UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-13604
STAT HEALTHCARE, INC.
(Name of small business issuer in its charter)
DELAWARE 76-0443952
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
12450 GREENSPOINT DRIVE, SUITE 1200, HOUSTON, TEXAS 77060
(Address of principal executive offices and zip code)
(713) 872-6900
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $0.01 par value Boston Stock Exchange
Class A Redeemable Common Stock Purchase Warrants Boston Stock Exchange
Securities registered under Section 12(g) of the Act:
Common Stock, par value $0.01 par value
Class A Redeemable Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended December 31, 1995 were $14.1
million. The aggregate market value of the voting stock held by non-affiliates
of the registrant at March 22, 1996 was $12.1 million (affiliates being, for
these purposes only, directors, executive officers and holders of more than 10%
of the registrant's common stock). The aggregate market value was computed by
reference to the closing price of the registrant's common stock as reported on
the Nasdaq SmallCap Market on such date. The number of outstanding shares of the
registrant's common stock as of March 22, 1996 was 3,702,472.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS PAGE
PART I .................................................................... 1
ITEM 1. DESCRIPTION OF BUSINESS ......................................... 1
ITEM 2. DESCRIPTION OF PROPERTY ......................................... 14
ITEM 3. LEGAL PROCEEDINGS ............................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS ............. 14
PART II ................................................................... 15
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........ 15
ITEM 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ....... 15
ITEM 7. FINANCIAL STATEMENTS ............................................ 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .................. 41
PART III .................................................................. 41
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ............... 41
ITEM 10. EXECUTIVE COMPENSATION .......................................... 42
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT .............................................. 45
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 45
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ................................ 46
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
STAT Healthcare, Inc. ("STAT" or the "Company") provides physician
contract management services to its affiliated physician groups, currently South
Texas Acute Trauma Physicians, P.A. ("STAT Physicians") and STAT Physicians,
P.A. ("STAT P.A."), which in turn provide emergency medical and other services
to hospitals. Pursuant to management and administrative services agreements (the
"Management Agreements") between the Company and each of STAT Physicians and
STAT P.A., the Company manages and administers the day-to-day business functions
of its affiliated physician groups, which includes the assumption of
responsibility for the administrative, accounting, personnel and business
functions related to the practice of medicine. The Company is also responsible
for the billing and collection of professional fees for medical services, the
maintenance of all financial files and records and the negotiation and
administration of all hospital contracts for STAT Physicians and STAT P.A.
Consulting services are also provided by the Company in connection with the
procurement and administration of professional liability insurance and the
employment of personnel. The Company also coordinates the scheduling of staff
physicians to provide emergency department coverage and assists the hospital
administration and medical staff in such areas as quality assurance, risk
management, departmental accreditation and marketing.
The Company was incorporated in Delaware in July 1994. The principal
executive offices of the Company are located at 12450 Greenspoint Drive, Suite
1200, Houston, Texas 77060. Its telephone number is (713) 872-6900.
GENERAL
Management of the Company believes that emergency departments, which
are often the first point of contact with patients, will play an increasingly
important role as emergency room physicians increasingly serve as the 24-hour
gatekeepers of the healthcare system. The Company was incorporated in July 1994
to offer physician contract management services to professional associations
that provide emergency department services to hospitals. The Company's income is
currently derived exclusively from revenues related to the Management
Agreements, less direct expenses paid by the Company on behalf of STAT
Physicians and STAT P.A., as provided for in the Management Agreements, and less
the operating expenses of the Company. Under contracts with hospitals, STAT
Physicians and STAT P.A. are obligated to provide not only emergency department
physicians for uninterrupted coverage on a 24-hour, 365-day-a-year basis, but
also management and administrative services related to emergency departments.
Under the Management Agreements, the Company manages and administers
STAT Physicians' and STAT P.A.'s day-to-day business functions, which include
assuming responsibility for the administrative, accounting, personnel and
business functions related to the practice of medicine. The Company is also
responsible for the billing and collection of professional fees for medical
services, the maintenance of all financial files and records and the negotiation
and administration of all managed care contracts on behalf of STAT Physicians
and STAT P.A. Consulting services are also provided by the Company in connection
with the procurement and administration of professional liability insurance and
the employment of personnel by the affiliated physician groups. The Company also
coordinates the scheduling of STAT Physicians' and STAT P.A.'s staff physicians
to provide emergency department coverage and assists the hospital administration
and medical staff in such areas as quality assurance, risk management,
departmental accreditation and marketing.
In addition, the Company identifies and recruits physicians as
candidates for admission to each hospital's medical staff. Only physicians whose
credentials meet STAT Physicians' and STAT P.A.'s standards are engaged to
provide medical services. As of December 31, 1995, STAT Physicians had contracts
with 11 hospitals in the Houston and southeastern Texas area to provide
physician contract management services and contracts with approximately 105
physicians for the delivery of medical services as independent contractors of
STAT Physicians and STAT P.A.
1
Competitive pressures have focused the attention of many hospital
administrators, in both the private and public sectors, on the need for better
management of their professional medical staff. Hospitals have increasingly
turned to contract management firms with specialized skills to help solve
physician contract and scheduling problems, to strengthen the management of
their professional medical staff and specific clinical departments, to better
control costs, and to assist in meeting their healthcare coverage needs and
obligations to patients who are indigent, uninsured or unassigned to a referring
private physician. Physicians are also encountering a changing environment in
which traditional private practice patterns are being adversely affected by
increasing administrative, liability and reimbursement constraints and
complexities. Using its management skills and experience, and the economies of
scale which the size and specialization of its operations permit, the Company
provides a management alternative to hospitals while offering a flexible
practice and lifestyle alternative to physicians.
A community's perception of a hospital's emergency department services
can be an important factor in determining a hospital's overall viability and
profitability, in part because the emergency department is a major source of
general admissions to hospitals. The Company believes that hospitals use
physician management firms to help solve problems associated with the
administration and management of hospital emergency departments. The Company
believes that among the management problems affecting the performance of many
hospital emergency departments are difficulties in the recruitment, scheduling
and retention of emergency physicians, budgetary concerns and increasing patient
volumes.
CONTRACTUAL ARRANGEMENTS
MANAGEMENT AGREEMENTS WITH STAT PHYSICIANS AND STAT P.A. The Management
Agreements with STAT Physicians and STAT P.A. are perpetual, without provision
for cancellation or termination. Under the Management Agreements, the Company
identifies, recruits and screens potential candidates to serve as emergency room
physicians in hospitals which have contracted for STAT Physicians' and STAT
P.A.'s physician contract management services. Each of STAT Physicians and STAT
P.A. then enters into contracts with physicians meeting its qualifications and
provides those physicians as candidates for admission to the hospital's medical
staff. The Company also coordinates on behalf of and with the assistance of STAT
Physicians and STAT P.A. the scheduling of staff physicians to provide coverage
on a 24-hour, 365-day-a-year basis for the hospital's emergency departments. In
addition, the Company assists the hospital's administration and medical staff in
such areas as quality assurance, risk management, departmental accreditation and
marketing.
The Company also manages and administers STAT Physicians' and STAT
P.A.'s day-to-day business functions, which include but are not limited to,
assuring responsibility for the administrative, accounting, payroll and
personnel functions related to the practice of medicine. The Company, under the
Management Agreements, also bills and collects the professional fees for the
medical services provided on behalf of STAT Physicians and STAT P.A., maintains
all files and records, negotiates and administers all hospital contracts, and
provides consulting services to STAT Physicians and STAT P.A. in connection with
the procurement and administration of professional liability insurance and the
employment of personnel. All final decisions relating to medical care are solely
that of STAT Physicians and STAT P.A.
In consideration of the services provided by the Company, under the
Management Agreements, STAT Physicians and STAT P.A. each pays a management fee
and provides reimbursement of all related expenses to the Company. Each of STAT
Physicians and STAT P.A. has also appointed the Company its attorney in fact to
act on its behalf for the purposes of collecting and receiving all fees and
revenues payable to STAT Physicians or STAT P.A., as the case may be, as a
result of professional services rendered and for the purpose of carrying out its
management functions under its hospital contracts.
HOSPITAL CONTRACTS. Within the United States, there are approximately
5,200 hospital emergency departments (approximately 375 in the State of Texas).
As a general rule, control of emergency departments is fragmented, with less
than 25% of the market under the management of national or regional service
organizations. According to industry sources, of the 5,200 hospital emergency
departments, approximately 1,200 are served by service organizations.
2
Management believes that significant opportunity exists to expand the Company's
base of hospitals and doctors because of the fragmented marketplace and the
desire of physicians to associate with larger organizations.
STAT Physicians or STAT P.A. currently provides emergency care services
through its independent contracting physicians with the following hospitals:
FACILITY LOCATION START DATE
- -------- -------- ----------
San Jacinto Methodist Hospital Baytown, TX July 1, 1987
Twelve Oaks Hospital Houston, TX May 1, 1989
Fort Bend Hospital (a) Missouri City, TX April 5, 1990
Alvin Community Hospital (a) Alvin, TX February 1, 1991
Parkway Hospital (a) Houston, TX August 16, 1991
Katy Medical Center (a) Katy, TX December 1, 1992
Kingwood Plaza Hospital (a) Kingwood, TX January 28, 1993
Alice Physicians & Surgeons (b) Alice, TX January 1, 1994
Mainland Regional Health Hospital (a) Texas City, TX December 12, 1994
Conroe Regional Medical Center (a) Conroe, TX February 1, 1996
Springbranch Medical Center (a) Houston, TX February 1, 1996
Doctors Hospital Airline (a) Houston, TX March 1, 1996
West Houston Medical Center (a) Houston, TX March 1, 1996
Bellaire Hospital (a) Houston, TX March 19, 1996
Sunbelt Medical Center (a) Houston, TX April 1, 1996
Doctors Hospital East Loop (a) Houston, TX April 1, 1996
Rosewood Medical Center (a) Houston, TX April 9, 1996
(a) Facility owned by Columbia/HCA Healthcare Corporation ("Columbia") and
serviced under a single contract with Columbia's Greater Houston
Division.
(b) Facility owned by Columbia.
During the year ended December 31, 1995, four hospitals each accounted
for 10% or more of net service revenues. These hospitals and the percentage of
net service revenues attributable to each are as follows: San Jacinto Methodist
Hospital (11%), Katy Medical Center (11%), Fort Bend Hospital (11%) and Mainland
Regional Health Hospital (12%).
The Company, through its affiliated physician groups, currently STAT
Physicians and STAT P.A., provides contract management services to hospitals
under fee-for-service contracts. Hospitals entering into fee-for-service
contracts agree to authorize STAT Physicians or STAT P.A. to bill and collect
the professional component of the charges for medical services rendered by the
STAT Physicians' or STAT P.A.'s contracted physicians. Under fee-for-service
arrangements, STAT Physicians and STAT P.A. receive directed disbursements of
the amounts collected and, depending on the hospital's patient volume and payor
mix, may also receive a stand-by or on-call fee from the hospital. Pursuant to
such contracts, STAT Physicians and STAT P.A. assume responsibility for billing
and collection and assume the risks of non-payment, changes in patient volume or
payor mix and delays attendant to reimbursement through government programs or
third party payors. All of these factors are taken into consideration by STAT
Physicians and STAT P.A., in consultation with the Company, in arriving at
appropriate contractual arrangements with health care institutions and
professionals. While the term of STAT Physicians' and STAT P.A.'s service
contracts with the hospitals is generally two years, automatically renewing
after the initial term for one year periods, such contracts typically provide
for termination without cause by either party on 90 days' prior notice.
PHYSICIAN CONTRACTS. STAT Physicians and STAT P.A. contract with
physicians as independent contractors to fulfill their contractual obligations
to provide qualified doctors to its hospital clients. While each hospital with
which STAT Physicians or STAT P.A. contracts ultimately determines whether a
physician must be board certified in emergency medicine to provide medical
services in its emergency room, in general, the hospitals do not require
3
physicians to be so certified. STAT Physicians and STAT P.A. require all
physicians to be currently licensed to practice medicine within the State of
Texas and to be Advanced Cardiac Life Support ("ACLS") certified before entering
into a contract for the doctor's service. Professional fees payable to the
physician are disbursed by the Company pursuant to the Management Agreements. As
independent contractors, the physicians are responsible for their own income and
social security taxes, as well as workers compensation insurance. The contracts
with independent contractor physicians can be terminated by STAT Physicians,
STAT P.A. or the independent contractor physicians with 30 days' notice, or
immediately by STAT Physicians or STAT P.A. for cause.
Each of STAT Physicians and STAT P.A. believes that its classification
of physicians as independent contractors is proper for federal tax purposes. A
contrary determination by federal taxing authorities or a change in existing
laws could materially adversely affect the Company and its operations. Most
state taxing authorities either have not challenged or have accepted the
classification of contract physicians as independent contractors. However, there
are some states in which the independent contractor classification of physicians
is or has been under administrative or judicial review. Management believes that
the status of physicians under contract to STAT Physicians or STAT P.A. as
independent contractors may be important to limiting the Company's potential
exposure to malpractice claims and to avoiding a determination that the Company
is in violation of laws relative to the corporate practice of medicine.
OPERATIONS
GENERAL. Aside from marketing and new business acquisition, the
principal operating activities of the Company include the recruitment and
credentialing of physicians, the maintenance of relations with clients (i.e.,
hospitals) the development and maintenance of quality assurance systems, the
scheduling and reimbursement of physicians, the billing and collection on behalf
of STAT Physicians and STAT P.A. for physician services fees and the
administration of personnel services. An overview of these activities follows:
RECRUITMENT AND CREDENTIALING. The recruitment and credentialing of
qualified independent contract physicians on behalf of its affiliated physician
groups is a central aspect of the Company's operations. Two full-time employees
of the affiliated physician groups are dedicated to recruiting and credentialing
independent contract physicians for STAT. The difficulty of this effort
fluctuates as market penetration is achieved in geographic areas and as the
organization grows in size and diversity of contract opportunities.
QUALITY ASSURANCE. Quality assurance systems are designed to monitor
physician documentation and a range of other factors that change from time to
time and are often independently established by individual hospitals. These
factors and the related systems are subject to review and examination by
independent hospital credentialing and regulatory agencies. Principally, quality
assurance is the responsibility of the STAT Physicians' and STAT P.A.'s Medical
Director assigned to the hospital. There are currently eight Medical Directors
responsible for quality assurance activities. The efficacy of these systems, and
the performance of its contract physicians, are critical to minimizing the
exposure of STAT Physicians, STAT P.A. and the Company to medical liability
claims.
TIME SCHEDULING. The scheduling of physician hours is performed
monthly. Hospitals are provided a monthly physician coverage schedule one week
prior to the first of each month. Physicians are scheduled on the basis of
either 12- or 24-hour shifts. Under five of the hospital contracts, multiple
physician coverage is required during certain periods. Because of varying other
demands on the contract physicians, the scheduling process is complex and
requires significant management attention. The Company has two full-time
employees dedicated to scheduling issues.
BILLING AND COLLECTION OF SERVICES. Fees charged to patients for
emergency department visits are comprised of two elements: (i) hospital
services; and (ii) physician services. Under all of the hospital contracts as of
December 31, 1995, the Company, through the Management Agreements, has the
responsibility for the billing and collection of physician fees on behalf of
STAT Physicians and STAT P.A. Currently, an independent company performs the
administrative billing and collection services on behalf of the Company. The
cost of using an independent company has now increased to the point that the
internalization of this function will be more cost effective.
4
PERSONNEL ADMINISTRATION. The Company assists STAT Physicians and STAT
P.A. in personnel administration, which includes the administration of payroll
services. In addition, the Company provides for the administration of fringe
benefit programs, which may include but are not limited to life insurance,
health insurance, education leave, professional dues, vacation allowances and
disability insurance.
PLAN OF OPERATIONS
The Company expects to continue its growth through the management of
business activities under additional hospital contracts. In particular, the
Company intends to both strategically target hospitals and health care alliances
and acquire currently existing physician service organizations. The Company
assists STAT Physicians and STAT P.A. in actively seeking opportunities to
competitively bid for hospital contracts. The Company also intends to assist
other professional associations, with which it will seek to enter similar
management agreements, to competitively bid for hospital contracts, both in the
Houston area and, to the extent possible, in other regions. Financing to date
for expansion has come from sales of common and preferred stock, a bridge loan
and from revenues.
In addition, the Company intends to take advantage of the growing
demand for physician service networks by seeking to contract with large payors,
such as managed care plans, to provide emergency medical services throughout the
Houston area on a capitation basis, which provides for fixed periodic payments
for each plan participant. While, initially, the direction of the Company's
growth is expected to reflect its emphasis on providing and expanding its
contract emergency department services, the Company believes that contractual
relationships with large payors could become an increasingly significant part of
its growth. If the Company succeeds in establishing contractual relationships
with large payors in Houston, of which there can be no assurance, the Company
will focus expansion in this regard in nearby markets, where it believes it
would then best be able to derive advantages from existing relationships.
RECENT DEVELOPMENTS
On December 21, 1995, the Company entered into an agreement and plan of
reorganization with AmHealth Corporation and its related health care entities
("AmHealth"). The agreement was amended on March 15, 1996. Under the terms of
this agreement, 11,200,000 shares of common stock of New STAT Healthcare, Inc.
("New STAT") will be exchanged (the "Exchange") for the stock and partnership
interests in the AmHealth organizations, and each issued and outstanding share
of the Company's common stock (as well as each option and warrant to purchase
the Company's common stock) will be converted into one share of common stock of
New STAT (or, in the case of options and warrants, the right to purchase common
stock of New STAT on a share-for-share basis). Upon consummation of the Exchange
and assuming participation by all eligible AmHealth securityholders, the
AmHealth securityholders will collectively own approximately 75% of the common
stock of New STAT to be outstanding immediately after the Exchange, resulting in
a change of control of the Company. New STAT is being organized to act as a
constituent entity in the Exchange and will have no business activity unrelated
to the exchange. Consummation of the Exchange is subject to the fulfillment of
certain covenants as well as securityholder approvals and is expected to occur
in the second quarter of 1996. Upon consummation of the Exchange, the Company's
common stock and common stock equivalents will be exchanged on a one-for-one
basis into common stock and common stock equivalents of New STAT, and the
corporate name of New STAT will be changed to "STAT Healthcare, Inc." If
consummated, the Exchange is expected to be accounted for as a pooling of
interests and, accordingly, historical financial data will be restated to
include the accounts of AmHealth.
In January 1996, the Company, in connection with the Columbia Agreement
described below, acquired the rights to a contract (the "HEMA Contract") for the
provision of emergency department medical services for a total purchase price of
$1.2 million, consisting of $960,000 in cash and 52,174 shares of the Company's
common stock. The Company also agreed to pay to the assignor of the HEMA
Contract up to $100,000 in each of the three twelve-month periods following the
acquisition of the contract depending upon the profits realized by the Company
under the HEMA Contract during such periods. The HEMA Contract rights which were
acquired are now part of the Columbia Agreement described below.
5
Effective February 1, 1996, the Company, through one of its affiliated
physician groups, entered into an agreement (the "Columbia Agreement") with
Columbia to provide emergency medical services to all but one of Columbia's
emergency departments in the Greater Houston Division. This agreement will
result in the addition of nine hospitals to the STAT service base between
February 1 and July 1, 1996 resulting in a total of 18 hospitals served (16 of
which are owned by Columbia). The 15 Greater Houston Division hospitals will be
covered by this single contract. The Columbia Agreement has an initial term of
two years, and may be renewed for successive two-year terms. This contract will
account for a significant portion of STAT's net service revenues and operating
expenses. The HEMA Contract rights are now part of the Columbia Agreement.
In February 1996, the Company acquired certain intangible assets of
Amedica, Ltd. for a total purchase price of $270,000, consisting of $200,000 in
cash and 15,730 shares of the Company's common stock. These assets consisted of
certain contract rights and the right to use the name "Amedica". However,
management does not intend to conduct any business under such name.
GOVERNMENT REGULATION
The Company's operations and relationships are subject to a variety of
governmental and regulatory requirements. Approximately 40% of patients treated
by STAT Physicians' contract physicians under fee-for-service arrangements
during 1994 and 1995 were participants in government-sponsored health care
programs (primarily Medicare and Medicaid). These programs are subject to
substantial regulation by federal and state governments, which are continually
revising and reviewing the programs and their regulations. Any change in
reimbursement regulations, policies, practices, interpretations or statutes that
places material limitations on reimbursement amounts or practices could
adversely affect the operations of STAT absent, or prior to, satisfactory
renegotiation of contracts with clients and arrangements with contracted
physicians.
GENERAL. The health care industry is highly regulated, and there can
be no assurance that the regulatory environment in which the Company operates
will not change significantly and adversely in the future. In general,
regulation of health care providers and companies managing the providers is
increasing.
There are currently several federal and state initiatives designed to
amend statutes and regulations relating to the provision of health care
services, the access of health care, the costs of health care and the manner in
which health care providers are reimbursed for their services. However, it is
not possible to predict whether any such initiatives will be enacted as
legislation or, if enacted, what their form, effective dates or impact on the
Company or its affiliated physician groups will be.
Every state imposes licensing requirements on individual physicians and
on facilities and services operated by physicians. Many states require
regulatory approval, including certificates of need, before establishing certain
types of health care facilities, offering certain services or making
expenditures in excess of statutory thresholds for health care equipment,
facilities or programs. The execution of a management agreement with a physician
group currently does not require any health care regulatory approval on the part
of the Company or the physician group. However, in connection with the expansion
of existing operations and the entry into new markets, the Company and its
affiliated physician groups may become subject to additional regulation.
FEE-SPLITTING; CORPORATE PRACTICE OF MEDICINE. The laws of many states
prohibit physicians from splitting professional fees with non-physicians and
prohibit non-physician entities, such as the Company, from practicing medicine
and from employing physicians to practice medicine. The laws in most states
regarding the corporate practice of medicine have been subject to limited
judicial and regulatory interpretation. The Company believes its current and
planned activities do not constitute fee-splitting or the corporate practice of
medicine as contemplated by these statutes or case law interpretations. However,
there can be no assurance that future interpretations of such laws will not
require structural and organizational modifications of the Company's existing
relationships with the STAT Physicians.
6
MEDICARE FRAUD AND ABUSE PROVISIONS. Federal law prohibits the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare or state health care program patients or patient care
opportunities, or in return for the purchase, lease or order of any item or
service that is covered by Medicare or a state health program. Pursuant to this
law, the federal government has recently announced a policy of increased
scrutiny of joint ventures and other transactions among health care providers in
an effort to reduce potential fraud and abuse relating to Medicare costs. The
applicability of these provisions to many business practices in the health care
industry, including the Company's management agreements has not to date been
subject to judicial and regulatory interpretation.
The Medicare and Medicaid anti-kickback amendments (the "Anti-Kickback
Law") provide criminal penalties for individuals or entities participating in
the Medicare or Medicaid programs who knowingly and willfully offer, pay,
solicit or receive remuneration in order to induce referrals for items or
services reimbursed under such programs. In addition to federal criminal
penalties, the Social Security Act also establishes the intermediate sanction of
excluding violators from participation in the Medicare or Medicaid programs.
A violation of the Anti-Kickback Law requires several elements: (i) the
offer, payment, solicitation or receipt of remuneration; (ii) the intent to
induce referrals; (iii) the ability of the parties to make or influence
referrals of patients; (iv) the provision of services that are reimbursable
under Medicare or state health programs; and (v) patient coverage under the
Medicare program or a state health program. Management believes that the Company
is receiving compensation under the Management Agreements for management
services. The Company also believes that it is not in a position to make or
influence referrals of patients or services reimbursed under Medicare or state
health programs to its affiliated physician groups. Consequently, the Company
does not believe that the management fees payable to it should be viewed as
remuneration for referring or influencing referrals of patients or services
covered by such programs as prohibited by the Anti-Kickback Laws. Furthermore,
the Company is not a provider or supplier of services or items reimbursed by
Medicare or state health programs.
In 1991, the Inspector General of the United States Department of
Health and Human Services published "Safe Harbor Regulations" defining safe
harbors for certain arrangements that do not violate the Anti-Kickback Laws. One
of the safe harbors specifically provided is a safe harbor for personal services
and management contracts. Under this safe harbor, "remuneration" prohibited by
the Anti-Kickback Laws will not include any payment made by a principal to an
agent as compensation for services of the agent as long as certain standards are
met. To management's knowledge, there have been no agency interpretations or
case law decisions involving management agreements similar to the Company's that
would indicate that such agreements do not fall within a safe harbor. Further,
management believes that since the Company is not a provider of medical
services, and is not in a position to refer patients to any particular medical
practice, the remuneration the Company receives for providing services should
not be found to violate the Anti- Kickback Laws.
PROHIBITIONS ON CERTAIN REFERRALS. The Omnibus Budget Reconciliation
Act of 1993 ("OBRA 93") included revisions to the Stark Law. The Stark Law
originally prohibited a physician from referring a Medicare or Medicaid patient
to any entity for the provision of clinical laboratory services if the physician
or an immediate family member of the physician had an ownership interest or
compensation relationship with the entity. The revisions to the Stark Law
included in OBRA 93 prohibit a referral to an entity in which the physician or
an immediate family member has an ownership interest or compensation
relationship if the referral is for any of a list of "designated health
services" or if an exception to the Stark Law does not exist. The list of
designated health services does not include the management of a physician health
care practice such as the Company provides. The Company does not consider its
operations to include the provision of a designated health service nor is the
Company a provider of such services; however, no regulations for the Stark Law
(except for clinical laboratory services) have been promulgated by the
regulatory and enforcement agency of the Stark Law, therefore the Company cannot
predict how enforcement or interpretation of the Stark Law will be handled. A
determination of the applicability of the Stark Law could have a significant
adverse effect on the Company.
REGULATORY COMPLIANCE. The Company believes that health care
regulations and statutes will continue to change and, as a result, it regularly
monitors developments in health care law. The Company expects to modify its
7
agreements and operations from time-to-time as the business and statutory and
regulatory environment changes. While the Company believes it will be able to
structure all its agreements and operations in accordance with applicable laws,
there can be no assurance that its arrangements will not be successfully
challenged in the future.
CORPORATE LIABILITY AND INSURANCE
STAT Physicians, STAT P.A. and the Company maintain professional
liability insurance in amounts deemed appropriate by management, based upon
historical claims and the nature and risks of the business. The current coverage
is $1,000,000 per incident and $3,000,000 aggregate per physician per hospital.
There can be no assurance that a future claim will not exceed the limits of
available insurance or that such coverage will continue to be available. Such
insurance would provide coverage, subject to policy limits, in the event the
Company were held liable as a co-defendant in any lawsuit against a contracted
health care professional or hospital client. STAT Physicians currently has
certain pending and threatened litigation and claims incurred in the ordinary
course of business; however, management believes that the probable resolution of
such contingencies will not materially affect the liquidity, the financial
position, or results of operations of STAT Physicians, STAT P.A. or the Company.
Management believes, although there can be no assurance, that courts considering
the question would not hold the management company vicariously liable for the
malpractice of physicians who are independent contractors contracted by the
affiliated physicians groups. In addition, the Company cannot be shielded from
liability in cases in which the Company was negligent.
In addition, STAT Physicians' and STAT P.A.'s contracts with hospital
clients generally contain provisions under which the client hospital is
indemnified for losses resulting from the contracting physician's malpractice up
to the limits of liability insurance (whether or not such losses are covered by
insurance policies), and the client agrees to indemnify STAT Physicians, STAT
P.A. or the Company, as the case may be, up to the limits of the client's
professional liability insurance for losses resulting from the negligence of the
client or client personnel (whether or not such losses are covered by insurance
policies). Both STAT Physicians and STAT P.A. require their independent
contracted physicians to indemnify STAT Physicians or STAT P.A., as the case may
be, for losses related to the performance of their medical services. By
requiring such indemnification, STAT Physicians and STAT P.A. are afforded
additional protection in the event that one of its individual contractor
physicians commits malpractice in the performance of his or her duties under the
contract.
COMPETITION
The business in which the Company operates is highly competitive. The
Company has both national and local competitors, including Coastal Healthcare
Group, Inc., Sterling Healthcare, Spectrum Emergency Services, Inc. and Emcare,
Inc. Based on the number of hospitals which the Company's national competitors
serve, its national competitors are substantially larger in size than the
Company. In the greater Houston area, the Company has more hospital contracts
than any other competitor. Competition in the industry is based on the scope,
quality and cost of services provided. Certain of the Company's actual or
potential competitors have substantially greater financial resources available
to them. While management believes that it competes on the basis of the quality
of its services, the larger resources of its national competitors may give them
certain cost advantages over the Company.
EMPLOYEES
On December 31, 1995, the Company had 25 full-time employees, of whom
six were in general executive positions and 19 were in administration. In
addition, as of such date approximately 105 physicians were under contract with
STAT Physicians or STAT P.A. None of the Company's employees is represented by a
collective bargaining agreement, and the Company considers its employee
relations to be satisfactory.
8
RISK FACTORS
LIMITED OPERATING HISTORY; DEPENDENCE ON AFFILIATED PHYSICIAN GROUPS
The Company was incorporated in July 1994 to offer physician contract
management services to professional associations or other legal entities
organized for the purpose of practicing medicine under state law, which provide
emergency department services to hospitals. The Company has a limited operating
history and currently relies on its Management Agreements and related fees from
STAT Physicians and STAT P.A., which are professional associations, as its sole
source of revenue. STAT Physicians and STAT P.A. have in place contracts with 17
hospitals for the provision of emergency department medical and administrative
services. While the terms of the hospital contracts are generally two years,
automatically renewing thereafter for one year periods, such contracts typically
provide for termination without cause by either party on 90 days' prior notice.
The termination or failure by STAT Physicians or STAT P.A. to renew a
significant number of these contracts or a single contract covering a
significant number of facilities would have a material impact on the revenues
attributable to the Management Agreements, which in turn could have a material
adverse effect on the Company.
INCREASED WORKING CAPITAL NEEDS AND RISKS OF COLLECTION RELATING TO
FEE-FOR-SERVICE REIMBURSEMENT PROGRAMS
The Company's business is dependent upon its ability to obtain and
maintain reimbursement for its affiliated physician groups on a fee-for-service
basis by third-party payors, including government programs (such as Medicare and
Medicaid). During the year ended December 31, 1995, the Company derived
approximately 97% of its revenues from payments made on a fee-for-service basis
by third party payors, private insurers and patients. Under fee-for-service
contracts, the Company, through the Management Agreements, assumes the financial
risks arising from changes in patient volume, payor mix and third party
reimbursement rates. Fee-for-service contractual arrangements also involve a
credit risk related to services provided to uninsured individuals. See Notes 3
and 4 of Notes to the Company's Financial Statements and Notes 4 and 5 of Notes
to STAT Physicians' Financial Statement for information concerning historical
allowance for contractual adjustments and uncollectibles. In addition,
fee-for-service contracts also have less favorable cash flow characteristics
than traditional flat-rate contracts due to longer collection periods. The
Company's working capital needs are generally a function of the acquisition of
new hospital contracts. As a result, the Company may require additional working
capital in the event of significant growth. The Company may experience a net use
of cash in its operating activities in future projects if the growth in
fee-for-service contracts continues.
The public and private sectors are experiencing increasing pressures to
restrain health care costs and to restrict reimbursement rates for medical
services. Any change in reimbursement amounts or practices to the affiliated
physician groups could materially adversely affect the operations of the Company
unless the Company is able to renegotiate satisfactory contractual arrangements
with STAT Physicians' and STAT P.A.'s hospital clients and contracted physicians
of the affiliated physician groups. In addition, while the Company seeks to
comply with applicable Medicare and Medicaid reimbursement regulations on behalf
of its affiliated physician groups, there can be no assurance that the Company
would be found to be in compliance in all respects with such regulations.
ASSUMPTION OF OBLIGATIONS OF STAT PHYSICIANS
The Management Agreements provide that the Company satisfy "specific
obligations" of STAT Physicians and STAT P.A. primarily relating to expenses
associated with payment of physicians' fees, billing and collection costs and
daily operations. There can be no assurance that cash flow from operations,
particularly under fee-for-service contracts, will provide sufficient resources
when needed to meet such obligations on a timely basis. In such event, the
Company would have to rely on its working capital or seek additional financing.
There can be no assurance that bank financing will be available to the Company
on acceptable terms or in sufficient amounts to allow the Company to expand its
business to include management services under additional fee-for-service
contracts, and therefore, the payment of such obligations may have a material
adverse impact on the liquidity and capital resources of the Company.
9
CLASSIFICATION OF PHYSICIANS AS INDEPENDENT CONTRACTORS; POTENTIAL
STATE AND FEDERAL TAX LIABILITY
STAT Physicians and STAT P.A. contract with physicians as independent
contractors, rather than employees, to fulfill their contractual obligations to
hospitals. Therefore, neither STAT Physicians nor STAT P.A. currently withholds
federal or state income taxes, makes federal or state unemployment tax payments,
or provides worker's compensation insurance with respect to such independent
contractors. The payment of applicable taxes is regarded as the responsibility
of such independent contractors. Management believes that classification of
physicians as independent contractors is standard industry practice and proper
for federal tax purposes. A contrary determination by federal taxing authorities
or a change in existing law could materially adversely affect the Company and
its operations. Most state taxing authorities either have not challenged or have
accepted the classification of contract physicians as independent contractors.
However, there are some states in which the independent contractor
classification of physicians is or has been under administrative or judicial
review.
DEPENDENCE ON CONTRACTS WITH HOSPITALS
During the four-month period ended December 31, 1994, and the
twelve-month period ended December 31, 1995, four hospital contracts have each
accounted for 10% or more of the Company's revenues. More importantly, effective
February 1996 the Company, through an affiliated physician group, entered into
the Columbia Agreement to provide emergency medicine services to all but one of
Columbia's emergency departments in the Greater Houston Division. This agreement
will result in the addition of nine hospitals to the Company's service base
between February 1 and July 1, 1996 resulting in a total of 18 hospitals (16 of
which are owned by Columbia). The Columbia Agreement has an initial terms of two
years, and may be renewed for successive two-year periods. Loss of this single
contract would have a material adverse impact on the Company's business.
HIGHLY COMPETITIVE INDUSTRY
The business in which the Company operates is highly competitive. The
Company has national and local competitors. The Company's national competitors
include Coastal Healthcare Group, Inc., Sterling Healthcare, Spectrum Emergency
Services, Inc. and Emcare, Inc. The Company also indirectly competes with the
more traditional structures of emergency health care delivery, including
hospitals that do not contract with physician groups to provide emergency
medical services. Competition in the industry is based on the scope, quality and
cost of services provided. Certain of the Company's actual or potential
competitors have substantially greater financial resources available to them.
RISKS OF EXPANSION
The Company's plans include a focus on the expansion of its business
through the addition of new hospital contracts under the existing Management
Agreements with STAT Physicians and STAT P.A. or under management agreements
with other professional associations in the Houston area and other areas. There
can be no assurance that the Company's resources will be sufficient to achieve
such expansion or that upon achieving such expansion its working capital and/or
additional staffing will be sufficient for its operating needs. In addition, the
Company's management and quality assurance procedures may not be sufficient in
the event of such expansion. The Company has, from time to time, entered into
confidentiality or similar agreements with other companies, and investigated
whether the acquisition of such companies would be an appropriate and advisable
expansion. The eventual completion of such contemplated transactions is highly
uncertain, and suitable candidates for acquisition may become available only at
irregular intervals. The long-term expansion plans of the Company do not rule
out the possibility of expansion by the acquisition of existing businesses. The
Company's internal policy is to publicize transactions at the time of execution
of a letter of intent. Currently there are no executed letters of intent.
10
DEPENDENCE UPON KEY PERSONNEL
The success of the Company to date has been dependent upon the active
involvement of its management, including the Company's Chairman, William H.
Rice, M.D., its President, Victor M. Miranda, M.D. and its Chief Financial
Officer, Ned E. Chapman. The Company maintains key employee life insurance in
the amount of $1,000,000 on each of the lives of Dr. Rice and Dr. Miranda and
has entered into employment agreements with Dr. Rice, Dr. Miranda and Mr.
Chapman. Since the Company relies on three executive officers, the loss to the
Company of the services of any of its executive officers could materially
adversely affect the Company's operations.
ADVERSE EFFECT OF STATE LAWS REGARDING THE CORPORATE PRACTICE OF MEDICINE
Business corporations are legally prohibited in many states from
providing or holding themselves out as providers of medical care. While the
Company has structured its operations in a manner that it believes complies with
the corporate practice of medicine laws of Texas and will seek to structure its
operations in the future to comply with the laws of any state in which it seeks
to operate, there can be no assurance that, given varying and uncertain
interpretations of such laws, the Company would be found to be in compliance
with restrictions on the corporate practice of medicine in such states. A
determination that the Company is in violation of applicable restrictions on the
practice of medicine in any state in which it operates could have a materially
adverse effect on the Company if the Company were unable to restructure its
operations to comply with the requirements of such state. Such regulations may
limit the states in which the Company can operate, thereby inhibiting future
expansion of the Company into potential markets in other states.
CORPORATE EXPOSURE TO PROFESSIONAL LIABILITIES
Due to the nature of their businesses, STAT Physicians and STAT P.A.
and certain physicians who provided services on their behalf have been the
subject of medical malpractice claims, with the attendant risk of substantial
damage awards. The most significant source of potential liability in this regard
is the alleged negligence of physicians placed by STAT Physicians or STAT P.A.
at contract hospitals. To the extent such physicians were regarded as agents of
the Company in the practice of medicine, the Company could be held liable for
any medical negligence of such physicians. In addition, the Company could be
found in certain instances to have been negligent in performing its contract
management services for the hospitals even if no agency relationship between the
Company, STAT Physicians and STAT P.A. and/or such physician exists. STAT
Physicians' and STAT P.A.'s contracts with hospitals generally require STAT
Physicians or STAT P.A., as the case may be, to indemnify such other parties for
losses resulting from a contracted physician's malpractice. However, there can
be no assurance that a future claim or claims will not exceed the limits of
available insurance coverage or that such coverage will continue to be
available.
POSSIBLE INSUFFICIENCY OF LIABILITY COVERAGE
Each of STAT Physicians, STAT P.A. and the Company currently maintain
professional liability insurance coverage they believe to be adequate in amount
and coverage; however, there can be no assurance that any future claims against
STAT Physicians, STAT P.A. or the Company will not be made in the future in
excess of the limits of such insurance, if any, or that any such claims, if
successful and in excess of such limits, will not have a material adverse effect
on the Company's assets and its ability to conduct its business. There can be no
assurance that STAT Physicians, STAT P.A. and the Company will continue to
maintain such insurance or that such insurance can be maintained at acceptable
costs. STAT Physicians' and STAT P.A.'s insurance primarily covers medical
malpractice. The Company's insurance coverage currently includes the following
types of policies: fire, property damage and general liability. There can be no
assurance that any claim will be within the scope of the Company's coverage or
that such claims will not exceed the Company's coverage.
11
REFORM OF HEALTHCARE DELIVERY SYSTEM
Numerous legislative proposals have been introduced or proposed in the
U.S. Congress and in some state legislatures that would effect major changes in
the U.S. healthcare system nationally or at the state level. The federal
proposals generally involve allocating fewer federal dollars to Medicare,
Medicaid, and other federal government healthcare programs. If any such
proposals are enacted, the proposals could have an adverse effect on the
Company, as the Company currently generates significant income from these
federal reimbursement programs. Congress is also considering other proposals
that may adversely impact the Company, including proposals that would implement
price controls on federal healthcare program expenditures and would permit
greater flexibility in states' administration of their Medicaid programs. It is
not clear at this time what federal or state proposals, if any, will be adopted
or the timeframe of the enactment of any such proposals. There can be no
assurance that currently proposed or future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have a material adverse effect on the Company.
RESTRICTIONS ON SELF-REFERRAL
PROHIBITIONS ON CERTAIN REFERRALS. The Omnibus Budget Reconciliation
Act of 1993 ("OBRA 93") included a provision that significantly expanded the
scope of the Ethics in Patient Referral Act, also known as the "Stark Law." The
Stark Law originally prohibited a physician from referring a Medicare or
Medicaid patient to any entity for the provision of clinical laboratory services
if the physician or an immediate family member of the physician had an ownership
interest or compensation relationship with the entity. The revisions to the
Stark Law included in OBRA 93 prohibit a referral to an entity in which the
physician or an immediate family member has an ownership interest or
compensation relationship if the referral is for any of a list of "designated
health services." The list of "designated health services" includes the
following: (1) clinical laboratory services; (2) physical therapy services; (3)
occupational therapy services; (4) radiology services, including magnetic
resonance services; (5) radiation therapy services and supplies; (6) durable
medical equipment and supplies; (7) parenteral and enteral nutrients and
supplies; (8) prosthetics, orthotics, and prosthetic devices and supplies; (9)
home health services; (10) outpatient prescription drugs; and (11) inpatient and
outpatient hospital services. Furthermore, the Stark Law prohibits any such
entity from billing the Medicare or Medicaid programs for the provision of
"designated health services" by the physician. The Stark Law applies as
described above unless the service provided is not a "designated health service"
or if an exception to the Stark Law exists. The Company does not believe that
the Stark Law will adversely affect the operations of the Company as it is not
currently and does not intend to be a "provider" of designated health services
as the Stark Law contemplates; however, no regulations for the Stark Law (except
for clinical laboratory services) have been promulgated by the federal
regulatory agency responsible for such regulations and enforcement, and the
Company cannot predict how the final Stark Law regulations or their
interpretation for enforcement will be handled or whether Congress will
ultimately modify the Stark Law as they have already attempted (unsuccessfully)
to do. Such interpretations of regulations or statutory changes could impact the
operations of the Company in the future.
PROHIBITIONS ON CERTAIN COMPENSATION ARRANGEMENTS. The Stark Law also
prohibits physician group practices from developing compensation or bonus
arrangements that are directly related to the volume or value of referrals by a
physician in the group for "designated health services." While there are no
regulatory guidelines or case law interpretations of this provision of the Stark
Law, the Company believes that the compensation arrangements of its existing
affiliated physician groups, administered by the Company are in compliance with
the Stark Law requirements. However, future regulatory interpretations for
enforcement of the Stark Law as it relates to compensation or bonus arrangements
could impact the affiliated physician groups and the operations of the Company
in this aspect of its business in the future.
CONTROL BY OFFICERS AND DIRECTORS
The officers and directors of the Company currently beneficially own
approximately 44.5% of the Company's outstanding common stock. As a result,
these shareholders have significant influence over the outcome of all matters
submitted to the Company's shareholders for their approval, including the
election of directors. This ownership by the
12
officers and directors may delay, defer or prevent a potential change of control
of the Company and, consequently, the market price for the Company's common
stock may be less likely to reflect a "premium for control."
POTENTIAL LIABILITY FOR RESCISSION OF PRIVATE SALES AND UNDER SECTION 5
OF THE SECURITIES ACT
Certain recent private sales of the Company's securities may be
required to be integrated with the offering of securities in the Exchange. If so
integrated, the purported private sales would constitute an unregistered public
offering in violation of Section 5 of the Securities Act of 1933. Such a
violation would entitle the subscribers in such private sales to rescission and
would subject the Company (and New STAT following the Exchange) to liability
under said Section 5. Management does not believe that rescission of any such
private sales would have a material adverse effect on the Company or on New STAT
following the Exchange.
NO DIVIDENDS CONTEMPLATED ON COMMON STOCK
To date, no cash dividends have been declared or paid on the Company's
common stock, and the Company does not anticipate declaring or paying any
dividends in the foreseeable future, but rather intends to reinvest profits, if
any, in its business.
POSSIBLE ADVERSE EFFECT OF FUTURE ISSUANCES OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares, par value $.01 per share, of "blank check" preferred stock
(the "Preferred Stock") with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Company's Board of Directors is empowered, without stockholder approval, to
issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of the Company's common stock. In the event of issuance, the Preferred
Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. The
Company has no present intention to issue any shares of its Preferred Stock.
However, there can be no assurance that shares of Preferred Stock will not be
issued at some time in the future.
LIMITED MARKET FOR THE COMPANY'S SECURITIES; POSSIBLE VOLATILITY OF
STOCK PRICE
There is a limited market for the Company's securities. The
discontinuation of market-making in the Company's securities by one or both of
the Company's two principal market-makers could have a material adverse effect
on the market price of the Company's securities. In addition, factors such as
announcements by the Company or its competitors concerning proposed plans,
procedures and proposed government regulations may have a significant effect on
the market price of the Company's securities. The stock market has experienced
extreme price and volume fluctuations which have particularly affected the
market prices for many healthcare companies and which have often been unrelated
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the price of the Company's securities.
POSSIBLE ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Of the 3,702,472 shares of the Company's common stock outstanding as of
the date of this Report, 1,640,570 shares are owned by "affiliates" of the
Company, as that term is defined in Rule 144 ("Rule 144") promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). If the Exchange is
consummated, there will be approximately 14,902,472 shares of New STAT common
stock outstanding immediately following the Exchange, all of which will be
freely tradeable without restriction or further registration under the
Securities Act, other than "restricted" shares issuable in the Exchange and
shares issuable to "affiliates" of New STAT. Such "restricted" shares
13
and the shares issuable in the Exchange to affiliates of New STAT will also be
subject to lock-up agreements with New STAT for a period of 12 months following
the Exchange. The Company's officers, directors, and certain of its current
stockholders, have agreed not to sell or otherwise dispose of any of their
shares of the Company's common stock now owned or issuable upon the exercise of
warrants prior to October 21, 1996 without the prior written consent of Network
1 Financial Securities, Inc, which agreements will extend to the New STAT shares
issuable in the Exchange. Absent registration under the Securities Act, the sale
of "restricted" shares and the sale of any shares held by affiliates are subject
to the volume, notice and manner of sale requirements of Rule 144. In addition,
as of the date of this Report, there were outstanding warrants and options to
purchase an aggregate of 1,159,166 shares of the Company's common stock which,
following the Exchange, will be exchanged for warrants and options exercisable
for New STAT common stock. All of the shares issued upon exercise of such
warrants and options will be freely tradeable without restriction or further
registration under the Securities Act, other than shares held by "affiliates" or
subject to contractual lock-up arrangements.
No prediction can be made as to the effect, if any, that sales of
shares of additional shares of common stock or the availability of such shares
for sale will have on the market prices prevailing from time to time. The
possibility that substantial amounts of common stock may be sold in the public
market may adversely affect prevailing market prices for the Company's common
stock and could impair the Company's ability to raise capital in the future
through the sale of equity securities.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's offices are located at 12450 Greenspoint Drive, Suite
1200, Houston, Texas 77060. The Company has entered into a sublease agreement,
which expires in July 1998, with a non-affiliated sublessor in Houston, Texas
for 9,556 square feet of space for its operations at an average monthly rental
of $8,760.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently a party to any material legal proceedings.
However, in the future it could be subject to claims arising from its business
management relationship to STAT Physicians, STAT P.A. or other professional
associations to which it may provide services. STAT Physicians is involved in
various legal proceedings incidental to its business, substantially all of which
involve claims related to the alleged medical malpractice of its independent
contracted physicians. In the opinion of management, no individual item of
litigation or group of similar items of pending litigation is likely to have a
material adverse effect on the Company's liquidity, financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the last quarter of the fiscal year ended December 31, 1995.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been quoted on the Nasdaq SmallCap
Market System since April 21, 1995 under the symbol "ERDR," and also on the
Boston Stock Exchange since April 21, 1995, under the symbol "EDR." On May 17,
1996, the last sale price per share of the Company's common stock was $8 1/2.
The following table sets forth the high and low sales prices for the Company's
common stock as reported by the Nasdaq SmallCap Market and the Boston Stock
Exchange for the periods indicated.
HIGH LOW
1995:
Second Quarter (beginning April 21)........... 3 13/16 2 1/8
Third Quarter................................. 3 7/8 2 3/8
Fourth Quarter................................ 5 2 3/4
1996:
First Quarter................................ 6 3/4 3 5/8
Second Quarter (through May 17).............. 8 3/4 5 5/8
On May 6, 1996, there were approximately 1,100 beneficial holders of
the Company's common stock.
To date, the Company has paid no cash dividends and has no present
intention of paying any dividends on the Company's common stock in the
foreseeable future, as it intends to use its earnings, if any, to generate
increased growth. The payment by the Company of cash dividends, if any, in the
future, rests solely within the discretion of the Company's Board of Directors
and will depend upon, among other things, the Company's earnings, capital
requirements and financial condition, as well as other factors deemed relevant
by the Company's Board of Directors. Although dividends are not limited
currently by any agreements, it is anticipated that future agreements, if any,
with institutional lenders may also limit the Company's ability to pay
dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the
financial statements and notes thereto included in Item 7 of this Report.
GENERAL
The Company, through the Management Agreement with STAT Physicians,
assumed management of the business activities of STAT Physicians commencing
September 1, 1994. Accordingly, its operating results from September 1, 1994
through December 31, 1995 represent a continuation of the operating results
which had been reported by STAT Physicians for the year ended December 31, 1993
and for the eight-month period ended August 31, 1994. The income statement data
for the year ended December 31, 1994 represents the combination of eight months
(January 1 through August 31, 1994) of STAT Physicians' operations and four
months (September 1 through December 31, 1994) of the Company's consolidated
operations. Since STAT Physicians was a subchapter S corporation and not subject
to federal income taxes, adjustments were made to its net income for the eight
month period ended August 31, 1994 and the year ended December 31, 1993 to show
those results on a comparative basis with the Company, which is subject to
federal income taxes.
15
The Company provides management services to STAT Physicians and STAT
P.A. which, in turn, provide physicians and related services to hospitals,
primarily to staff and manage emergency department operations. STAT Physicians
and STAT P.A. currently have contracts and/or agreements with 17 hospitals to
provide emergency department services by physicians, who are retained as
independent contractors, and to provide related administrative functions, which
are performed by the Company. Services are scheduled to commence at one
additional hospital on July 1, 1996. Sixteen of the hospitals are owned by
Columbia and services to 15 of these will be provided pursuant to the Columbia
Agreement. All hospitals served are under fee-for-service arrangements. At
December 31, 1994, 3 of 12 then existing contracts were compensated directly by
hospitals on a fixed fee basis.
The following discussion provides an analysis of the results of
operations as described above and liquidity and capital resources of the Company
and should be read in conjunction with the audited financial statements of the
Company and STAT Physicians and notes thereto included elsewhere in this Report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SERVICE REVENUES. Net service revenues increased by $3.6 million,
or 34%, to $14.1 million in 1995, from $10.5 million for the 1994. This increase
is attributable to an 18% increase in patients treated during the periods
compared coupled with a 14% increase in net revenue per patient in 1995 compared
with 1994. Approximately 180,000 patients were treated during 1995 compared with
153,000 patients during 1994. The comparative increase in patients treated is
attributable to new contracts which were started in mid-December 1994 and in
March 1995. Patient volumes under contracts serviced throughout both periods
were mostly unchanged. The increase in net revenue per patient ($9.53 from
$68.94 to $78.47) is attributable to the conversion between 1995 and 1994 of
additional contracts to fee-for-service arrangements coupled with increases in
levels of service which were required by patients treated. Standard billing
rates for medical procedures were identical between the two years.
DIRECT EXPENSES. Direct expenses consist of professional fees (contract
physicians and physicians' assistants), liability insurance and external billing
and collection costs associated with the contracting of these administrative
services. Professional fees increased by $1.5 million, or 20%, to $9.2 million
from $7.7 million in 1994. The rate of increase in these fees approximates the
rate of increase in number of patients treated. The cost of professional fees
per patient treated increased modestly from $50.42 in 1994 to $51.34 in 1995.
Liability insurance costs are incurred on a per patient treated basis. The
increase in this cost is attributable to the increased number of patients
treated coupled with an increase in premium rates from an average of $3.14 per
patient in 1994 to $3.92 per patient in 1995. Premium costs, which are subject
to change at the policy renewal date, were $4.25 per patient at December 31,
1995. The increase in billing and collection costs, $0.7 million, from $0.8
million to $1.5 million is attributable to the conversion from hospital
reimbursement to direct billing (fee-for-service) arrangements under those
contracts which had not been converted during 1994. These costs averaged 10.3%
of net service revenues for 1995 and would have been approximately 11% of net
service revenues had fee-for-service arrangements been in effect throughout the
year.
OPERATING EXPENSES. Operating expenses increased by $0.7 million, or
68%, from $1.0 million in 1994 to $1.7 million in 1995. The majority of this
increase is attributable to increases in human resource costs ($0.5 million or
64%) and occupancy costs ($0.1 million or 223%). The increase in human resource
costs is attributable to (i) an increase in administrative personnel associated
with the increased volume of business, (ii) a comparative increase in salaries
paid to the two physician officers of the Company whose combined salaried
compensation increased from $307 thousand in 1994 to $558 thousand in 1995, and
(iii) normal annual salary adjustments provided to employees. The salaries of
the physician officers of the Company were increased with the formation of the
Company, whereas during previous periods (when operating as STAT Physicians - a
privately-owned company) they were compensated in part through higher physician
contract service rates which were characterized as physician costs. The increase
in occupancy costs is primarily attributable to the April 1995 move into larger
administrative facilities.
16
INTEREST INCOME. Interest income for 1995 was derived from the
investment of cash obtained from the Company's initial public offering in April
1995. The Company had no excess cash for investment during 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SERVICE REVENUES. Net service revenues increased by $ 1.7 million,
or 19%, from $8.8 million to $10.5 million. This increase was primarily
attributable to an increase in patient visits associated with the addition of
hospital contracts that commenced in 1994 (from 130,000 to 153,000) and a modest
increase in average revenue per patient of $0.70, from $68.25 to $68.95. Average
revenue per patient can be and was positively influenced by an increased number
of commercially insured patients. Payors include private insurers, the federal
government, state governments, patients and other sources of payment.
DIRECT EXPENSES. Direct expenses consist of fees to contract
physicians, medical liability insurance and billing and collection costs
associated with the external contracting of these services. Contract physician
fees increased $0.9 million, or 13%, from $6.8 million to $7.7 million and
represent 73.1% of net revenues for 1994, compared with 76.9% of net revenues
for 1993. The decline as a percent of net revenues is the result of better
productivity in 1994 than in 1993. Productivity is measured by the number of
patients each doctor treats. Medical liability insurance costs increased 30% as
a result of comparative premium increases ($3.14 per patient average in 1994
compared with $2.83 per patient for 1993) and the increase in patient visits.
Billing and collection costs increased $0.5 million from $0.3 million in 1993 to
$0.8 million in 1994. This increase was directly attributable to an industry
wide shift from fixed fee contracts to fee-for-service contracts.
OPERATING EXPENSES. Operating expenses increased 17%, compared with the
19% increase in net revenues. This increase was primarily attributable to an
increase in human resource costs associated with a comparative increase in
personnel coupled with annual salary increases awarded to personnel included in
both periods.
INTEREST EXPENSE. The increase in interest expense during 1994,
compared with 1993, was attributable to an increase in borrowings to finance
accounts receivable necessitated by the shift from fixed fee to fee-for-service
business.
LIQUIDITY AND CAPITAL RESOURCES
Capital requirements of the Company currently relate to three major
areas. These are (i) capital needs in connection with the start-up of new
contracts; (ii) the need for capital to increase administrative capabilities,
including the internalization of billing and collection services and the
computerization of patient charts; and (iii) capital needs associated with the
AmHealth companies assuming that the Exchange described herein is consummated.
Additionally, the Company or New STAT may have cash requirements with respect of
rescission rights relating to common stock issued in connection with two asset
purchase transactions consummated during the first quarter of 1996. The stock
issued in these transactions was valued at $310,000.
Experience indicates that upon commencement of a new hospital contract,
a period ranging from 90 to 150 days is required to achieve normal cash flows
under the contract. Between February 1 and July 1, 1996, the Company anticipates
starting services at nine new hospitals pursuant to the Columbia Agreement. The
commencement of these services will create a significant cash flow deficit
during their start-up phase. Additionally, with the concurrence of Columbia, the
HEMA Contract was purchased, for a price of $1,200,000, from the group which had
provided contract emergency medicine services to one hospital for a period in
excess of 20 years. The purchase price was paid on January 31, 1996, in cash
totaling $960,000 and shares of the Company's common stock valued at $240,000
(52,174 shares).
It is impracticable to quantify the capital requirements for
administrative capabilities relating to the internalization of billing and
collection services and the computerization of patient charts. With respect to
internalizing the billing and collection services, the Company is presently
evaluating several alternatives which range from acquiring a company that
currently performs such services to assessing the costs and related obstacles
associated with staffing and equipping a new internal organization. If the
acquisition alternative is selected, the acquisition could be accomplished
either with cash or with issuance of shares of the Company's common stock. With
respect to the computerization of patient charts, there are a large number of
alternative systems which are available. The Company is currently evaluating
several of these alternatives which vary in cost and range from a low of
approximately $25,000 per hospital to a high of approximately $100,000 per
hospital depending upon sophistication and type of end product. No decision has
been made regarding these matters.
Historically, the Company's capital requirements have been met through
operating cash flows, bank borrowings and sales of the Company's common stock
(private placements and an initial public offering). The Company presently
17
has a bank line of credit totaling $1,500,000, of which approximately $600,000
is drawn, and is currently in discussion with several banks regarding a new line
of credit of approximately $5,000,000. Additionally, the Company is also in the
process of evaluating a secondary public offering of its common stock during the
second half of 1996. The increased line of credit and the secondary public
offering are being evaluated in the context of completion of the proposed
Exchange with AmHealth. No assurances can be made that the Company will be able
to accomplish either or both of these financing objectives.
Inflation has not had, nor is it expected to have, a material impact on
the operations and financial condition of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock- Based Compensation" ("SFAS No. 123"). SFAS No.
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans. The financial accounting standards of SFAS No. 123
permit companies to either continue accounting for stock-based compensation
under existing rules or adopt SFAS No.123 and begin reflecting the fair value of
stock options and other forms of stock-based compensation in the results of
operations as additional expense. The disclosure requirements of SFAS No. 123
require companies which elect not to record the fair value in the statement of
operations to provide pro forma disclosures of net income and earnings per share
in the notes to the financial statements as if the fair value of stock-based
compensation had been recorded. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995. The Company will provide the pro forma disclosures beginning with its 1996
Annual Report and will continue accounting for such plans under the existing
accounting rules.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995. The Company does not anticipate that adoption of SFAS
No. 121 will have a significant effect on its financial position or results of
operations.
FUTURE OUTLOOK
In addition to historical information, this Report contains
predictions, estimates and other forward-looking statements that involve a
number of risks and uncertainties. These risks and uncertainties include the
fact that the Company is still a relatively young company whose business is
still developing. This development will require substantial amounts of funding
and the Company is dependent on debt financing and the equity markets to finance
such efforts. Where access to funding is difficult, the Company's stockholders
may face significant dilution, and the ability of the Company to proceed with
its programs and plans may be significantly and adversely affected. Actions and
advances by competitors may also significantly affect the Company's prospects.
While this outlook represents management's current judgment on the
future direction of the business, these risks and uncertainties are only some of
the factors that may ultimately affect the Company's success, and actual results
may differ materially from any future performance suggested in this Report. A
more detailed explanation of these and other risks is contained in "Risk
Factors" under Item 1 of this Report.
18
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
STAT Healthcare, Inc. NO.
<S> <C> <C>
Independent Auditors' Report.................................................................... 20
Balance Sheets at December 31, 1995 and 1994.................................................... 21
Consolidated Statements of Income for the year ended December 31, 1995
and the period from July 29, 1994 (date of incorporation) through December 31, 1994........... 22
Statements of Changes in Shareholders' Equity for the year ended December 31, 1995
and the period from July 29, 1994 (date of incorporation) through December 31, 1994........... 23
Statements of Cash Flows for the year ended December 31, 1995 and for the
period from July 29, 1994 (date of incorporation) through December 31, 1994................... 24
Notes to Financial Statements................................................................... 25
SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A.
Independent Auditors' Report.................................................................... 32
Balance Sheets at August 31, 1994 and December 31, 1993......................................... 33
Statements of Income for the eight months ended August 31, 1994 and the year ended
December 31, 1993............................................................................. 34
Statements of Changes in Shareholders' Equity for the eight months ended August 31, 1994
and the year ended December 31, 1993.......................................................... 35
Statements of Cash Flows for the eight months ended August 31, 1994 and the year ended
December 31, 1993............................................................................. 36
Notes to Financial Statements................................................................... 37
</TABLE>
19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
STAT Healthcare, Inc.:
We have audited the accompanying balance sheets of STAT Healthcare,
Inc. (the "Company") as of December 31, 1995 and 1994, and the related
consolidated statements of income, and statements of changes in shareholders'
equity and cash flows for the year ended December 31, 1995 and the period from
July 29, 1994 (date of incorporation) to December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of STAT Healthcare,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the year ended December 31, 1995 and the period from July 29,
1994 (date of incorporation) to December 31, 1994, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
February 23, 1996, except as to note 13,
which is as of April 8, 1996
<PAGE>
20
STAT HEALTHCARE, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
---------- ----------
<S> <C> <C>
Cash and cash equivalents ...................................................................... $1,763,000 $ 159,000
Accounts receivable:
Patient accounts, net (note 4) ........................................................ 3,154,000 1,389,000
Hospital accounts ..................................................................... 30,000 181,000
Due from STAT Physicians, P.A ......................................................... 122,000 59,000
---------- ----------
Net accounts receivable ............................................. 3,306,000 1,629,000
Prepaids and other current assets .............................................................. 486,000 72,000
Notes receivable (note 5) ...................................................................... 200,000 --
---------- ----------
Total current assets ................................................ 5,755,000 1,860,000
Office equipment and furnishings, net of accumulated depreciation of $16,000
at December 31, 1995 ........................................................................ 96,000 --
Deferred offering costs and other non-current assets (note 2) .................................. 9,000 234,000
---------- ----------
Total assets ........................................................ $5,860,000 $2,094,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
10% convertible secured notes (note 7) ......................................................... $ -- $ 350,000
Accrued physicians' fees ....................................................................... 706,000 724,000
Accounts payable ............................................................................... 307,000 135,000
Accrued liabilities ............................................................................ 152,000 137,000
---------- ----------
Total current liabilities and total liabilities ..................... 1,165,000 1,346,000
---------- ----------
Shareholders' equity (notes 7, 8 and 9):
Preferred stock, $.01 par value. Authorized 1,000,000 shares;
Series A convertible, issued and outstanding 74,000 shares at
December 31, 1994 ..................................................................... -- 370,000
Common stock, $.01 par value. Authorized 10,000,000 shares;
issued and outstanding 3,623,332 and 800,000 shares, respectively ..................... 36,000 8,000
Capital in excess of par value ........................................................ 3,857,000 242,000
Retained earnings ..................................................................... 802,000 128,000
---------- ----------
Total shareholders' equity .......................................... 4,695,000 748,000
Commitments and contingencies (notes 10, 11, 12 and 13)
Total liabilities and shareholders' equity .......................... $5,860,000 $2,094,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
STAT HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995 AND
PERIOD FROM JULY 29, 1994 (DATE OF INCORPORATION) THROUGH DECEMBER 31, 1994
1995 1994
------------ ------------
Net service revenues (note 3) ................ $ 14,124,000 $ 3,672,000
------------ ------------
Direct expenses:
Physicians' fees ........................... 9,241,000 2,601,000
Liability insurance ........................ 706,000 167,000
Billing and collection ..................... 1,461,000 322,000
------------ ------------
Total direct expenses .................... 11,408,000 3,090,000
------------ ------------
Gross profit ............................. 2,716,000 582,000
------------ ------------
Operating expenses:
Human resources ............................ 1,405,000 336,000
Occupancy .................................. 139,000 17,000
Furniture and equipment .................... 56,000 8,000
Supplies ................................... 61,000 11,000
Outside services and other ................. 78,000 8,000
------------ ------------
Total operating expenses ................. 1,739,000 380,000
------------ ------------
Operating income ......................... 977,000 202,000
Interest income .............................. 75,000 --
Interest expense ............................. (31,000) (9,000)
------------ ------------
Income before income taxes ............... 1,021,000 193,000
Income taxes (note 6) ........................ 347,000 65,000
------------ ------------
Net income ............................... $ 674,000 $ 128,000
============ ============
Net income per common share (note 2) ..... $ 0.21 $ 0.06
============ ============
Number of shares used in computing
net income per common share .................. 3,180,504 2,199,624
============ ============
See accompanying notes to financial statements.
22
<PAGE>
STAT HEALTHCARE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND
PERIOD FROM JULY 29, 1994 (DATE OF INCORPORATION) THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------
CAPITAL IN TOTAL
NUMBER NUMBER EXCESS OF RETAINED SHAREHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT PAR VALUE EARNINGS EQUITY
--------- ------- --------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at July 29, 1994............ --- $ --- --- $ --- $ --- $ --- $ ---
Sale of common stock at par.......... --- --- 450,000 5,000 --- --- 5,000
Sale of Series A, Convertible
Preferred stock................. 74,000 370,000 --- --- --- --- 370,000
Sale of common stock at $.10 per
share.......................... --- --- 100,000 1,000 9,000 --- 10,000
Sale of common stock at $1.00 per
share, net of issuance costs...... --- --- 250,000 2,000 233,000 --- 235,000
Net income........................... --- --- --- --- --- 128,000 128,000
Balances at December 31, 1994........ 74,000 370,000 800,000 8,000 242,000 128,000 748,000
Initial public offering of common
stock, net of issuance costs... --- --- 1,250,000 12,000 3,243,000 --- 3,255,000
Conversion of 10% secured notes
to common stock................ --- --- 93,332 1,000 17,000 --- 18,000
Conversion of Series A,
Convertible Preferred
stock to common stock .........(74,000) (370,000) 1,480,000 15,000 355,000 --- ---
Net income........................... --- --- --- --- --- 674,000 674,000
Balances at December 31, 1995........ --- $ --- 3,623,332 $36,000 $3,857,000 $802,000 $4,695,000
======== ============= ========== ============ ============== =========== =================
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
STAT HEALTHCARE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 AND
PERIOD FROM JULY 29, 1994 (DATE OF INCORPORATION) THROUGH DECEMBER 31, 1994
1995 1994
----------- -----------
Cash flows from operating activities:
Net income ......................................... $ 674,000 $ 128,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation ....................................... 16,000 --
Changes in assets and liabilities:
Increase in net accounts receivable ................ (1,677,000) (1,629,000)
Increase in prepaids and other current assets ...... (414,000) (72,000)
Increase in other non-current assets ............... (9,000) --
(Decrease) increase in accrued physicians' fees .... (18,000) 724,000
Increase in accounts payable ....................... 172,000 135,000
Increase in accrued liabilities .................... 15,000 137,000
----------- -----------
Total adjustments .................................. (1,915,000) (705,000)
----------- -----------
Net cash used in operating activities .............. (1,241,000) (577,000)
----------- -----------
Cash flows from investing activities:
Increase in notes receivable ....................... (200,000) --
Purchase of office equipment and furnishings ....... (112,000) --
----------- -----------
Net cash used in investing activities .............. (312,000) --
----------- -----------
Cash flows from financing activities:
Proceeds from sales of common stock ................ 3,255,000 250,000
Proceeds from sale of preferred stock .............. -- 370,000
Proceeds from issuance of convertible secured notes -- 350,000
Repayment of convertible secured notes ............. (332,000) --
Decrease (increase) in deferred offering costs ..... 234,000 (234,000)
----------- -----------
Net cash provided by financing activities .......... 3,157,000 736,000
----------- -----------
Net increase in cash and cash equivalents .......... 1,604,000 159,000
Cash and cash equivalents at beginning of period ... 159,000 --
----------- -----------
Cash and cash equivalents at end of period ......... $ 1,763,000 $ 159,000
=========== ===========
See accompanying notes to financial statements.
24
STAT HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
STAT HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) THE COMPANY
STAT Healthcare, Inc. (the Company) was incorporated in the state of
Delaware on July 29, 1994. From that date until September 1, 1994, the Company's
activities were limited to initial capitalization and the negotiation of a
Management Agreement with South Texas Acute Trauma Physicians, P.A. (STAT
Physicians).
The Management Agreement with STAT Physicians became effective
September 1, 1994 and is perpetual. The Management Agreement has no termination
or cancellation provisions. In addition, the Company has the ability to control
the designation of physician owner(s) of STAT Physicians. The Company's income
is currently derived exclusively from revenues associated with the Management
Agreement, less direct expenses paid by the Company on behalf of Physicians, as
provided in the Management Agreement and less the operating expenses of the
company. Additionally, on September 1, 1994, the Company assumed the employment
of all personnel previously employed at STAT Physicians and the operating costs
associated therewith from that date forward.
Because of the existence of a parent-subsidiary relationship by means
other than record ownership of STAT Physicians' voting stock and because of the
unilateral control, notwithstanding the lack of technical majority ownership,
which the Company has over the assets and operations of STAT Physicians,
consolidation of the results of operations of the two companies is necessary to
present fairly the results of operations of the Company. Accordingly, the
Consolidated Statements of Income combine their operating results since
September 1, 1994. Assets and liabilities arising from consolidated operations
are included in the Balance Sheets of the Company. All significant intercompany
transactions have been eliminated in this consolidation.
The Company operates in a single business segment, emergency medical
management services. The Company's principal business relates to management and
administrative services provided to those engaged in physician staffing of
hospital emergency departments. At December 31, 1995 and 1994, the Company
managed contracts for physician services with 11 and 12 hospitals, respectively,
located in South Texas. Under these contracts, 24-hour physician coverage of the
emergency departments is provided.
Physicians providing services are independent contractors to STAT
Physicians and are paid monthly on the basis of fixed hourly rates. As
independent contractors, these physicians are responsible for their own income
and Social Security taxes as well as workers compensation insurance.
The contracts between STAT Physicians and hospitals are generally
written for an initial term of two years and automatically renew each year after
the initial term. These contracts have cancellation clauses which provide for
90-day cancellation by either party without significant penalty. Certain terms
and conditions are routinely modified. Management believes that relations with
all hospitals are good and does not anticipate hospital cancellation of any
contracts.
STAT Physicians' contractual arrangements with hospitals are
principally fee-for-service contracts under which the Company bills and collects
the professional component of medical services on behalf of STAT Physicians. At
December 31, 1995, all contracts were fee-for-service contracts, while at
December 31, 1994, 9 of 12 contracts were fee-for-service contracts. Services
performed under contracts not subject to fee-for-service arrangements at
December 31, 1994 were compensated by the hospitals on a fixed fee basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent. Actual results could differ from these
estimates.
25
CASH EQUIVALENTS
Cash invested in short-term instruments purchased with original
maturities of three months or less is deemed to be cash equivalents for
financial statement purposes.
SERVICE REVENUES AND ACCOUNTS RECEIVABLE
Service revenues are recorded at established billing rates, net of an
allowance for contractual adjustments and a provision for uncollectible
accounts.
Patient accounts receivable, which are payable to STAT Physicians, are
reduced to an estimated realizable value taking into consideration contractual
adjustments mandated by payors (Medicare, Medicaid and private insurers) and
expected write-offs of uncollectible accounts. These estimates are based upon
management judgements and historical experience at individual hospitals.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. 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.
DEFERRED OFFERING COSTS
Deferred offering costs totaling $ 234,000 at December 31, 1994 were
combined with additional offering costs incurred during 1995 and were recorded
as a reduction of the proceeds from the initial public offering of common stock
during 1995.
DEFERRED ACQUISITION COSTS
Costs incurred to effect an expected pooling of interests business
combination are deferred and charged to expense in the period that the business
combination is consummated. If a plan of combination is abandoned, costs that
have been deferred are expensed.
NET INCOME PER COMMON SHARE
Net income per common share for the period ended December 31, 1994 is
computed based on the number of common and common equivalent shares of the
Company as if all shares were outstanding for the entire period, less the number
of treasury shares assumed to have been purchased (at the initial offering price
of the Company's common stock) from the proceeds of actual sales of stock. Net
income per common share for the year ended December 31, 1995 is computed based
on the weighted average number of common shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase common stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments (i.e., cash
equivalents, accounts and notes receivable, and payables) approximate their
carrying values due to the short-term nature of these items.
26
(3) NET SERVICE REVENUES
Gross service revenues represent the billed value of physician services
provided at hospital locations. Under the contracts between STAT Physicians and
the hospitals and under its management agreement with STAT Physicians, the
Company has the ability, subject to hospital concurrence, to establish the rates
to be billed to patients for services provided. Billings discounts represent the
difference between gross service revenues and the amount which is ultimately
expected to be received. These discounts relate principally to contractual
adjustments mandated by payors such as Medicare and Medicaid and also to
contracted arrangements with private insurers. Discounts also include provisions
for indigent patients without the means of paying for emergency medical
services.
Gross service revenues and billings discounts for the year ended
December 31, 1995 and the period ended December 31, 1994 are as follows:
1995 1994
------------ ------------
Gross service revenues ............... $ 29,809,000 $ 7,646,000
Billings discounts ................... (15,685,000) (3,974,000)
------------ ------------
Net service revenues ................. $ 14,124,000 $ 3,672,000
============ ============
Net service revenues derived from fee-for-service contracts and from
hospital fixed fee contracts for the year ended December 31, 1995 and the period
ended December 31, 1994 are as follows:
1995 1994
----------- -----------
Fee-for-service ........................ $13,764,000 $ 2,807,000
Fixed fee .............................. 360,000 865,000
----------- -----------
Net service revenues ................... $14,124,000 $ 3,672,000
=========== ===========
For the year ended December 31, 1995, one hospital accounted for 12% of
net service revenues and three hospitals accounted for 11% each of net service
revenues. For the period ended December 31, 1994, three hospitals accounted for
14%, 12% and 11%, respectively, of net service revenues. Although subject to
individual contracts, net service revenues derived from hospitals which, at
December 31, 1995, were owned by Columbia/HCA Healthcare Corporation accounted
for 67% and 65% of 1995 and 1994 net service revenues, respectively. See note
13.
(4) NET PATIENT ACCOUNTS RECEIVABLE
Net patient accounts receivable at December 31, 1995 and 1994 are as
follows:
1995 1994
----------- -----------
Gross patient accounts receivable ............ $ 7,648,000 $ 3,711,000
Allowance for contractual adjustments ........ (2,710,000) (1,795,000)
----------- -----------
Estimated accounts receivable ................ 4,938,000 1,916,000
Allowance for doubtful accounts .............. (1,784,000) (527,000)
----------- -----------
Net patient accounts receivable .............. $ 3,154,000 $ 1,389,000
----------- -----------
27
(5) NOTES RECEIVABLE
Notes receivable represent two $100,000 notes, bearing interest at 6%,
from officer/shareholders. The notes are unsecured and are due October 31, 1996.
(6) INCOME TAXES
Income taxes for the year ended December 31, 1995 and the period ended
December 31, 1994 are as follows:
1995 1994
-------- --------
Federal .............................. $330,000 $ 58,000
State ................................ 17,000 7,000
-------- --------
Total ................................ $347,000 $ 65,000
======== ========
The actual income tax expense for the year ended December 31, 1995 and
the period ended December 31, 1994 differs from the expected federal income tax
computed by applying the U.S. corporate rate of 34% to income before income
taxes as follows:
1995 1994
--------- ---------
Computed "expected" tax expense ........................ $ 347,000 $ 66,000
Increase in tax resulting from nondeductible expenses .. 2,000 1,000
State tax provision, net of federal benefit ............ 11,000 4,000
Other .................................................. (13,000) (6,000)
--------- ---------
$ 347,000 $ 65,000
========= =========
For the year ended December 31, 1995 and the period ended December 31,
1994, there were no significant temporary differences which created deferred tax
assets or liabilities.
Refundable income taxes of $31,000 are included in other current assets
at December 31, 1995. Income taxes payable of $65,000 are included in accrued
liabilities at December 31, 1994. Income taxes of $440,000 were paid during the
year ended December 31, 1995. No income taxes were paid during the period ended
December 31, 1994.
(7) 10% CONVERTIBLE SECURED NOTES
The 10% convertible secured notes were issued in October and November
1994 in connection with a bridge financing. A total of $332,000 was repaid and
the balance of $18,000 was converted to common stock in connection with the
Company's initial public offering during 1995. The conversion of convertible
secured notes to common stock is a non cash investing and financing transaction
and is excluded from the 1995 Statement of Cash Flows.
Interest expense of $35,000 was paid during the year ended December 31,
1995. No interest expense was paid during the period ended December 31, 1994.
(8) CAPITAL STOCK
Authorized capital stock of the Company consists of 1,000,000 shares of
$.01 par value preferred stock and 10,000,000 shares of $.01 par value common
stock. In September 1994, the Company sold 74,000 shares of Series A convertible
preferred stock (Preferred Stock) to STAT Physicians for $370,000. The Preferred
Stock was converted into common stock at a rate of 20 shares of common stock for
each share of Preferred Stock (1,480,000 common shares) upon the completion of
the Company's initial public offering of common stock in 1995. The
28
conversion of Preferred Stock into common stock is a non cash investing and
financing transaction and is excluded from the 1995 Statement of Cash Flows.
At December 31, 1995, shares of common stock are reserved for issuance
in connection with the future exercise of Class A warrants to purchase common
stock at the price of $4.50 per share (734,166 shares) and underwriter warrants
for 125,000 shares of common stock at $5.44 per share. These warrants were
issued in connection with the Company's initial public offering of common stock
and the related conversion of 10% convertible secured notes. Additionally,
300,000 shares are reserved for issuance in connection with the Company's stock
option plan.
(9) STOCK OPTION PLAN
The Company has a stock option plan, providing for the granting of
incentive stock options or nonqualified stock options, for the benefit of its
employees and directors. Under this plan, options may be granted to purchase an
aggregate of 300,000 shares of common stock at no less than 100% (90% in the
event of a nonqualified stock option) of the fair market value of the common
stock at the time of the grant. At December 31, 1995, 10,000 unoptioned shares
were available for granting. All options which have been granted expire five
years from the date of grant. Information relating to stock options is as
follows:
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
Outstanding at December 31, 1994 .......... -- --
Granted ................................... 290,000 $ 2.88-3.17
------- ------------
Outstanding at December 31, 1995 .......... 290,000 $ 2.88-3.17
------- ------------
Shares exercisable at December 31, 1995 ... 2,500 $ 3.00
------- ------------
(10) CONTINGENCIES
The Company procures professional liability insurance on behalf of STAT
Physicians which provides coverage on a claims-made basis during the policy
period. The coverage is purchased on a "slot" basis and extends to the Company,
to STAT Physicians and to contract physicians who perform services. Individual
policies are not provided to physicians; however, they must be prequalified for
coverage as a routine credentialing process. If a claims-made policy is not
renewed or replaced by a new policy which provides occurrence retroactively, it
becomes necessary to purchase an extended reporting period endorsement.
Management intends to renew the existing claims- made policy and in the past has
either renewed or successfully purchased retroactive coverage.
Although the Company does not directly contract with hospitals or
physicians for the provision or procurement of medical services, its contractual
relationship with STAT Physicians exposes it to potential claims from litigants.
Accordingly, the Company is named as an additional insured under the
professional liability coverage of STAT Physicians. STAT Physicians currently
has certain pending and threatened litigation and claims incurred in the
ordinary course of business; however, management believes that the probable
resolution of such contingencies will not materially affect the liquidity, the
financial position, or the results of operations of STAT Physicians or of the
Company.
29
(11) LEASE OBLIGATION
In April 1995, the Company entered into a lease agreement for office
facilities. Future minimum lease payments under this agreement as of December
31, 1995 are as follows:
1996 ............................................ $103,000
1997 ............................................ 108,000
1998 ............................................ 58,000
--------
$269,000
========
(12) PENDING PLAN OF REORGANIZATION
On December 21, 1995, the Company entered into an agreement and plan of
reorganization with AmHealth Corporation and its related health care entities
(AmHealth). The agreement was amended on March 15, 1996. Under the terms of this
agreement, 11,200,000 shares of Common Stock of New STAT Healthcare, Inc. (New
STAT) will be exchanged for the stock and partnership interests associated with
the AmHealth organizations. New STAT is being organized to act as a constituent
entity in the exchange and will have no business activity unrelated to the
exchange. Consummation of the agreement is subject to the fulfillment of certain
covenants as well as shareholder/partner approvals and is expected to occur in
the second quarter of 1996. Upon consummation of the pending plan of
reorganization, the Company's common stock and common stock equivalents will be
exchanged on a one-for-one basis into common stock and common stock equivalents
of New STAT. If consummated, the transaction is expected to be accounted for as
a pooling of interests and, accordingly, historical financial data will be
restated to include the accounts of AmHealth. In the event that the transaction
is not consummated, the Company will issue 200,000 shares of its Common Stock to
the shareholders and partners of the AmHealth organizations.
(13) SUBSEQUENT EVENTS
In January 1996 the Company reached an agreement with the Greater
Houston Division of Columbia/HCA Healthcare Corporation (Columbia) to provide
emergency medicine services to all but one of Columbia's emergency departments
in the Greater Houston Division. This agreement will result in the addition of
nine hospitals to the Company's service base between February 1 and July 1, 1996
resulting in a total of 18 hospitals served (16 of which are owned by Columbia).
The contract for services relating to this agreement was finalized in April
1996. The Houston Division hospitals (15) are covered by this contract with an
initial term of two years which renews automatically. This contract will account
for a significant portion of the Company's net service revenues and operating
expenses.
On January 31, 1996, and in conjunction with the Columbia agreement
noted above, the Company acquired the rights to one hospital contract for the
provision of emergency department medical services. Consideration paid for the
contract and certain non-competition covenants consisted of $960,000 in cash and
52,174 shares of the Company's common stock. Up to an additional $100,000 may be
paid in each of the three twelve-month periods following the acquisition of the
contract based on profits realized at that hospital.
On February 1, 1996, the Company acquired intangible assets of Amedica,
Ltd. (Amedica) in a transaction that will be accounted for by the purchase
method of accounting. Amedica provides healthcare services relating to the
management of independent physician associations. Consideration paid consisted
of $200,000 in cash and 15,730 shares of the Company's common stock.
The common stock (67,904 shares with an ascribed value of $310,000)\
issued in connection with the acquisitions noted in the preceding 2 paragraphs
may be required to be integrated with the offering of securities relating to the
pending plan of reorganization. If so integrated, the purported private sales
would constitute an unregistered public offering in violation of Section 5 of
the Securities Act. Such a violation would entitle the recipients in such
private sales to rescission and would subject the Company to liability under\
said Section 5. Pending resolution of this matter, the stock value of these
transactions is reported in the pro forma balance sheet seperate from
shareholders' equity.
30
Unaudited financial information of Amedica as of December 31, 1995 and
1994 and for the years then ended is as follows:
Balance sheet information: 1995 1994
--------- ---------
Current assets .......................................... $ 128,000 $ 63,000
Total assets ............................................ 135,000 64,000
Current liabilities ..................................... 25,000 --
Total liabilities ....................................... 150,000 --
Partners' capital ....................................... (15,000) 64,000
========= =========
Operations information:
Revenue ................................................. $ 439,000 $ 347,000
Expenses ................................................ 518,000 312,000
Net income (loss) ....................................... (79,000) 35,000
========= =========
Unaudited pro forma results of operations for the year ended December
31, 1995, giving effect to the Amedica acquisition as though it had occurred on
January 1, 1995, are as follows:
Net service revenues .................................... $14,563,000
Net income .............................................. 598,000
===========
Net income per common share ............................. $ 0.19
===========
Unaudited pro forma financial information showing the effects of the
hospital contract and Amedica acquisitions on the Company's balance sheet at
December 31, 1995 is as follows:
ASSETS AS REPORTED PRO FORMA
---------- ----------
Cash and cash equivalents .......................... $1,763,000 $ 603,000
Intangible assets:
Covenants not to compete ......................... -- 120,000
Contract rights .................................. -- 1,150,000
Excess of cost over fair
value of assets acquired ......................... -- 200,000
All other assets ................................. 4,097,000 4,097,000
---------- ----------
Total assets ..................................... $5,860,000 $6,170,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities .................................. $1,165,000 $1,165,000
---------- ----------
Common stock subject to recision, 67,904 shares..... -- 310,000
Common stock, $.01 par value. Authorized
10,000,000 shares; issued and outstanding
3,623,332 and 3,691,236, respectively ............ 36,000 36,000
Capital in excess of par value ..................... 3,857,000 3,857,000
Retained earnings .................................. 802,000 802,000
---------- ----------
Total shareholders' equity ......................... 4,695,000 4,695,000
---------- ----------
Total liabilities and shareholders' equity ....... $5,860,000 $6,170,000
========== ==========
INDEPENDENT AUDITORS' REPORT
The Board of Directors
South Texas Acute Trauma
Physicians, P.A.:
We have audited the accompanying balance sheets of South Texas Acute
Trauma Physicians, P.A. (the Company) as of August 31, 1994 and December 31,
1993, and the related statements of income, changes in shareholders' equity and
cash flows for the eight months ended August 31, 1994 and the year ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of South Texas Acute
Trauma Physicians, P.A. as of August 31, 1994 and December 31, 1993, and the
results of its operations and its cash flows for the eight months ended August
31, 1994 and the year ended December 31, 1993, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
March 10, 1995, except as to
the last paragraph of note 6,
which is as of April 11, 1995
32
<PAGE>
SOUTH TEXAS ACUTE TRAUMA
PHYSICIANS, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, DECEMBER 31,
Assets 1994 1993
---------- ----------
<S> <C> <C>
Cash and cash equivalents .............................................................. $ 63,459 $ 10,410
Accounts receivable (notes 5 and 6):
Patient accounts, net ............................................................. 1,311,893 840,057
Hospital accounts ................................................................. 316,220 438,542
---------- ----------
Net accounts receivable .................................................. 1,628,113 1,278,599
Prepaid assets ......................................................................... 186,218 55,301
---------- ----------
Total current assets ..................................................... 1,877,790 1,344,310
Other assets ........................................................................... 14,508 7,440
---------- ----------
Total assets ............................................................. $1,892,298 $1,351,750
========== ==========
Liabilities and Shareholders' Equity
Current installments of long-term debt (note 6) ........................................ $ 209,459 $ 175,944
Notes payable to hospitals (note 7) .................................................... 203,334 70,000
Accrued physicians' fees ............................................................... 681,493 605,310
Accrued liabilities .................................................................... 70,582 36,576
Accounts payable ....................................................................... 126,332 61,965
Bank overdraft ......................................................................... -- 21,792
---------- ----------
Total current liabilities ................................................ 1,291,200 971,587
Long-term debt, excluding current liabilities (note 6) ................................. -- 3,135
---------- ----------
Total liabilities ........................................................ 1,291,200 974,722
---------- ----------
Shareholders' equity:
Common stock, $1 par value. Authorized 100,000 shares;
issued and outstanding 1,000 shares .......................................... 1,000 1,000
Retained earnings ................................................................. 600,098 376,028
---------- ----------
Total shareholders' equity ............................................... 601,098 377,028
Commitments and contingencies (notes 3, 8 and 9)
Total liabilities and shareholders' equity ............................... $1,892,298 $1,351,750
========== ==========
</TABLE>
See accompanying notes to financial statements.
32
SOUTH TEXAS ACUTE TRAUMA
PHYSICIANS, P.A.
STATEMENTS OF INCOME
EIGHT MONTHS
ENDED YEAR ENDED
AUGUST 31, DECEMBER 31,
1994 1993
---------- ----------
Net service revenues (note 4) ....................... $6,875,693 $8,872,811
Direct expenses:
Physicians' fees ........................... 5,112,348 6,822,463
Liability insurance ........................ 314,154 368,275
Billing and collection ..................... 473,066 304,284
---------- ----------
Total direct expenses ................. 5,899,568 7,495,022
---------- ----------
Gross profit .......................... 976,125 1,377,789
---------- ----------
Operating expenses:
Human resources ............................ 524,802 713,162
Occupancy .................................. 26,661 37,775
Furniture and equipment .................... 19,568 29,602
Supplies ................................... 16,409 39,206
Outside services and other ................. 67,856 62,580
---------- ----------
Total operating expenses .............. 655,296 882,325
---------- ----------
Operating income ...................... 320,829 495,464
Interest expense .................................... 15,372 13,396
---------- ----------
Net income ............................ 305,457 482,068
Pro forma income taxes (note 3) ..................... 103,457 164,068
---------- ----------
Pro forma net income .................. $ 202,000 $ 318,000
========== ==========
See accompanying notes to financial statements.
SOUTH TEXAS ACUTE TRAUMA
PHYSICIANS, P.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
--------- --------- ---------
Balances at December 31, 1992 ...... $ 1,000 $ 57,849 $ 58,849
Net income ......................... -- 482,068 482,068
Shareholder distributions .......... -- (163,889) (163,889)
--------- --------- ---------
Balances At December 31, 1993 ...... 1,000 376,028 377,028
Net Income ......................... -- 305,457 305,457
Shareholder distributions .......... -- (81,387) (81,387)
--------- --------- --------
Balances at August 31, 1994 ........ $ 1,000 $ 600,098 $ 601,098
========= ========= =========
See accompanying notes to financial statements.
SOUTH TEXAS ACUTE TRAUMA
PHYSICIANS, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED
AUGUST 31, DECEMBER 31,
1994 1993
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 305,457 $ 482,068
Adjustments to reconcile net income to net cash
used in operating activities:
Changes in assets and liabilities:
Increase in net accounts receivable .......... (349,514) (669,509)
Increase in prepaids and other assets ........ (137,985) (42,042)
Increase in accrued physicians' fees ......... 76,183 78,867
Increase in accrued liabilities .............. 34,006 34,272
Increase in accounts payable ................. 64,367 61,965
--------- ---------
Total adjustments ....................... (312,943) (536,447)
--------- ---------
Net cash used in operating activities ... (7,486) (54,379)
--------- ---------
Cash flows from financing statements:
Proceeds from issuance of long-term debt ....................... 50,000 150,000
Proceeds from issuance of hospital notes ....................... 200,000 70,000
Principal payments on long-term debt ........................... (19,620) (36,312)
Principal payments on hospital notes ........................... (66,666) --
Shareholder distributions ...................................... (81,387) (163,889)
Increase (decrease) in bank overdraft .......................... (21,792) 21,792
Net cash provided by financing activities 60,535 41,591
--------- ---------
Net increase (decrease) in cash and cash equivalents .................... 53,049 (12,788)
Cash and cash equivalents at beginning of period ........................ 10,410 23,198
--------- ---------
Cash and cash equivalents at end of period .............................. $ 63,459 $ 10,410
========= =========
Supplemental disclosure of cash flow information--
cash payments during the period for interest ....................... $ 8,958 $ 7,689
========= =========
</TABLE>
See accompanying notes to financial statements.
SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
AND
DECEMBER 31, 1993
(1) THE COMPANY
South Texas Acute Trauma Physicians, P.A., dba STAT Physicians (the
Company) was incorporated as a professional association in the state of Texas on
November 22, 1985. The Company's principal business is the physician staffing of
hospital emergency departments. At August 31, 1994 and December 31, 1993, the
Company had contracts for physician services with eleven hospitals located in
South Texas. Under these contracts the Company provides 24-hour physician
coverage of the emergency departments, and one of the Company's physicians acts
as the designated Director of Emergency Medicine for each hospital. At December
31, 1993, the Company also provided weekend physician coverage under another
contract. The Company terminated this weekend contract effective June 30, 1994
for economic reasons.
Physicians providing services on behalf of the Company are independent
contractors and are paid monthly on the basis of either a fixed hourly rate or
on the basis of a minimum hourly rate which is adjustable upward based on
monthly volume. As independent contractors, these physicians are responsible for
their own income and Social Security taxes as well as workers compensation
insurance.
Hospital contracts are generally written for an initial term of two
years and automatically renew each year after the initial term. These contracts
have cancellation clauses which provide for 90-day cancellation by either party
without significant penalty. Certain terms and conditions are routinely
modified. The Company's management believes that relations with all hospitals
are good and does not anticipate the cancellation of any contracts.
Contractual agreements with hospitals are primarily (a) contracts where
the Company bills and collects the professional component for the charges for
medical services, and (b) contracts where the Company receives fees from the
hospital based on a fixed fee, hourly rate or percentage of gross billings.
Effective September 1, 1994, the Company entered into a management
agreement with STAT Healthcare, Inc. (STAT Healthcare). Under this agreement,
the Company assigned all revenues and related accounts receivable from September
1, 1994 forward to STAT Healthcare. In consideration thereof, STAT Healthcare
assumed responsibility for collection of receivables and agreed to pay for all
direct and operating costs associated with the hospital contracts from September
1, 1994 forward.
Additionally, on September 1, 1994 STAT Healthcare employed all
administrative personnel previously employed by the Company and assumed
responsibility for all administrative matters relating to these contracts,
pursuant to a management agreement.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash invested in short-term investments purchased with original
maturities of three months or less is deemed to be cash equivalents for
financial statement purposes. At August 31, 1994 and December 31, 1993, cash
equivalents of $2,826 and $2,772, respectively, consisted of money market funds.
SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SERVICE REVENUES AND ACCOUNTS RECEIVABLE
Service revenues under contracts where fees are received from hospitals
are recorded at established billing rates, net of amounts to be retained by the
hospital. Service revenues under contracts where the Company bills and collects
for services provided are recorded at established billing rates, net of
contractual adjustments and the provision for uncollectible accounts.
Patient accounts receivable are reduced to an estimated realizable
value taking into consideration contractual adjustments mandated by payors
(Medicare, Medicaid and private insurers) and expected write-offs of
uncollectible accounts. These estimates are based upon historical experience at
individual hospitals.
(3) INCOME TAXES
For federal income tax purposes, the Company has elected to be treated
as an "S corporation." Accordingly, the Company's income is allocated to the
Company's shareholders, included in their personal income tax returns and taxed
at their respective individual rates. No federal income taxes will be assessed
the corporation. The pro forma income taxes reflected in the accompanying
statements of income are based on an effective corporate rate of 34%.
The Federal income tax return of the Company for the tax year ended
January 31, 1992, is currently under examination by the Internal Revenue
Service. Management believes that the examination is routine in nature and does
not anticipate any significant adjustments from the examination.
(4) NET SERVICE REVENUES
Gross service revenues represent the billed value of physician services
provided at hospital locations. Under the contracts between the Company and the
hospitals, the Company has the ability, subject to hospital concurrence, to
establish the rates to be billed to patients for services provided.
Billings discounts represent the difference between gross service
revenues and the amount which the Company ultimately expects to receive. Net
service revenues consist of contractual payments from hospitals and estimated
collectible fees from patients and third-party payors where the Company is
responsible for billing and collection functions. Net service revenues for the
eight months ended August 31, 1994 and for the year ended December 31, 1993 are
as follows:
1994 1993
------------ ----------
Net service revenues:
From hospitals................... $2,694,797 $6,249,569
From patients.................... 4,180,896 2,623,242
----------- ----------
$6,875,693 $8,872,811
========== ==========
Hospital account payments are usually received by the 15th day of the
month following service. Some hospitals make partial payments during the service
month. Patient accounts are collected over normal collection cycles from a
variety of payors including Medicare, Medicaid, private insurers and patients.
SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Gross and net service revenues from the eight months ended August 31,
1994 and for the year ended December 31, 1993 are as follows:
1994 1993
------ -----
Gross service revenues.................... $ 14,369,113 $14,900,171
Billings discounts........................ (7,493,420) (6,027,360)
------------- -----------
Net service revenues...................... $ 6,875,693 $ 8,872,811
============= ============
For the eight months ended August 31, 1994, four hospitals accounted
for between 10% and 14% each of net service revenues.
(5) NET PATIENT ACCOUNTS RECEIVABLE
Net patient accounts receivable at August 31, 1994 and at December 31,
1993 are as follows:
1994 1993
---- ----
Gross patient accounts receivable............ $3,485,859 $1,866,677
Allowance for contractual adjustments........ (1,426,944) (614,988)
----------- ---------
Estimated accounts receivable................ 2,058,915 1,251,689
Allowance for doubtful accounts.............. (747,022) (411,632)
--------- ---------
Net patient accounts receivable.............. $1,311,893 $ 840,057
---------- ---------
(6) LONG-TERM DEBT
Long-term debt at August 31, 1994 and at December 31, 1993 is as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C> <C> <C>
13% note payable, due in monthly installments of $1,878 including interest
through April 1994. Paid in full in April 1994 ........................ $ -- $ 7,735
10% note payable, due in monthly installments of $1,616 including interest
through February 1995. Paid in full in February 1995 .................. 9,459 21,344
Revolving credit note (up to $200,000), interest due quarterly at the bank's
prime rate (7.75% at August 31, 1994) plus 2%, principal due August 1995 200,000 150,000
--------- ---------
Long-term debt ........................................................... (209,459) (179,079)
Less current installments ..................................................... (209,459) (175,944)
--------- ---------
$ --- $ 3,135
========= =========
</TABLE>
The notes payable are secured by the Company's accounts receivable. The
revolving credit note is secured by the Company's accounts receivable and the
corporate guarantee and accounts receivable of STAT Healthcare. Subsequent to
August 31, 1994, the bank increased the revolving line of credit to $400,000. On
April 11, 1995, the line of credit was repaid by STAT Healthcare and was
canceled.
SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(7) NOTES PAYABLE TO HOSPITALS
Notes payable to hospitals at August 31, 1994 and at December 31, 1993
are as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<C> <C>
8% unsecured note, due in 16 monthly installments of $4,690, including interest,
commencing in January 1995............................................................. $ 70,000 $ 70,000
Noninterest-bearing unsecured note, due in monthly installments of $33,333 through
December 1994. Paid in full in December 1994.......................................... 133,334 ---
---------- ----------
$ 203,334 $ 70,000
---------- ----------
</TABLE>
Notes payable to hospitals arose as unsecured advances designed to
provide cash flow assistance during the inception of fee-for-service activities.
(8) LEASES
The Company leases its office space under a month-to-month lease. The
Company also leases certain equipment and vehicles under operating leases.
Future minimum lease payments under noncancelable operating leases at August 31,
1994 are as follows:
1994........................................................... $ 8,000
1995........................................................... 6,300
1996........................................................... 4,400
1997........................................................... 3,700
--------
$22,400
Rental expense for the eight months ended August 31, 1994 and for the
year ended December 31, 1993 was $16,591 and $26,659, respectively.
(9) CONTINGENCIES
The Company procures professional liability insurance which provides
coverage on a claims-made basis during the policy period. The coverage is
purchased on a "slot" basis and extends to the Company and to contract
physicians who perform services. Individual policies are not provided to
physicians; however, they must be prequalified for coverage as a routine
credentialing process. If a claims-made policy is not renewed or replaced by a
new policy which provides occurrence retroactively, it becomes necessary to
purchase an extended reporting period endorsement. Management intends to renew
its existing claims-made policy and in the past has either renewed or
successfully purchased retroactive coverage.
The Company has certain pending and threatened litigation and claims
incurred in the ordinary course of business; however, management believes that
the probable resolution of such contingencies will not materially affect the
liquidity, the financial position, or the results of the Company's operations.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
the directors and executive officers of the Company:
NAME AGE POSITION(S)
William H. Rice, M.D...................38 Chairman of the Board
Victor M. Miranda, M.D.................38 President and Director
Ned E. Chapman.........................54 Chief Financial Officer, Treasurer and
Director
Russell D. Schneider...................41 Director
The principal occupation and business experience of each director and
executive officer is set forth below.
William H. Rice, M.D., co-founder of STAT Physicians in 1986 with Dr.
Miranda and Chairman of STAT since its inception, received his medical degree
from the University of Texas Medical School at San Antonio in 1983. After
post-graduate training in trauma and surgery, he began work in emergency
medicine. Dr. Rice is actively involved in the administrative and clinical
business of STAT. He is a physician consultant to the Texas Department of
Health, is active at the regional and national level with the American College
of Emergency Physicians on legislative and clinical issues and is an Affiliate
Professor of Medicine at the University of Texas Medical School at Houston. Dr.
Rice currently devotes 100% of his time to the management and operation of STAT.
Victor M. Miranda, M.D., co-founder of STAT Physicians in 1986 with Dr.
Rice and President of STAT since its inception, graduated from the University of
Texas Medical School at Galveston in 1982. Dr. Miranda began his career in
emergency medicine after post-graduate training in trauma and surgery. Dr.
Miranda is Board certified in Emergency Medicine. Dr. Miranda is actively
involved in all aspects of the administrative and clinical management of STAT.
He is the medical director of two emergency medical services at hospitals within
Houston, and an active member of the American College of Emergency Physicians.
Dr. Miranda currently devotes 100% of his time to the management and operation
of STAT.
Ned E. Chapman joined STAT Physicians as Chief Financial Officer in
1992. From 1989 until joining STAT Physicians, Mr. Chapman served as a financial
consultant to a number of private and public companies in California's Silicon
Valley. Mr. Chapman was formerly CFO of three companies, two of which were
public companies (Magnuson Computers and CAS, Inc.). Mr. Chapman is a CPA and
was with Price Waterhouse for 11 years, last serving as a senior audit manager.
Mr. Chapman received a B.S. degree from Northern Illinois University. Mr.
Chapman has been Chief Financial Officer of STAT since its inception. Mr.
Chapman currently devotes 100% of his time to the management and operation of
STAT.
Russell D. Schneider, a director of STAT since July 1995, received an
MBA from California Coast University in January 1981 and an M.S. in Urban
Studies and Administration from the University of Nebraska in December 1978. Mr.
Schneider was a co-founder of Columbia/HCA Corporation in 1988 and served on its
Board of Directors and as Senior Vice President of Market Development,
overseeing the involvement of Columbia/HCA Corporation in physician ventures,
mergers, acquisitions and business development. From 1978 to 1988, he served as
Chief Executive Officer of San Jacinto Methodist Hospital and of Nan Travis
Memorial Hospital.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers and
persons who own more than ten percent of the Company's common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the Nasdaq Stock Market. Based on the Company's review of the
copies of such reports received by the Company and on written representations
received by the Company, the Company believes that no director, executive
officer or holder of more than ten percent of the Company's common stock failed
to file on a timely basis the reports required by Section 16(a) of the Exchange
Act relating to transactions during fiscal year 1995, except that Drs. Rice and
Miranda and Mr. Chapman each filed one Form 4 report (relating to one option
grant) late and Mr. Schneider filed his initial Form 3 approximately ten days
late.
ITEM 10. EXECUTIVE COMPENSATION.
ANNUAL COMPENSATION
The following table sets forth the cash compensation, as well as
certain other compensation paid or accrued, by the Company and STAT Physicians,
as identified, to the Company's Chairman, President and Chief Financial Officer
(the "named executive officers") for the fiscal years ended December 31, 1995,
1994 and 1993. No other executive officer of the Company had a total annual
salary and bonus of more than $100,000 during the reported periods.
<TABLE>
<CAPTION>
OTHER
ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION GRANTED
- --------------------------- ---- ------ ---------- ------
<S> <C> <C> <C>
William H. Rice, M.D., Chairman................... 1993(2) $195,845 $217,372(1) N/A
1994(2) 86,800 137,874 N/A
1994(3) 66,667 16,291 N/A
------ -------
153,467 154,165(1)
======= =======
1995(3) 274,999 26,595(1) 21,658
Victor M. Miranda, M.D., President................ 1993(2) 196,851 332,583(1) N/A
1994(2) 86,800 196,938 N/A
1994(3) 66,667 68,650 N/A
------ -------
153,467 265,588(1)
======= =======
1995(3) 283,218 65,182(1) 109,342
Ned E. Chapman, Chief Financial Officer........... 1993 68,115 N/A N/A
1994(2) 56,231 N/A N/A
1994(3) 23,615 N/A N/A
1995(3) 127,265 N/A 45,000
</TABLE>
________
(1) Represents shift pay for Drs. Miranda and Rice when performing services as
attending physicians.
(2) Represents compensation from STAT Physicians.
(3) Represents compensation from the Company.
OPTION/SAR GRANTS TABLE
The following table sets forth certain information concerning stock
options granted to the named executive officers during 1995. No stock
appreciation rights were granted during 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF TOTAL PRICE APPRECIATION FOR OPTION
SECURITIES OPTIONS GRANTED TERM (3)
UNDERLYING TO EMPLOYEES IN EXERCISE PRICE ----------------------
NAME OPTIONS GRANTED (1) FISCAL YEAR PER SHARE (2) EXPIRATION DATE 5% 10%
---- ------------ ----------- ------------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
William H. Rice, M.D........... 21,658 7% $ 3.17 10/16/00 $10,8114 $ 31,625
Victor M. Miranda, M.D......... 109,342 36 3.17 10/16/00 54,596 159,663
Ned E. Chapman................. 45,000 15 2.88 10/16/00 35,744 78,985
</TABLE>
- --------------------------------------------
(1) Each option will become exercisable in five equal annual installments
over the optionee's continued service measured from the date of grant.
(2) The exercise price must be paid in cash.
(3) Potential realizable value is based on the assumption that the price
per share of the Company's common stock appreciated at the assumed
annual rate of stock appreciation for the option term. There is no
assurance that the assumed 5% and 10% annual rates of appreciation
(compounded annually) will actually be realized over the term of the
option. The assumed 5% and 10% annual rates are set forth in accordance
with the rules and regulations adopted by the Securities and Exchange
Commission and do not represent the Company's estimate of stock price
appreciation.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information concerning
unexercised options held by each of the named executive officers at December 31,
1995. No options or stock appreciation rights were exercised during 1995 and no
options were exercisable and no stock appreciation rights were outstanding at
December 31, 1995.
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUES OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL AT FISCAL
NAME YEAR-END YEAR-END (1)
---- -------- ------------
William H. Rice, M.D........ 21,658 $36,927
Victor M. Miranda, M.D...... 109,342 $186,428
Ned E. Chapman.............. 45,000 $89,775
____________
(1) The estimated fair value per share of common stock used to value
unexercised, in-the-money options is $4.88 per share.
EMPLOYMENT AGREEMENTS
Effective September 1, 1994, Drs. Miranda and Rice entered into
three-year Employment Agreements with the Company providing for an annual base
salary of $200,000, plus bonuses as determined by the Board of Directors. The
Employment Agreements provide that in the event of termination of employment,
Drs. Miranda and Rice shall not compete with the Company for two years from the
date of termination. The Company also entered into a three-year Employment
Agreement with Ned E. Chapman for annual compensation of $103,200. The
Employment Agreements contain non-competition provisions which will remain in
force for a period of two years following termination of employment.
STOCK OPTION PLAN
In July 1994, the Company's Board of Directors adopted and the
stockholders approved the 1994 Stock Option Plan (the "Plan" or the "1994 Stock
Option Plan"). The Plan is administered by the Company's Board of Directors or
by a committee appointed by the Board (the "Plan Administrator"). Pursuant to
the Plan, options to acquire an aggregate of 300,000 shares of the Company's
common stock are permitted to be, and have been, granted. The Plan provides for
grants to employees, consultants and directors of the Company.
The 1994 Stock Option Plan authorizes the Company's Board of Directors
to issue incentive stock options ("ISOs"), as defined in Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as stock options
that do not conform to the requirements of the Code section ("Non-ISO").
Consultants and directors who are not also employees of the Company may be
granted only Non-ISOs. The exercise price of each ISO may not be less than 100%
of the fair market value of the Company's common stock at the time of grant,
except that in the case of a grant to an employee who owns l0% or more of the
outstanding stock of the Company or a subsidiary or parent of the Company (a
"10% Stockholder"), the exercise price may not be less than 110% of the fair
market value on the date of the grant. For purposes of the Plan, STAT Physicians
is not a subsidiary or parent of the Company. The exercise price of each Non-ISO
will be determined by the Plan Administrator in its discretion and may be no
more than 10% less than the fair market value of the Company's common stock on
the date of grant. Notwithstanding the foregoing, the exercise price of any
option granted on or after the effective date of the registration of any class
of equity security of the Company pursuant to Section 12 of the Exchange Act and
prior to six months after the termination of such registration may be no less
than 100% of the fair market value per share on the date of the grant. ISOs may
not be exercised after the tenth anniversary (fifth anniversary in the case of
any option granted to a 10% stockholder) of their grant. Non-ISOs may not be
exercised after the tenth anniversary of the date of grant. Options may not be
transferred during the lifetime of an optionholder.
Subject to the provisions of the Plan, the Plan Administrator has the
authority to determine the individuals to whom the stock options are to be
granted, the number of shares to be covered by each option, the exercise price,
the type of option, the option period, the restrictions, if any, on the exercise
of the option, the terms for the payment of the option price and other terms and
conditions. Payments by optionholders upon exercise of an option may be made (as
determined by the Company's Board) in cash or such other form of payment as may
be permitted under the Plan, including without limitation, by promissory note or
by shares of Company's common stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the date of this Report, certain
information with respect to stock ownership of (i) all persons known by the
Company to be beneficial owners of 5% or more of the outstanding shares of the
Company's common stock; (ii) each director; and (iii) all directors and officers
as a group. Unless otherwise indicated, the beneficial owners have sole voting
and investment power over the shares listed below:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS SHARES OWNED SHARES OWNED
- ---------------- ------------ ------
<S> <C> <C>
William H. Rice, M.D.(1)................................... 778,342(2) 21.0%
Victor M. Miranda, M.D.(1)................................. 778,342(2) 21.0
Robert M. Rubin(3)......................................... 307,323 8.3
Ned E. Chapman(1).......................................... 78,886 2.1
Russell D. Schneider(1).................................... 15,000(4) *
All directors and officers as a group (four persons)....... 1,650,570 44.5
</TABLE>
- --------------------
* Indicates less than 1%.
(1) The address for Dr. Rice, Dr. Miranda, Mr. Chapman and Mr. Schneider is
c/o STAT Healthcare, Inc., 12450 Greenspoint
Drive, Suite 1200, Houston, Texas 77060.
(2) Represents a 50% ownership interest in STAT Physicians which owned
1,556,684 shares of the Company's common stock.
(3) The address for Mr. Rubin is 6060 Kingsgate Circle, Delray Beach,
Florida 33484.
(4) Reflects 5,000 shares of the Company's common stock held of record and
10,000 shares of the Company's common stock subject to presently
exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective as of September 1, 1994, the Company entered into a
Management Agreement with STAT Physicians whereby the Company has agreed to
manage the business and affairs of STAT Physicians.
On April 11, 1995, the Company obtained a $600,000 bank line of credit
and borrowed the entire amount available under such line. The proceeds of such
line were used, in part, to repay the $400,000 principal amount outstanding
under a STAT Physicians line of credit, which amount had been used to finance
operations of the Company. A portion of the proceeds of the Company's April 1995
initial public offering was used to repay the $600,000 outstanding under the
line of credit, which remains available to the Company and is secured by the
Company's accounts receivable.
On October 16, 1995, in order to meet federal income tax obligations
arising from the income of STAT Physicians attributable to them, Drs. Rice and
Miranda each borrowed $100,000 from the Company pursuant to loan agreements
having a maturity date of October 16, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits to this report have been included only with the copies of
this report filed with the Securities and Exchange Commission. Copies of
individual exhibits will be furnished to stockholders upon written request to
the Company and payment of a reasonable fee.
<TABLE>
<CAPTION>
NO. DESCRIPTION
- ------- -----------
<S> <C>
2.1* Amended and Restated Agreement and Plan of Reorganization (included as Appendix I to
the Joint Proxy Statement/Prospectus included as a part of the Registration Statement on
Form S-4 (Reg. No. 333-2486) filed by New STAT Healthcare, Inc.)
3.1.1* Certificate of Incorporation (Filed as Exhibit 3.1.1 to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-87860))
3.1.2* Certificate of Amendment to Certificate of Incorporation (Filed as Exhibit 3.1.2 to the
Company's Registration Statement on Form SB-2 (Reg. No. 33-87860))
3.2* Bylaws (Filed as Exhibit 3.2 to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-87860))
4.1* Specimen Common Stock Certificate (Filed as Exhibit 4.2 to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-87860))
4.2* Form of Class A Warrant Agreement (Filed as Exhibit 4.5 to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-87860))
4.3* Form of Class A Warrant Agreement (Filed as Exhibit 4.6 to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-87860))
4.4* Form of Underwriters' Warrant (Filed as Exhibit 4.4 to the Company's Registration
Statement on Form SB-2 (Reg. No. 33-87860))
10.1*+ Employment Agreement between the Company and W.H. Rice, M.D. (Filed as
Exhibit 10.1 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-87860))
10.2*+ Employment Agreement between the Company and Victor M. Miranda, M.D. (Filed as
Exhibit 10.2 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-87860))
10.3*+ Employment Agreement between the Company and Ned E. Chapman (Filed as
Exhibit 10.3 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-87860))
10.4.1* Management Agreement, by and between the Company and South Texas Acute Trauma
Physicians, P.A. (Filed as Exhibit 10.4 to the Company's Registration Statement on Form
SB-2 (Reg. No. 33-87860))
10.4.2* Amendment to Management Agreement (Filed as Exhibit 10.4.1 to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-87860))
10.5*+ 1994 Stock Option Plan (Filed as Exhibit 10.5 to the Company's Registration Statement
on Form SB-2 (Reg. No. 33-87860))
10.6.1* Office lease by and between the Company and HCH Gulf Coast Hospital, dated June 5,
1989 (Filed as Exhibit 10.8.1 to the Company's Registration Statement on Form SB-2
(Reg. No. 33-87860))
10.6.2* Sublease Agreement by and between the Company and CB Commercial Real Estate Group,
Inc. (Filed as Exhibit 10.8.2 to the Company's Registration Statement on Form SB-2 (Reg.
No. 33-87860))
10.7* Hospital Contract by and between the Company and San Jacinto Methodist Hospital (Filed
as Exhibit 10.9 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-
87860))
10.8* Hospital Contract by and between the Company and Katy Medical Center (Filed as Exhibit
10.10 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-87860))
10.9* Hospital Contract by and between the Company and Fort Bend Hospital (Filed as Exhibit
10.11 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-87860))
10.10* Hospital Contract by and between the Company and Parkway Hospital (Filed as Exhibit
10.12 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-87860))
10.11* Asset Purchase Agreement, made as of January 31,
1996, by and among the Company, Houston Emergency
Medical Associates, P.A., William Blackstone, M.D.,
Diana Fite, M.D. and Tue Nguyen, M.D. (Filed as
Exhibit 2.1 to the Company's Current Report on Form
8-K dated January 31, 1996)
10.12* Form of Succession Agreement between the Company and the stockholders of South Texas
Acute Trauma Physicians, P.A. (Filed as Exhibit 10.13 to the Registration Statement on
Form S-4 (Reg. No. 333-2486) filed by New STAT Healthcare, Inc.)
10.13* Professional Services Agreement, dated February 1, 1996, by and between the Greater
Houston Division of Columbia/HCA Healthcare Corporation and STAT Physicians, P.A.
(Filed as Exhibit 10.20 to the Registration Statement on Form S-4 (Reg. No. 333-2486)
filed by New STAT Healthcare, Inc.)
10.14* Credit Agreement dated as of April 10, 1995 between
the Company and Southwest Bank of Texas, N.A.
("SWBT"), as amended by that certain Amendment to
Credit Agreement effective July 3, 1995, and as
further amended by that certain Second Amendment to
Credit Agreement dated effective as of April 10, 1996
(Filed as Exhibit 10.22 to the Registration Statement
on Form S-4 (Reg. No. 333-2486) filed by New STAT
Healthcare, Inc.)
10.15* Security Agreement between the Company and SWBT made as of April 10, 1995, as
amended by that certain First Amendment to Security Agreement made as of April 10,
1996 (Filed as Exhibit 10.23 to the Registration Statement on Form S-4 (Reg. No. 333-
2486) filed by New STAT Healthcare, Inc.)
10.16* Form of Administrative Services Agreement, between Old STAT and STAT Physicians,
P.A. (Filed as Exhibit 10.24 to the Registration Statement on Form S-4 (Reg. No. 333-
2486) filed by New STAT Healthcare, Inc.)
24.1# Power of Attorney pursuant to which amendments to this Report may be filed (included
on the signature page of this Report)
27.1 Financial data schedule
</TABLE>
- ---------
* Incorporated herein by reference to the indicated filing.
+ Management contract or compensatory plan.
# Previously filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of fiscal 1995.
47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Dated: May 20, 1996 STAT HEALTHCARE, INC.
By: /S/ NED E. CHAPMAN
Ned E. Chapman
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
WILLIAM H. RICE, M.D.* Chairman of the Board of Directors May 20, 1996
WILLIAM H. RICE, M.D.
VICTOR M. MIRANDA, M.D.* President and Director(Principal May 20, 1996
VICTOR M. MIRANDA, M.D. Executive Officer)
/S/NED E. CHAPMAN Chief Financial Officer, Treasurer May 20, 1996
NED E. CHAPMAN and Director (Principal Financial
and Accounting Officer)
RUSSELL D. SCHNEIDER* Director May 20, 1996
RUSSELL D. SCHNEIDER
*By: /S/ NED E. CHAPMAN
NED E. CHAPMAN
ATTORNEY-IN-FACT
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-KSB/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 1,763,000
<SECURITIES> 0
<RECEIVABLES> 3,306,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,755,000
<PP&E> 96,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,860,000
<CURRENT-LIABILITIES> 1,165,000
<BONDS> 0
0
0
<COMMON> 36,000
<OTHER-SE> 4,659,000
<TOTAL-LIABILITY-AND-EQUITY> 5,860,000
<SALES> 14,124,000
<TOTAL-REVENUES> 14,124,000
<CGS> 11,408,000
<TOTAL-COSTS> 13,147,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,000
<INCOME-PRETAX> 1,021,000
<INCOME-TAX> 347,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 674,000
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
