partners pursuant to
Section 3.4 for the for the period from July 1, 1997 to June
30, 1998.
(iii) 1998-1999 Budget. By May 1, 1998, Purchasing
Partners and the Company shall agree on a budget for direct
marketing to be conducted by Purchasing Partners pursuant to
Section 3.4 for the for the period from July 1, 1998 to June
30, 1999.
(iv) 1999 Budget. By May 1, 1999, Purchasing
Partners and the Company shall agree on a budget for direct
marketing to be conducted by Purchasing Partners pursuant to
Section 3.4 for the period from July 1, 1999 to
December 31, 1999.
(b) Reimbursement by the Company. The Company shall pay
to Purchasing Partners an amount equal to [ * ] of the total
expenses incurred by Purchasing Partners in conducting direct
marketing activities pursuant to Section 3.4, provided that the
maximum amount that the Company shall be required to pay to Purchasing
Partners in respect of such expenses in any calendar year shall be
[ * ] of total amount to be expended pursuant to the annual budget
agreed to by Purchasing Partners and the Company pursuant to Section
3.5 (a). If any annual budget required by Section 3.5(a) is not
agreed to by the Company and Purchasing Partners by the required date
or such later date as may be agreed to in writing by the Company and
Purchasing Partners, then the Company shall pay to Purchasing Partners
an amount equal to [ * ] of the total expenses incurred by
Purchasing Partners in conducting direct marketing activities pursuant
to Section 3.4, provided that the maximum amount that the Company
shall be required to pay to Purchasing Partners in respect of such
expenses in any calendar year shall be [ * ].
(i) Evidence of Expenses. Within 30 days
following the end of each calendar quarter, Purchasing
Partners shall furnish to the Company a written statement of
expenses incurred by Purchasing Partners in conducting direct
marketing activities pursuant to Section 3.4, together with
such documentation of such expenses as the Company may
reasonably request.
(ii) Payment. The Company shall within forty-five
(45) days following receipt of the statement provided for in
Section 3.5 (b)(i) pay to Purchasing Partners the amount
required pursuant to this Section 3.5.
(iii) Audit by the Company. The Company shall have
the right, at its own expense, to have the marketing
expenditures by Purchasing Partners pursuant to Section 3.4
audited by a public accounting firm of national reputation.
If such an audit discloses that the Company has made
reimbursement payments to Purchasing Partners in excess of
what is required by Section 3.5 (b), then within
__________________________________
* Confidential portions omitted and filed separately with the
Commission.
- 7 -
<PAGE> 8
forty-five (45) days following the conclusion of the audit
Purchasing Partners shall refund to the Company an amount
equal to such excess reimbursement payments.
3.6. Training. The Company shall use reasonable efforts to
provide, at the Company's expense, training to employees and/or consultants
employed by Purchasing Partners in the marketing of the Identified Products and
Services (i) upon the execution of this Agreement with respect to the
Identified Products and Services, and (ii) from time to time during the term of
this Agreement with respect to new versions of, or newly offered, Identified
Products and Services. In the event that Purchasing Partners desires that the
Company provide other training to Purchasing Partners' employees or
consultants, the Company shall, where reasonable in the opinion of the
Company's management, provide such additional training and shall be compensated
by Purchasing Partners at a rate, if any, to be agreed at the time of such
training by the Company and Purchasing Partners, each acting in good faith.
3.7. Development Efforts. Purchasing Partners shall, where
reasonable in the opinion of Purchasing Partners' management, make a good faith
effort to allow the Company to participate in Purchasing Partners programs to
increase its family of data or information system products and services on
terms and conditions substantially similar to those offered by Purchasing
Partners to third parties.
3.8. Quarterly Meetings. During the term of this Agreement, the
Company and Purchasing Partners shall use reasonable efforts to cause quarterly
meetings to be held between appropriate management personnel of the Company and
Purchasing Partners. The purpose of these meetings shall be to: (i) review
progress to date; (ii) modify or enhance marketing strategies to increase
participation by Member Hospitals; (iii) design future marketing plans; and
(iv) discuss potential joint development initiatives. In addition, the Company
and Purchasing Partners shall use reasonable efforts to cause a senior
executive officer of Purchasing Partners and a senior executive officer of the
Company to meet at least three times per calendar year to evaluate the working
relationship between the parties and to explore new opportunities.
3.9. Acceptance of Contracts. All orders for the Identified
Products or Services solicited by Purchasing Partners from a Member Hospital
shall be subject to acceptance by the Company and shall not be deemed to be
accepted until such time as a written agreement is executed by the Company and
the Member Hospital. Purchasing Partners shall be not entitled to commissions
or other remuneration for any orders solicited by Purchasing Partners, except
as provided for in this Agreement. If the aggregate Sales to Member Hospitals
of Non-Benchmark Study products and services (as determined in Section 2 of the
Non-Benchmark Study Option) between the date hereof and December 31, 1999
equals or exceeds [ * ], the Company and Purchasing Partners shall
negotiate in good faith reasonable cash commissions or other acceptable
consideration to be paid to Purchasing Partners during the remainder of the
term of this Agreement for Sales of Non-Benchmark Study products and services
in excess of [ * ].
__________________________________
* Confidential portions omitted and filed separately with the
Commission.
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<PAGE> 9
IV. CONFIDENTIALITY
4.1. Proprietary Information. "Proprietary Information" shall mean
all information of any kind disclosed by one party hereunder to the other,
including but not limited to oral, written or electronically stored data, that:
(i) is proprietary to the disclosing party; (ii) the disclosing party takes
steps to maintain in confidence; (iii) relates to the technology, business
plans and/or finances of the disclosing party; and (iv) may adversely affect
the disclosing party's competitive position if disclosed. Proprietary
Information shall not include any information: (i) that is a matter of public
knowledge or generally known in the trade at the time of disclosure, or becomes
public knowledge or generally known in the trade at any time during the term of
this Agreement or thereafter other than through the act omission of the
receiving party; (ii) that was rightfully obtained by the receiving party from
a third party not known to be under any obligation of confidentiality; or (iii)
that the receiving party can show was developed by the receiving party
independent of the Proprietary Information received.
4.2. Non-Disclosure. All Proprietary Information shall be held in
confidence by the receiving party and may not be disclosed without the written
consent of the disclosing party except as required by law or governmental
agency; provided, however, that the receiving party may disclose Proprietary
Information to its employees and/or consultants who have a need to access the
Proprietary Information for the purpose of carrying out the terms and
intentions of this Agreement. Any employees or consultants to whom such
Proprietary Information is disclosed shall be informed of Article IV of this
Agreement and of the confidential nature of such Proprietary Information.
4.3. No License. Each of the parties agree that except as provided
in Article V below, nothing in this Agreement is intended to grant any rights
or license under any intellectual property rights of either party, including
but not limited to patents, trademarks, copyrights or maskwork rights, nor
shall this Agreement grant either party any rights in or to the other party's
Proprietary Information.
4.4. Survival. The provisions of this Article IV shall survive the
termination of this Agreement for a period of five (5) years.
V. INTELLECTUAL PROPERTY
5.1. Ownership. The Company hereby represents and warrants to
Purchasing Partners that:
(a) the Company owns or possesses the right to use all
patents, trademarks, trademark registrations, service marks, service
mark registrations, trade names, copyrights, licenses, inventions,
trade secrets and rights necessary for the conduct of its business and
that the Company is not aware of any claim to the contrary or any
challenge by any other person to the rights of the Company with
respect to the foregoing; and
(b) the Company's business as now conducted does not, and
as conducted during the term of this Agreement will not, infringe or
conflict with in any material
- 9 -
<PAGE> 10
respect patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses or other intellectual property or franchise
right of any person.
5.2. Grant of Limited License. The Company hereby grants to
Purchasing Partners a limited, non-exclusive, non-transferable right for the
term of this Agreement to use the Company's trademarks, service marks and trade
names in marketing and sales materials and when otherwise referencing the
Company and its products and services in connection with Purchasing Partners'
direct marketing activities pursuant to Section 3.4. The Company shall have
the right to inspect all uses by Purchasing Partners of the Company's
trademarks, service marks and trade names. Purchasing Partners' use of the
Company's trademarks, service marks and trade names shall inure to the benefit
of the Company. Purchasing Partners shall promptly notify the Company of all
claims of infringement or misuse of the Company's trademarks, service marks and
trade names or other intellectual property rights made against Purchasing
Partners.
VI. INDEMNIFICATION
6.1. Indemnification by the Company. The Company shall indemnify
and hold harmless Purchasing Partners and its partners and their respective
directors, officers, employees and agents against and from any losses, claims,
damages or liabilities (collectively "Claims"), insofar as such Claims (or
actions in respect thereof) arise out of or are based upon (i) the falsity or
incorrectness of the representations and warranties of the Company contained in
Section 5.1 of this Agreement, (ii) any breach by the Company of the provisions
of Article IV, (iii) any actual or alleged defect in any Identified Product or
Service sold by the Company to any Member Hospital, or (iv) any actual or
alleged misrepresentation in any marketing or sales material provided or
approved by the Company for use by Purchasing Partners pursuant to Section 3.4
of this Agreement. The Company shall also pay all reasonable attorney's fees
and costs and court costs incurred by Purchasing Partners in enforcing the
indemnification provided for in this Section 6.1.
6.2. Indemnification by Purchasing Partners. Purchasing Partners
shall indemnify and hold harmless the Company and its directors, officers,
employees, and agents against and from any Claims, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any actual or alleged written or oral misrepresentation made
by Purchasing Partners with respect to the Company or the Identified Products
and Services (excluding any statements contained in any marketing or sales
material provided or approved by the Company for use by Purchasing Partners
pursuant to Section 3.4 of this Agreement), or (ii) any breach by Purchasing
Partners of the provisions of Article IV. Purchasing Partners shall also pay
all reasonable attorney's fees and costs and court costs incurred by the
Company in enforcing the indemnification provided for in this Section 6.2.
6.3. Method of Asserting Claim. A party seeking indemnification
pursuant to this Article VI (the "Indemnified Party") shall give prompt written
notice to the party from which indemnification is sought (the "Indemnifying
Party") of any Claim which it discovers or of which it receives notice after
the date hereof and which might give rise to indemnification hereunder, stating
the nature, basis and (to the extent known) amount of the Claim; provided that
failure to give prompt notice shall not jeopardize the Indemnified Party's
right to indemnification
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<PAGE> 11
unless such failure shall have materially prejudiced the ability of the
Indemnifying Party to defend such Claim.
6.4. Defense of Claims. In case of any Claim by a third party or
by any governmental body, or any legal, administrative or arbitration
proceeding with respect to which an Indemnified Party may have liability under
this Article VI, the Indemnifying Party shall be entitled to participate
therein, and, to the extent desired by it, to assume the defense thereof, and
after notice from the Indemnifying Party to the Indemnified Party of the
election so to assume the defense thereof, the Indemnifying Party shall not be
liable to the Indemnified Party for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof, other
than reasonable costs of investigation, unless the Indemnifying Party does not
actually assume the defense thereof following notice of such election. The
parties shall render to each other such assistance as may reasonably be
required of each other at the Indemnifying Party's expense in order to ensure
proper an adequate defense of any such Claim. If the Indemnifying Party
actually assumes the defense of the Indemnified Party, the Indemnified Party
shall not make any settlement of any Claim that might give rise to liability of
the Indemnifying Party under this Article VI without the written consent of the
Indemnifying Party, which consent shall not be unreasonably be withheld. The
Indemnifying Party shall not agree to a compromise or settlement of any Claim
that would require the payment of any amount by the Indemnified Party, or would
otherwise affect the rights and privileges of the Indemnified Party, without
the written consent of the Indemnified Party.
VII. TERM AND TERMINATION
7.1. Term. This Agreement shall be effective as of the date first
above written and shall terminate on December 31, 1999.
7.2. Termination.
(a) Upon Mutual Agreement. This Agreement may be
terminated at any time upon mutual Agreement of the parties hereto.
(b) Termination by Purchasing Partners.
(i) Upon Material Breach by the Company. This
Agreement may be terminated by Purchasing Partners by written
notice to the Company effective thirty (30) days after the
receipt of such notice, if the Company materially breaches the
terms of this Agreement and does not cure such breach within
such thirty (30) day period.
(ii) Upon Breach of Confidentiality by the
Company. This Agreement may be terminated by Purchasing
Partners by written notice to the Company effective ten (10)
days after the receipt of such notice, if the Company breaches
the provisions set forth in Article IV of this Agreement and
does not cure such breach within such ten (10) day period.
- 11 -
<PAGE> 12
(iii) Upon a Change of Control. Within thirty (30)
days following a Change of Control, this Agreement may be
terminated by Purchasing Partners by written notice to the
Company effective on the date indicated in such notice. For
the purposes of this Agreement, the term "Change in Control"
shall mean the purchase or other acquisition by any person,
entity or group of persons, within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or any comparable successor
provisions, of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 30% or more
of either the outstanding shares of Common Stock or the
combined voting power of Company's then outstanding voting
securities entitled to vote generally; the approval by the
stockholders of Company of a reorganization, merger, or
consolidation, in each case, with respect to which persons who
were stockholders of Company immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own more than 30% of the combined voting power
entitled to vote generally in the election of directors of the
reorganized, merged or consolidated Company's then outstanding
securities; a liquidation or dissolution of Company; or of the
sale of all or substantially all of Company's assets.
(iv) Failure to Consummate IPO. If the Company
fails to consummate the IPO by September 1, 1996, Purchasing
Partners may terminate this Agreement upon thirty (30) days'
written notice to the Company; provided, however, Purchasing
Partners must first negotiate in good faith for a period of
thirty (30) days an alternative compensation arrangement with
the Company.
(c) Termination by the Company.
(i) Upon Material Breach by Purchasing Partners.
This Agreement may be terminated by the Company by written
notice to Purchasing Partners effective thirty (30) days after
the receipt of such notice, if Purchasing Partners materially
breaches the terms of this Agreement and does not cure such
breach within such thirty (30) day period.
(ii) Upon Breach of Confidentiality by Purchasing
Partners. This Agreement may be terminated by the Company by
written notice to Purchasing Partners effective ten (10) days
after the receipt of such notice, if Purchasing Partners
breaches the provisions set forth in Article IV of this
Agreement and does not cure such breach within such ten (10)
day period.
(iii) For Failure to Meet Sales Targets. This
Agreement may be terminated by the Company upon written notice
given no later than March 31 of any year if the Sales of
products and services by the Company to Member Hospitals from
the date of this Agreement through December 31 of the
preceding year is not greater than or equal to the following
targets:
- 12 -
<PAGE> 13
DATE SALES TARGET
---- ------------
December 31, 1996 [ * ]
December 31, 1997 [ * ]
December 31, 1998 [ * ]
(iv) Forfeiture of Options. Following any
delivery of any notice of termination of this Agreement by
the Company pursuant to Section 7.2 (c)(ii) asserting a
material breach by Purchasing Partners of the provisions of
Article IV, Purchasing Partners shall not be permitted to
exercise any unexercised portion of the Benchmark Study Option
or the Non-Benchmark Study Option until such time as the breach
identified in such notice has been cured. Upon any
termination of this Agreement by the Company pursuant to
Section 7.2 (c)(ii) upon a material breach by Purchasing
Partners of the provisions of Article IV, the Benchmark Study
Option and the Non-Benchmark Study Option shall immediately
terminate.
7.3. Survival. Notwithstanding any other provision of this
Agreement, the terms of Article IV shall survive the termination of this
Agreement as provided in Section 4.4.
VIII. MISCELLANEOUS
8.1. Notices. Except as otherwise expressly provided herein, all
communications provided for in this Agreement shall be in writing and delivered
or sent by registered or certified mail, return receipt requested, or by
overnight courier to the following addresses:
(a) if to the Company, at:
APACHE Medical Systems, Inc.
1650 Tysons Boulevard
Suite 300
McLean, Virginia 22102-3915
Attention: Gerald F. Bisbee, Jr.,
Chairman and Chief Executive Officer
or to such other address as the Company may in writing designate, with
a copy to:
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610
Attention: Nancy M. Borders
__________________________________
* Confidential portions omitted and filed separately with the
Commission.
- 13 -
<PAGE> 14
(b) if to Purchasing Partners, at:
American Healthcare Systems Purchasing Partners, L.P.
4501 Charlotte Park Drive
P.O. Box 668800
Charlotte, North Carolina 28266
Attention: Vice Chairman
and at:
American Healthcare Systems Purchasing Partners, L.P.
12730 High Bluff Drive
Suite 300
San Diego, California 92130
Attention: Treasurer
or to such other addresses as Purchasing Partners may in writing
designate, with a copy to:
Neal, Gerber & Eisenberg
Two LaSalle Street - Suite 2200
Chicago, Illinois 60602
Attention: Charles Evans Gerber
8.2. Assignment. This Agreement shall not be assignable by either
party hereto, except with the written consent of the other party hereto or by
operation of law, provided, however, that Purchasing Partners may assign and
transfer this Agreement to any entity formed and operated as a successor to
Purchasing Partners in the business of acting as a purchasing agent for Member
Hospitals.
8.3. Law Governing. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts)
of the State of Delaware.
8.4. Headings. The headings of the sections and subsections of
this Agreement are inserted for convenience only and do not constitute a part
of this Agreement.
8.5. Counterparts. This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument, and it
shall not be necessary in making proof of this Agreement to produce or account
for more than one such counterpart.
8.6. Integration and Severability. This Agreement and the Exhibits
hereto, including the Registration Agreement and the Options, embody the entire
agreement and understanding between the Company and Purchasing Partners, and
supersede all prior agreements and understandings relating to the subject
matter hereof. In case any one or more of the provisions contained in this
Agreement, or application thereof, shall be invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained in this
- 14 -
<PAGE> 15
Agreement, and any other application thereof, shall not in any way be affected
or impaired thereby.
- 15 -
<PAGE> 16
This Agreement is hereby executed as of the date first above written.
APACHE MEDICAL SYSTEMS, INC.
By:
------------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
AMERICAN HEALTHCARE SYSTEMS
PURCHASING PARTNERS, L.P.
By: American Healthcare Plans, Inc.,
its general partner
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
- 16 -
<PAGE> 17
EXHIBITS
--------
Exhibit A - Exclusivity Option
- ---------
Exhibit B - Benchmark Option
- ---------
Exhibit C - Non-Benchmark Option
- ---------
Exhibit D - Registration Agreement
- ---------
Exhibit E - Member Hospitals
- ---------
Exhibit F - Identified Products and Services
- ---------
Exhibit G - Discounts
- ---------
<PAGE> 18
EXHIBIT A
[EXCLUSIVITY OPTION]
THIS OPTION AND THE SECURITIES REPRESENTED BY THIS OPTION HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT") AND MAY
NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
APACHE MEDICAL SYSTEMS, INC.
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102-3915
OPTION AGREEMENT TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, in consideration of the execution and
delivery of that certain Marketing Agreement, dated as of June 3, 1996, and
other good and valuable consideration, the receipt of which is hereby
acknowledged, APACHE MEDICAL SYSTEMS, INC., a Delaware corporation (the
"Company"), hereby grants to AMERICAN HEALTHCARE SYSTEMS PURCHASING PARTNERS,
L.P., a California limited partnership (the "Holder"), an option to purchase a
total of Sixty-Five Thousand Four Hundred Eighty-Eight (65,488) shares (the
"Shares") of Common Stock of the Company, at a price per Share (the "Exercise
Price") of $8.18, subject to adjustment and upon the terms and conditions
hereinafter set forth. As used herein, the term "Common Stock" shall mean the
Company's Common Stock, $.01 par value per share after giving effect to the
Company's initial public offering, including the conversion of the Company's
preferred stock and a one for 2.86 reverse stock split.
1. Method of Exercise; Payment; Issuance of New Option
Agreement.
(a) Cash Exercise. The purchase right
represented by this Option Agreement may be exercised by the Holder, in whole
or in part and from time to time on or after the date hereof through the tenth
anniversary hereof, by (i) the surrender of this Option Agreement (with the
notice of exercise form attached hereto as Exhibit A duly executed) at the
principal office of the Company and (ii) the payment to the Company, by
certified check or wire transfer of funds to an account specified in writing by
the Company, of an amount equal to the Exercise Price per Share multiplied by
the number of Shares being purchased. The Holder shall be deemed to have
become the holder of record of, and shall be treated for all purposes as the
record holder of, the Shares represented thereby (and such Shares shall be
deemed to have been issued) immediately prior to the close of business on the
date or dates upon which this Option Agreement is exercised. In the event of
any exercise of the rights represented by this Option
<PAGE> 19
Agreement, certificates for the Shares so purchased shall be delivered to the
Holder as soon as practicable and, unless this Option Agreement has been fully
exercised or expired, a new Option Agreement representing the portion of the
Shares, if any, with respect to which this Option Agreement shall not then have
been exercised shall also be issued to the Holder as soon as practicable.
(b) Cashless Exercise. In lieu of exercising
this Option Agreement as provided in Subsection 1(a) above, from time to time
on or after the date hereof through the tenth anniversary hereof, the Holder
may elect to receive Shares equal to the value of this Option Agreement (or the
portion thereof being cancelled) by surrender of this Option Agreement (with
the notice of exercise form attached hereto as Exhibit A duly executed) at the
principal office of the Company together with notice of such cashless exercise,
in which event the Company shall issue to the Holder hereof a number of Shares
computed using the following formula:
Y (A - B)
X = ---------
A
Where
X - The number of Shares of Common Stock to be issued
to the Holder;
Y - The number of Shares of Common Stock vested under
Section 2 hereof;
A - The fair market value of one share of the
Company's Common Stock; and
B - The Exercise Price (as adjusted to the date of
such calculations);
provided that in no event shall "X" be less than zero (0).
(c) Fair Market Value. For purposes of
Subsection 1(b) above, fair market value of Common Stock shall mean the closing
price of the Common Stock quoted on the NASDAQ National Market if the Common
Stock is traded thereon or the closing price quoted on any national exchange on
which the Common Stock is listed, whichever is applicable, as published in The
Wall Street Journal for ten trading days prior to the date of notice of
exercise. If the Common Stock is not traded on the NASDAQ National Market or
on a national exchange, the fair market value shall be the prevailing market
price per share of Common Stock on any other securities exchange or in the
over-the-counter market as determined in good faith by the Company's Board of
Directors, which determination shall be conclusive.
(d) Option Reduced by Exercise. Each exercise
under this Option Agreement shall reduce the total number of Shares that may
thereafter be purchased under this Option Agreement.
<PAGE> 20
2. Stock Fully Paid; Reservation of Shares. All Shares
that may be issued upon the exercise of the purchase rights represented by this
Option Agreement shall, upon issuance, be fully paid and nonassessable, and
free from all preemptive rights, taxes, liens and charges with respect to the
issue thereof. During the period within which the purchase rights represented
by this Option Agreement may be exercised, the Company will at all times have
authorized, and reserved for the purpose of the issue upon exercise of the
purchase rights evidenced by this Option Agreement, a sufficient number of
shares of its Common Stock to provide for the exercise of the purchase rights
represented by this Option Agreement. The Company shall at all times take all
such action and obtain all such permits or orders as may be necessary to enable
the Company lawfully to issue such shares of Common Stock as duly and validly
issued, fully paid and nonassessable shares upon exercise in full of this
Option Agreement.
3. Fractional Shares. This Option Agreement may be
exercised only with respect to a whole number of Shares. No fractional Share of
Common Stock will be issued in connection with any exercise hereunder. To the
extent that the formula stated in Subsection 1(b) results in a fractional
Share, the aggregate number of Shares issuable shall be rounded to the nearest
whole number of Shares.
4. Adjustment of Exercise Price and Number of Shares.
The number and kind of securities purchasable upon the exercise of this Option
Agreement and the Exercise Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Adjustment for Stock Splits and Combinations.
If the Company at any time or from time to time effects a subdivision of the
outstanding Common Stock, the Exercise Price for the Common Stock issuable upon
exercise of this Option Agreement immediately before the subdivision shall be
proportionately decreased, and conversely, if the Company at any time or from
time to time combines the outstanding Common Stock, the Exercise Price of the
Common Stock issuable upon exercise of this Option Agreement immediately before
the combination shall be proportionately increased. Any adjustment under this
Subsection 4(a) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(b) Adjustment for Certain Dividends and
Distributions. In the event the Company at any time, or from time to time,
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event the number of shares of
Common Stock issuable upon exercise of this Option Agreement shall be increased
as of the time of such issuance or, in the event such a record date is fixed,
as of the close of business on such record date, by multiplying the number of
Shares issuable upon exercise of this Option Agreement by a fraction, (i) the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such
-3-
<PAGE> 21
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution, and (ii)
the denominator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date; provided, however, that if such record date is
fixed and such dividend is not fully paid or if such distribution is not fully
made on the date fixed thereof, the number of Shares of Common Stock issuable
upon exercise of this Option Agreement shall be recomputed accordingly as of
the close of business on such record date and thereafter the number of Shares
of Common Stock issuable upon exercise of this Option Agreement shall be
adjusted pursuant to this Subsection 4(b) as of the time of actual payment of
such dividends or distributions. In the event the Company at any time, or from
time to time, makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities other than Common Stock or in other property (other than cash), then
and in each such event the Board of Directors of the Company shall make a good
faith estimate of the value per share of Common Stock of such dividend or other
distribution, and at the Board's election, either (i) the number of shares of
Common Stock issuable upon exercise of this Option Agreement shall be increased
as of the time of such issuance or, in the event such a record date is fixed,
as of the close of business on such record date to reflect the additional value
that each outstanding share of Common Stock is receiving or (ii) this Option
Agreement shall be considered as of the time of such issuance or, in the event
such a record date is fixed, as of the close of business on such record date to
include the right to receive such additional value per share at the time of
exercise by the delivery of the other securities or other property paid to the
holders of Common Stock; provided, however, that if such record date is fixed
and such dividend is not fully paid or if such distribution is not fully made
on the date fixed thereof, no adjustment shall be made to this Option Agreement
as of the close of business on such record date and thereafter this Option
Agreement shall be adjusted pursuant to this Subsection 4(b) as of the time of
actual payment of such dividends or distributions.
(c) Adjustment for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon the exercise of this Option
Agreement is changed into the same or different number of shares of any class
or classes of stock or other securities or other property, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this Section), then
and in any such event the Holder shall have the right thereafter to exercise
this Option Agreement into the kind and amount of stock and other securities or
property receivable upon such recapitalization, reclassification or other
change, by holders of the number of Shares of Common Stock for which this
Option Agreement might have been exercised immediately prior to such
recapitalization, reclassification or change, and the Exercise Price therefor
shall be appropriately adjusted, all subject to further adjustment as provided
herein and under the Company's Amended and Restated Certificate of
Incorporation, as it may be amended from time to time.
(d) Reorganization, Mergers, Consolidations or
Sales of Assets. If at any time or from time to time there is a capital
reorganization of the Common Stock (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares provided for elsewhere in
this Section) or a merger or consolidation of the Company with or into another
corporation, or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the Holder shall thereafter be entitled to receive upon exercise of this Option
Agreement, upon payment of the Exercise Price then in effect, the number of
shares of stock or
-4-
<PAGE> 22
other securities or property of the Company, or of the successor entity
resulting from such merger or consolidation or sale, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
capital reorganization, merger, consolidation, or sale. In any such case
(except to the extent any cash or property is received in such transaction),
appropriate adjustment shall be made in the application of the provisions of
this Section and the Company's Amended and Restated Certificate of
Incorporation, as amended from time to time, with respect to the rights of the
Holder after the reorganization, merger, consolidation or sale to the end that
the provisions of this Section and the Company's Amended and Restated
Certificate of Incorporation (including adjustment of the number of Shares of
Common Stock issuable upon exercise of this Option Agreement) shall be
applicable after that event and be as nearly equivalent to the provisions
hereof as may be practicable.
(e) No Impairment. The Company will not, by
amendment of its Amended and Restated Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company but will at all times in good faith assist
in the carrying out of all the provisions of this Section and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against dilution or other impairment.
(f) Notice of Capital Changes. If at any time
the Company shall offer for subscription pro rata to the holders of shares of
Common Stock any additional shares of stock of any class, other rights or any
equity security of any kind, or there shall be any reorganization or
reclassification of the capital stock of the Company, or consolidation or
merger of the Company with, or sale of all or substantially all of its assets
to another company or there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company, then, in any one or more of said
cases, the Company shall give the Holder written notice, by registered or
certified mail, postage prepaid, of the date on which (i) a record shall be
taken for such subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of record of shares of Common Stock
shall participate in such subscription rights, or shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such written
notice shall be given at least 20 business days prior to the action in question
and not less than 20 business days prior to the record date in respect thereto.
(g) Adjustment of Number of Shares. Upon each
adjustment in the Exercise Price, the number of Shares of Common Stock
purchasable hereunder shall be adjusted, to the nearest whole share, to the
product obtained by multiplying the number of Shares purchasable immediately
prior to such adjustment in the Exercise Price by a fraction, the numerator of
which shall be the Exercise Price immediately prior to such adjustment and the
denominator of which shall be the Exercise Price immediately thereafter.
-5-
<PAGE> 23
(h) No Greater Anti-Dilution Protection. The
Company hereby represents and warrants to the Holder that as of the date hereof
the Company is not contractually committed to provide any greater or more
favorable anti-dilution protection to any holder of an option, warrant or other
contractual right to acquire shares of Common Stock of the Company than those
rights granted to the Holder in this Section 4. The Company further covenants
and agrees that if, after the date hereof, it shall grant to any person having
the contractual right to acquire shares of Common Stock anti-dilution
protection that is greater or more favorable than the rights granted to the
Holder in this Section 4, the Company shall promptly give written notice to the
Holder of such rights and shall automatically extend such greater or more
favorable rights to the Holder as of the date of the grant of such rights to
such other party.
5. Notice of Adjustments. Whenever the Exercise Price
or the number of Shares purchasable hereunder shall be adjusted pursuant to
Paragraph 4 hereof, the Company shall make a certificate signed by an officer
of the Company setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, and the Exercise Price and the number of Shares purchasable
after giving effect to such adjustment, and shall cause copies of such
certificate to be delivered to the Holder.
6. Compliance with Securities Act; Disposition of Option
Agreement or Shares of Common Stock.
(a) Compliance with Securities Act. The Holder,
by acceptance hereof, agrees that this Option Agreement and the Shares of
Common Stock to be issued upon exercise hereof are being acquired for
investment and that the Holder will not offer, sell or otherwise dispose of any
Shares of Common Stock to be issued upon exercise hereof except under
circumstances which will not result in a violation of the registration
provisions of the Securities Act of 1933, as amended (the "Act"). All Shares
of Common Stock issued upon exercise of this Option Agreement (unless
registered under the Act) shall be stamped or imprinted with a legend in
substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR
DISPOSITION MAY BE EFFECTED UNLESS (i) THE SECURITY
IS REGISTERED UNDER THE ACT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (ii) AN
OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, IS OBTAINED TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED, OR
(iii) A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION IS OBTAINED TO THE EFFECT THAT NO
ENFORCEMENT ACTION WILL BE PURSUED IF THE SECURITY IS
SOLD OR DISPOSED OF WITHOUT REGISTRATION UNDER SUCH
ACT."
-6-
<PAGE> 24
(b) Disposition of Shares. With respect to any
offer, sale or other disposition of any Shares of Common Stock acquired
pursuant to the exercise of this Option Agreement prior to registration of such
Shares, the Holder agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of the
Holder's counsel, reasonably acceptable to the Company, to the effect that such
offer, sale or other disposition may be effected without registration or
qualification (under the Act as then in effect) of such Shares of Common Stock
and indicating whether or not under the Act certificates for such Shares of
Common Stock to be sold or otherwise disposed of require any restrictive legend
as to applicable restrictions on transferability in order to insure compliance
with the Act. Promptly upon receiving such written notice and reasonably
satisfactory opinion, if so requested, the Company, as promptly as practicable,
shall notify the Holder that the Holder may sell or otherwise dispose of such
Shares of Common Stock, all in accordance with the terms of the notice
delivered to the Company. If a determination has been made pursuant to this
Subsection 6(b) that the opinion of counsel for the Holder is not reasonably
satisfactory to the Company, the Company shall so notify the Holder promptly
after such determination has been made. Notwithstanding the foregoing, such
Shares of Common Stock may be offered, sold or otherwise disposed of in
accordance with Rule 144 under the Act, provided that the Company may request a
reasonable assurance that the provisions of Rule 144 have been satisfied. The
Company hereby covenants to use its best efforts to file all reports required
to be filed by it under the Securities Exchange Act of 1934, as amended, so
that the requirement of paragraph (c) of Rule 144 promulgated under the Act as
to adequate current public information shall be satisfied. Each certificate
representing Shares of Common Stock thus transferred (except a transfer
pursuant to Rule 144) shall bear a legend as to the applicable restrictions on
transferability in order to insure compliance with the Act, unless in the
aforesaid opinion of counsel for the Holder, such legend is not required in
order to insure compliance with the Act. The Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
7. Nature of the Option. This Option Agreement contains
the grant of a non-statutory option and is not intended to qualify for any
special tax benefits to the Holder.
8. Limitation of Liability. No provision hereof, in the
absence of affirmative action by the Holder to purchase Shares of Common Stock,
and no enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of the Holder for the purchase price of any
Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
9. No Rights as Stockholder. The Holder, as such, shall
not be entitled to vote or receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the Holder, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Option Agreement shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
-7-
<PAGE> 25
10. Representations and Warranties. The Company
represents and warrants to the Holder as follows:
(a) This Option Agreement has been duly
authorized and executed by the Company and is a valid and binding obligation of
the Company enforceable in accordance with its terms;
(b) The Shares have been duly authorized and
reserved for issuance by the Company and, when issued in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable;
(c) The rights, preferences, privileges and
restrictions granted to or imposed upon the Shares and the holders thereof are
as set forth in the Company's Amended and Restated Certificate of
Incorporation, a true and complete copy of which has been delivered to the
Holder; and
(d) The execution and delivery of this Option
Agreement are not, and the issuance of the Shares upon exercise of this Option
Agreement in accordance with the terms hereof will not be, inconsistent with
the Company's Amended and Restated Certificate of Incorporation or by-laws, do
not and will not contravene any law, governmental rule or regulation, judgment
or order applicable to the Company, and, except for consents that have already
been obtained by the Company, do not and will not conflict with or contravene
any provision of, or constitute a default under, any indenture, mortgage,
contract or other instrument of which the Company is a party or by which it is
bound or require the consent or approval of, the giving of notice to, the
registration with or the taking of any action in respect of or by, any Federal,
state or local government authority or agency or other person.
11. Modification and Waiver. This Option Agreement and
any provision hereof may be changed, waived, discharged or terminated only by
an instrument in writing signed by the party against which enforcement of the
same is sought.
12. Notices. Any notice, request or other document
required or permitted to be given or delivered to the Holder or the Company
shall be delivered, or shall be sent by certified or registered mail, postage
prepaid, to the addresses indicated below:
If to the Company at:
APACHE Medical Systems, Inc.
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102-3915
Attention: Gerald E. Bisbee, Jr., Ph.D.,
Chairman and Chief Executive Officer
-8-
<PAGE> 26
With a copy to:
Gardner, Carton & Douglas
321 North Clark Street - Suite 3200
Chicago, Illinois 60610
Attention: Nancy M. Borders
If to the Holder:
American Healthcare Systems Purchasing Partners, L.P.
4501 Charlotte Park Drive
P.O. Box 668800
Charlotte, North Carolina 28266
Attention: Vice Chairman
with copies to:
American Healthcare Systems Purchasing Partners, L.P.
12730 High Bluff Drive
Suite 300
San Diego, California 92130
Attention: Treasurer
Neal, Gerber & Eisenberg
Two North LaSalle Street - Suite 2200
Chicago, Illinois 60602
Attention: Charles Evans Gerber
13. No Assignment; Binding Effect on Successors. This
Option Agreement may not be sold, pledged, assigned, hypothecated, transferred
or disposed of by the Holder in any manner, provided, however, that the Holder
may assign and transfer this Option Agreement to an entity formed and operated
as a successor to the Holder in the business of acting as a purchasing agent
for hospitals affiliated with the Holder, and provided further that, in the
event that the Holder intends to include any Shares purchasable hereunder in an
underwritten offering of Common Stock, the Holder may assign and transfer the
right to purchase such Shares to the underwriter so as to allow the underwriter
to purchase such Shares for inclusion in the underwritten offering. This
Option Agreement shall be binding upon any corporation succeeding the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets, and all of the obligations of the Company relating to the
Common Stock issuable upon the exercise of this Option Agreement shall survive
the exercise and termination of this Option Agreement. All of the covenants
and agreements of the Company hereunder shall inure to the benefit of the
successors of the Holder and all of the covenants and agreements of the Holder
hereunder shall inure to the benefit of the successors of the Company.
-9-
<PAGE> 27
14. Descriptive Headings. The descriptive headings of
the several paragraphs of this Option Agreement are inserted for convenience
only and do not constitute a part of this Option Agreement.
15. Governing Law. This Option Agreement shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the internal laws of the State of Delaware, without regard to
principles of conflicts of law.
Dated: ________________________________ APACHE MEDICAL SYSTEMS, INC.
By: _____________________________
Title: __________________________
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<PAGE> 28
EXHIBIT A
NOTICE OF EXERCISE
To: APACHE MEDICAL SYSTEMS, INC.
(1) The undersigned hereby elects to purchase
________ shares of Common Stock of APACHE MEDICAL SYSTEMS, INC. pursuant to the
terms of the attached Option Agreement, and (unless such election is being made
pursuant to Subsection 1(b) of such Option Agreement) tenders herewith payment
of the Exercise Price for such shares in full.
(2) The undersigned is aware of the Company's
business affairs and financial condition, and has acquired all such information
about the Company as it deems necessary and appropriate to enable it to reach
an informed and knowledgeable decision to acquire such shares of Common Stock.
In exercising this Option Agreement, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
("Securities Act"), and that the undersigned will not offer, sell or otherwise
dispose of any such shares of Common Stock except under circumstances that will
not result in a violation of the registration provisions of the Securities Act
or any state securities laws.
(3) The undersigned understands that such shares
of Common Stock have not been registered under the Securities Act in reliance
upon a specific exemption therefrom, which exemption depends upon, among other
things, the bona fide nature of its investment intent as expressed herein.
(4) The undersigned is able, without impairing
its financial condition, to hold such shares of Common Stock for an indefinite
period of time and to suffer a complete loss of its investment. The
undersigned understands that the Company is under no obligation to it to
register such shares, except as provided in that Registration Agreement dated
as of _________, 1996. In addition, the undersigned understands that the
certificate evidencing these shares will be imprinted with a legend which
prohibits the transfer of the shares unless (i) they are registered, (ii) such
registration is not required in the opinion of counsel reasonably acceptable to
the Company, or (iii) a letter from the Securities and Exchange Commission is
obtained to the effect that no enforcement action will be taken if the shares
are transferred.
(5) The undersigned is familiar with the current
provisions of Rule 144, promulgated under the Securities Act, which, in
substance, permits limited public resale of "restricted securities" acquired,
directly or indirectly, from the issuer thereof (or from an affiliate of such
issuer), in a offering subject to the satisfaction of certain conditions,
including, among other things: (i) the availability of certain public
information about the Company; (ii) the resale occurring not less than two
years after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than three
(3) years the sale being made through a
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<PAGE> 29
broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act
of 1934) and the amount of securities being sold during any three-month period
not exceeding the specified limitations stated therein, if applicable.
(6) The undersigned further understands that at
the time it wishes to sell such shares of Common Stock there may be no public
market upon which to make such a sale, and that, even if such a public market
then exists, the Company may not be satisfying the current public information
requirements of Rule 144, and that, in such event, it would be precluded from
selling such shares under Rule 144 even if the two-year minimum holding period
had been satisfied. It understands that the Company is under no obligation to
it to make Rule 144 available.
(7) The undersigned further understands that in
the event all of the applicable requirements of Rule 144 are not satisfied,
registration under the Securities Act, compliance with Regulation A, or some
other registration exemption will be required; and that, notwithstanding the
fact that Rule 144 is not exclusive, the Staff of the Securities and Exchange
Commission has expressed its opinion that persons proposing to sell private
placement securities other than in a registered offering and otherwise than
pursuant to Rule 144 will have a substantial burden of proof in establishing
that an exemption from registration is available from such offers or sales, and
that such persons and their respective brokers who participate in such
transactions do so at their own risk.
(8) Please issue a certificate or certificates
representing said shares of Common Stock in the name of the undersigned and, if
appropriate, please issue a new Option Agreement for the unexercised portion,
if any, of the attached Option Agreement in the name of the undersigned.
Dated: _____________________ American Healthcare Systems Purchasing
Partners, L.P.
By: American Healthcare Plans, Inc.,
its general partner
________________________________________
By:_____________________________________
Its:____________________________________
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<PAGE> 30
EXHIBIT B
[BENCHMARK STUDY OPTION]
THIS OPTION AND THE SECURITIES REPRESENTED BY THIS OPTION HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT") AND MAY
NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
APACHE MEDICAL SYSTEMS, INC.
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102-3915
OPTION AGREEMENT TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, in consideration of the execution and
delivery of that certain Marketing Agreement, dated as of June 3, 1996 (the
"Marketing Agreement"), and other good and valuable consideration, the receipt
of which is hereby acknowledged, APACHE MEDICAL SYSTEMS, INC., a Delaware
corporation (the "Company"), hereby grants to AMERICAN HEALTHCARE SYSTEMS
PURCHASING PARTNERS, L.P., a California limited partnership (the "Holder"), an
option to purchase a total of Fifty Thousand (50,000) shares (the "Shares") of
Common Stock of the Company, at a price per Share (the "Exercise Price") of
$13.00, subject to adjustment and upon the terms and conditions hereinafter set
forth. As used herein, the term "Common Stock" shall mean the Company's Common
Stock, $.01 par value per share after giving effect to the Company's initial
public offering, including the conversion of the Company's preferred stock and
a one for 2.86 reverse stock split.
1. Method of Exercise; Payment; Issuance of New Option
Agreement.
(a) Cash Exercise. To the extent that such right
is vested under Section 2 hereof, the purchase right represented by this Option
Agreement may be exercised by the Holder, in whole or in part and from time to
time on or after the date hereof through the tenth anniversary hereof, by (i)
the surrender of this Option Agreement (with the notice of exercise form
attached hereto as Exhibit A duly executed) at the principal office of the
Company and (ii) the payment to the Company, by certified check or wire
transfer of funds to an account specified in writing by the Company, of an
amount equal to the Exercise Price per Share multiplied by the number of Shares
being purchased. The Holder shall be deemed to have become the holder of
record of, and shall be treated for all purposes as the record holder of, the
Shares represented thereby (and such Shares shall be deemed to have been
issued) immediately prior to the close of business on the date or dates upon
which this Option Agreement is exercised. In the event of any
<PAGE> 31
exercise of the rights represented by this Option Agreement, certificates for
the Shares so purchased shall be delivered to the Holder as soon as practicable
and, unless this Option Agreement has been fully exercised or expired, a new
Option Agreement representing the portion of the Shares, if any, with respect
to which this Option Agreement shall not then have been exercised shall also be
issued to the Holder as soon as practicable.
(b) Cashless Exercise. In lieu of exercising
this Option Agreement as provided in Subsection 1(a) above, to the extent
vested under Section 2 hereof, from time to time on or after the date hereof
through the tenth anniversary hereof, the Holder may elect to receive Shares
equal to the value of this Option Agreement (or the portion thereof being
cancelled) by surrender of this Option Agreement (with the notice of exercise
form attached hereto as Exhibit A duly executed) at the principal office of the
Company together with notice of such cashless exercise, in which event the
Company shall issue to the Holder hereof a number of Shares computed using the
following formula:
Y (A - B)
X = ---------
A
Where
X - The number of Shares of Common Stock to be issued
to the Holder;
Y - The number of Shares of Common Stock vested under
Section 2 hereof;
A - The fair market value of one share of the
Company's Common Stock; and
B - The Exercise Price (as adjusted to the date of
such calculations);
provided that in no event shall "X" be less than zero (0).
(c) Fair Market Value. For purposes of
Subsection 1(b) above, fair market value of Common Stock shall mean the closing
price of the Common Stock quoted on the NASDAQ National Market if the Common
Stock is traded thereon or the closing price quoted on any national exchange on
which the Common Stock is listed, whichever is applicable, as published in The
Wall Street Journal for ten trading days prior to the date of notice of
exercise. If the Common Stock is not traded on the NASDAQ National Market or
on a national exchange, the fair market value shall be the prevailing market
price per share of Common Stock on any other securities exchange or in the
over-the-counter market as determined in good faith by the Company's Board of
Directors, which determination shall be conclusive.
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<PAGE> 32
(d) Option Reduced by Exercise. Each exercise
under this Option Agreement shall reduce the total number of Shares that may
thereafter be purchased under this Option Agreement.
2. Vesting of Option.
(a) [ * ] Benchmark Studies. Twenty
Thousand (20,000) Shares under this Option Agreement shall vest in full and
become purchasable hereunder on December 31, 1996, IF at least [ * ]
Member Hospitals (as defined in the Marketing Agreement) have Purchased a
Benchmark Study from the Company between the date of the Marketing Agreement
and December 31, 1996. If less than One Hundred Member Hospitals have
Purchased a Benchmark Study from the Company between the date of the Marketing
Agreement and December 31, 1996, none of the Twenty Thousand (20,000) Shares
shall vest or become purchasable hereunder, and this Option Agreement shall be
deemed to be reduced by such number of Shares as of such date. If at least
[ * ] Member Hospitals Purchase a Benchmark Study from the Company between
the date of the Marketing Agreement and December 31, 1999, on the date that the
last Purchase of the [ * ] Purchases of a Benchmark Study is made by a
Member Hospital, whether before or after December 31, 1996, Ten Thousand
(10,000) Shares under this Option Agreement shall vest in full and become
purchasable hereunder as of such date.
(b) [ * ] Benchmark Studies. Twenty
Thousand (20,000) Shares under this Option Agreement shall vest in full and
become purchasable hereunder, IF at least [ * ] Member Hospitals have
Purchased a Benchmark Study from the Company between the date of the Marketing
Agreement and December 31, 1999. If at least [ * ] Member Hospitals,
but less than [ * ] Member Hospitals, have Purchased a Benchmark Study
from the Company between the date of the Marketing Agreement and December 31,
1999, [ * ] Shares will vest and become purchasable hereunder after
each such Purchase over the [ * ] such Purchases made between the date
of the Marketing Agreement and December 31, 1999. If less than [ * ]
Member Hospitals have Purchased a Benchmark Study from the Company between the
date of the Marketing Agreement and December 31, 1999, this Option Agreement
shall be deemed to be reduced as of December 31, 1999 by such number of Shares
as have not vested and become purchasable as of that date. The vesting
provisions under this Section 2(b) are not affected by whether the
[ * ] Purchases are made before or after December 31, 1996.
(c) Purchases Calculation. As used in this
Section 2, the terms "Purchased", "Purchase" and "Purchases" shall mean the
binding and enforceable commitment on the part of a Member Hospital to purchase
a Benchmark Study as evidenced by a signed written agreement executed by an
authorized officer of such Member Hospital on or prior to the applicable
date(s) referenced in this Section 2.
3. Stock Fully Paid; Reservation of Shares. All Shares
that may be issued upon the exercise of the purchase rights represented by this
Option Agreement shall, upon
__________________________________
* Confidential portions omitted and filed separately with the
Commission.
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<PAGE> 33
issuance, be fully paid and nonassessable, and free from all preemptive rights,
taxes, liens and charges with respect to the issue thereof. During the period
within which the purchase rights represented by this Option Agreement may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidenced by this
Option Agreement, a sufficient number of shares of its Common Stock to provide
for the exercise of the purchase rights represented by this Option Agreement.
The Company shall at all times take all such action and obtain all such permits
or orders as may be necessary to enable the Company lawfully to issue such
shares of Common Stock as duly and validly issued, fully paid and nonassessable
shares upon exercise in full of this Option Agreement.
4. Fractional Shares. This Option Agreement may be
exercised only with respect to a whole number of Shares. No fractional Share of
Common Stock will be issued in connection with any exercise hereunder. To the
extent that the formula stated in Subsection 1(b) or the vesting under Section
2 results in a fractional Share, the aggregate number of Shares issuable shall
be rounded down to the nearest whole number of Shares.
5. Adjustment of Exercise Price and Number of Shares.
The number and kind of securities purchasable upon the exercise of this Option
Agreement and the Exercise Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Adjustment for Stock Splits and Combinations.
If the Company at any time or from time to time effects a subdivision of the
outstanding Common Stock, the Exercise Price for the Common Stock issuable upon
exercise of this Option Agreement immediately before the subdivision shall be
proportionately decreased, and conversely, if the Company at any time or from
time to time combines the outstanding Common Stock, the Exercise Price of the
Common Stock issuable upon exercise of this Option Agreement immediately before
the combination shall be proportionately increased. Any adjustment under this
Subsection 5(a) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(b) Adjustment for Certain Dividends and
Distributions. In the event the Company at any time, or from time to time,
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event the number of shares of
Common Stock issuable upon exercise of this Option Agreement shall be increased
as of the time of such issuance or, in the event such a record date is fixed,
as of the close of business on such record date, by multiplying the number of
Shares issuable upon exercise of this Option Agreement by a fraction, (i) the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution, and (ii) the denominator of which
is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date
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<PAGE> 34
fixed thereof, the number of Shares of Common Stock issuable upon exercise of
this Option Agreement shall be recomputed accordingly as of the close of
business on such record date and thereafter the number of Shares of Common
Stock issuable upon exercise of this Option Agreement shall be adjusted
pursuant to this Subsection 5(b) as of the time of actual payment of such
dividends or distributions. In the event the Company at any time, or from time
to time, makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities other than Common Stock or in other property (other than cash), then
and in each such event the Board of Directors of the Company shall make a good
faith estimate of the value per share of Common Stock of such dividend or other
distribution, and at the Board's election, either (i) the number of shares of
Common Stock issuable upon exercise of this Option Agreement shall be increased
as of the time of such issuance or, in the event such a record date is fixed,
as of the close of business on such record date to reflect the additional value
that each outstanding share of Common Stock is receiving or (ii) this Option
Agreement shall be considered as of the time of such issuance or, in the event
such a record date is fixed, as of the close of business on such record date to
include the right to receive such additional value per share at the time of
exercise by the delivery of the other securities or other property paid to the
holders of Common Stock; provided, however, that if such record date is fixed
and such dividend is not fully paid or if such distribution is not fully made
on the date fixed thereof, no adjustment shall be made to this Option Agreement
as of the close of business on such record date and thereafter this Option
Agreement shall be adjusted pursuant to this Subsection 4(b) as of the time of
actual payment of such dividends or distributions.
(c) Adjustment for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon the exercise of this Option
Agreement is changed into the same or different number of shares of any class
or classes of stock or other securities or other property, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this Section), then
and in any such event the Holder shall have the right thereafter to exercise
this Option Agreement into the kind and amount of stock and other securities or
property receivable upon such recapitalization, reclassification or other
change, by holders of the number of Shares of Common Stock for which this
Option Agreement might have been exercised immediately prior to such
recapitalization, reclassification or change, and the Exercise Price therefor
shall be appropriately adjusted, all subject to further adjustment as provided
herein and under the Company's Amended and Restated Certificate of
Incorporation, as it may be amended from time to time.
(d) Reorganization, Mergers, Consolidations or
Sales of Assets. If at any time or from time to time there is a capital
reorganization of the Common Stock (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares provided for elsewhere in
this Section) or a merger or consolidation of the Company with or into another
corporation, or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the Holder shall thereafter be entitled to receive upon exercise of this Option
Agreement, upon payment of the Exercise Price then in effect, the number of
shares of stock or other securities or property of the Company, or of the
successor corporation resulting from such merger or consolidation or sale, to
which a holder of Common Stock deliverable upon
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<PAGE> 35
conversion would have been entitled on such capital reorganization, merger,
consolidation, or sale. In any such case (except to the extent any cash or
property is received in such transaction), appropriate adjustment shall be made
in the application of the provisions of this Section and the Company's Amended
and Restated Certificate of Incorporation, as amended from time to time, with
respect to the rights of the Holder after the reorganization, merger,
consolidation or sale to the end that the provisions of this Section and the
Company's Amended and Restated Certificate of Incorporation (including
adjustment of the number of Shares of Common Stock issuable upon exercise of
this Option Agreement) shall be applicable after that event and be as nearly
equivalent to the provisions hereof as may be practicable.
(e) No Impairment. The Company will not, by
amendment of its Amended and Restated Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company but will at all times in good faith assist
in the carrying out of all the provisions of this Section and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against dilution or other impairment.
(f) Notice of Capital Changes. If at any time
the Company shall offer for subscription pro rata to the holders of shares of
Common Stock any additional shares of stock of any class, other rights or any
equity security of any kind, or there shall be any reorganization or
reclassification of the capital stock of the Company, or consolidation or
merger of the Company with, or sale of all or substantially all of its assets
to another company or there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company, then, in any one or more of said
cases, the Company shall give the Holder written notice, by registered or
certified mail, postage prepaid, of the date on which (i) a record shall be
taken for such subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of record of shares of Common Stock
shall participate in such subscription rights, or shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such written
notice shall be given at least 20 business days prior to the action in question
and not less than 20 business days prior to the record date in respect thereto.
(g) Adjustment of Number of Shares. Upon each
adjustment in the Exercise Price, the number of Shares of Common Stock
purchasable hereunder shall be adjusted, to the nearest whole share, to the
product obtained by multiplying the number of Shares purchasable immediately
prior to such adjustment in the Exercise Price by a fraction, the numerator of
which shall be the Exercise Price immediately prior to such adjustment and the
denominator of which shall be the Exercise Price immediately thereafter.
(h) No Greater Anti-Dilution Protection. The
Company hereby represents and warrants to the Holder that as of the date hereof
the Company is not contractually committed to provide any greater or more
favorable anti-dilution protection to any holder of an
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<PAGE> 36
option, warrant or other contractual right to acquire shares of Common Stock of
the Company than those rights granted to the Holder in this Section 4. The
Company further covenants and agrees that if, after the date hereof, it shall
grant to any person having the contractual right to acquire shares of Common
Stock anti-dilution protection that is greater or more favorable than the
rights granted to the Holder in this Section 4, the Company shall promptly give
written notice to the Holder of such rights and shall automatically extend such
greater or more favorable rights to the Holder as of the date of the grant of
such rights to such other party.
6. Notice of Adjustments. Whenever the Exercise Price
or the number of Shares purchasable hereunder shall be adjusted pursuant to
Paragraph 5 hereof, the Company shall make a certificate signed by an officer
of the Company setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, and the Exercise Price and the number of Shares purchasable
after giving effect to such adjustment, and shall cause copies of such
certificate to be delivered to the Holder.
7. Compliance with Securities Act; Disposition of Option
Agreement or Shares of Common Stock.
(a) Compliance with Securities Act. The Holder,
by acceptance hereof, agrees that this Option Agreement and the Shares of
Common Stock to be issued upon exercise hereof are being acquired for
investment and that the Holder will not offer, sell or otherwise dispose of any
Shares of Common Stock to be issued upon exercise hereof except under
circumstances which will not result in a violation of the registration
provisions of the Securities Act of 1933, as amended (the "Act"). All Shares
of Common Stock issued upon exercise of this Option Agreement (unless
registered under the Act) shall be stamped or imprinted with a legend in
substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR
DISPOSITION MAY BE EFFECTED UNLESS (i) THE SECURITY
IS REGISTERED UNDER THE ACT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (ii) AN
OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, IS OBTAINED TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED, OR
(iii) A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION IS OBTAINED TO THE EFFECT THAT NO
ENFORCEMENT ACTION WILL BE PURSUED IF THE SECURITY IS
SOLD OR DISPOSED OF WITHOUT REGISTRATION UNDER SUCH
ACT."
(b) Disposition of Shares. With respect to any
offer, sale or other disposition of any Shares of Common Stock acquired
pursuant to the exercise of this Option
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<PAGE> 37
Agreement prior to registration of such Shares, the Holder agrees to give
written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of the Holder's counsel, reasonably
acceptable to the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the
Act as then in effect or any federal or state law then in effect) of such
Shares of Common Stock and indicating whether or not under the Act certificates
for such Shares of Common Stock to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
insure compliance with the Act. Promptly upon receiving such written notice
and reasonably satisfactory opinion, if so requested, the Company, as promptly
as practicable, shall notify the Holder that the Holder may sell or otherwise
dispose of such Shares of Common Stock, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this Subsection 7(b) that the opinion of counsel for the Holder is not
reasonably satisfactory to the Company, the Company shall so notify the Holder
promptly after such determination has been made. Notwithstanding the
foregoing, such Shares of Common Stock may be offered, sold or otherwise
disposed of in accordance with Rule 144 under the Act, provided that the
Company may request a reasonable assurance that the provisions of Rule 144 have
been satisfied. The Company hereby covenants to use its best efforts to file
all reports required to be filed by it under the Exchange Act, so that the
requirement of paragraph (c) of Rule 144 promulgated under the Act as to
adequate current public information shall be satisfied. Each certificate
representing Shares of Common Stock thus transferred (except a transfer
pursuant to Rule 144) shall bear a legend as to the applicable restrictions on
transferability in order to insure compliance with the Act, unless in the
aforesaid opinion of counsel for the Holder, such legend is not required in
order to insure compliance with the Act. The Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
8. Nature of the Option. This Option Agreement contains
the grant of a non-statutory option and is not intended to qualify for any
special tax benefits to the Holder.
9. Limitation of Liability. No provision hereof, in the
absence of affirmative action by the Holder to purchase Shares of Common Stock,
and no enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of the Holder for the purchase price of any
Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
10. No Rights as Stockholder. The Holder, as such, shall
not be entitled to vote or receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the Holder, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Option Agreement shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
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<PAGE> 38
11. Representations and Warranties. The Company
represents and warrants to the Holder as follows:
(a) This Option Agreement has been duly
authorized and executed by the Company and is a valid and binding obligation of
the Company enforceable in accordance with its terms;
(b) The Shares have been duly authorized and
reserved for issuance by the Company and, when issued in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable;
(c) The rights, preferences, privileges and
restrictions granted to or imposed upon the Shares and the holders thereof are
as set forth in the Company's Amended and Restated Certificate of
Incorporation, a true and complete copy of which has been delivered to the
Holder; and
(d) The execution and delivery of this Option
Agreement are not, and the issuance of the Shares upon exercise of this Option
Agreement in accordance with the terms hereof will not be, inconsistent with
the Company's Amended and Restated Certificate of Incorporation or by-laws, do
not and will not contravene any law, governmental rule or regulation, judgment
or order applicable to the Company, and, except for consents that have already
been obtained by the Company, do not and will not conflict with or contravene
any provision of, or constitute a default under, any indenture, mortgage,
contract or other instrument of which the Company is a party or by which it is
bound or require the consent or approval of, the giving of notice to, the
registration with or the taking of any action in respect of or by, any Federal,
state or local government authority or agency or other person.
12. Modification and Waiver. This Option Agreement and
any provision hereof may be changed, waived, discharged or terminated only by
an instrument in writing signed by the party against which enforcement of the
same is sought.
13. Notices. Any notice, request or other document
required or permitted to be given or delivered to the Holder or the Company
shall be delivered, or shall be sent by certified or registered mail, postage
prepaid, to the addresses indicated below:
If to the Company at:
APACHE Medical Systems, Inc.
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102-3915
Attention: Gerald E. Bisbee, Jr., Ph.D., Chairman and Chief
Executive Officer
With a copy to:
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<PAGE> 39
Gardner, Carton & Douglas
321 North Clark Street - Suite 3200
Chicago, Illinois 60610
Attention: Nancy M. Borders
If to the Holder:
American Healthcare Systems Purchasing Partners, L.P.
4501 Charlotte Park Drive
P.O. Box 668800
Charlotte, North Carolina 28266
Attention: Vice Chairman
with copies to:
American Healthcare Systems Purchasing Partners, L.P.
12730 High Bluff Drive
Suite 300
San Diego, California 92130
Attention: Treasurer
Neal, Gerber & Eisenberg
Two North LaSalle Street - Suite 2200
Chicago, Illinois 60602
Attention: Charles Evans Gerber
14. No Assignment; Binding Effect on Successors. This
Option Agreement may not be sold, pledged, assigned, hypothecated, transferred
or disposed of by the Holder in any manner, provided, however, that the Holder
may assign and transfer this Option Agreement to any entity formed and operated
as a successor to the Holder in the business of acting as a purchasing agent
for Member Hospitals, and provided further that, in the event that the Holder
intends to include any Shares purchasable hereunder in an underwritten offering
of Common Stock, the Holder may assign and transfer the right to purchase such
Shares to the underwriter so as to allow the underwriter to purchase such
Shares for inclusion in the underwritten offering. This Option Agreement shall
be binding upon any corporation succeeding the Company by merger, consolidation
or acquisition of all or substantially all of the Company's assets, and all of
the obligations of the Company relating to the Common Stock issuable upon the
exercise of this Option Agreement shall survive the exercise and termination of
this Option Agreement. All of the covenants and agreements of the Company
hereunder shall inure to the benefit of the successors of the Holder and all of
the covenants and agreements of the Holder hereunder shall inure to the benefit
of the successors of the Company.
15. Descriptive Headings. The descriptive headings of
the several paragraphs of this Option Agreement are inserted for convenience
only and do not constitute a part of this Option Agreement.
-10-
<PAGE> 40
16. Governing Law. This Option Agreement shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the internal laws of the State of Delaware, without regard to
principles of conflicts of law.
Dated: ________________________________ APACHE MEDICAL SYSTEMS, INC.
By: _____________________________
Title: __________________________
-11-
<PAGE> 41
EXHIBIT A
NOTICE OF EXERCISE
To: APACHE MEDICAL SYSTEMS, INC.
(1) The undersigned hereby elects to purchase
________ shares of Common Stock of APACHE MEDICAL SYSTEMS, INC. pursuant to the
terms of the attached Option Agreement, and (unless such election is being made
pursuant to Subsection 1(b) of such Option Agreement) tenders herewith payment
of the Exercise Price for such shares in full.
(2) The undersigned is aware of the Company's
business affairs and financial condition, and has acquired all such information
about the Company as it deems necessary and appropriate to enable it to reach
an informed and knowledgeable decision to acquire such shares of Common Stock.
In exercising this Option Agreement, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
("Securities Act"), and that the undersigned will not offer, sell or otherwise
dispose of any such shares of Common Stock except under circumstances that will
not result in a violation of the registration provisions of the Securities Act
or any state securities laws.
(3) The undersigned understands that such shares
of Common Stock have not been registered under the Securities Act in reliance
upon a specific exemption therefrom, which exemption depends upon, among other
things, the bona fide nature of its investment intent as expressed herein.
(4) The undersigned is able, without impairing
its financial condition, to hold such shares of Common Stock for an indefinite
period of time and to suffer a complete loss of its investment. The
undersigned understands that the Company is under no obligation to it to
register such shares, except as provided in that Registration Agreement dated
as of ___________, 1996. In addition, the undersigned understands that the
certificate evidencing these shares will be imprinted with a legend which
prohibits the transfer of the shares unless (i) they are registered, (ii) such
registration is not required in the opinion of counsel reasonably acceptable to
the Company, or (iii) a letter from the Securities and Exchange Commission is
obtained to the effect that no enforcement action will be taken if the shares
are transferred.
(5) The undersigned is familiar with the current
provisions of Rule 144, promulgated under the Securities Act, which, in
substance, permits limited public resale of "restricted securities" acquired,
directly or indirectly, from the issuer thereof (or from an affiliate of such
issuer), in a offering subject to the satisfaction of certain conditions,
including, among other things: (i) the availability of certain public
information about the Company; (ii) the resale occurring not less than two
years after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than three
(3) years the sale being made through a
-12-
<PAGE> 42
broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act
of 1934) and the amount of securities being sold during any three-month period
not exceeding the specified limitations stated therein, if applicable.
(6) The undersigned further understands that at
the time it wishes to sell such shares of Common Stock there may be no public
market upon which to make such a sale, and that, even if such a public market
then exists, the Company may not be satisfying the current public information
requirements of Rule 144, and that, in such event, it would be precluded from
selling such shares under Rule 144 even if the two-year minimum holding period
had been satisfied. It understands that the Company is under no obligation to
it to make Rule 144 available.
(7) The undersigned further understands that in
the event all of the applicable requirements of Rule 144 are not satisfied,
registration under the Securities Act, compliance with Regulation A, or some
other registration exemption will be required; and that, notwithstanding the
fact that Rule 144 is not exclusive, the Staff of the Securities and Exchange
Commission has expressed its opinion that persons proposing to sell private
placement securities other than in a registered offering and otherwise than
pursuant to Rule 144 will have a substantial burden of proof in establishing
that an exemption from registration is available from such offers or sales, and
that such persons and their respective brokers who participate in such
transactions do so at their own risk.
(8) Please issue a certificate or certificates
representing said shares of Common Stock in the name of the undersigned and, if
appropriate, please issue a new Option Agreement for the unexercised portion,
if any, of the attached Option Agreement in the name of the undersigned.
Dated: _____________________________________
American Healthcare Systems Purchasing Partners, L.P.
By: American Healthcare Plans, Inc.,
its general partner
________________________________________
By:_____________________________________
Its:____________________________________
-13-
<PAGE> 43
EXHIBIT C
[NON-BENCHMARK STUDY OPTION]
THIS OPTION AND THE SECURITIES REPRESENTED BY THIS OPTION HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT") AND MAY
NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
APACHE MEDICAL SYSTEMS, INC.
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102-3915
OPTION AGREEMENT TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, in consideration of the execution and
delivery of that certain Marketing Agreement, dated as of June 3, 1996 (the
"Marketing Agreement"), and other good and valuable consideration, the receipt
of which is hereby acknowledged, APACHE MEDICAL SYSTEMS, INC., a Delaware
corporation (the "Company"), hereby grants to AMERICAN HEALTHCARE SYSTEMS
PURCHASING PARTNERS, L.P., a California limited partnership (the "Holder"), an
option to purchase a total of Two Hundred Fifty Thousand Eight Hundred Six
(250,806) shares (the "Shares") of Common Stock of the Company, at a price per
Share (the "Exercise Price") of $13.00, subject to adjustment and upon the
terms and conditions hereinafter set forth. As used herein, the term "Common
Stock" shall mean the Company's Common Stock, $.01 par value per share after
giving effect to the Company's initial public offering, including the
conversion of the Company's preferred stock and a one for 2.86 reverse stock
split.
1. Method of Exercise; Payment; Issuance of New Option
Agreement.
(a) Cash Exercise. To the extent that such right
is vested under Section 2 hereof, the purchase right represented by this Option
Agreement may be exercised by the Holder, in whole or in part and from time to
time on or after the date hereof through the tenth anniversary hereof, by (i)
the surrender of this Option Agreement (with the notice of exercise form
attached hereto as Exhibit A duly executed) at the principal office of the
Company and (ii) the payment to the Company, by certified check or wire
transfer of funds to an account specified in writing by the Company, of an
amount equal to the Exercise Price per Share multiplied by the number of Shares
being purchased. The Holder shall be deemed to have become the holder of
record of, and shall be treated for all purposes as the record holder of, the
Shares represented thereby (and such Shares shall be deemed to have been
issued) immediately prior to the close of
<PAGE> 44
business on the date or dates upon which this Option Agreement is exercised.
In the event of any exercise of the rights represented by this Option
Agreement, certificates for the Shares so purchased shall be delivered to the
Holder as soon as practicable and, unless this Option Agreement has been fully
exercised or expired, a new Option Agreement representing the portion of the
Shares, if any, with respect to which this Option Agreement shall not then have
been exercised shall also be issued to the Holder as soon as practicable.
(b) Cashless Exercise. In lieu of exercising
this Option Agreement as provided in Subsection 1(a) above, to the extent
vested under Section 2 hereof, from time to time on or after the date hereof
through the tenth anniversary hereof, the Holder may elect to receive Shares
equal to the value of this Option Agreement (or the portion thereof being
cancelled) by surrender of this Option Agreement (with the notice of exercise
form attached hereto as Exhibit A duly executed) at the principal office of the
Company together with notice of such cashless exercise, in which event the
Company shall issue to the Holder hereof a number of Shares computed using the
following formula:
Y (A - B)
X = ---------
A
Where
<TABLE>
<S> <C> <C>
X - The number of Shares of Common Stock to be issued to the Holder;
Y - The number of Shares of Common Stock vested under Section 2 hereof;
A - The fair market value of one share of the Company's Common Stock; and
B - The Exercise Price (as adjusted to the date of such calculations);
</TABLE>
provided that in no event shall "X" be less than zero (0).
(c) Fair Market Value. For purposes of
Subsection 1(b) above, fair market value of Common Stock shall mean the closing
price of the Common Stock quoted on the NASDAQ National Market if the Common
Stock is traded thereon or the closing price quoted on any national exchange on
which the Common Stock is listed, whichever is applicable, as published in The
Wall Street Journal for ten trading days prior to the date of notice of
exercise. If the Common Stock is not traded on the NASDAQ National Market or
on a national exchange, the fair market value shall be the prevailing market
price per share of Common Stock on any other securities exchange or in the
over-the-counter market as determined in good faith by the Company's Board of
Directors, which determination shall be conclusive.
<PAGE> 45
(d) Option Reduced by Exercise. Each exercise
under this Option Agreement shall reduce the total number of Shares that may
thereafter be purchased under this Option Agreement.
2. Vesting of Option.
(a) Fiscal Quarter Vesting of Non-Benchmark
Sales. Up to One Hundred Fifty-Six Thousand Four Hundred (156,400) Shares
under this Option Agreement are eligible to vest and become purchasable
hereunder under this Subsection 2(a) based upon the total cumulative Sales of
non-Benchmark Study products and services made by the Company to Member
Hospitals (as defined in the Marketing Agreement) between the date of the
Marketing Agreement and December 31, 1999. All 156,400 Shares shall vest in
full and become purchasable hereunder, IF at the total cumulative Sales of
non-Benchmark Study products and services made by the Company to Member
Hospitals between the date of the Marketing Agreement and December 31, 1999 is
[ * ] or more. The total cumulative number of Shares vested under this
Subsection 2(a) shall be calculated after the completion of each fiscal quarter
as provided below in Subsection 2(c), starting with September 30, 1996 and
ending with December 31, 1999 or such earlier fiscal quarter end by which all
156,400 Shares have become fully vested; provided, however, the first
calculation shall be for the period from the date hereof through September 30,
1996. The total cumulative number of Shares that shall vest after the end of
the end of each such fiscal quarter shall be equal to the number of Shares, up
to 156,400, determined by multiplying 156,400 by a fraction the numerator of
which is the total cumulative Sales of non-Benchmark Study products and
services made by the Company to Member Hospitals from the date of the Marketing
Agreement through the end of such fiscal quarter and the denominator of which
is [ * ]. This Option Agreement shall be deemed to be reduced as of
December 31, 1999 by such number of Shares as have not vested and become
purchasable as of that date.
(b) Annual Vesting of Non-Benchmark Sales.
Up to Ninety-Four Thousand Four Hundred Six (94,406) Shares under this
Option Agreement are eligible to vest and become purchasable under this
Subsection 2(b) after the end of each fiscal year based upon the total Sales of
non-Benchmark Study products and services made by the Company to Member
Hospitals during each such year ended December 31, starting with fiscal year
1996, as is set forth below:
<TABLE>
<CAPTION>
YEAR ANNUAL SALES SHARES VESTED
---- ------------ -------------
<S> <C> <C>
1996 [ * ] 23,426
1997 [ * ] 23,426
1998 [ * ] 23,777
1999 [ * ] 23,777
</TABLE>
__________________________________
* Confidential portions omitted and filed separately with the Commission.
-3-
<PAGE> 46
If one of the foregoing annual Sales targets is not reached, none of the Shares
listed for such fiscal year shall vest, and this Option Agreement shall be
deemed to be reduced by such number of Shares as of the end of such fiscal
year. If the annual Sales target for a given fiscal year is reached prior to
the end of such fiscal year, the Shares listed as vested shall be considered
vested as of the last day of such fiscal year, on which the annual Sales target
is reached. If the actual Sales of Non-Benchmark Study products and services
made to Member Hospitals for a given fiscal year is greater than the annual
Sales target for such fiscal year, the difference between the actual Sales of
Non-Benchmark Study products and services made to Member Hospitals for such
fiscal year and the annual Sales target for such year shall be carried forward
into the next fiscal year or years and applied as if such Sales were made in
the latter fiscal year or years.
(c) Sales Calculation. As used in this Section
2, the terms "Sales" and "Sale" shall mean the total net dollar amount of sales
to Member Hospitals for non-Benchmark Study products and services as reflected
in binding and enforceable written sales contracts or any amendments or
supplements thereto signed by authorized officers of Premier Hospitals and
accepted by the Company. A "Sale" of a non-Benchmark Study product or service
shall be considered to be made for the purposes of this Section 2 as of the
date, on or after execution of such contract, amendment or supplement, on which
the customary, required down payment has been received by the Company, or if
such down payment is not required or is waived, on the date of the execution of
such contract, amendment or supplement; provided, however, that if the price
given to a Member Hospital for a non-Benchmark Study product or service is
later retroactively reduced by the Company, the Sales for the applicable
quarter and the applicable year shall be reduced by the same amount as the
reduction. In addition, if prior to December 31, 1999 the Company has sold
[ * ] Benchmark Studies to Premier Hospitals, the net dollar amount of each
additional Benchmark Study sale over the first [ * ] such sales shall be
treated for the purposes of this Section 2 as a Sale of non-Benchmark Study
products and services. The Company shall calculate the Sales (cumulative in
the case of Subsection 2(a) and annual in the case of Subsection 2(b)), within
twenty (20) days of the end of each fiscal quarter in the case of Subsection
2(a) and within forty-five (45) days of the end of each fiscal year in the case
of Subsection 2(b), and shall promptly deliver this calculation to the Holder.
The Holder may challenge any such calculation if it believes in good faith that
such calculation is not accurate by giving written notice to the Company of
such challenge within forty (40) days of the end of such fiscal quarter or
within seventy-five (75) days of such fiscal year, as the case may be, stating
the amount of Sales which it believes is the correct number. If the Holder so
challenges such calculation and the Company does not agree with the Holder's
stated amount of Sales, KMPG Peat Marwick LLP (or such other nationally
recognized accounting firm as shall then be the auditors for the Company) (the
"Auditors") shall determine the correct amount of cumulative Sales or Sales for
such period, as the case may be, and its determination shall be binding upon
the Company and the Holder. The fees and expenses of the Auditors shall be
borne by the party whose Sales calculation was further from the amount of Sales
determined by the Auditors.
3. Stock Fully Paid; Reservation of Shares. All Shares
that may be issued upon the exercise of the purchase rights represented by this
Option Agreement shall, upon issuance, be fully paid and nonassessable, and
free from all preemptive rights, taxes, liens and
__________________________________
* Confidential portions omitted and filed separately with the
Commission.
-4-
<PAGE> 47
charges with respect to the issue thereof. During the period within which the
purchase rights represented by this Option Agreement may be exercised, the
Company will at all times have authorized, and reserved for the purpose of the
issue upon exercise of the purchase rights evidenced by this Option Agreement,
a sufficient number of shares of its Common Stock to provide for the exercise
of the purchase rights represented by this Option Agreement. The Company shall
at all times take all such action and obtain all such permits or orders as may
be necessary to enable the Company lawfully to issue such shares of Common
Stock as duly and validly issued, fully paid and nonassessable shares upon
exercise in full of this Option Agreement.
4. Fractional Shares. This Option Agreement may be
exercised only with respect to a whole number of Shares. No fractional Share of
Common Stock will be issued in connection with any exercise hereunder. To the
extent that the formula stated in Subsection 1(b) or the vesting under Section
2 results in a fractional Share, the aggregate number of Shares issuable shall
be rounded down to the nearest whole number of Shares.
5. Adjustment of Exercise Price and Number of Shares.
The number and kind of securities purchasable upon the exercise of this Option
Agreement and the Exercise Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Adjustment for Stock Splits and Combinations.
If the Company at any time or from time to time effects a subdivision of the
outstanding Common Stock, the Exercise Price for the Common Stock issuable upon
exercise of this Option Agreement immediately before the subdivision shall be
proportionately decreased, and conversely, if the Company at any time or from
time to time combines the outstanding Common Stock, the Exercise Price of the
Common Stock issuable upon exercise of this Option Agreement immediately before
the combination shall be proportionately increased. Any adjustment under this
Subsection 5(a) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(b) Adjustment for Certain Dividends and
Distributions. In the event the Company at any time, or from time to time,
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event the number of shares of
Common Stock issuable upon exercise of this Option Agreement shall be increased
as of the time of such issuance or, in the event such a record date is fixed,
as of the close of business on such record date, by multiplying the number of
Shares issuable upon exercise of this Option Agreement by a fraction, (i) the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution, and (ii) the denominator of which
is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date fixed thereof, the number of Shares of Common Stock issuable upon exercise
of this Option
-5-
<PAGE> 48
Agreement shall be recomputed accordingly as of the close of business on such
record date and thereafter the number of Shares of Common Stock issuable upon
exercise of this Option Agreement shall be adjusted pursuant to this Subsection
5(b) as of the time of actual payment of such dividends or distributions. In
the event the Company at any time, or from time to time, makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities other than
Common Stock or in other property (other than cash), then and in each such
event the Board of Directors of the Company shall make a good faith estimate of
the value per share of Common Stock of such dividend or other distribution, and
at the Board's election, either (i) the number of shares of Common Stock
issuable upon exercise of this Option Agreement shall be increased as of the
time of such issuance or, in the event such a record date is fixed, as of the
close of business on such record date to reflect the additional value that each
outstanding share of Common Stock is receiving or (ii) this Option Agreement
shall be considered as of the time of such issuance or, in the event such a
record date is fixed, as of the close of business on such record date to
include the right to receive such additional value per share at the time of
exercise by the delivery of the other securities or other property paid to the
holders of Common Stock; provided, however, that if such record date is fixed
and such dividend is not fully paid or if such distribution is not fully made
on the date fixed thereof, no adjustment shall be made to this Option Agreement
as of the close of business on such record date and thereafter this Option
Agreement shall be adjusted pursuant to this Subsection 4(b) as of the time of
actual payment of such dividends or distributions.
(c) Adjustment for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon the exercise of this Option
Agreement is changed into the same or different number of shares of any class
or classes of stock or other securities or other property, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this Section), then
and in any such event the Holder shall have the right thereafter to exercise
this Option Agreement into the kind and amount of stock and other securities or
property receivable upon such recapitalization, reclassification or other
change, by holders of the number of Shares of Common Stock for which this
Option Agreement might have been exercised immediately prior to such
recapitalization, reclassification or change, and the Exercise Price therefor
shall be appropriately adjusted, all subject to further adjustment as provided
herein and under the Company's Amended and Restated Certificate of
Incorporation, as it may be amended from time to time.
(d) Reorganization, Mergers, Consolidations or
Sales of Assets. If at any time or from time to time there is a capital
reorganization of the Common Stock (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares provided for elsewhere in
this Section) or a merger or consolidation of the Company with or into another
corporation, or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the Holder shall thereafter be entitled to receive upon exercise of this Option
Agreement, upon payment of the Exercise Price then in effect, the number of
shares of stock or other securities or property of the Company, or of the
successor corporation resulting from such merger or consolidation or sale, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such capital reorganization, merger, consolidation, or
-6-
<PAGE> 49
sale. In any such case (except to the extent any cash or property is
received in such transaction), appropriate adjustment shall be made in the
application of the provisions of this Section and the Company's Amended and
Restated Certificate of Incorporation, as amended from time to time, with
respect to the rights of the Holder after the reorganization, merger,
consolidation or sale to the end that the provisions of this Section and the
Company's Amended and Restated Certificate of Incorporation (including
adjustment of the number of Shares of Common Stock issuable upon exercise of
this Option Agreement) shall be applicable after that event and be as nearly
equivalent to the provisions hereof as may be practicable.
(e) No Impairment. The Company will not, by
amendment of its Amended and Restated Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company but will at all times in good faith assist
in the carrying out of all the provisions of this Section and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against dilution or other impairment.
(f) Notice of Capital Changes. If at any time
the Company shall offer for subscription pro rata to the holders of shares of
Common Stock any additional shares of stock of any class, other rights or any
equity security of any kind, or there shall be any reorganization or
reclassification of the capital stock of the Company, or consolidation or
merger of the Company with, or sale of all or substantially all of its assets
to another company or there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company, then, in any one or more of said
cases, the Company shall give the Holder written notice, by registered or
certified mail, postage prepaid, of the date on which (i) a record shall be
taken for such subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of record of shares of Common Stock
shall participate in such subscription rights, or shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such written
notice shall be given at least 20 business days prior to the action in question
and not less than 20 business days prior to the record date in respect thereto.
(g) Adjustment of Number of Shares. Upon each
adjustment in the Exercise Price, the number of Shares of Common Stock
purchasable hereunder shall be adjusted, to the nearest whole share, to the
product obtained by multiplying the number of Shares purchasable immediately
prior to such adjustment in the Exercise Price by a fraction, the numerator of
which shall be the Exercise Price immediately prior to such adjustment and the
denominator of which shall be the Exercise Price immediately thereafter.
(h) No Greater Anti-Dilution Protection. The
Company hereby represents and warrants to the Holder that as of the date hereof
the Company is not contractually committed to provide any greater or more
favorable anti-dilution protection to any holder of an option, warrant or other
contractual right to acquire shares of Common Stock of the Company than those
rights granted to the Holder in this Section 4. The Company further covenants
and
-7-
<PAGE> 50
agrees that if, after the date hereof, it shall grant to any person having the
contractual right to acquire shares of Common Stock anti-dilution protection
that is greater or more favorable than the rights granted to the Holder in this
Section 4, the Company shall promptly give written notice to the Holder of such
rights and shall automatically extend such greater or more favorable rights to
the Holder as of the date of the grant of such rights to such other party.
6. Notice of Adjustments. Whenever the Exercise Price
or the number of Shares purchasable hereunder shall be adjusted pursuant to
Paragraph 5 hereof, the Company shall make a certificate signed by an officer
of the Company setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, and the Exercise Price and the number of Shares purchasable
after giving effect to such adjustment, and shall cause copies of such
certificate to be delivered to the Holder.
7. Compliance with Securities Act; Disposition of Option
Agreement or Shares of Common Stock.
(a) Compliance with Securities Act. The Holder,
by acceptance hereof, agrees that this Option Agreement and the Shares of
Common Stock to be issued upon exercise hereof are being acquired for
investment and that the Holder will not offer, sell or otherwise dispose of any
Shares of Common Stock to be issued upon exercise hereof except under
circumstances which will not result in a violation of the registration
provisions of the Securities Act of 1933, as amended (the "Act"). All Shares
of Common Stock issued upon exercise of this Option Agreement (unless
registered under the Act) shall be stamped or imprinted with a legend in
substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR
DISPOSITION MAY BE EFFECTED UNLESS (i) THE SECURITY
IS REGISTERED UNDER THE ACT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (ii) AN
OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, IS OBTAINED TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED, OR
(iii) A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION IS OBTAINED TO THE EFFECT THAT NO
ENFORCEMENT ACTION WILL BE PURSUED IF THE SECURITY IS
SOLD OR DISPOSED OF WITHOUT REGISTRATION UNDER SUCH
ACT."
(b) Disposition of Shares. With respect to any
offer, sale or other disposition of any Shares of Common Stock acquired
pursuant to the exercise of this Option Agreement prior to registration of such
Shares, the Holder agrees to give written notice to the
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<PAGE> 51
Company prior thereto, describing briefly the manner thereof, together with a
written opinion of the Holder's counsel, reasonably acceptable to the Company,
to the effect that such offer, sale or other disposition may be effected
without registration or qualification (under the Act as then in effect) of such
Shares of Common Stock and indicating whether or not under the Act certificates
for such Shares of Common Stock to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
insure compliance with the Act. Promptly upon receiving such written notice
and reasonably satisfactory opinion, if so requested, the Company, as promptly
as practicable, shall notify the Holder that the Holder may sell or otherwise
dispose of such Shares of Common Stock, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this Subsection 7(b) that the opinion of counsel for the Holder is not
reasonably satisfactory to the Company, the Company shall so notify the Holder
promptly after such determination has been made. Notwithstanding the
foregoing, such Shares of Common Stock may be offered, sold or otherwise
disposed of in accordance with Rule 144 under the Act, provided that the
Company may request a reasonable assurance that the provisions of Rule 144 have
been satisfied. The Company hereby covenants to use its best efforts to file
all reports required to be filed by it under the Exchange Act, so that the
requirement of paragraph (c) of Rule 144 promulgated under the Act as to
adequate current public information shall be satisfied. Each certificate
representing Shares of Common Stock thus transferred (except a transfer
pursuant to Rule 144) shall bear a legend as to the applicable restrictions on
transferability in order to insure compliance with the Act, unless in the
aforesaid opinion of counsel for the Holder, such legend is not required in
order to insure compliance with the Act. The Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
8. Nature of the Option. This Option Agreement contains
the grant of a non-statutory option and is not intended to qualify for any
special tax benefits to the Holder.
9. Limitation of Liability. No provision hereof, in the
absence of affirmative action by the Holder to purchase Shares of Common Stock,
and no enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of the Holder for the purchase price of any
Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
10. No Rights as Stockholder. The Holder, as such, shall
not be entitled to vote or receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the Holder, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Option Agreement shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
11. Representations and Warranties. The Company
represents and warrants to the Holder as follows:
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(a) This Option Agreement has been duly
authorized and executed by the Company and is a valid and binding obligation of
the Company enforceable in accordance with its terms;
(b) The Shares have been duly authorized and
reserved for issuance by the Company and, when issued in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable;
(c) The rights, preferences, privileges and
restrictions granted to or imposed upon the Shares and the holders thereof are
as set forth in the Company's Amended and Restated Certificate of
Incorporation, a true and complete copy of which has been delivered to the
Holder; and
(d) The execution and delivery of this Option
Agreement are not, and the issuance of the Shares upon exercise of this Option
Agreement in accordance with the terms hereof will not be, inconsistent with
the Company's Amended and Restated Certificate of Incorporation or by-laws, do
not and will not contravene any law, governmental rule or regulation, judgment
or order applicable to the Company, and, except for consents that have already
been obtained by the Company, do not and will not conflict with or contravene
any provision of, or constitute a default under, any indenture, mortgage,
contract or other instrument of which the Company is a party or by which it is
bound or require the consent or approval of, the giving of notice to, the
registration with or the taking of any action in respect of or by, any Federal,
state or local government authority or agency or other person.
12. Modification and Waiver. This Option Agreement and
any provision hereof may be changed, waived, discharged or terminated only by
an instrument in writing signed by the party against which enforcement of the
same is sought.
13. Notices. Any notice, request or other document
required or permitted to be given or delivered to the Holder or the Company
shall be delivered, or shall be sent by certified or registered mail, postage
prepaid, to the addresses indicated below:
If to the Company at:
APACHE Medical Systems, Inc.
1650 Tysons Boulevard, Suite 300
McLean, Virginia 22102-3915
Attention: Gerald E. Bisbee, Jr., Ph.D., Chairman and Chief
Executive Officer
With a copy to:
Gardner, Carton & Douglas
321 North Clark Street - Suite 3200
Chicago, Illinois 60610
Attention: Nancy M. Borders
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If to the Holder:
American Healthcare Systems Purchasing Partners, L.P.
4501 Charlotte Park Drive
P.O. Box 668800
Charlotte, North Carolina 28266
Attention: Vice Chairman
with copies to:
American Healthcare Systems Purchasing Partners, L.P.
12730 High Bluff Drive
Suite 300
San Diego, California 92130
Attention: Treasurer
Neal, Gerber & Eisenberg
Two North LaSalle Street - Suite 2200
Chicago, Illinois 60602
Attention: Charles Evans Gerber
14. No Assignment; Binding Effect on Successors. This
Option Agreement may not be sold, pledged, assigned, hypothecated, transferred
or disposed of by the Holder in any manner, provided, however, that the Holder
may assign and transfer this Option Agreement to any entity formed and operated
as a successor to the Holder in the business of acting as a purchasing agent
for Member Hospitals, and provided further that, in the event that the Holder
intends to include any Shares purchasable hereunder in an underwritten offering
of Common Stock, the Holder may assign and transfer the right to purchase such
Shares to the underwriter so as to allow the underwriter to purchase such
Shares for inclusion in the underwritten offering.
This Option Agreement shall be binding upon any corporation
succeeding the Company by merger, consolidation or acquisition of all or
substantially all of the Company's assets, and all of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Option
Agreement shall survive the exercise and termination of this Option Agreement.
All of the covenants and agreements of the Company hereunder shall inure to the
benefit of the successors of the Holder and all of the covenants and agreements
of the Holder hereunder shall inure to the benefit of the successors of the
Company.
15. Descriptive Headings. The descriptive headings of
the several paragraphs of this Option Agreement are inserted for convenience
only and do not constitute a part of this Option Agreement.
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<PAGE> 54
16. Governing Law. This Option Agreement shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the internal laws of the State of Delaware, without regard to
principles of conflicts of law.
Dated: ____________________________ APACHE MEDICAL SYSTEMS, INC.
By: _________________________
Title: ______________________
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<PAGE> 55
EXHIBIT A
NOTICE OF EXERCISE
To: APACHE MEDICAL SYSTEMS, INC.
(1) The undersigned hereby elects to purchase
________ shares of Common Stock of APACHE MEDICAL SYSTEMS, INC. pursuant to the
terms of the attached Option Agreement, and (unless such election is being made
pursuant to Subsection 1(b) of such Option Agreement) tenders herewith payment
of the Exercise Price for such shares in full.
(2) The undersigned is aware of the Company's
business affairs and financial condition, and has acquired all such information
about the Company as it deems necessary and appropriate to enable it to reach
an informed and knowledgeable decision to acquire such shares of Common Stock.
In exercising this Option Agreement, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
("Securities Act"), and that the undersigned will not offer, sell or otherwise
dispose of any such shares of Common Stock except under circumstances that will
not result in a violation of the registration provisions of the Securities Act
or any state securities laws.
(3) The undersigned understands that such shares
of Common Stock have not been registered under the Securities Act in reliance
upon a specific exemption therefrom, which exemption depends upon, among other
things, the bona fide nature of its investment intent as expressed herein.
(4) The undersigned is able, without impairing
its financial condition, to hold such shares of Common Stock for an indefinite
period of time and to suffer a complete loss of its investment. The
undersigned understands that the Company is under no obligation to it to
register such shares, except as provided in that Registration Agreement dated
as of __________, 1996. In addition, the undersigned understands that the
certificate evidencing these shares will be imprinted with a legend which
prohibits the transfer of the shares unless (i) they are registered, (ii) such
registration is not required in the opinion of counsel reasonably acceptable to
the Company, or (iii) a letter from the Securities and Exchange Commission is
obtained to the effect that no enforcement action will be taken if the shares
are transferred.
(5) The undersigned is familiar with the current
provisions of Rule 144, promulgated under the Securities Act, which, in
substance, permits limited public resale of "restricted securities" acquired,
directly or indirectly, from the issuer thereof (or from an affiliate of such
issuer), in a offering subject to the satisfaction of certain conditions,
including, among other things: (i) the availability of certain public
information about the Company; (ii) the resale occurring not less than two
years after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than three
(3) years the sale being made through a
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<PAGE> 56
broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act
of 1934) and the amount of securities being sold during any three-month period
not exceeding the specified limitations stated therein, if applicable.
(6) The undersigned further understands that at
the time it wishes to sell such shares of Common Stock there may be no public
market upon which to make such a sale, and that, even if such a public market
then exists, the Company may not be satisfying the current public information
requirements of Rule 144, and that, in such event, it would be precluded from
selling such shares under Rule 144 even if the two-year minimum holding period
had been satisfied. It understands that the Company is under no obligation to
it to make Rule 144 available.
(7) The undersigned further understands that in
the event all of the applicable requirements of Rule 144 are not satisfied,
registration under the Securities Act, compliance with Regulation A, or some
other registration exemption will be required; and that, notwithstanding the
fact that Rule 144 is not exclusive, the Staff of the Securities and Exchange
Commission has expressed its opinion that persons proposing to sell private
placement securities other than in a registered offering and otherwise than
pursuant to Rule 144 will have a substantial burden of proof in establishing
that an exemption from registration is available from such offers or sales, and
that such persons and their respective brokers who participate in such
transactions do so at their own risk.
(8) Please issue a certificate or certificates
representing said shares of Common Stock in the name of the undersigned and, if
appropriate, please issue a new Option Agreement for the unexercised portion,
if any, of the attached Option Agreement in the name of the undersigned.
Dated: __________________________
American Healthcare Systems Purchasing
Partners, L.P.
By: American Healthcare Plans, Inc.,
its general partner
________________________________________
By:_____________________________________
Its:____________________________________
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<PAGE> 57
EXHIBIT D
REGISTRATION AGREEMENT
REGISTRATION AGREEMENT, dated as of _______________, 1996 (the
"Agreement"), by and between APACHE Medical Systems, Inc., a Delaware
corporation (the "Company"), and American Healthcare Systems Purchasing
Partners, L.P. ("Purchasing Partners").
RECITALS
A. In connection with the issuance of Series E and Series F
Preferred Stock in December 1995, the Company, the holders of all of the
outstanding Series of Preferred Stock of the Company and Key Employees (as
defined herein) entered into a Registration Agreement, dated as of December 28,
1995 (the "Other Registration Agreement"), which amended, restated and
superseded the terms of all prior registration agreements and combined all
registration provisions applicable to the capital stock of the Company.
B. The Company now wishes to grant registration rights to
Purchasing Partners as permitted by Section 12 of the Other Registration
Agreement in connection with Purchasing Partners' purchase of up to 366,294
shares of Common Stock of the Company pursuant to the exercise of certain
options (the "Options") granted to Purchasing Partners in consideration of
Purchasing Partners' entering into that certain Marketing Agreement, dated as
of June 3, 1996, (or such greater or lesser number of shares as to which the
366,294 shares are adjusted pursuant to the terms of the Options).
1. Definitions. As used in this Agreement, the following terms
have the following meanings:
Common Stock: The common stock, $.01 par value, of the Company.
Forms S-1, S-2 and S-3: The forms so designated, promulgated by the
Securities and Exchange Commission (the "Commission") for registration
of securities under the Securities Act of 1933, as amended (the
"Securities Act"), and any forms succeeding to the functions of such
forms, whether or not bearing the same designation.
Holder: A holder of Registrable Stock as defined in the Other
Registration Agreement.
Investors: Collectively, the holders of the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock, the Series
D Preferred Stock, the Series E Preferred Stock and the Series F
Preferred Stock.
Key Employees: William A. Knaus, Elizabeth A. Draper, Douglas P.
Wagner, Jack E. Zimmerman and Gerald E. Bisbee, Jr.
<PAGE> 58
"Register", "registered" and "registration" refer to a registration
effected by filing a registration statement in compliance with the
Securities Act and the declaration or ordering by the Commission of
effectiveness of such registration statement.
Registrable Stock: All shares of Common Stock included in the
definition of Registrable Stock in the Other Registration Agreement
and all shares of Common Stock issued or issuable upon exercise of the
Options.
Subject Stock: All Registrable Stock held (or to be held after giving
effect to exercise of options or warrants) by Purchasing Partners, the
Investors and the Key Employees, other than shares acquired in a
distribution pursuant to a registration statement filed by the Company
under the Securities Act.
2. Required Registration.
(a) Subject to the terms of Section 4 hereof, Purchasing
Partners may request the Company in writing to effect a registration
of at least 50,000 shares of its Common Stock (or such greater or
lesser number of shares as to which 50,000 shares are adjusted
pursuant to the terms of the Options), stating the number of shares of
Registrable Stock to be disposed of by such Purchasing Partners and
the intended method of disposition.
(b) The Holders and Key Employees may register securities
for sale for their own account in any registration requested pursuant
to this Section 2, subject to limitations on the number of shares
which may be imposed by the underwriter as set forth in Section 4(d)
below. Upon receipt of such request, the Company will give prompt
written notice thereof to all Holders and Key Employees (including in
such notice, the name of any managing underwriter designated by
Purchasing Partners pursuant to Section 7) whereupon such Holders and
Key Employees shall give written notice to the Company within 20 days
after the date of the Company's notice (the "Notice Period") if they
propose to dispose of any shares of Registrable Stock pursuant to such
registration, stating the number of shares of Registrable Stock to be
disposed of by such Holder(s) or Key Employee(s) and the intended
method of disposition.
(c) The Company will use its best efforts to effect
promptly after the Notice Period the registration under the Securities
Act of all shares of Subject Stock specified in the request of
Purchasing Partners, the requests of Holders and the requests of the
Key Employees subject, however, to the limitations set forth in
Section 4.
3. Registration Procedures. Whenever the Company is required by
the provisions of this Agreement to use its best efforts to effect promptly the
registration of shares of Subject Stock, the Company will:
(a) prepare and file with the Commission a registration
statement with respect to such shares and use its best efforts to
cause such registration statement to become and remain effective as
provided herein;
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<PAGE> 59
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and current and to comply with the provisions of
the Securities Act with respect to the disposition of all shares
covered by such registration statement, including such amendments and
supplements as may be necessary to reflect the intended method of
disposition from time to time of the prospective seller or sellers of
such shares, but for no longer than one hundred fifty (150) days
subsequent to the effective date of such registration in the case of a
registration statement on Form S-1 or S-2 and for no longer than
ninety (90) days in the case of a registration statement on Form S-3;
(c) furnish to each prospective seller such number of
copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request in order to
facilitate the public sale or other disposition of the shares owned by
such seller;
(d) use its best efforts to register or qualify the
shares covered by such registration statement under such other
securities or blue sky or other applicable laws of such jurisdictions
within the United States as each prospective seller shall reasonably
request, to enable such seller to consummate the public sale or other
disposition in such jurisdictions of the shares owned by such seller;
provided, however, that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not at the time
so qualified;
(e) if such registration is to be underwritten, enter
into an underwriting agreement in form and content typical of
underwriting agreements customarily used and use reasonable efforts to
make appropriate officers of the Company available to participate at
Purchasing Partners' expense in a "road show", to the extent such
participation is reasonably deemed necessary by the underwriters; and
(f) if such registration is not to be underwritten,
furnish to each prospective seller a signed counterpart, addressed to
the prospective sellers, of (i) an opinion of counsel for the Company,
dated the effective date of the registration statement, and (ii) a
"comfort" letter signed by the independent public accountants who have
certified the Company's financial statements included in the
registration statement, covering substantially the same matters with
respect to the registration statement (and the prospectus included
therein) and (in the case of the "comfort" letter) with respect to
events subsequent to the date of the financial statements, as are
customarily covered (at the time of such registration) in opinions of
issuer's counsel and in "comfort" letters delivered to the
underwriters in underwritten public offerings of securities.
4. Limitations on Required Registrations.
(a) The Company shall not be required to effect more than
one registration pursuant to Section 2, unless all shares sought to be
registered by Purchasing Partners are not included in the registration
pursuant to Section 2, in which case Purchasing Partners
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<PAGE> 60
shall have one additional demand right pursuant to Section 2
which may be exercised only after January 1, 1998.
(b) The Company shall not be required to cause a
registration requested pursuant to Section 2 to become effective prior
to ninety (90) days after the effective date of the first registration
statement requested by the Holders under Section 2 of the Other
Registration Agreement.
(c) The Company shall not register securities for sale
for its own account in any registration requested pursuant to Sections
2 or 14 unless permitted to do so by the written consent of Purchasing
Partners. The Company may not cause any other registration of
securities for sale for its own account (other than a registration
effected solely to implement any employee benefit plan or a
transaction to which Rule 145 of the Commission is applicable) to be
initiated after a registration requested pursuant to Section 2 and to
become effective less than 120 days after the effective date of any
registration requested pursuant to Section 2.
(d) Whenever a requested registration is for an
underwritten offering, only shares which are to be included in the
underwriting may be included in the registration. Notwithstanding the
provisions of Sections 2(b) and 4(c), if the underwriter determines
that (i) marketing factors require a limitation of the total number of
shares of the Holders, Key Employees and/or the Company to be
underwritten, or (ii) the offering price per share would be reduced by
the inclusion of the shares of the Holders, Key Employees and/or the
Company, the underwriter may exclude or otherwise limit the number of
shares of Subject Stock to be included in the registration and
underwriting. The Company shall so advise Purchasing Partners, all
Holders and Key Employees (except those Holders and Key Employees who
have not indicated to the Company their decision to distribute any of
their Subject Stock through such underwriting), and the number of
shares of Subject Stock that may be included in the registration and
underwriting shall be allocated among Purchasing Partners and such
Holders and such Key Employees in proportion, as nearly as
practicable, to the respective amounts of Subject Stock owned (or to
which they have the current, vested right to acquire) by Purchasing
Partners, such Holders and such Key Employees at the time of filing
the registration statement, and the remainder, if any, to the Company;
provided, however, if the demand is pursuant to Section 2 and all
shares sought to be registered by Purchasing Partners are not included
in such registration, Purchasing Partners shall have an additional
demand right pursuant to Section 2 exercisable only after January 1,
1998. No Subject Stock excluded from the underwriting by reason of
the underwriter's marketing limitation shall be included in such
registration. If any Holder or Key Employee disapproves of any such
underwriting, such person may elect to withdraw therefrom by written
notice to the Company and the underwriter. The securities so
withdrawn from such underwriting shall also be withdrawn from such
registration.
(e) If at the time of any request to register Registrable
Stock pursuant to Section 2, the Company is engaged, or has fixed
plans to engage within 90 days of the
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<PAGE> 61
time of the request, in a registered public offering as to which
Purchasing Partners may include such Stock pursuant to Section 5 or is
engaged in any other activity which, in the good faith determination
of the Company's Board of Directors, would be adversely affected by
the requested registration to the material detriment of the Company,
then the Company may at its option direct that such request be delayed
for a period not in excess of three months from the effective date of
such offering, or the date of commencement of such other material
activity, as the case may be, such right to delay a request to be
exercised by the Company not more than once while the right set forth
in Section 2 is in effect.
5. Incidental Registration. If the Company at any time proposes
to register any of its securities under the Securities Act (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 of the Commission is applicable), including
registrations made at the request of Holders under the Other Registration
Agreement, the Company will each such time give written notice to Purchasing
Partners, all Holders and Key Employees of its intention so to do. Upon the
written request of Purchasing Partners, a Holder or Holders or a Key Employee
or Key Employees (stating the number of shares of Subject Stock to be disposed
of thereby and the intended method of disposition) given within 20 days after
receipt of any such notice, the Company will use its best efforts to cause all
such shares of Subject Stock intended to be disposed of, Purchasing Partners,
the Holders or the Key Employees of which shall have requested registration
thereof, to be registered under the Securities Act so as to permit the
disposition (in accordance with the methods in said request) by Purchasing
Partners, such Holder or Holders or Key Employee or Key Employees of the shares
so registered, subject, however, to the limitations set forth in Section 6.
6. Limitations on Incidental Registration. If the registration
of which the Company gives notice pursuant to Section 5 is for an underwritten
offering, only securities which are to be included in the underwriting may be
included in the registration. Notwithstanding any provision of Section 5, if
the underwriter determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may exclude or otherwise
limit the number of shares of Subject Stock to be included in the registration
and underwriting. In the case of a registration initiated by the Company, the
Company shall advise Purchasing Partners, all Holders and Key Employees (except
those Holders and Key Employees who have not indicated to the Company their
decision to distribute any of their Subject Stock through such underwriting) of
the limitations imposed by the underwriter, and the number of shares of Subject
Stock that may be included in the registration and underwriting shall be
allocated among Purchasing Partners, such Holders and Key Employees in
proportion, as nearly as practicable, to the respective amounts of Subject
Stock owned by (or as to which there is a current vested right to acquire)
Purchasing Partners, such Holders and Key Employees at the time of filing the
registration statement. In the case of a registration initiated by Holders
under the Other Registration Agreement, the Company shall comply with the terms
of the Other Registration Statement with respect to allocation of shares of
Subject Stock to be included in the underwriting first among Holders and then
among Key Employees and shall advise Purchasing Partners of the limitations
imposed by the underwriter, and the number of shares of Subject Stock that may
be included in the registration and underwriting by Purchasing Partners shall
be limited to such number of shares as is
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<PAGE> 62
remaining after inclusion of the Subject Stock of all Holders and Key Employees
who wish to distribute their Subject Stock through such registration and
underwriting. No Subject Stock excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration. If
Purchasing Partners or any Holder or Key Employee disapproves of any such
underwriting, such person may elect to withdraw therefrom by written notice to
the Company and the underwriter. The securities so withdrawn from such
underwriting shall also be withdrawn from such registration.
7. Termination of Agreement. The registration rights granted
under Sections 2 and 5 shall terminate as to Purchasing Partners or any
successor of such rights at such time as such person (i) no longer holds or has
the right to acquire an aggregate number of shares of Common Stock equal to one
percent (1%) or more of the outstanding shares of Common Stock of the Company
and (ii) would then be permitted to sell all of such shares within one
three-month period pursuant to Rule 144.
8. Designation of Underwriter.
(a) In the case of any registration effected pursuant to
Section 2, Purchasing Partners shall have the right to designate the
managing underwriter in any underwritten offering.
(b) In the case of any registration initiated by Holders,
such Holders shall have the right to designate the managing
underwriter in any underwritten offering.
(c) In the case of any registration initiated by the
Company, the Company shall have the right to designate the managing
underwriter in any underwritten offering.
9. Form S-3. The Company shall effect all qualifications and
compliances as would permit or facilitate the sale and distribution of its
stock on Form S-3. After the Company has qualified for the use of Form S-3 and
after January 1, 2001, Purchasing Partners shall have the right to request up
to two registrations on Form S-3 (such requests shall be in writing and shall
state the number of shares of Registrable Stock to be disposed of and the
intended method of disposition), subject only to the following:
(a) The Company shall not be required to effect a
registration pursuant to this Section 9, unless Purchasing Partners
proposes to dispose of at least 50,000 shares of Registrable Stock (or
such greater or lesser number of shares as to which 50,000 shares are
adjusted pursuant to the terms of the Options).
(b) The Company shall not be required to effect a
registration pursuant to this Section 9 more frequently than once
every six months.
The Company shall give notice to all Holders and Key Employees (to the extent
they have rights of registration under the Other Registration Agreement) of the
receipt of a request for registration pursuant to this Section 9, and shall
provide a reasonable opportunity for such other Holders and
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<PAGE> 63
Key Employees to participate in the registration, provided that if the
registration is for an underwritten offering, the terms of paragraph (d) of
Section 4 shall apply to all participants in such offering. Subject to the
foregoing, the Company will use its best efforts to effect promptly the
registration of all shares of Subject Stock on Form S-3 to the extent requested
by Purchasing Partners.
10. Cooperation by Purchasing Partners.
(a) Purchasing Partners and each underwriter designated
by Purchasing Partners, will furnish to the Company such information
as the Company may reasonably require from Purchasing Partners or such
underwriter in connection with the registration statement (and the
prospectus included therein).
(b) Failure of Purchasing Partners to furnish the
information and agreements described in this Agreement shall not
affect the obligations of the Company under the Other Registration
Agreement to remaining sellers who furnish such information and
agreements, unless in the reasonable opinion of counsel to the Company
or the underwriters, such failure impairs or may impair the viability
of the offering or the legality of the registration statement or the
underlying offering.
(c) Purchasing Partners, to the extent that it has shares
included in the registration statement, will suspend (until further
notice) further sales of such shares after receipt of telegraphic or
written notice from the Company to suspend sales to permit the Company
to correct or update a registration statement or prospectus; but the
obligations of the Company with respect to maintaining any
registration statement current and effective shall be extended by a
period of days equal to the period such suspension is in effect.
At the end of the period during which the Company is obligated to keep
the registration statement current and effective as described in paragraph (b)
of Section 3 (and any extensions thereof required by the preceding sentence),
Purchasing Partners, to the extent that it has shares included in the
registration statement, shall discontinue sales of shares pursuant to such
registration statement upon receipt of notice from the Company of its intention
to remove from registration the shares covered by such registration statement
which remain unsold, and Purchasing Partners shall (after written request for
such notice, describing the information required in the response) notify the
Company of the number of shares registered which remain unsold promptly upon
receipt of such notice from the Company.
11. Expenses of Registration. All expenses incurred in effecting
any registration pursuant to this Agreement, including, without limitation, all
registration and filing fees, printing expenses, expenses of compliance with
blue sky laws, fees and disbursements of counsel for the Company and expenses
of any audits incidental to or required by any such registration, shall be
borne by the Company, except (a) that all underwriting discounts and
commissions, if any, shall be borne by Purchasing Partners, the Holders and the
Key Employees holding the securities registered pursuant to such registration,
pro-rata according to the quantity of their securities so
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<PAGE> 64
registered; and (b) the Company shall not be required to pay for any expenses
of any registration proceeding begun pursuant to Section 2 if the registration
request is subsequently withdrawn at the request of Purchasing Partners (in
which case Purchasing Partners shall bear such expenses); provided, however,
that if immediately prior to the time of such withdrawal, Purchasing Partners
has learned of a materially adverse change in the condition, business or
prospects of the Company (other than events outside the control of the Company)
from that known to Purchasing Partners at the time of their request, then
Purchasing Partners shall not be required to pay any of such expenses and shall
retain their rights pursuant to Sections 2 and 9.
12. Indemnification.
(a) To the extent permitted by law, the Company will
indemnify Purchasing Partners, each partner, agent, officer and
director of Purchasing Partners, each person controlling Purchasing
Partners, and each underwriter and selling broker of the securities so
registered (collectively, "Representative" and collectively with
Purchasing Partners, each such partner, agent, officer, director or
person, "Indemnitees") against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on
any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or other document
incident to any registration, qualification or compliance (or in any
related registration statement, notification or the like) or any
omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances in which they
were made, or any violation by the Company of any rule or regulation
promulgated under the Securities Act and any state law applicable to
the Company and relating to action or inaction required of the Company
in connection with any such registration, qualification or compliance,
and will reimburse each such Indemnitee for any legal and any other
expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, provided,
however, that the Company will not be liable to any Indemnitee in any
such case to the extent that any such claim, loss, damage or liability
is caused by any untrue statement or omission so made in strict
conformity with written information furnished to the Company by an
instrument duly executed by such Indemnitee and stated to be
specifically for use therein and except that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to
any such untrue statement (or alleged untrue statement) or omission
(or alleged omission) made in the preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement becomes effective or
in the amended prospectus filed with the Commission pursuant to Rule
424(b) (the "Final Prospectus"), such indemnity agreement shall not
inure to the benefit of any Representative, if a copy of the Final
Prospectus was not furnished to the person or entity asserting the
loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act; provided, further, that
the indemnity agreement contained in this subsection 11(a) shall not
apply to amounts paid in settlement of any such claim, loss, damage,
liability or action if such settlement is effected without the consent
of the Company, which consent shall not be unreasonably withheld.
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<PAGE> 65
(b) To the extent permitted by law, Purchasing Partners
and each underwriter of the securities registered will indemnify each
other, the Company and its officers and directors and each person, if
any, who controls any thereof within the meaning of Section 15 of the
Securities Act and their respective successors against all claims,
losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering
circular or other document incident to any registration, qualification
or compliance (or in any related registration statement, notification
or the like) or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances in
which they were made; and will reimburse the Company and each other
person indemnified pursuant to this paragraph (b) for all legal and
any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, provided, however, that this paragraph (b) shall apply only if
(and only to the extent that) such statement or omission was made in
reliance upon and in strict conformity with written information
(including, without limitation, written negative responses to
inquiries) furnished to the Company by an instrument duly executed by
Purchasing Partners or such underwriter and stated to be specifically
for use in such prospectus, offering circular or other document (or
related registration statement, notification or the like) or any
amendment or supplement thereto and except that the foregoing
indemnity agreement is subject to the condition that, insofar as it
relates to any such untrue statement (or alleged untrue statement) or
omission (or alleged omission) made in the preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement becomes effective or
in the Final Prospectus, such indemnity agreement shall not inure to
the benefit of (i) the Company and (ii) any Representative, if a copy
of the Final Prospectus was not furnished to the person or entity
asserting the loss, liability, claim or damage at or prior to the time
such furnishing is required by the Securities Act; provided, further,
that this indemnity shall not be deemed to relieve any underwriter of
any of its due diligence obligations; provided, further, that the
indemnity agreement contained in this subsection 11(b) shall not apply
to amounts paid in settlement of any such claim, loss, damage,
liability or action if such settlement is effected without the consent
of Purchasing Partners, which consent shall not be unreasonably
withheld; and provided, further, that the obligations of Purchasing
Partners shall be limited to an amount equal to the proceeds to
Purchasing Partners of the Subject Stock sold by it as contemplated
herein, unless such claim, loss, damage, liability or action resulted
from Purchasing Partners' fraudulent misconduct.
(c) Each party entitled to indemnification hereunder (the
"indemnified party") shall give notice to the party required to
provide indemnification (the "indemnifying party") promptly after such
indemnified party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the indemnifying party (at
its expense) to assume the defense of any claim or any litigation
resulting therefrom, provided that counsel for the indemnifying party,
who shall conduct the defense of such claim or litigation, shall be
satisfactory to the indemnified party, and the indemnified party may
participate in such defense at such party's expense, and provided,
further, the omission by
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<PAGE> 66
any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this Section
12, except to the extent that the omission results in a failure of
actual notice to the indemnifying party and such indemnifying party is
damaged solely as a result of the failure to give notice. No
indemnifying party, in the defense of any such claim or litigation,
shall, except with the consent of each indemnified party, consent to
entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect to such claim or litigation.
(d) The reimbursement required by this Section 12 shall
be made by periodic payments during the course of the investigation or
defense, as and when bills are received or expenses incurred.
(e) The obligation of the Company under this Section 12
shall survive the completion of any offering of Subject Stock in a
registration statement under this Agreement, or otherwise.
13. Rights Which May Be Granted to Subsequent Investors.
(a) Within the limitations prescribed by this paragraph
(a), but not otherwise, the Company may grant to subsequent investors
in the Company and to persons who as of the date hereof are holders of
Common Stock or holders of options to purchase Common Stock rights of
incidental registration (such as those provided in Section 5). Such
rights may only pertain to shares of Common Stock, including shares of
Common Stock into which any other securities may be converted. Such
rights may be granted with respect to (i) a registration actually
requested by Purchasing Partners pursuant to Section 2, but only in
respect to that portion of such registration as remains available
after inclusion of all Registrable Stock requested by Purchasing
Partners, Holders and Key Employees, (ii) registrations initiated by
the Company, but only in respect of that portion of such registration
as is available under the limitations set forth in Section 6 (which
limitations shall apply pro-rata to Purchasing Partners, all Holders
and Key Employees (to the extent such Holders and Key Employees still
have rights under the Other Registration Agreement)), and such rights
shall be limited in all cases to sharing pro-rata in the available
portion of the registration in question with Purchasing Partners,
Holders and Key Employees such sharing to be based on the number of
shares of Common Stock held or to be held by Purchasing Partners,
Holders and Key Employees and held or to be held by such other
investors, plus the number of shares of Common Stock into which other
securities held by such other investors are convertible, which are
entitled to registration rights, and (iii) registrations requested by
Holders under the Other Registration Agreement, but only with respect
to that portion of such registration as remains available after
inclusion of all Registrable Stock requested by Holders, Key Employees
and Purchasing Partners. With respect to registrations which are for
underwritten public offerings, "available portion" shall mean the
portion of the underwritten shares which is available as specified in
clauses (i), (ii) and (iii) of the third sentence of this paragraph
(a). Shares not included in such underwriting shall not be
registered.
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<PAGE> 67
(b) The Company may not grant to subsequent investors in
the Company rights of registration upon request (such as those
provided in Section 2), unless (i) such rights are limited to shares
of Common Stock, (ii) Purchasing Partners, all Holders and Key
Employees (to the extent such Holders and Key Employees still have
rights under the Other Registration Agreement) are given enforceable
contractual rights to participate in registrations requested by such
subsequent investors, such participation to be on a pro-rata basis and
subject to the limitations described in the final three sentences of
paragraph (a) of this Section 13, (iii) such rights shall not become
effective prior to 90 days after the effective date of the first
registration pursuant to Section 2 of the Other Registration
Agreement, and (iv) such right shall not be more favorable than those
granted to the Holders in the Other Registration Agreement.
14. Annual Registrations by the Company.
(a) Subject to the terms and conditions of this Section
14, starting with the fiscal year ending December 31, 1996, for each
of the next four years through the fiscal year ending December 31,
1999, unless Purchasing Partners consents otherwise, the Company
hereby covenants and agrees to effect a registration of shares of
Common Stock for sale by Purchasing Partners, the Holders and Key
Employees as soon thereafter as is practicable following the filing of
the Company's annual report on Form 10-K for such fiscal year (an
"Annual Registration"). The Company shall give notice to Purchasing
Partners and each Holder and Key Employee of the Annual Registration
and each such person shall have twenty days from the date of the
notice to request in writing to the Company that shares of Subject
Stock held (or to be held upon exercise of options or warrants) by
such person be included in the Annual Registration. If one or more of
Purchasing Partners, the Holders or the Key Employees, who requests to
register for sale in the Annual Registration at least 50,000 shares of
Subject Stock (or such greater or lesser number of shares as to which
50,000 shares are adjusted pursuant to the terms of the Options),
requests in its/their notice(s) that such offering be underwritten,
the Company shall use its best efforts to secure an underwriter to
underwrite the shares to be sold in the Annual Registration. If such
a request is made and if the Company is successful in securing an
underwriter to underwrite such shares, the Company shall give notice
that the offering is to be underwritten to each person who notified
the Company of its intent to include Subject Stock in the Annual
Registration. Each such person shall then have ten days from the date
of such notice of underwriting to notify the Company that such person
no longer wishes to include Subject Stock in the Annual Registration
or wishes to reduce the number of shares included in the Annual
Registration. If, after such ten days, the underwriter determines
that marketing factors require a limitation of the number of shares to
be underwritten, the underwriter may exclude or otherwise limit the
number of shares of Subject Stock to be included in the registration
and underwriting. In such a case, the Company shall advise Purchasing
Partners, all Holders and Key Employees (except those Holders and Key
Employees who have not indicated to the Company their decision to
distribute any of their Subject Stock through such underwriting) of
the limitations imposed by the underwriter, and the number of shares
of
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<PAGE> 68
Subject Stock that may be included in the registration and
underwriting shall be allocated as is provided in Section 6 for
underwritten offerings initiated by the Company.
(b) The obligation of the Company to effect an Annual
Registration is limited as follows:
(i) The first Annual Registration shall not
become effective sooner than nine months after the effective date of
the registration statement on Form S-1 for the Company's initial
public offering.
(ii) If at the time of any Annual Registration,
the Company is engaged, or has fixed plans to engage within 90 days of
the date the annual report of Form 10-K is due, in a registered public
offering as to which Purchasing Partners may include such Subject
Stock pursuant to Section 5 or is engaged in any other activity which,
in the good faith determination of the Company's Board of Directors,
would be adversely affected by the Annual Registration to the material
detriment of the Company, then the Company may at its option direct
that such Annual Registration be delayed for a period not in excess of
three months from the effective date of such offering, or the date of
commencement of such other material activity, as the case may be, such
right to delay an Annual Registration to be exercised by the Company
not more than once per calendar year.
(iii) The Company shall not be required to effect
an Annual Registration pursuant to this Section 14, unless Purchasing
Partners and the Holders and Key Employees who request to register
shares for sale in the Annual Registration propose to dispose of at
least 50,000 shares of Registrable Stock (or such greater or lesser
number of shares as to which 50,000 shares are adjusted pursuant to
the terms of the Options).
15. Transfer of Registration Rights. The registration rights
granted to Purchasing Partners under this Agreement may not be transferred,
except that Purchasing Partners may assign and transfer such rights to an
entity formed and operated as a successor to Purchasing Partners in the
business of acting as a purchasing agent for hospitals affiliated with
Purchasing Partners and to underwriters of the Subject Stock.
16. "Stand-Off" Agreement. In consideration for the Company
performing its obligations under this Agreement, Purchasing Partners agrees for
a period of time (not to exceed 180 days) from the effective date of any
registration of securities of the Company (upon request of the Company or of
the underwriters managing any underwritten offering of the Company's
securities) not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Stock, other than shares
of Registrable Stock included, in the registration, without the prior written
consent of the Company or such underwriters, as the case may be, provided that
all officers and directors of the Company, each Holder who is then entitled to
registration rights under the Other Registration Agreement and each holder of
more than 5% of the outstanding Common Stock shall enter into similar
agreement.
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<PAGE> 69
17. Delay of Registration. Purchasing Partners shall have no
right to take any action to restrain, enjoin, or otherwise delay any
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
18. Notices. All notices, requests, consents and other
communications herein (except as stated in the last sentence of this Section
18) shall be in writing, and shall be mailed by first-class or certified mail,
postage prepaid, delivered by Federal Express or similar overnight courier, or
personally delivered, as follows:
If to the Company:
Apache Medical Systems, Inc.
1650 Tysons Boulevard - Suite 300
McLean, Virginia 22102-3915
Attention: Gerald E. Bisbee, Jr., Ph.D., Chairman and Chief
Executive Officer
with a copy to:
Gardner, Carton & Douglas
321 North Clark Street - Suite 3200
Chicago, Illinois 60610
Attention: Nancy M. Borders
If to Purchasing Partners:
American Healthcare Systems Purchasing Partners, L.P.
4501 Charlotte Park Drive
P.O. Box 668800
Charlotte, North Carolina 28266
Attention: Vice Chairman
with copies to:
American Healthcare Systems Purchasing Partners, L.P.
12730 High Bluff Drive
Suite 300
San Diego, California 92130
Attention: Treasurer
Neal, Gerber & Eisenberg
Two LaSalle Street - Suite 2200
Chicago, Illinois 60602
Attention: Charles Evans Gerber
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<PAGE> 70
or such other addresses as each of the parties hereto may provide from time to
time in writing to the other party.
19. Conflict with Other Agreements. The terms of this Agreement
shall be binding upon the parties hereof notwithstanding any conflicting
provision in any other agreement to which either is a party.
20. Modifications; Waiver. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated unless
effected by a writing executed and delivered by the Company and Purchasing
Partners.
21. Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof, and
supersedes all negotiations, agreements, representations, warranties,
commitments, whether in writing or oral, prior to the date hereof.
22. Successors. All of the terms of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
successors of the parties hereto.
23. Execution and Counterparts. This Agreement may be executed in
any number of counterparts, each of which when so executed and delivered shall
be deemed an original, and such counterparts together shall constitute one
instrument.
24. Governing Law and Severability. This Agreement shall be
governed by the laws of the State of Delaware as applied to agreements entered
into and to be performed entirely within Delaware. In the event any provision
of this Agreement or the application of such provision to any party shall be
held by a court of competent jurisdiction to be contrary to law, the remaining
provisions of this Agreement shall remain in full force and effect.
25. Headings. The descriptive headings of the Sections hereof and
the Schedules hereto are inserted for convenience only, and do not constitute a
part of this Agreement.
This Agreement is hereby executed as of the date first above written.
APACHE MEDICAL SYSTEMS, INC.
By: ________________________________
Name:
Title:
AMERICAN HEALTHCARE PURCHASING PARTNERS L.P.
By: American Healthcare Plans, Inc., its
general partner
By: ________________________________
Name:
Title:
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<PAGE> 71
EXHIBIT E
To be provided by Purchasing Partners
[Not yet received by the Company]
<PAGE> 72
EXHIBIT F
Identified Products
<TABLE>
<S> <C>
Product Description
- --------------------------- --------------------------------
MCMP (case management, CDS, Comprehensive (concurrent,
Guidelines) prospective, retrospective)
clinically-based decision support
program
Outcomes Repository & Collection and integration system
Integration Services for clinical, financial and
administrative data; database
architecture design
Outcomes Generator Retrospective, concurrent and
prospective generator of patient
outcomes
EIS (Enterprise Information Software tool to provide group or
System) individual patient analysis of
clinical, financial and
administrative performance
Benchmark Studies Reports that provide group or
individual patient analysis of
clinical, financial and
administrative performance
Service Bureau Reporting services and tools to
provide group or individual
patient analysis of clinical,
financial and administrative
performance
Risk Predictor Point-of-care clinically-based
support system and tools
Clinical Decision Support Decision support, reporting and
analysis system
Consulting Process and change management
based on the Company's systems
and related information; database
architecture design;
methodological optimization of
clinical, financial and
administrative information
Disease management Marketing and efficacy studies;
population-based planning;
economic efficacy; linked to the
Company's information
Case Management Objective process and rules-based
tools supporting care delivery
across the continuum and linked
to relevant Company information
</TABLE>
<PAGE> 73
EXHIBIT G
Discounts
1. Benchmark Studies
a. In 1996, Member Hospitals shall receive pricing for Benchmark Studies
equal to the lower of: (i) the pricing set forth below, or (ii) a [ + ]:
Cardiovascular* [ + ]**
Critical Care (first unit)* [ + ]***
Critical Care (additional units) [ + ]
b. Beginning in 1997, Member Hospitals shall receive pricing for Benchmark
Studies at the same discounts applicable to Software products (as described in
2.a. below).
2. Other Products and Services
a. Software
Member Hospitals shall receive a [ + ].
Groups of ten or more Member Hospitals purchasing under a single
corporate contract shall receive a [ + ].
b. Custom Products and Services and Special Consulting Projects
Member Hospitals shall receive a [ + ].
c. System Support Fees and Transaction Fees
Member Hospitals shall not receive a discount on these fees.
3. General
Notwithstanding the discounts set forth above, sales to government
hospitals shall not be used in determining the discounts applicable to Member
Hospitals.
If, during any calendar year, the Company first offers a new release or
new version of a product or service, the Company may adjust the price of such
new release or new version and the sales of the prior release or prior version
of such product or service shall not be considered in determining for the
remainder of the calendar year [ + ] in that calendar year,
when selling the new release or new version to Member Hospitals.
# [ + ]
* Includes Medicare Analysis discounted for Member Hospitals from [ + ]
to [ + ].
** Represents [ + ] list price for a Cardiovascular Benchmark Study
and [ + ] for the Medicare Analysis.
*** Represents [ + ] list price for a Critical Care Benchmark Study
and [ + ] for the Medicare Analysis.
____________________
+ Confidential portions omitted and filed separately with the Commission.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
APACHE Medical Systems, Inc.
The audits referred to in our report dated March 22, 1996, except as to Note 12
which is as of June 18, 1996, included the related consolidated financial
statement schedule for each of the years in the three year period ended December
31, 1995, included in the registration statement. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the references to
our Firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus.
KPMG Peat Marwick LLP
McLean, Virginia
June 21, 1996
