As filed with the Securities and Exchange Commission on June 22, 1999.
Registration No. 333-5826
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST-EFFECTIVE
AMENDMENT NO. 5
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ATLANTIC INTEGRATED HEALTH
INCORPORATED
(Name of small business issuer as specified in our charter)
NORTH CAROLINA 8011 56-1966823
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification No.)
organization)
1315 S. GLENBURNIE ROAD, SUITE A5
NEW BERN, NORTH CAROLINA 28562
(252) 514-0057
(Address and telephone number of principal executive offices)
--------------------------------------
J. PHILIP MAHANEY JR., M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1315 S. GLENBURNIE ROAD, SUITE A5
NEW BERN, NORTH CAROLINA 28562
(252) 514-0057
(Name, address and telephone number of agent for service)
----------------
COPIES TO:
AMY E. CULBERT, ESQ. DONALD R. REYNOLDS, ESQ.
OPPENHEIMER WOLFF & DONNELLY LLP WYRICK, ROBBINS, YATES & PONTON L.L.P.
3400 PLAZA VII, 45 SOUTH SEVENTH STREET THE SUMMIT
MINNEAPOLIS, MN 55402 4101 LAKE BOONE TRAIL, SUITE 300
(612) 607-7287 RALEIGH, NC 37607
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
----------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
----------------------------------------------------
================================================================================
Subject to Completion Dated June 22, 1999
544,000 PRIMARY CLASS COMMON SHARES
972,000 REFERRAL CLASS COMMON SHARES
148,000 NONPROFIT CLASS NONVOTING COMMON SHARES
---------------------------------
ATLANTIC INTEGRATED HEALTH
INCORPORATED
ATLANTIC: THE OFFERING:
* We are an independent, * We are offering Primary Class Common
physician-owned and governed Shares, the Referral Class Common
integrated medical practice group Shares, or the Nonprofit Class
network. Nonvoting Common Shares.
* We are in the process of * The initial public offering price
integrating, economically and per share will be $1.00.
clinically, physicians practicing * The offering of the shares will be
primarily in single-specialty restricted to qualified investors
medical practice groups into a only.
larger multi-specialty network of * You will be required to enter into
physicians and medical practice subscription and shareholder
groups. buy/sell agreements, which restrict
the sale of the shares to eligible
NO PUBLIC MARKET: persons and provide us a right to
* Prior to this offering, there has repurchase the shares upon the
been no public market for the occurrence of certain purchase
shares. events at fair market value, as
* Upon completion of this offering, determined in the sole discretion of
there will continue to be no public our Board of Directors, thereby
market for the shares and no precluding the development of a
assurance can be given that a public trading market for the shares.
market for the shares will ever * We intend to use the net proceeds of
develop after the offering. this offering for general working
capital purposes.
-------------------
THE SHARES OFFERED BY THIS PROSPECTUS ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK.
YOU SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE 4.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
==================================================================================================
PRICE TO UNDERWRITING DISCOUNTS AND PROCEEDS TO
PUBLIC(1)(2) COMMISSIONS(3) COMPANY
- --------------------------------------------------------------------------------------------------
Per Primary Class Common Share....... $1.00 None $1.00
Per Referral Class Common Share...... $1.00 None $1.00
Per Nonprofit Class Nonvoting
Common Share......................... $1.00 None $1.00
- --------------------------------------------------------------------------------------------------
Total ............................... $1,664,000 None $1,664,000
==================================================================================================
(1) The minimum and maximum investment is 2,000 shares, or $2,000 per investor.
See "Plan of Distribution."
(2) The shares will be offered only to qualified investors. See "Plan of
Distribution."
(3) The shares will be offered on a "best efforts" basis by our officers and
directors. We will not pay any selling commissions to any of our officers
or directors in connection with the offering and sale of the shares,
although we will reimburse any out-of-pocket expenses.
The date of this prospectus is _______, 1999
[INSERT THE FOLLOWING RED HERRING LANGUAGE ON COVER PAGE OF PROSPECTUS]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
TABLE OF CONTENTS
Where You Can Find More Information......................................... ii
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 4
Use of Proceeds............................................................. 9
Dividend Policy............................................................. 9
Dilution.................................................................... 9
Capitalization.............................................................. 10
Selected Consolidated Financial Data........................................ 11
Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 13
Business.................................................................... 17
Management.................................................................. 30
Certain Transactions........................................................ 36
Principal Shareholders...................................................... 37
Description of Securities................................................... 40
Shares Eligible for Future Sale............................................. 44
Plan of Distribution........................................................ 45
Validity of Shares.......................................................... 47
Experts..................................................................... 47
Index to Consolidated Financial Statements.................................. F-1
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different.
This prospectus may only be used where it is legal to sell these securities. The
information in this prospectus may only be accurate on the date of this
prospectus.
i
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form SB-2 (of which this
prospectus is a part) under the Securities Act of 1933 (the "Securities Act"),
with the Securities and Exchange Commission with respect to the shares offered
hereby. This prospectus does not contain all of the information set forth in the
Registration Statement, as amended by Post-Effective Amendments 1 through 5, and
the exhibits and schedules thereto.
We file reports, proxy statements, and other documents with the SEC in
accordance with the requirements of the Securities Exchange Act of 1934. Our SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information regarding the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. You may also read and copy any document we
file at the SEC's regional offices at:
Citicorp Center Seven World Trade Center
500 West Madison Street New York, New York 10048
Chicago, Illinois 60621
ii
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PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY, TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
ATLANTIC
We are an independent, physician-owned and governed integrated medical
practice group network. We are in the process of integrating, economically and
clinically, physicians practicing primarily in single-specialty medical practice
groups into a larger multi-specialty network of physicians and medical practice
groups. Physicians participating in our network provide primary and referral
specialty health care services to managed care health plan enrollees and other
patients. We seek to improve the clinical performance and efficiencies of
individual physician and medical practice group operations by centralizing
specific administrative and purchasing functions and introducing management
tools, such as clinical pathways, utilization review and outcomes measurement.
As of May 15, 1999, we had entered into medical services provider
agreements covering over 500 physicians located in 22 counties in eastern North
Carolina. These agreements require participating physicians to comply with key
operating policies and procedures established by our physician Board of
Directors. Additionally, as of May 15, 1999, through our wholly-owned
subsidiary, The Beacon Company, we had entered into facility participation
agreements with eight hospitals in eastern North Carolina. These agreements
allow us, through Beacon, to work with local hospitals on joint contracting
opportunities.
We derive our revenues from four main sources:
* fees paid by employers, managed care health plans, and other
third-party payors to access our integrated provider network;
* commissions and fees paid by employers for health plan related
administrative and consulting services;
* fees paid by vendors on behalf of participating physicians for
providing group purchasing and related services; and
* administrative service fees paid by participating physicians.
Our strategy is to continue to develop a multi-specialty integrated medical
group network in eastern North Carolina. In each targeted community we plan to
affiliate with local physicians who provide a variety of medical specialty
services. To implement our strategy, we intend to pursue:
* growth in our existing community markets;
* expansion into new community markets through affiliation with
physicians, medical practice groups or existing provider networks;
* creation of contract relationships with hospitals, health plans, and
other third-party payors in the community market areas;
* use of management information systems, electronic data interchange and
the internet; and
* management activities to increase the efficiency of and reduce costs
associated with the operation of our regional network.
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1
- --------------------------------------------------------------------------------
We were incorporated in North Carolina in December 1994 under the name
"Atlantic Primary Care, Inc." References in this prospectus to "Atlantic," "we,"
"our," "us" and the "Company" refer to Atlantic Integrated Health Incorporated
and its wholly-owned subsidiary. Our principal executive offices are located at
1315 S. Glenburnie Road, Suite A5, New Bern, North Carolina 28562. Our telephone
number is (252) 514-0057. Our e-mail address is aih@cconnect.net, and our
website is located at http://www.aihinc.com. Information contained on our
website does not constitute part of this prospectus.
THE OFFERING
Securities offered......................544,000 Primary Class Common Shares
972,000 Referral Class Common Shares
148,000 Nonprofit Class Nonvoting Common
Shares
Securities to be outstanding
after the offering.....................856,500 Primary Class Common Shares
1,426,000 Referral Class Common Shares
152,000 Nonprofit Class Nonvoting Common
Shares
Investor qualifications.................Primary Class Common Shares will be
issued to only "Primary Care Physicians"
who have entered into, directly or
indirectly, medical services provider
agreements with us.
Referral Class Common Shares will be
issued to only physicians practicing
primarily in referral medical and
surgical specialties who have entered
into, directly or indirectly, medical
services provider agreements with us.
Non-Profit Class Nonvoting Common Shares
will be issued to only nonprofit
entities or public corporations engaged
in the delivery of health care services,
which have contracted with us to provide
medical or other health care services.
Restrictions on resale of shares........All purchasers of the shares offered
hereby will be required to enter into
subscription and shareholder buy/sell
agreements, which restrict the sale of
the shares to "eligible persons" only
and give us the right to repurchase the
shares upon certain purchase events at
fair market value as determined in the
sole discretion of our Board of
Directors.
Voting rights...........................The Primary Class Common Shares and the
Referral Class Common Shares vote
together as a single class on most
matters, with each share entitling the
holder to one vote, except as otherwise
provided by law and our Amended and
Restated Articles of Incorporation. The
Nonprofit Class Nonvoting Common Shares
are not entitled to vote on any matters,
except as otherwise provided by law. See
"Description of Capital Stock."
Use of proceeds.........................The net proceeds from the offering will
be used for general working capital
purposes. See "Use of Proceeds."
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2
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SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------- ---------------------------
STATEMENT OF OPERATIONS DATA: 1997 1998 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Revenue ................................................. $ 283,240 $ 283,413 $ 65,031 $ 123,077
Total operating expenses ................................ 456,086 412,953 104,390 101,125
----------- ----------- ----------- -----------
Operating income (loss) ................................. (172,846) (129,540) (39,359) 21,952
Interest income ......................................... 977 2,560 330 914
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of a
change in accounting principle ....................... (171,869) (126,980) (39,029) 22,866
Cumulative effect of a change in accounting
principle ............................................ -- -- -- (82,711)
----------- ----------- ----------- -----------
Net loss ................................................ $ (171,869) $ (126,980) $ (39,029) $ (59,845)
=========== =========== =========== ===========
Income (loss) per basic common share:
Income (loss) before cumulative effect of a
change in accounting principle .................... $ (.41) $ (.20) $ (.07) $ .03
Cumulative effect of a change in accounting
principle ......................................... -- -- -- (.12)
----------- ----------- ----------- -----------
Net loss ............................................. $ (.41) $ (.20) $ (.07) $ (.09)
=========== =========== =========== ===========
Basic average common shares outstanding ................. 416,688 620,167 586,333 712,333
=========== =========== =========== ===========
OPERATING DATA:
Number of Affiliated Practice Sites ..................... 119 176 139 206
Number of Affiliated Physicians ......................... 312 437 376 527
MARCH 31, 1999
---------------------------------
ACTUAL AS ADJUSTED
------------ ------------
BALANCE SHEET DATA:
Working capital................................................................... $249,879 $1,908,879
Total assets...................................................................... 291,151 1,950,151
Total shareholders' equity........................................................ 162,256 1,821,256
- --------------------------------------------------------------------------------
3
RISK FACTORS
THE OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN THE SHARES OFFERED HEREBY. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. AN INVESTMENT IN THE
SHARES MAY NOT BE APPROPRIATE FOR INVESTORS WHO CANNOT AFFORD TO LOSE THEIR
ENTIRE INVESTMENT.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS,
INCLUDING THOSE DESCRIBED BELOW.
WE HAVE A LIMITED OPERATING HISTORY AND A SIGNIFICANT ACCUMULATED DEFICIT.
We were incorporated in December 1994 and have a limited operating
history. Our business is subject to the risks inherent in the establishment of a
new business enterprise. Because we have limited operations, we cannot provide
you with the type of information that would be available from an institution
with a longer history of operations. Our profitability will depend primarily
upon the efforts of the individual physicians and medical practice groups that
are participating providers of medical services pursuant to medical services
provider agreements with us. There is no assurance that we will ever operate
profitably. As a result of the substantial start-up expenditures that have been
and will continue to be incurred, we can be expected to continue to incur
operating losses during at least the next two years of operations. Furthermore,
any delays in commencing substantial business operations will further increase
start-up expenses and delay realization of potential revenues and income. As of
March 31, 1999, we had accumulated a deficit since our inception in an amount
equal to $532,694. As a result of our accumulated deficit, along with other
matters, the report of our independent public accountants on our consolidated
financial statements contains an explanatory paragraph concerning our ability to
continue as a going concern.
WE MAY NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN OR WHICH MAY
DILUTE YOUR EQUITY OWNERSHIP.
The use of proceeds from our offering have been and will continue to be
used for general working capital purposes. We believe that if the anticipated
fees are collected under our administrative fee assessment program and if we
achieve our expected revenues and are to manage our expenses at budgeted levels,
we will not require any significant additional capital. If our revenues are not
sufficient to complete our initial business development activities, we may
adjust our medical services fee arrangements, collect fees under our
administrative fee assessment program and seek to raise additional capital.
There can be no assurance that we will be successful in executing our business
plan or that we will be able to increase the fees charged to buyers of health
care services or reduce the fees paid to participating providers if we are
unable to achieve profitable operations. We plan to conduct additional offerings
of shares of our capital stock as we add additional physicians to our network.
Such additional offerings may result in dilution of the equity interests of our
shareholders. In any event, there can be no assurance that we will be able to
sell additional shares or obtain any necessary additional financing on
satisfactory terms, or at all.
4
WE ARE DEPENDENT ON PHYSICIANS, MEDICAL PRACTICE GROUPS AND OTHER HEALTH CARE
PROVIDERS.
Our profitability and long-range business plans are dependent upon our
attracting and retaining the services of qualified individual physicians,
medical practice groups and other health care providers, especially primary care
medical practice groups. We continue to enter into medical services provider
agreements with selected credentialed providers. Although we believe that we
will be able to enter into and maintain such agreements with a sufficient number
of providers, there can be no assurance that we will be able to do so on a
timely basis or under favorable terms.
WE ARE DEPENDENT ON LONG-TERM RELATIONSHIPS WITH MANAGED CARE HEALTH PLANS,
INSURANCE CARRIERS, EMPLOYERS AND OTHER BUYERS OF HEALTH CARE SERVICES.
Our profitability and long-range business plans are dependent upon our
establishment of relationships with managed care health plans, insurance
carriers, employers and other buyers of health care services. As a result, we
continue to meet with and enter into arrangements with managed care health
plans, insurance companies, self-funded employers and other buyers of health
care services. Although we believe that we will be able to enter into and
maintain such relationships with a sufficient number of buyers of health care
services, there can be no assurance that we will be able to do so on a timely
basis or under favorable terms.
WE FACE INTENSE COMPETITION.
The health care industry is very competitive. Our organization and our
affiliated physicians and medical practice groups compete with individual
physicians and medical practice groups, HMOs, preferred provider organizations,
physician-hospital organizations, integrated delivery systems and physician
practice management companies. Many of our competitors are significantly larger
and have substantially greater capital resources than us. There is no assurance
that we will be able to compete effectively against such competitors. Even
though our competitors will include certain existing managed health care plans,
we intend to market the services of our integrated, multi-specialty group
network to certain other managed health care plans with which we will not
compete. Our success and profitability will be dependent, in part, on our
ability to establish contract relationships with existing health plan
organizations, which will provide us access to employer buyer coalitions and
other insured and self insured employer groups. Although we currently have
numerous contracts with self-insured employers, we do not have long-term
relationships with any managed care health plan or other buyers of health care
services. Continuing consolidation of the participants in the health care
industry could limit our opportunities to establish additional contracts and
relationships.
WE OR OUR PARTICIPATING MEDICAL PRACTICE GROUPS MAY BE DEEMED TO BE AN
AFFILIATED SERVICE GROUP WHICH COULD DISQUALIFY OUR QUALIFIED EMPLOYEE BENEFIT
PLANS OR THOSE OF OUR PARTICIPATING MEDICAL PRACTICE GROUPS.
Section 414(m) of the Internal Revenue Code of 1986 requires that all
employees who are employed by members of an "affiliated service group" be
treated as employed by a single employer for purposes of discrimination testing
and certain other requirements imposed on qualified employee benefit plans.
Although we are organized as a business corporation, with our business limited
to the provision of administrative services, we and the participating medical
providers within our network may be deemed to be an "affiliated service group."
In the event we and the participating medical providers are found to be an
"affiliated service group," our organizational structure and contractual
arrangements may have to be modified. Notwithstanding any such possible
modifications, if our or the medical providers' qualified employee benefit plans
become disqualified as a result of the "affiliated service group" issue,
5
participating physicians may suffer adverse income tax consequences, including
immediate taxation of the employer's contributions to the pension and profit
sharing plans which they and their respective medical providers sponsor.
WE ARE SUBJECT TO ANTITRUST LAWS WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Federal and state antitrust laws prohibit practices that unreasonably
restrain competition. We believe that our proposed organizational structure,
contemplated contractual arrangements and business operations will be lawful and
will not violate current antitrust laws, even though we may not meet the
requirements of identified federal antitrust policy statement safety zones or
exemptions. We are still in our early stages of development, and certain
structures, programs and business operations required for the economic and
clinical integration of participating physicians and medical practice groups
have not been implemented. Many of such structures, programs and business
operations must be implemented and continued to satisfy certain antitrust
requirements, and no assurance can be provided that the requisite structures,
programs and business operations will be implemented in a timely manner and
continued. Moreover, evolving interpretations of antitrust laws and
corresponding statements of enforcement policy could make it necessary for us to
modify our organizational structure and/or restructure our contractual
arrangements or business operations. If we are found to be in violation of
federal or state antitrust laws, we may be subject to fines of up to $10,000,000
or other sanctions. Even the mere assertion of a violation of the antitrust laws
could have a material adverse effect on us.
WE ARE SUBJECT TO INSURANCE, HMO, PPO AND URO REGULATION.
All entities classified as an "insurance company" under North Carolina law
are subject to various state laws regulating the business of insurance which are
enforced by the North Carolina Department of Insurance ("DOI"). If our method
for compensating physicians within our network includes the allocation to the
medical practice groups of deficits that result from our payment arrangements
with health plans and other purchasers, we might be deemed an "insurance
company" and, as a result, be subject to North Carolina laws regulating
insurance. Current North Carolina insurance law requirements for insurance
companies include, but are not limited to, the payment of licensing fees, the
filing of annual statements, and the maintaining of certain capitalization and
financial reserves. Failure to comply with these or other requirements could
result in the imposition of fines, penalties, and the disqualification from
doing business in North Carolina.
In addition to regulating traditional insurance companies, the DOI is
responsible for the regulation of HMOs, PPOs and utilization review
organizations. While there are no specific regulations governing physician
organizations, the DOI has taken the position that a physician network
organization could become subject to the HMO statute if the physician
organization enters into arrangements which involve the shifting or other
transfer of an "insurance risk." Although we currently do not have any risk
sharing contracts, nor do we plan to structure ourselves in such a fashion as to
be regulated by the DOI, we may enter into such contracts in the future and at
such time may become subject to these regulations. A physician organization may
also become subject to regulation as a PPO and a URO. Although we believe that
our current operations would not require us to register as a PPO or a URO, no
assurance can be given that the DOI would not take a contrary position. Any
challenge by the DOI and requirement that we restructure our operations could
have a material effect on our operations.
WE ARE SUBJECT TO OTHER GOVERNMENT REGULATION.
Federal and state laws regulate the relationships among providers of
health care services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid
6
statutes, which prohibit the soliciting or receiving, or the offering or payment
of remuneration, either directly or indirectly, in return for or to induce a
referral of items or services for Medicare and Medicaid patients. Federal and
state statutes impose restrictions on physician referrals for designated health
services to entities with which the physician has a financial relationship.
These laws and applicable regulations also regulate the submission of claims for
the reimbursement of physician services, or for services incident to those
services, provided under federal health care programs that are false or
fraudulent. Violations of these laws may result in substantial civil and
criminal penalties, including civil monetary penalties, exclusion from the
participation in the Medicare and Medicaid programs, loss of licensure to
practice medicine and other penalties. Such exclusion and penalties, if applied
to our affiliated physicians and medical practice groups, could have a material
adverse effect on us.
Recently adopted health insurance reform legislation includes important
changes in federal laws regulating fraud and abuse. Statutory provisions
establishing criminal penalties, both fines and imprisonment, for intentionally
fraudulent activity in the provision of health services are included. Claims for
reimbursement that are improperly processed and submitted to federal programs
that result in inappropriately obtained reimbursement can result in civil
penalties. Moreover, persons who have an ownership interest or serve as officers
or managing employees of entities that are convicted or excluded from
participation in such federal programs for filing false or fraudulent claims
would also be subject to exclusion and civil penalties for each day the
individual maintains that interest. Finally, remuneration between organizations
and entities, which provide services to Medicare or Medicaid beneficiaries and
have a written risk sharing agreement, are exempted under Medicare and Medicaid
statutes that prohibit the payment or remuneration to induce or obtain
referrals. These statutes, if applied to us and our affiliated physicians and
medical practice groups, could have a material adverse effect on us.
Moreover, the laws of many states prohibit physicians from splitting fees
with non-physicians and prohibit non-physician entities from practicing
medicine. Although we believe our operations are in material compliance with
existing applicable federal and state laws, there can be no assurance that our
existing medical services provider agreements will not be successfully
challenged as constituting the unlicensed practice of medicine or that the
enforceability of the provisions of such agreements will not be limited.
There can be no assurance that review of our business or the affiliated
physicians' businesses by state or federal courts or regulatory authorities will
not result in a determination that could adversely affect our operations, the
operations of our affiliated physicians and medical practice groups or that the
health care regulatory environment will not change so as to restrict our or the
affiliated physicians' existing medical practice groups' operations or their
expansion.
In addition to extensive existing governmental health care regulation,
there are numerous initiatives at the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services.
Certain aspects of these health care proposals, such as further reductions in
Medicare and Medicaid payments and additional prohibitions on physician
ownership, directly or indirectly, of facilities to which they refer patients,
if adopted, could adversely affect us.
WE MAY BE SUBJECT TO POTENTIAL LEGAL LIABILITIES.
Our health care services involve determinations regarding health insurance
coverage, utilization management and maintenance of patient records. Although we
do not intend to deliver medical services, we may be forced to defend medical
malpractice or other tort claims made by persons who receive medical services
from our participating physicians or medical practice groups. The legal theories
upon which persons might attempt to assert liability against us or other
comparable companies in the managed
7
health industry continue to evolve. There is no assurance that we will not be
subject to liability from litigation which might adversely affect our business.
We currently do not maintain any insurance for such potential liabilities. We
intend to obtain such insurance at the time we enter into our first contract
with a managed care health plan; however, no assurance can be given that we will
ever obtain and maintain such insurance.
THE OFFERING PRICE WAS ARBITRARILY DETERMINED AND BEARS NO RELATIONSHIP TO OUR
ASSETS, BOOK VALUE, EARNINGS, NET WORTH OR OTHER GENERALLY RECOGNIZED CRITERIA
OF VALUE.
The public offering price set forth on the cover page of this prospectus
was determined solely by us and is primarily based on our projected capital
requirements. The offering price bears no relationship to our assets, book
value, earnings, net worth or other generally recognized criteria of value.
THE SHARES OFFERED HEREBY ARE SUBJECT TO LIMITATIONS ON TRANSFER AND THERE IS NO
PUBLIC TRADING MARKET FOR THE SHARES WHICH COULD IMPEDE YOUR ABILITY TO RESELL
THEM.
All purchasers of our outstanding shares of capital stock have entered
into a subscription and shareholder buy/sell agreement and all purchasers of the
shares offered hereby will be required to enter into a subscription and
shareholder buy/sell agreement which restricts the sale of the shares and
precludes the development of a trading market for the shares. Accordingly, there
is currently no public or private trading market for the shares offered hereby
and so long as such agreements are in effect, there will continue to be no
public or private trading market for the shares.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD HAVE THE
EFFECT OF MAKING IT MORE DIFFICULT FOR A THIRD PARTY TO EFFECT A CHANGE IN
CONTROL WHICH COULD LIMIT THE PRICE CERTAIN INVESTORS MIGHT PAY FOR OUR SHARES.
Our Amended and Restated Articles of Incorporation and Bylaws, as amended,
contain certain provisions that could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. Such provisions could limit the price that
certain investors might pay in the future for shares of our capital stock.
8
USE OF PROCEEDS
The net proceeds to be received by us from the sale of the shares offered
hereby after deducting the estimated offering expenses of $5,000, are estimated
to be approximately $1,659,000 if the maximum number of shares is sold. We
anticipate that all of the net proceeds from the offering will be used for
general working capital purposes. In addition, management, at its discretion,
may decide that proceeds from the sale of shares to physicians in a certain
geographic region be set aside for certain projects and services for such
physicians. To date, we have not entered into any written agreements of this
nature. Pending such uses, the net proceeds will be invested in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on shares of our capital
stock since our inception, and our Board of Directors presently intends to
retain all earnings for use in the business in the foreseeable future.
DILUTION
Our net tangible book value as of March 31, 1999 was approximately
$162,256 or $.21 per share. Net tangible book value represents the amount of our
total tangible assets reduced by the amount of our total liabilities. Without
taking into account any other changes in net tangible book value after March 31,
1999, other than to give effect to the sale of the maximum number of shares
offered hereby (after deducting the estimated offering expenses of $5,000
payable by us) at $1.00 per share, our pro forma net tangible book value at
March 31, 1999, would have been approximately $1,821,256 or $.75 per share. This
represents an immediate increase in net tangible book value of $.54 per share,
and an immediate dilution of $.25 per share to new investors. The following
table illustrates this per share dilution:
Public offering price.................................... $1.00
Net tangible book value per share before offering..... $.21
Increase attributable to new investors................ $.54
----
Pro forma net tangible book value after offering......... $ .75
-----
Dilution to new investors................................ $ .25
=====
9
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999, on
an as adjusted basis to reflect the receipt of the estimated net proceeds from
the sale of the shares offered hereby, at $1.00 per share.
MARCH 31, 1999
----------------------------
ACTUAL AS ADJUSTED
----------- -----------
Shareholders' equity:
Primary Class Common Shares;
1,000,000 shares authorized;
312,500 shares issued and outstanding;
856,500 shares as adjusted .............................. $ 312,500 $ 856,500
Referral Class Common Shares;
1,800,000 shares authorized;
454,000 shares issued and outstanding;
1,426,000 shares as adjusted ............................ 454,000 1,426,000
Nonprofit Class Nonvoting Shares;
200,000 shares authorized;
4,000 shares issued and outstanding;
152,000 shares as adjusted .............................. 4,500 152,500
Additional paid-in capital .............................. 74,000 74,000
Syndication costs ....................................... (105,000) (110,000)
Stock subscription and shareholder notes receivable ..... (45,050) (45,050)
Accumulated deficit ..................................... (532,694) (532,694)
----------- -----------
Total shareholders' equity .............................. $ 162,256 $ 1,821,256
=========== ===========
10
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of December
31, 1997 and 1998, and for the years ended December 31, 1997 and 1998, are
derived from and should be read in conjunction with our consolidated financial
statements and the related notes thereto audited by Arthur Andersen LLP,
independent public accountants, which are included elsewhere in this prospectus.
The selected consolidated financial data presented below as of March 31, 1998
and 1999, and for the three-month periods ended March 31, 1998 and 1999, are
derived from our unaudited consolidated financial statements which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information set forth therein, and which are included elsewhere in this
prospectus. The results of operations for the three-month period ended March 31,
1999 are not necessarily indicative of the results to be expected for the entire
year ending December 31, 1999 or for any future period. The information
presented below under the caption "Operating Data" is unaudited. Our selected
consolidated financial data set forth below are qualified by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes thereto included elsewhere in this prospectus.
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ----------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS DATA: (UNAUDITED) (UNAUDITED)
Revenue ............................................... $ 283,240 $ 283,413 $ 65,031 $ 123,077
----------- ----------- ----------- -----------
Expenses
Consulting fees .................................... 135,717 21,063 3,102 8,217
Salaries and wages ................................. 251,803 291,410 78,897 68,201
Recruiting and education ........................... 6,781 12,196 2,653 5,945
Office expense and other ........................... 44,907 67,246 16,667 14,389
Rent ............................................... 4,420 10,018 1,038 2,398
Interest ........................................... -- 2,700 -- 1,350
Depreciation and amortization ...................... 7,458 8,320 2,033 625
Allowance for uncollectible accounts ............... 5,000 -- -- --
----------- ----------- ----------- -----------
Operating income (loss) ............................... (172,846) (129,540) (39,359) 21,952
Interest income ....................................... 977 2,560 330 914
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of a change
in accounting principle ............................ (171,869) (126,980) (39,029) 22,866
Cumulative effect of a change in accounting
principle .......................................... -- -- -- (82,711)
----------- ----------- ----------- -----------
Net loss .............................................. $ (171,869) $ (126,980) $ (39,029) $ (59,845)
=========== =========== =========== ===========
Income (loss) per basic common share:
Income (loss) before cumulative effect of a
change in accounting principle .................. $ (.41) $ (.20) $ (.07) $ .03
Cumulative effect of a change in accounting
principle ....................................... -- -- -- (.12)
----------- ----------- ----------- -----------
Net loss ........................................... $ (.41) $ (.20) $ (.07) $ (.09)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding ............................. 416,688 620,167 586,333 712,333
=========== =========== =========== ===========
11
OPERATING DATA:
Number of Affiliated Practice Sites ................... 119 176 139 206
Number of Affiliated Physicians ....................... 312 437 376 527
BALANCE SHEET DATA:
Working capital ....................................... $ 114,857 $ 138,237 $ 112,446 $ 249,879
Total assets .......................................... 165,007 273,517 186,137 291,151
Total shareholders' equity ............................ $ 140,246 $ 135,051 $ 140,252 $ 162,256
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of the operations and financial
condition should be read in conjunction with our Consolidated Financial
Statements and the related notes thereto.
OVERVIEW
We are an independent, physician-owned and governed, integrated medical
practice group network. Since our inception, we have focused our efforts on
providing administrative services to participating physicians and medical
practice groups and on developing a community-based, integrated health care
delivery system to provide quality, cost-effective health care to the citizens
of eastern North Carolina. We are in the process of integrating, economically
and clinically, physicians practicing primarily in single-specialty medical
practice groups into a larger multi-specialty network of physicians and medical
practice groups. Physicians participating in our network provide primary and
referral specialty heath care services to managed care health plan enrollees and
other patients. We continue to develop strategic alliances with payors of health
care services and other health care providers to achieve greater coordination of
the delivery of and payment of health care services.
As of May 15, 1999, we had entered into medical services provider
agreements covering over 500 physicians located in 22 counties in eastern North
Carolina. Additionally, as of May 15, 1999, through our subsidiary, The Beacon
Company, we had entered into facility participation agreements with eight
hospitals in eastern North Carolina.
We derive our revenues from four main sources:
* fees paid by employers, managed care health plans, and other
third-party payors to access our integrated provider network;
* commissions and fees paid by employers for health plan related
administrative and consulting services;
* fees paid by vendors on behalf of participating physicians for
providing group purchasing and related services; and
* administrative service fees paid by participating physicians.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Net revenue for 1998 of $283,413 was approximately equal to 1997 revenues
of $283,240. While total revenues were constant from 1997 to 1998, the change in
the sources of 1998 revenue was more dramatic. Revenues generated from group
purchasing contracts increased from $30,889 in 1997 to $175,152 in 1998, an
increase of $144,263 or 467%. This increase was offset by a drop in network
development and access fees from $70,000 in 1997 to $30,532 in 1998, a decrease
of $39,468 or 57% and administrative fees paid from affiliated medical practice
groups which fell from $185,350 in 1997 to $72,771 in 1998. The declines in
these two categories were not disappointing to us because in 1998 the network
development and access fees were generated from 12 customers while 1997 revenue
was derived
13
from one. In addition, we have been working towards reducing our reliance on
administrative fees collected directly from our affiliated medical practice
groups.
Operating expenses decreased from $456,086 in 1997 to $412,953 in 1998, a
decrease of $43,133 or 9%. This decrease was primarily attributable to a drop in
consulting fees which was partially offset by increases in all other operating
expenses.
Salaries and wages expense increased from $251,803 in 1997 to $291,410 in
1998, an increase of $39,607. This increase was primarily due to the addition of
provider relations and network marketing representatives along with customary
salary increases. Consulting fees decreased from $135,717 in 1997 to $21,063 in
1998, a decrease of $114,654. Consulting fees in 1997 were higher than in 1998
because of the costs associated with our negotiation of contracts associated
with the Kanawha/Beacon transaction, drafting and negotiation of facility
contracts with hospitals and exploring alternatives for capitalizing Beacon.
Office and other expenses increased from $44,907 in 1997 to $67,246 in 1998, an
increase of $22,339. The increase was due primarily to an increase in
telecommunications, printing and general office supplies. our rent/occupancy
expense increased from $4,420 in 1997 to $10,018 in 1998 due to the relocation
of our new headquarters. Depreciation and amortization expense increased
slightly due to the acquisition of depreciable office equipment. Our recruiting
and educational expenses increased from $6,781 in 1997 to $12,196 in 1998
because of increased network development activities.
We incurred a net loss of $126,980 in 1998 compared to a net loss of
$171,869 in 1997. Since inception, we have incurred an accumulated deficit of
$472,849. The decrease in net loss in 1998 was primarily due to a decrease in
consulting fees in 1998. We anticipate that our operating losses will continue
for at least the next two years.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenue increased from $65,031 for the three months ended March 31, 1998
to $123,077 for the three months ended March 31, 1999, an increase of $58,046,
or 89%. This increase was due to a strong growth in group purchasing contract
revenue and network access fees.
Operating expenses decreased from $101,125 for the three months ended
March 31, 1998 to $102,266 for the three months ended March 31, 1999. This
decrease was attributable to a decrease in salaries and wages which was
partially offset by increases in consulting fees and rent expense.
Salaries and wages decreased from $78,897 for the three months ended March
31, 1998 to $68,201 for the three months ended March 31, 1999, a decrease of
$10,696. This decrease was due to incentive compensation paid in fourth quarter
of 1998 as opposed to the first quarter of 1999. Excluding the incentive
compensation, salaries and wages would have increased in 1999 because of
additional employees. Office and other expenses decreased slightly from $16,667
in the three months ended March 31, 1998 to $14,389 in the three months ended
March 31, 1999, a decrease of $2,278. This decrease was due to a temporary
decrease in fees paid to credential the physician network. Consulting fees
increased from $3,102 for the three months ended March 31, 1998 to $8,217 for
the three months ended March 31, 1999, an increase of $5,115.
Our operating income before the cumulative effect of change in accounting
principle was $21,952 for the three months ended March 31, 1999 compared to an
operating loss of $39,359 for the three months ended March 31, 1998. The
operating income for the first quarter of 1999 primarily resulted from an
increase in revenues and a decrease in salaries and wages paid during the three
months ended March 31, 1999. We incurred a net loss after the cumulative effect
of a change in accounting principle of $59,845
14
in the three months ended March 31, 1999 compared with a net loss of $39,029 in
the three months ended March 31, 1998. The net loss primarily resulted from our
adoption of the provisions of Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities" (SOP 98-5) at the beginning of the first quarter
of 1999. SOP 98-5 provides guidance on the financial reporting of start-up costs
and organization costs and requires that all non-governmental entities expense
the costs of start-up activities as these costs are incurred instead of being
capitalized and amortized. The initial impact of adopting SOP 98-5 resulted in a
charge of $82,711. While our operating income before the cumulative effect of
adopting SOP 98-5 exceeded our expectations during the first quarter of 1999, we
anticipate continued operating losses for the next two years.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations primarily through the sale of
equity securities and revenue generated from operations.
On October 19, 1996, we filed a Registration Statement on Form SB-2 with
the Commission, pursuant to which we registered for offer and sale under the
federal securities laws (i) 700,000 Primary Class Common Shares; (ii) 1,400,000
Referral Class Common Shares; and (iii) 150,000 Nonprofit Class Nonvoting Common
Shares. The SEC declared our Registration Statement effective on December 30,
1996, and certain of our officers and directors commenced sale of our shares
shortly thereafter. During the initial offering period which closed on July 28,
1997, we sold 116,000 Primary Class Common Shares, 216,000 Referral Class Common
Shares and no Nonprofit Class Nonvoting Common Shares. On September 22, 1997, we
filed a Post-Effective Amendment No. 2 to the Registration Statement. The SEC
declared the Post-Effective Amendment No. 2 effective on September 30, 1997.
During the second offering period which closed on April 28, 1998, we sold an
aggregate of 26,000 Primary Class Common Shares, 76,000 Referral Class Common
Shares and no Nonprofit Class Nonvoting Common Shares. On June 24, 1998, we
filed a Post-Effective Amendment No. 3 and on August 7, 1998 a Post-Effective
Amendment No. 4 in response to the SEC's comments on Post-Effective Amendment
No. 3. The SEC declared the Post-Effective Amendment No. 4 effective on August
12, 1998. During the third offering period which closed on March 10, 1999, we
sold an aggregate of 14,000 Primary Class Common Shares, 136,000 Referral Class
Common Shares and 2,000 Nonprofit Class Nonvoting Common Shares. We sold an
aggregate of 156,000 Primary Class Common Shares, 428,000 Referral Class Common
Shares and 2,000 Nonprofit Class Nonvoting Common Shares since the Registration
Statement was first declared effective on December 30, 1996. The net proceeds
from our offering have been used for working capital.
We had $249,879 and $114,857 in working capital at March 31, 1999 and
1998, respectively. Our cash and cash equivalents were $201,175 and $106,275 at
March 31, 1999 and 1998, respectively. The increase in our working capital and
cash balance is due to the increase in revenues described above and our stock
offering. Depending upon the success of our stock offering and the amount of
future revenue derived from network development and access fees, we believe that
sufficient liquidity is available to satisfy our working capital through
December 31, 1999. In the event that our future stock sales and revenues derived
from network development and access fees are lower than projected, we anticipate
that we may charge our shareholders assessments, reduce the number of our
employees or decrease compensation paid to our officers.
We did not have any material commitments for capital expenditures as of
March 31, 1999.
15
YEAR 2000 MATTERS
We have identified the information technology and non-IT systems and
software which could be affected by the year 2000, and have assessed the efforts
required to remediate or replace them. All of our key systems and software have
been remediated or will be replaced by the end of summer 1999. We expect that
our systems and software are year 2000 ready or will be ready on a timely basis.
We have not contacted vendors, governmental agencies and other third parties
with whom we deal to identify potential issues we might encounter if those third
parties are not year 2000 compliant. Our business is such that we do not rely
heavily upon such third parties. If third parties with whom we do business do
not perform, we will replace them.
A significant portion of our year 2000 readiness efforts have occurred or
are occurring in connection with system upgrades or replacements that were
otherwise planned (but perhaps accelerated due to the year 2000) or which have
significant improvements and benefits unrelated to year 2000. We have incurred
no year 2000 remediation costs this year through March 31, 1999. We expect to
spend $5,000 for all of 1999. We have not yet estimated Year 2000 costs for
periods after 1999. Based on current expectations, neither the costs incurred
for year 2000 readiness efforts, nor the delay or deferral of certain
development projects that might have otherwise been undertaken in the absence of
year 2000 readiness efforts, are expected to have a material effect on our
financial position or operating results.
Our cost and timetable estimates for our year 2000 efforts reflect certain
assumptions and are subject to potentially significant estimation uncertainties
that could cause actual results to differ materially. Factors which could impact
these estimates include: the availability of appropriate technology personnel;
the rate and magnitude of related labor costs; the successful identification of
all aspects of our systems and software that require remediation or replacement;
and the success of third parties in their year 2000 compliance efforts. Due to
the complexity and pervasiveness of the year 2000 issue, and in particular the
uncertainty regarding the compliance efforts of third parties, no assurance can
be given that these estimates will be achieved, and actual results could differ
materially.
16
BUSINESS
GENERAL
We were incorporated as a business corporation on December 5, 1994 under
the name "Atlantic Primary Care, Inc." We are in the process of integrating,
economically and clinically, physicians practicing primarily in single-specialty
medical practice groups into a larger multi-specialty network of physicians and
medical practice groups. We are organized as an independent, physician-owned and
governed integrated medical practice group network. Physicians participating in
our network provide primary and referral specialty health care services to
managed care health plan enrollees and other patients. We seek to improve the
clinical performance and efficiencies of individual physician and medical
practice group operations by centralizing specific administrative and purchasing
functions and introducing management tools, such as clinical pathways,
utilization review and outcomes measurement.
As of May 15, 1999, we had entered into medical services provider
agreements covering over 500 physicians located in 22 counties in eastern North
Carolina. These agreements require our participating physicians to comply with
key operating policies and procedures established by our physician Board of
Directors. Additionally, as of May 15, 1999, Atlantic, through our wholly-owned
subsidiary, The Beacon Company had entered into facility participation
agreements with eight hospitals in eastern North Carolina. These agreements
allow us, through Beacon, to work with local hospitals on joint contracting
opportunities.
Our strategy is to continue to develop a multi-specialty Integrated
Medical Group Network in eastern North Carolina. In each targeted community we
plan to affiliate with local physicians who provide a variety of medical
specialty services. To implement our strategy, we intend to pursue:
* growth in our existing community markets;
* expansion into new community markets through affiliation with
physician medical practice groups or existing provider networks;
* creation of contract relationships with hospitals, health plans, and
other third-party payors in the community market areas;
* use of management information systems, electronic data interchange,
and the internet; and
* management activities to increase the efficiency of and reduce costs
associated with the operation of our regional network.
Consistent with this strategy, we are currently negotiating agreements
with other health plans to underwrite private label, fully insured health plans
using our network of health care providers.
In February 1998, we entered into certain agreements with Kanawha
HealthCare Solutions, Inc. and its parent Kanawha Insurance Company to launch
such products. Despite our efforts, Kanawha recently terminated all of these
agreements due to a number of market factors, including its decision to
discontinue the operation of its HMO in the state of North Carolina. We continue
to use Kanawha HealthCare Solutions, Inc. for third party administration
services related to our direct contracting with self-insured and partially
self-insured buyers of health care services.
17
MISSION
Our shareholders share the common vision that we are to be a
physician-owned and governed network of medical practice groups. Our mission is
to integrate, economically and clinically, physicians now practicing primarily
in single-specialty medical practice groups into a larger multi-specialty group
Integrated Medical Group Network to:
* integrate and coordinate multi-specialty patient care beginning at
the local community level;
* improve the access, quality and cost effectiveness of health care
services delivered through the development of new health care
service delivery products that are competitive and responsive to the
changing requirements and opportunities of the marketplace;
* develop and implement network administrative, operating and
information systems required to improve the delivery of health care
services and patient outcomes;
* negotiate managed care (capitation, percentage of premium, and other
permitted risk sharing) health plan contracts and contracts with
other buyers of health care services; and
* develop the capability to provide additional ancillary services and
generate additional efficiencies in the delivery of outpatient
services.
To accomplish our mission, we are seeking well-defined, long-term
relationships with health plans and other buyers of health care services which
share our vision and commitment to influencing changes in the health care
delivery system that are positive for patients and helpful to health care
providers. We have developed and continue to develop working relationships with
hospitals and other health care providers that serve our geographic region,
providing physicians the maximum flexibility to provide patients with the best
possible care.
INDUSTRY
Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care. As markets have evolved from traditional
fee-for-service medicine to managed care, insurance companies and health care
providers have confronted market pressures to provide high quality health care
in a cost-effective manner. Purchasers of health care services bargain
collectively in an effort to reduce premiums and to bring about greater
accountability of health plans and providers with respect to accessibility,
choice of provider, quality of care and other indicators of consumer
satisfaction. The focus on cost-containment has placed small to mid-sized
physician groups and solo practices at a disadvantage because they typically
have higher operating costs and little purchasing power with suppliers; they
often lack and do not have the capital to purchase new technologies that can
improve quality and reduce costs; and they do not have the cost accounting and
quality management systems necessary for entry into sophisticated risk-sharing
contracts with payors.
Industry experts expect the health care delivery system to evolve into a
system in which the primary care physician, often part of a multi-specialty
group or network, is a key leader in managing and directing health care
expenditures. As a result of these developments, primary care physicians have
increasingly become the conduit for the delivery of medical care by acting as
"case managers" and directing referrals
18
to certain specialists, hospitals, alternate-site facilities and diagnostic
facilities. By contracting directly with payors, organizations that have both
primary care and referral physician leadership are able to reduce the
administrative overhead expenses incurred by medical practice groups and health
plans and thereby reduce the cost of delivering health care services.
As a result of the trends toward increased enrollment in managed care
health plans and physician membership in medical practice groups, health care
providers have sought to reorganize themselves into integrated health care
delivery systems that are better suited to this environment. Some physician
groups and networks are joining with hospitals and other institutional providers
in various ways to create vertically integrated delivery systems which provide
medical and hospital services ranging from community-based primary medical care
to specialized inpatient services. These health care delivery systems contract
with health plans to provide hospital and medical services to enrollees under
full risk contracts, through which providers assume the obligation of providing
both the professional and institutional components of covered health care
services to the plans enrollees.
In order to compete effectively in this emerging environment, physicians
are concluding that they must have greater control over the delivery and
financial impact of a broader range of health care services through the
acceptance of a global capitation. Moreover, physicians are increasingly
abandoning traditional private practice in favor of affiliations with larger
organizations and networks, like us, which offer experienced, innovative
management and management information systems.
Many payors and their intermediaries, including governmental entities,
look to network providers of physician services to develop and maintain quality
outcomes, management programs and patient care data. In addition, such payors
and intermediaries seek to share the risk of providing health care services
through capitation arrangements which provide for fixed payments for patient
care over a specified period of time. While the acceptance of greater
responsibility and risk provides the opportunity to retain and enhance market
share and operate at a higher level of profitability, medical practice groups
and independent physicians have determined that the acceptance of capitation
carries with it significant requirements for infrastructure, information
systems, capital, network resources and financial and medical management.
Physicians increasingly are turning to organizations, such as us, to provide the
resources necessary to function effectively in this environment.
BUSINESS STRATEGY
Our strategy focuses on business activities in four principal areas:
1. FORMING A REGIONAL PHYSICIAN NETWORK.
Our management believes that the majority of health care services will
continue to be delivered at the local community level in the future,
particularly primary medical care in rural regions, such as eastern North
Carolina. Based on our experience and discussions with buyers of health care
services, our management believes that the purchase of health care services will
increasingly be accomplished through contracts with regional networks of
physicians and other providers; and thus demand by buyers of health care
services will grow rapidly for a regional, high quality physician network in
eastern North Carolina that is capable of sharing risk. We continue to meet this
market demand by selectively contracting with physicians in communities
throughout eastern North Carolina. As of May 15, 1999, we had entered into
medical services provider agreements covering over 500 physicians located in 22
counties in eastern North Carolina. Each participating physician is credentialed
through an established process that meets and/or exceeds National Commission for
Quality Assurance ("NCQA") guidelines. The medical services provider agreement,
entered into by all of our participating physicians, requires our participating
19
physicians to follow specific administrative and clinical policies and
procedures adopted by our Board of Directors.
2. DEVELOPING STRATEGIC ALLIANCES.
We believe that developing strategic relationships with hospitals, other
health care providers and insurance carriers, including HMOs, improves the
delivery of health care services and patient care. We continue to actively
pursue the development of such relationships.
Our current and proposed agreements with hospital and other providers
strive to enhance the quality and efficiency of care to patients and provide an
integrated and coordinated continuum of care. Consistent with this goal, our
current agreements with hospitals and other providers feature discounted fee for
service formulas. As we attempt to position ourselves within a managed care
market, our proposed agreements with hospitals and other providers will feature
reimbursement formulas that align financial and clinical incentives between
physicians, hospitals, and other providers to best meet patient care needs. As
our physicians share permitted financial risk, hospitals and other providers
will be placed at risk for those aspects of health care delivery that they most
directly influence or control. As of May 15, 1999, Atlantic, through our
subsidiary, Beacon, had entered into facility participation agreements with
eight hospitals in eastern North Carolina.
We continue our efforts to negotiate provider agreements with managed care
health plans and insurance companies desiring to do business in eastern North
Carolina. Also, we continue to develop agreements with managed care
organizations or third party administrators, to facilitate the offering of
services by our participating physicians and medical practice groups to large
partially and fully self-insured employers.
We entered into certain agreements with Kanawha in February 1998. These
agreements outlined duties and responsibilities of each organization to develop
a variety of health plans to be marketed to small and large employers in our
target markets. Initially, the parties intended to develop and distribute HMO,
PPO and third party administrator health plan products. Since the agreements
were executed, Kanawha has exited the HMO marketplace in North Carolina.
However, we are still working together with Kanawha to launch a PPO and jointly
market their health plan products to self-insured and partially self-insured
buyers of health care services. In June 1998, we purchased all of Kanawha's
ownership interest in Beacon.
Affiliated physicians are required to honor the terms and conditions of
contracts entered into by us and approved by respective medical practice groups
of such physicians. However, we do not prejudice individual participating
physicians or medical practice groups from entering into direct agreements with
managed care health plans, insurance companies or other buyers of health care
services. our standard medical services provider agreement does provide,
however, that we shall have the exclusive right, for a period of 180 days to
negotiate a new network/buyer agreement with certain buyers of health care
services designated by us. In the event that we do not enter into a
network/buyer agreement with a designated buyer of health care services within
180 days, the affiliated physicians have the right to contract with any buyer of
health care services, regardless of whether or not we have contracted with a
particular plan.
The expectation is that through relationships with managed care health
plans and other buyers of health care services, our physicians will devote
greater resources to ensuring the wellness of patients, provide better quality
and cost-effective patient care and become more competitive in the health care
marketplace. As a result, it is anticipated that the overall cost of providing
care will be contained,
20
rendering both us and our participating providers more appealing to managed care
health plans, other buyers of health care services, and medical consumers.
3. SEEKING IMPROVEMENTS IN HEALTH CARE SERVICE DELIVERY AND OUTCOMES.
We are organized as a multi-specialty integrated medical group network.
The integration of the medical group practices and physicians creates
significant potential to enhance the quality and cost-effectiveness of care
provided to patients served by the network. One of our goals is to accomplish
such integration through the systematic sharing of information, coordination of
care and such activities as the development and application of clinical pathways
and outcome measurements. We believe that information technology is important to
the growth of our integrated health care delivery system and that the
availability of detailed clinical data is fundamental to quality control and
cost containment.
We are monitoring the current developments in information and
telecommunications systems that will be able to link our central office with the
offices of certain participating physicians and medical practice groups via the
internet or other electronic means to facilitate the collection and analysis of
clinical and administrative data and the potential development of a
comprehensive health care database. The database is to combine information about
the cost and utilization of health care services rendered to patients of the
network. The information technology being monitored is designed to permit
immediate verification of the eligibility of patients for service under various
managed care health plans. The cost of linking us with the offices of certain
participating physicians and medical practice groups through information and
telecommunications systems will not result in any significant charges to us and
will likely cost participating physicians and medical practice groups monthly
fees. The exact amount of such fees will be dependent upon the type of services
desired by each physician and medical practice group.
Through analysis of data and appropriate sharing of pertinent information
with physicians, hospitals, patients, managed care plans and buyers of health
care services, our physicians should be able to reduce the risk of providing
unnecessary and inappropriate care. Equally important, these systems and
enhanced communications among providers, patients and purchasers, will improve
efforts to deliver quality service in a cost-effective manner and document
continuous improvements in health care service delivery and outcomes. The
information we desire to store in a database should allow participating
physicians systematically to develop and utilize clinical pathways and outcome
measurements and to address other quality-of-care issues. Although our
management views this strategy as important, it realizes that this strategy is a
long-term goal and not one that management believes will be achieved in the near
future.
4. ENHANCING THE MANAGEMENT AND PERFORMANCE OF PARTICIPATING PRACTICES.
We continue to expand the number of shared management services we offer to
our participating physicians. While we expect that our participating physicians
will continue to employ and directly supervise the various clinical, reception,
medical records and other support personnel required at each office site, we
believe that many other administrative-management services may be provided more
efficiently and on a cost-effective basis through centralized resources in the
network office.
To this end, we have developed and formed a group purchasing program
whereby participating physicians and medical practice groups may acquire
frequently utilized goods and services. Our main programs include professional
liability insurance, medical office supplies, radiology supplies, reference
laboratory services, telecommunications services and compliance with
Occupational Safety and Health Administration training. We continue to issue
requests-for-proposals for office supplies and other business services and
information systems. We also continue to expand our consulting services to
medical practice groups and physicians. These services include physician
recruitment, establishment of
21
cross coverage arrangements and creating a medical practice, opening a new
office, or combining or merging practices.
In conjunction with our strategic planning efforts, we may determine that
it would be advantageous from a marketing and/or service standpoint to sponsor
the establishment of strategically located care centers or physician offices in
locations which would help attract new customers and patients, or provide
enhanced access to services for existing patients. As appropriate, we will
undertake to facilitate efforts by the affiliated medical practices to recruit
and hire physicians directly to staff such sites.
MEDICAL SERVICES PROVIDER AGREEMENTS, STRUCTURE AND OWNERSHIP AND MANAGEMENT
MEDICAL SERVICES PROVIDER AGREEMENTS: Affiliated medical practice groups
and physicians are linked to us and each other through medical services provider
agreements. We contract with our participating physicians and affiliated medical
practice groups for the provision of medical services and the allocation of
revenues and expenses and, in turn, contracts with managed care health plans and
insurance companies for marketing and enrollment services. These agreements
obligate us to allocate revenues among participating physicians and medical
practice groups in accordance with agreed upon formulae and obligate the
physicians and medical practice groups to provide medical services and share
certain risks of covering the costs of health care services provided. In
addition, the medical services provider agreements may require participating
physicians and medical practice groups to participate in an administrative fee
assessment program.
STRUCTURE AND OWNERSHIP: We are a North Carolina business corporation
organized to provide administrative services only and not to provide medical
services. We are owned by medical practice groups and physicians who, directly
or indirectly, enter into medical services provider agreements with and become
our shareholders. A diagram of our structure and ownership and our relationships
with buyers of health care services and participating physicians and medical
practice groups is set forth below:
22
[CHART]
MEDICAL PRACTICE GROUP/ HEALTH PLANS
PHYSICIAN SHAREHOLDERS OTHER BUYERS OF HEALTH CARE SERVICES
- Permitted Risk Sharing and
Non-Risk Sharing Provider Agreements
ATLANTIC INTEGRATED HEALTH INCORPORATED
- Physician Board of Directors
- Physician Officers
- Lay Chief Operating Officer
- Lay Chief Financial Officer
- Committees
- Administrative Staff
- Management Information System
Non-Exclusive Medical Services
Provider Agreement
MEDICAL GROUP/PHYSICIAN MEDICAL GROUP/PHYSICIAN
- Own property and equipment
- Employ Support Staff
- Employment Agreement
Physician
We are owned by participating medical practice groups and physicians, as
depicted in the upper left corner of the diagram, and such shareholders have
elected the members of the Board of Directors, all of whom are physicians. As
depicted in the center box of the diagram, our officers are physicians, although
our Chief Operating Officer and Chief Financial Officer are lay persons
experienced in the operation of medical practice groups and managed care
systems.
Our Board of Directors has established a number of committees that are
advisory committees of the Board of Directors and oversee and recommend policies
and procedures concerning matters of general management, finance, marketing,
contracting, continuous quality improvement, utilization management and
management information systems. The members of such committees are primarily
physicians who are participants in our network, although other physicians and
lay persons may also be designated members of the committees.
We will negotiate and enter into agreements on behalf of participating
physicians and medical practice groups with health plans and other buyers of
health care services, as depicted in the upper right corner of the diagram. Such
health care services will be provided by participating physicians and
23
medical practice groups and their respective physicians and other licensed
professionals. The terms and provisions for the rendering of the health care
services, payment for such services, and the sharing, by the participating
physicians and medical practice groups, of the risk of covering the costs of
providing such health care services are included in the medical services
provider agreements, as depicted in the lower left corner of the diagram.
Physicians' employment relationships with their respective medical practice
groups will be maintained. The numbers of participating physicians, their
medical specialties and geographic locations, are determined by our Board of
Directors.
Our structure and ownership have been designed to avoid us and the
participating medical practice groups being deemed an "affiliated service
group," as defined under the Internal Revenue Code. Our Board of Directors has
structured us to avoid such "affiliated service group" designation and to enable
participating medical practice groups to continue their existing qualified
pension and profit sharing plans without any adverse tax consequences. The Board
of Directors believes that we and the participating medical practice groups will
not be an "affiliated service group" because (a) we are organized as a business
corporation; (b) our business is limited to providing administrative services
(and will not constitute practicing medicine); and (c) no individual physician
is permitted to own 5% or more of our outstanding capital stock. No assurance
can be provided, however, that the Internal Revenue Service or another
regulatory agency will not take the position that we, as we are structured,
owned and operated from time to time, will be an "affiliated service group."
MANAGEMENT: Because of the complex array of business activities that we
pursue, we have undertaken to retain qualified management personnel and
professional advisors to carry out the day-to-day work of managing the network.
The central network office is supervised by the Chief Operating Officer who was
selected by and is accountable to the Board of Directors. Our staff supports our
Board of Directors and committees; facilitates strategic planning regarding the
growth and development of network services; manages shared practice management
services provided or available to affiliated physicians; assists the network in
our efforts to obtain and manage risk contracts with managed care health plans
and other buyers of health care services; and is responsible for developing
management systems, including pro forma financial schedules to facilitate the
monitoring of revenues and expenditures incurred by the network.
In addition to the Chief Operating Officer, as our grows in size and
function, we will continue to develop our own staff with experience in such
areas as finance, marketing, health services/provider relations and management
information systems. The number and type of staff employed or retained will
evolve based on the size of the network, number of enrollees and patients served
and complexity of planning or management challenges.
We are still developing many of our business operations. As a result, we
contract with consultants to assure that the array of experience and expertise
necessary to expand the network successfully is readily available. We require
the on-going advice of attorneys, certified public accountants and consulting
actuaries.
PHYSICIAN SELECTION AND CREDENTIALING
To become one of our participating physician, each physician must complete
the credentialing process which meets or exceeds guidelines promulgated by the
NCQA. Credentialing criteria have been developed to assure the inclusion of
desired numbers of physicians, as identified by specialty and geographic
location, within the network; the compilation of information concerning the cost
and quality of services rendered by respective physicians; and the confirmation
by applicants of their willingness to
24
adhere to policies and procedures adopted by our Board of Directors. Each
participating physician is required to complete successfully our credentialing
process.
We have contracted with National Provider Credentialing Service, a
Virginia corporation, to accomplish primary source verification and
electronically catalogue the information contained on each physician's
credentialing application. We commenced our credentialing program in July 1996.
PHYSICIAN REIMBURSEMENT, PHYSICIAN PAYMENTS, RISK MANAGEMENT
The medical services provider agreement entered into by each physician and
medical practice group participating in our network is structured to provide
that:
* participating physicians and medical practice groups render required
and appropriate medical services to designated patients;
* payment for such medical services is to be made to participating
physicians and medical practice groups through programs determined
by the Board of Directors; and
* we coordinate and manage such provision of medical services, payment
for the medical services and the sharing of certain risk by the
participating physicians and medical practice groups related to the
cost of providing the required and appropriate medical services.
Designation of primary care physicians as "case managers" to coordinate patient
care will vary depending on the terms of the contracts entered into with buyers
of health care services.
We have worked with and will continue to engage a professional actuarial
firm to work with the Board of Directors to develop common fee schedules for our
network and to determine appropriate allocation of capitation. In the event
participating physicians and medical practice groups are paid on a
fee-for-service basis, we will endeavor to utilize a common fee schedule and, as
permitted and appropriate, will develop provisions for holding back a portion of
the fees paid to participating physicians and medical practice groups in a
contingency reserve fund. As determined by our Board of Directors and the terms
and conditions of specific managed care health plan contracts, a scheduled,
periodic accounting of managed care health plan expenses will be completed. The
monetary amounts "held back" will be returned to the participating physicians
and medical practice groups to the extent that the operating results permit. If
a surplus still remains after all amounts held back during the year from
payments otherwise due physicians have been returned, such surplus will be
allocated among participating physicians in accordance with criteria determined
by the Board of Directors.
The allocation of administrative assessments, revenues, sharing of risk,
operating reserve deficits or other reimbursement/compensation limitations
described herein may vary among medical practice groups and individual providers
within a medical practice group.
THE ATLANTIC MEDICAL MANAGEMENT INFORMATION SYSTEM
We continue to evaluate information systems to provide interactive health
services and management information as described below. Our management objective
is to provide participating physicians with access to appropriate data as
patient care is rendered and evaluated. It is contemplated that we and
participating medical practice groups will be linked electronically and that
information will be delivered and shared through electronic data interchange
("EDI") and a private intranet. No target date has been established for
implementation of such management information systems within our network.
25
The functions of core information systems selected are to include e-mail,
accounting applications, on-line verification of eligibility, database
collection and reporting, management of contracts, claims processing and
payment, referral authorization and statistical reporting. We and/or medical
practice groups will retain ownership of all data, information and reports
generated by and through the use of the information systems.
ADMINISTRATIVE FEE ASSESSMENT PROGRAM
The medical services provider agreement entered into by each participating
physician or medical practice group provides that we, in our sole discretion and
by determination of our Board of Directors, may require the participating
physicians and medical practice groups to provide financial support to help
defray our operating expenses. Consistent with this provision, we have the
authority to bill the participating physicians and medical practice groups or
retain from revenues paid to us administrative and management fees that are
equal to 3% of our "net revenues," as defined in the medical services providers
agreement. In addition, upon execution of the medical services provider
agreement, participating physicians and medical practice groups who are referral
specialists may be required to pay to us an initial administrative and
management fee up to $3,000 per referral physician.
COMPETITION
The health care market is extremely competitive and undergoing rapid
change. We and our affiliated physicians and medical practice groups compete
with individual physicians and medical practice groups, HMOs, PPOs,
physician-hospital organizations, integrated delivery systems and physician
practice management companies. Many of our competitors are significantly larger
and have substantially greater capital resources than us. We believe that the
principal competitive factors that will affect our ability to contract with
health plans and other buyers of health care services include achievement of
cost efficiencies through integrated operations, satisfaction of the needs of
target purchasers and achievement of superior customer/patient satisfaction.
GOVERNMENT REGULATION
Various state and federal laws regulate the relationships among providers
for the provision of physician and other health care services, and as a business
in the health care industry, we are subject to these laws and regulations. We
believe our operations are in material compliance with applicable laws; however,
we have not received any legal opinion from counsel or any advisory opinions
from regulators that our operations are in material compliance with applicable
laws. Many aspects of our business operations have not been the subject of state
or federal regulatory interpretation. Moreover, as a result of our providing
both physician practice management services and medical support services, we may
be the subject of more stringent review by the regulatory authorities. There can
be no assurance that a review of our or our affiliated physicians' businesses by
courts or regulatory authorities will not result in a determination that could
adversely affect our operations or the operations of our affiliated physicians
and medical practice groups. Moreover, no assurance can be provided that new and
more restrictive state or federal laws and regulations will not be enacted or
adopted.
The laws of many states prohibit business corporations such as us from
practicing medicine or employing physicians to practice medicine. Although the
State of North Carolina does not expressly prohibit the corporate practice of
medicine, it does require all persons practicing medicine to be licensed. We
perform only non-medical administrative services, does not represent to the
public or our clients that it offers medical services and does not exercise
influence or control over the practice of medicine by the physicians with whom
it contracts. Accordingly, we believe that it is not in violation of applicable
state
26
laws relating to the corporate practice of medicine. However, the laws in most
states, including the State of North Carolina, regarding the corporate practice
of medicine have been subjected to limited judicial and regulatory
interpretation; therefore, no assurances can be given that our activities will
be found to be in compliance, if challenged.
Federal and state laws regulate the relationships among providers of
health care services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the soliciting or receiving, or the offering or payment of remuneration, either
directly or indirectly, in return for or to induce a referral of items or
services for federal health care program patients including, among other
patients, Medicare and Medicaid patients. Federal and state statutes impose
restrictions on physician referrals of designated health services to entities
with which the physician has a financial relationship. These laws and applicable
regulations also regulate the submission of claims for the reimbursement of
physician services, or for services incident to those services, provided under
federal health care programs that are false or fraudulent. Violations of these
laws may result in substantial civil and criminal penalties, including civil
monetary penalties, exclusion from the participation in federal health care
programs, including, among other programs, the Medicare and Medicaid programs,
loss of licensure to practice medicine and other penalties. Such exclusion and
penalties, if applied to our affiliated medical practice groups, could have an
adverse effect on us.
Extensive procedural and substantive changes to fraud and abuse and
reimbursement related provisions of federal law were enacted as part of the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the
Balanced Budget Act of 1997 ("BBA"). In part, the changes provided new funding
and other incentives to encourage more vigorous enforcement of existing law. In
addition, new criminal and civil penalty provisions were added, existing
requirements and penalties were extended to additional federal programs, and
changes were made to mandatory and permissive exclusion provisions. New criminal
violations relating to "health care fraud" and "federal health care offense"
were defined. New civil monetary penalties were added for actions such as
patterns of incorrect coding or billing for unnecessary services, offering
inducements to beneficiaries to obtain services from a particular provider, and
for contracting with, or employing, an individual who is excluded from
participation in a federal health care program. During 1998 alone, HIPAA and BBA
also have resulted in a very substantial number of proposed and final rules,
advisory opinions and other notifications.
Certain provisions of state and federal statutes, commonly referred to as
the "anti-kickback laws," prohibit the offer, payment, solicitation or receipt
of any form of remuneration either in return for the referral of patients, or in
return for the recommendation, arrangement, purchase, lease or order of items or
services that are covered by a "federal health care program." For purposes of
the anti-kickback law, a "federal health care program" includes the Medicare and
Medicaid programs and any other plan or program that provides health benefits
which are funded directly, in whole or in part, by the United States Government.
The anti-kickback laws are broad in scope and have been broadly interpreted by
courts in many jurisdictions. Read literally, the statutes place at risk many
otherwise legitimate business arrangements, potentially subjecting such
arrangements to lengthy, expensive investigations and prosecutions initiated by
federal and state governmental officials.
The federal government has published several final and proposed
regulations for the creation of certain "safe harbors" from prosecution under
the federal anti-kickback law, but some of our operations do not satisfy the
requirements for any of the "safe harbor" exemptions. We believe, however, that
in the conduct of our contemplated business operations we will not be in a
position to make or influence the referral of patients for goods or services and
that such business operations will not constitute or generate any violation of
state or federal anti-kickback laws. To the extent we are deemed by state or
federal authorities to be a separate provider of health care services, making
referrals to or receiving referrals
27
from physicians or medical practice groups through our Non-Exclusive Medical
Provider Agreements, the financial arrangement under such agreements could be
subject to scrutiny and prosecution under the anti-kickback laws. Violation of
the anti-kickback laws is a felony, punishable by fines up to $25,000 per
violation and imprisonment for up to five years. In addition, the Department of
Health and Human Services may impose civil penalties, including excluding
violators from participation in federal health care programs, and other criminal
and civil penalties may be imposed pursuant to applicable state laws.
Significant prohibitions against physician referrals were enacted, subject
to certain exemptions, by Congress in the Omnibus Budget Reconciliation Act of
1993. These prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the field
of physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995 and subject to certain exemptions,
Stark II prohibits a physician or a member of the physician's immediate family
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest,
or with which the physician has entered into a compensation arrangement. The
designated health services include the provision of clinical laboratory
services, radiology, radiation therapy services and supplies, physical and
occupational therapy services, durable medical equipment and supplies,
parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics
and prosthetic devices and supplies, outpatient prescription drugs, home health
services and inpatient and outpatient hospital services. The penalties for
violation of Stark II include a prohibition on Medicaid and Medicare
reimbursement and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." Since we
provide administrative services only and not any "designated health services" or
other health services, our management believes that our business operations do
not generate any violations of the Stark legislation. While we believe we are in
compliance with the Stark legislation, future regulations could require us to
modify the form of our relationships with the affiliated physician groups. For
example, proposed regulations implementing the Stark II laws were issued in
January 1998, but have yet to be finalized. Moreover, the violation of the Stark
legislation by any of our affiliated medical practice groups could result in
significant fines and loss of reimbursement which would adversely affect us.
Many states have adopted similar prohibitions against payments intended to
induce referrals of Medicaid and other patients. The State of North Carolina has
enacted statutes which prohibit the payment of fees to induce referrals and
prohibit referrals of patients by health care providers for certain designated
health care services to entities in which the health care provider or group
practice or any member of the group practice has an investment interest.
Sanctions which may be imposed for violations of such statutes include
discipline by the applicable professional licensing board, suspension or
revocation of the offending provider's license and substantial civil money
penalties. While we believe it will be in compliance with such state laws, the
existing or future laws or regulations could require us to modify the form of
our relationships with the affiliated physician groups.
Laws in all states regulate the business of insurance and the operation of
HMOs. The laws and regulations of the State of North Carolina, as interpreted by
the state's Department of Insurance, permit physician organizations, such as us,
to enter into risk sharing contracts only with licensed entities such as HMOs.
Although we currently do not have any risk sharing contracts, we may enter into
such contracts in the future and at such time may be subject to the HMO statute.
A physician organization may also become subject to regulation as a PPO or a
URO. Although our management believes that our current operations fall outside
of the oversight of the DOI, no assurance can be provided, that our structure
and operation and the structure and operation of our affiliated medical practice
groups will not be challenged by the DOI or other regulatory agencies. Any such
challenge and any requirements that we restructure our operations or qualify for
an insurance license could have a material effect on our operations.
28
EMPLOYEES
As of May 15, 1999, we had six full-time employees, including the Chief
Operating Officer. We are not subject to any collective bargaining agreements
and we believe that our employee relations are good. In addition, we recently
hired P. Wayne Williams to serve as the President and Chief Operating Officer of
our wholly owned subsidiary, The Beacon Company. Mr. Williams is scheduled to
start work on June 15, 1999.
FACILITIES
Our offices are located at 1315 S. Glenburnie Road, Suite A5, New Bern,
North Carolina 28562. We initially signed a one-year lease for approximately
1,300 square feet at an aggregate monthly rent of approximately $805 (including
association fees). We are currently leasing this space on a month by month
basis.
LEGAL PROCEEDINGS
We are not involved in any legal proceedings considered by us to be
material.
29
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers as of May 15, 1999 are as follows:
Name Age Position
---- --- --------
J. Philip Mahaney, Jr., M.D. 53 President and Chief Executive Officer
and Director*
John P. Emerick, M.D. 49 Treasurer and Director**
W. James Stackhouse, M.D. 49 Chairman of the Board and Director*
Robert H. Blake, III 40 Chief Operating Officer
Stephen W. Nuckolls 31 Chief Financial Officer
Michael L. Bramley, M.D. 51 Vice President and Director*
Charles J. Baio, M.D. 48 Director*
Graham A. Barden, III, M.D. 43 Director*
Mark N. Dumas, M.D. 47 Director*
A. Clark Gaither, M.D. 44 Director*
Frank L. Gay, M.D. 38 Director***
Robert A. Krause, M.D. 50 Director*
Edwin P. Little, M.D. 44 Director*
Michael J. Lobos, M.D. 39 Director**
Robert S. Meyer, M.D. 51 Secretary and Director*
Alice P. Selden, M.D. 46 Director**
Leo E. Waivers, M.D. 46 Director*
Daniel Whitley, Jr., M.D. 47 Director**
John A. Williams, III, M.D. 41 Director**
Kerry A. Willis, M.D. 39 Director*
- ----------------------------
30
* Primary Director
** Referral Director
*** OB/GYN Director
J. PHILIP MAHANEY, JR., M.D. has served as President and Chief Executive
Officer of Atlantic since March 1996 and has served as a director of Atlantic
since December 1994. He is a family practice physician with Coastal Carolina
Health Care, P.A., a medical practice group located in New Bern, North Carolina.
Dr. Mahaney also serves as the Treasurer of Coastal Carolina Health Care, P.A.
JOHN P. EMERICK, M.D. has served as a director of Atlantic since August
1997. He is a self-employed psychiatrist in Morehead City, North Carolina where
he has worked since 1995. Dr. Emerick completed his psychiatric residency in
1979 and maintained a practice in Columbia, South Carolina prior to moving to
Morehead City. Dr. Emerick also serves as medical director of Companion Benefit
Alternatives, a division of Blue Cross and Blue Shield of South Carolina.
W. JAMES STACKHOUSE, M.D. has served as the Chairman of the Board of
Directors of Atlantic since April 1998. Prior to becoming Chairman, he served as
the Treasurer of Atlantic from November 1996 to April 1998. He is a physician
practicing internal medicine with Goldsboro Medical Specialists, P.A., a medical
practice group located in Goldsboro, North Carolina. Dr. Stackhouse has been a
physician with Goldsboro Medical Specialists, P.A. since 1981.
ROBERT H. BLAKE, III has been the Chief Operating Officer of Atlantic
since June 1996. From February 1994 to June 1996, he served as Assistant Vice
President, Managed Care Services of Acordia National, Inc., a health insurance
services company in Charleston, West Virginia. From July 1992 to June 1996, he
served as President of The Greenbrier Study Group, a health care consulting firm
in Charleston, West Virginia. From July 1993 to February 1994, Mr. Blake served
as a Managed Care Network and Provider Sponsored Health Plan Developer for
Newbridge, Inc./Health Economics Corporation.
STEPHEN W. NUCKOLLS has been the Chief Financial Officer of Atlantic since
April 1997. He also serves as the Chief Operating Officer of Coastal Carolina
Health Care, PA., a medical practice group located in New Bern, North Carolina.
From September 1995 to July 1996, Mr. Nuckolls served as Chief Financial Officer
of Blue Ridge Primary Care, Inc., an integrated medical group of over 120
physicians based in Roanoke, Virginia which subsequently merged with the
Carilion Health System. From May 1990 to September 1995, Mr. Nuckolls was
employed by McGladrey & Pullen, LLC, an international accounting and consulting
firm.
MICHAEL L. BRAMLEY, M.D. has served as Vice President of Atlantic since
November 1996 and as a director of Atlantic since October 1996. He is a
practicing pediatrician with Greenville Pediatrics, P.A., a medical practice
group located in Greenville, North Carolina. Dr. Bramley has been with
Greenville Pediatrics, P.A. since 1976 and also serves as Secretary of
Greenville Pediatrics, P.A.
CHARLES J. BAIO, M.D. has served as a director of Atlantic since April
1997. He practices internal medicine with Wilson Medical Associate, P.A., in
Wilson, North Carolina. Dr. Baio has practiced medicine since 1984.
GRAHAM A. BARDEN, III, M.D. FAAP has served as a director of Atlantic
since April 1997. He is a practicing pediatrician with Coastal Childrens'
Clinic, Inc., a pediatric practice group located in New
31
Bern, North Carolina. Dr. Barden has been a pediatrician with Coastal Childrens'
Clinic, Inc. since 1986.
MARK N. DUMAS, M.D. has served as a director of Atlantic since November
1998. He practices internal medicine with Kinston Medical Specialists, P.A., in
Kinston, North Carolina where he has worked since 1986.
A. CLARK GAITHER, M.D. has served as a director of Atlantic since June
1995. He is a practicing physician with Goldsboro Family Physicians, P.A., a
medical practice group located in Goldsboro, North Carolina. He also serves as
President of Goldsboro Family Physicians, P.A. and has practiced medicine with
Goldsboro Family Physicians, P.A. since 1992.
FRANK L. GAY, M.D. has served as a director of Atlantic since June 1997.
He has practiced obstetrics/gynecology with Greenville Obstetrics and
Gynecology, a division of Physicians East, P.A., a medical practice group
located in Greenville, North Carolina for over three years. Prior to joining
this group, Dr. Gay served as a staff Obstetrician/Gynecologist for the United
States Air Force for four years.
ROBERT A. KRAUSE, M.D. has served as a director of Atlantic since December
1994. He is a self-employed family practitioner. He has served in such a
capacity since 1989.
EDWIN P. LITTLE, M.D. has served as a director of Atlantic since November
1998. He has practiced family medicine in Pink Hill, North Carolina since 1983.
He was self-employed until he joined Kinston Medical Specialists, P.A. in 1996.
MICHAEL J. LOBOS, M.D. has served as a director of Atlantic since October
1998. He has practiced urology with Washington Urological Associates, P.A.
located in Washington, North Carolina since 1992.
ROBERT S. MEYER, M.D. has served as Secretary and as a director of
Atlantic since March 1996. Dr. Meyer is a self-employed family practice
physician. Dr. Meyer has practiced family medicine since 1978. Dr. Meyer is the
Chairman of the Board and Medical Director for Home Health and Hospice CARE,
Inc., a non-profit home health agency headquartered in Goldsboro, North
Carolina.
ALICE P. SELDEN, M.D. has served as a director of Atlantic since November
1997. She practices general surgery with Johnston Surgical Associates, P.A., a
medical practice located in Smithfield, North Carolina. Dr. Selden has practiced
general surgery in Smithfield since 1986.
LEO E. WAIVERS, M.D. has served as a director of Atlantic since October
1996. He practices general internal medicine with Greenville Internal Medicine,
P.A., a medical practice group located Greenville, North Carolina. He serves as
President of Greenville Internal Medicine, P.A. and has practiced internal
medicine with Greenville Internal Medicine, P.A. since 1991.
DANIEL WHITLEY, JR., M.D. has served as a director of Atlantic since
August 1997. He is a practicing otolaryngologist with Goldsboro ENT Associates,
P.A. where he has practiced since completing his residency in 1988.
JOHN A. WILLIAMS, III, M.D. has served as a director of Atlantic since
August 1997. He is a practicing cardiologist with Heart Center Cardiology, a
medical practice group located in New Bern, North Carolina. Prior to founding
his practice in 1994, Dr. Williams served as a lieutenant commander
32
for four years in the United States Navy Reserve Medical Corps in the
Cardiovascular Disease Division at the National Naval Medical Center in
Bethesda, Maryland.
KERRY A. WILLIS, M.D. has served as a director of Atlantic since December
1994 and the Chairman of the Board of Directors of The Beacon Company (a wholly
owned subsidiary of Atlantic) since April 1998. From March 1996 to April 1998,
Dr. Willis served as Chairman of the Board of Directors of Atlantic, and from
December 1994 to March 1996 as Vice President of Atlantic. He is a family
practice physician with East Carteret Family Medicine, P.A., a medical practice
group located in Beaufort, North Carolina. In addition, Dr. Willis serves as the
President of East Carteret Family Medicine, P.A.
COMPOSITION OF THE BOARD OF DIRECTORS
Our Board of Directors currently consists of 18 members, 12 of whom are
Primary Care Directors (as defined below), five of whom are Referral Directors
(as defined below), and one of whom is an OB/GYN Director (as defined below).
Pursuant to our Bylaws, as amended, at least 62.5%, but no more than 70% of the
members of our Board of Directors must be Primary Care Physicians (the "Primary
Care Directors"). Our Bylaws define Primary Care Physicians as physicians who
practice substantially (75% or more as determined by gross practice revenues) in
one or more of the primary care specialties of family practice, general internal
medicine, general pediatrics or general practice ("Primary Care Specialties");
are generally not board certified in any specialty other than a Primary Care
Specialty; and, if board certified in any other specialty other than a Primary
Care Specialty, generally do not hold themselves out as practicing in any
specialty other than the Primary Care Specialties. In addition, our Bylaws, as
amended, provide that at least one (1) of every ten (10) members of the Board of
Directors shall be a physician practicing solely in the medical specialty of
obstetrics and gynecology (the "OB/GYN Director(s)"). The remainder of our board
of directors must be physicians who practice primarily in referral medical and
surgical specialties other than the Primary Care Specialties (the "Referral
Directors").
CLASSIFIED BOARD OF DIRECTORS
Our Board of Directors consists of three classes as nearly equal in number
as possible with the directors in each class having terms of three years. The
staggered board was created in November 1997 and is being phased in as follows:
one class elected for a one-year term; the second class was elected for a
two-year term; and the third class will be elected for a three-year term. The
directors assigned to each class, and the division into classes were determined
by the majority vote of our Board of Directors at a meeting of the Board of
Directors held in November 1997. At each annual meeting, all directors filling
seats of directors with expired terms (whether re-elected or replacing another
director) will be elected for three-year terms. In November 1998, the following
directors were elected to the following terms:
DIRECTORS ELECTED FOR THREE-YEAR TERMS EXPIRING IN 2001
J. Philip Mahaney, Jr., M.D.
Alice P. Seldon, M.D.
Leo E. Waivers, M.D.
Mark N. Dumas, M.D.
Edwin P. Little, M.D.
Michael J. Lobos, M.D.
33
DIRECTORS NOT STANDING FOR ELECTION WHOSE TERMS EXPIRE IN 1999
Charles J. Baio, M.D.
Michael I. Bramley, M.D.
A. Clark Gaither, M.D.
Frank I. Gay, M.D.
W. James Stackhouse, M.D.
John A. Williams, III, M.D.
DIRECTORS NOT STANDING FOR ELECTION WHOSE TERMS EXPIRE IN 2000
Graham A. Barden, III, M.D.
John P. Emerick, M.D.
Robert A. Krause, M.D.
Robert S. Meyer, M.D.
Daniel Whitley, Jr., M.D.
Kerry A. Willis, M.D.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has established six committees: an Executive
Committee, a Nominating Committee, a Network Committee, a Medical Management
Committee, a Finance Committee and a Compensation Committee. The current members
of the Executive Committee are Drs. Michael L. Bramley, J. Philip Mahaney, Jr.,
Robert S. Meyer, M.D., W. James Stackhouse and Kerry A. Willis. The members of
the Executive Committee will also serve as members of the Nominating Committee.
The Network Committee is composed of Dr. A. Clark Gaither and Leo E. Waivers.
The Medical Management Committee is composed of Drs. Robert S. Meyer and Michael
L. Bramley, and the Finance Committee is composed of Drs. W. James Stackhouse,
Ronald A. Moore and Joseph W. Ponzi. The Compensation Committee is composed of
Drs. Joseph E. Agsten, W. James Stackhouse and Leo E. Waivers. The Board of
Directors is in the process of formally appointing new members to these
committees in order to obtain appropriate composition of Referral and Primary
Care physicians.
The Executive Committee reviews and discusses proposals and makes
recommendations to the Board of Directors and has the authority to take certain
actions on behalf of the Board of Directors between meetings of the Board of
Directors. The Network Committee has certain responsibilities and authority
concerning medical provider network development, and the Medical Management
Committee has certain responsibilities and authority concerning utilization
management and quality assurance matters. The Finance Committee has certain
responsibilities and authority concerning managed care contracts, reimbursement
schedules, financial risk sharing models and other financial matters. The
Compensation Committee makes recommendations to the Board concerning
compensation to be paid to the Company's officers and directors.
DIRECTOR COMPENSATION
Our Chairman of the Board of Directors, W. James Stackhouse, M.D.,
received $16,000 during 1998 in compensation for his services to the Board from
the time of his election in April 1998. Kerry A. Willis, M.D., our former
Chairman of the Board of Directors and the current Chairman of the Board of
Directors of The Beacon Company, received $24,000 during 1998 in compensation
for his services as
34
Chairman of the Board of Atlantic through April 1998 and as Chairman of The
Beacon Company from April 1998 through December 1998. No other members of our
Board of Directors currently receive compensation for their service on the
Board. They may be reimbursed by us for any out-of-pocket expenses incurred in
connection with their service on the Board.
In February 1999, the Board implemented a policy designed to compensate
shareholder and other physicians for their time and effort devoted to the
organization. While no compensation other than direct expenses will be paid by
us or The Beacon Company for attendance at Board or committee meetings, we will
compensate physicians at a rate of $75.00 per hour for performing services on
behalf of us or Beacon outside of such meetings.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for the
fiscal years ended December 31, 1997 and 1998 awarded to or earned by our Chief
Operating Officer and our President and Chief Executive Officer. Other than the
Chief Operating Officer, none of our executive officers earned over $100,000 in
the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND ---------------------
PRINCIPAL POSITION YEAR SALARY BONUS
------------------ ---- ------ -----
J. Philip Mahaney, Jr., M.D. 1998 $24,000 $ 0
PRESIDENT AND CHIEF EXECUTIVE OFFICER 1997 24,000 0
Robert H. Blake, III 1998 96,000 15,000
CHIEF OPERATING OFFICER 1997 96,000 0
(1) Dr. Mahaney has served as our President and Chief Executive Officer since
March 1996.
OPTIONS
No options have been granted to executive officers since our inception.
EMPLOYMENT AGREEMENT
On June 1, 1996, we entered into an employment agreement with Robert H.
Blake, III under which Mr. Blake agreed to serve as our Chief Operating Officer.
The initial term of the agreement expired on December 31, 1996 and contained
provisions providing for the maintenance of confidentiality of our proprietary
information. We and Mr. Blake have orally extended the term of the agreement
beyond December 31, 1996 for an indefinite period. Effective January 1, 1999 the
Board of Directors increased Mr. Blake's base salary to $99,840.
35
CERTAIN TRANSACTIONS
All shareholders of our Primary Class Common Shares and the Referral Class
Common Shares are required to enter into, or practice medicine through a medical
practice group that has entered into, a medical services provider agreement with
us. Correspondingly, each member of the Board of Directors has entered into or
has agreed to enter into or practices medicine through a medical practice group,
of which he or she is a shareholder, which has entered into or has agreed to
enter into, a medical services provider agreement. In addition, upon execution
of the medical services provider agreement, participating physicians and medical
practice groups who are referral specialists are required to pay to us an
initial administrative and management fee up to $3,000 per referral physician.
As of the date hereof, it is not possible to determine the amount which will be
paid to the respective physicians or medical practice groups pursuant to the
terms of the medical services provider agreement.
In January 1997, we entered into a written lease with New Bern Family
Practice Center, P.A., of which Dr. Mahaney, our President and Chief Executive
Officer, is a shareholder and Treasurer. The lease expired December 31, 1997 and
was extended on a month-to-month basis to May 1998. Monthly rent was
approximately $520.00. Prior to this arrangement, we occupied the space rent
free pursuant to an oral lease entered into in March 1996. In May 1998, we moved
our offices to 1315 S. Glenburnie Road, Suite A5, New Bern, North Carolina
28562.
36
PRINCIPAL SHAREHOLDERS
The following tables set forth certain information regarding the
beneficial ownership of our Primary Class Common Shares, Referral Class Common
Shares and Nonprofit Class Nonvoting Common Shares, respectively, as of May 15,
1999 for (i) each person known by us to beneficially own more than 5% of any
class of the shares of our capital stock, (ii) each executive officer named in
the Summary Compensation Table, (iii) each of our directors, and (iv) all of our
directors and executive officers as a group. Shares not outstanding but deemed
beneficially owned by virtue of the right of an individual or group to acquire
them within 60 days are treated as outstanding only when determining the amount
and percentage owned by such individual or group. Unless otherwise noted, each
person or group identified has sole voting and investment power with respect to
the shares of capital stock shown.
PRIMARY CLASS COMMON SHARES
PRIMARY
CLASS COMMON SHARES
BENEFICIALLY OWNED(1)(2)
------------------------------
NAME AMOUNT PERCENT OF CLASS(3)
- --------------------------------------------- ------ -------------------
J. Philip Mahaney, Jr., M.D.................. 2,000 *
Robert H. Blake, III......................... 0 *
Charles J. Baio, M.D......................... 2,000 *
Graham A. Barden, III M.D.................... 2,000 *
Michael L. Bramley, M.D...................... 2,000 *
Mark N. Dumas, M.D. ......................... 2,000 *
John P. Emerick, M.D......................... 0 *
A. Clark Gaither, M.D........................ 2,000 *
Frank L. Gay, M.D............................ 0 *
Robert A. Krause, M.D........................ 2,000 *
Edwin P. Little, M.D. ....................... 2,000 *
Michael J. Lobos, M.D. ...................... 0 *
Robert S. Meyer, M.D......................... 2,000 *
Alice P. Selden, M.D......................... 0 *
W. James Stackhouse, M.D..................... 2,000 *
Leo E. Waivers, M.D.......................... 2,000 *
Daniel Whitley, Jr., M.D..................... 0 *
John A. Williams, III, M.D................... 0 *
Kerry A. Willis, M.D......................... 2,000 *
All directors and executive
officers as a group.......................... 24,000 7.7%
(20 persons)
- ------------------------------
* Less than 1% of the issued and outstanding Primary Class Common Shares.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or member of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned
by such person or group.
37
(2) Unless otherwise noted, all of the shares shown are held by individuals or
entities possessing sole voting and investment power with respect to such
shares.
(3) Based on 312,500 Primary Class Common Shares outstanding as of May 15,
1999.
REFERRAL CLASS COMMON SHARES
REFERRAL CLASS COMMON SHARES
BENEFICIALLY OWNED(1)(2)
------------------------------
NAME AMOUNT PERCENT OF CLASS(3)
- --------------------------------------------- ------ -------------------
J. Philip Mahaney, M.D....................... 0 *
Robert H. Blake, III......................... 0 *
Charles J. Baio, M.D......................... 0 *
Graham A. Barden, III, M.D................... 0 *
Michael L. Bramley, M.D...................... 0 *
Mark N. Dumas, M.D. ......................... 0 *
John P. Emerick, M.D......................... 2,000 *
A. Clark Gaither, M.D........................ 0 *
Frank L. Gay, M.D............................ 2,000 *
Robert A. Krause, M.D........................ 0 *
Edwin P. Little, M.D. ....................... 0 *
Michael J. Lobos, M.D. ...................... 2,000 *
Robert S. Meyer, M.D......................... 0 *
Alice P. Selden, M.D......................... 2,000 *
W. James Stackhouse, M.D..................... 0 *
Leo E. Waivers, M.D.......................... 0 *
Daniel Whitley, Jr., M.D..................... 2,000 *
John A. Williams, III, M.D................... 2,000 *
Kerry A. Willis, M.D......................... 0 *
All directors and executive
officers as a group.......................... 12,000 2.6%
(20 persons)
- -----------------------------
* Less than 1% of the issued and outstanding Referral Class Common Shares.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or member of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned
by such person or group.
(2) Unless otherwise noted, all of the shares shown are held by individuals
possessing sole voting and investment power with respect to such shares.
(3) Based on 454,000 Referral Class Common Shares outstanding as of May 15,
1999.
38
NONPROFIT CLASS NONVOTING COMMON SHARES
NONPROFIT CLASS NONVOTING COMMON
SHARES BENEFICIALLY OWNED(1)(2)
--------------------------------
NAME AMOUNT PERCENT OF CLASS(3)
- --------------------------------------------- ------ -------------------
Rural Health Group, Inc.(4).................. 2,000 44.5%
Aurora Medical Center(5)..................... 2,500 55.5%
J. Philip Mahaney, M.D....................... 0 *
Robert H. Blake, III......................... 0 *
Charles J. Baio, M.D......................... 0 *
Graham A. Barden, III, M.D................... 0 *
Michael L. Bramley, M.D...................... 0 *
Mark N. Dumas, M.D. ......................... 0 *
John P. Emerick, M.D......................... 0 *
A. Clark Gaither, M.D........................ 0 *
Frank L. Gay, M.D............................ 0 *
Robert A. Krause, M.D........................ 0 *
Edwin P. Little, M.D. ....................... 0 *
Michael J. Lobos, M.D. ...................... 0 *
Robert S. Meyer, M.D......................... 0 *
Alice P. Selden, M.D......................... 0 *
W. James Stackhouse, M.D..................... 0 *
Leo E. Waivers, M.D.......................... 0 *
Daniel Whitley, Jr., M.D..................... 0 *
John A. Williams, III, M.D................... 0 *
Kerry A. Willis, M.D......................... 0 *
All directors and executive
officers as a group.......................... 0 *
(20 persons)
- -----------------------------
* Less than 1% of the issued and outstanding Nonprofit Class Nonvoting
Common Shares.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or member of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned
by such person or group.
(2) Unless otherwise noted, all of the shares shown are held by individuals or
entities possessing sole voting and investment power with respect to such
shares.
(3) Based on 4,500 Nonprofit Class Nonvoting Common Shares outstanding as of
May 15, 1999.
(4) Rural Health Group, Inc.'s principal address is P.O. Box 644, Jackson,
North Carolina 27845.
(5) The principal address of Aurora Medical Center, a division of Beaufort
County Hospital, is P.O. Box 639, Aurora, North Carolina 27806.
39
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 1,000,000 Primary Class Common
Shares, par value $1.00 per share, 1,800,000 Referral Class Common Shares, par
value $1.00 per share and 200,000 Nonprofit Class Nonvoting Common Shares, par
value $1.00 per share. Prior to July 1996, our authorized capital stock
consisted of 100,000 shares of common stock, $1.00 par value per share. In
August 1996, after we amended and restated our Articles of Incorporation to
reflect our current capital structure, the shares of common stock previously
issued and outstanding were canceled and re-issued as either Primary Class
Common Shares, Referral Class Common Shares or Nonprofit Class Nonvoting Common
Shares, as the case may be, depending upon the qualifications of the existing
shareholders.
PRIMARY CLASS COMMON SHARES
As of May 15, 1999, there were 312,500 Primary Class Common Shares issued
and outstanding, held by 159 holders of record. All of the issued and
outstanding Primary Class Common Shares are fully paid and nonassessable.
Pursuant to our Amended and Restated Articles of Incorporation, we may
issue Primary Class Common Shares only to Primary Care Physicians, which are
defined in our Bylaws, as amended, as physicians who practice substantially (75%
or more as determined by gross practice revenues) in one or more of the primary
care specialties of family practice, general internal medicine, general
pediatrics or general practice ("Primary Care Specialties"); are generally not
board certified in any specialty other than a Primary Care Specialty; and, if
board certified in any other specialty other than a Primary Care Specialty,
generally do not hold themselves out as practicing in any specialty other than
the Primary Care Specialties, and, until August 31, 1997, to practice groups
(partnerships, professional corporations or professional limited liability
companies) engaged primarily in the provision of services of Primary Care
Physicians, which physicians, either directly or through a practice group, or
practices, have contracted with us to provide medical and other health care
services through contracts negotiated by us.
The holders of the Primary Class Common Shares are entitled to one vote
for each share held of record on all matters submitted to a vote of the
shareholders. In addition, the holders of the Primary Class Common Shares are
entitled to vote as a group with special voting requirements on:
* election of all Primary Care Directors;
* amendments to our Amended and Restated Articles of Incorporation
regarding classes of shares and the respective rights of such
classes;
* when a shareholder vote is required, approval of the sale or
transfer of all or substantially all of the assets of, or the
dissolution of, Atlantic;
* certain amendments to our Bylaws, as amended; and
* all matters on which such vote is required by the North Carolina
Business Corporation Act.
The vote of 65% of all of the issued and outstanding Primary Class Common
Shares and 65% of all of the issued and outstanding Referral Class Common Shares
is required to adopt amendments to our Amended and Restated Articles of
Incorporation regarding classes of shares and the respective rights of such
classes, and/or, if shareholder vote is required, to approve the sale or
transfer of all or substantially all of our assets.
40
The vote of 65% of all of the issued and outstanding Primary Class Common
Shares is required to elect Primary Care Directors, and the Primary Class Common
Shares are the only class of shares voting on the election of the Primary Care
Directors.
Holders of the Primary Class Common Shares are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. Holders of the Primary Class Common Shares have no
preemptive rights and no right to convert their Primary Class Common Shares into
any other securities. Upon any liquidation or dissolution of Atlantic, the
holders of the Primary Class Common Shares are entitled to share, pro rata, in
any distribution of our assets to shareholders.
REFERRAL CLASS COMMON SHARES
As of May 15, 1999, there were 454,000 Referral Class Common Shares
issued and outstanding, held by 227 holders of record. All of the issued and
outstanding Referral Class Common Shares are fully paid and nonassessable.
Pursuant to our Amended and Restated Articles of Incorporation, Referral
Class Common Shares will be issued only to physicians practicing primarily in
referral medical and surgical specialties other than Primary Care Specialties
and, until August 31, 1997, to practice groups (partnerships, professional
corporations or professional limited liability companies) engaged primarily in
the provision of services of physicians practicing primarily in such referral
medical and surgical specialties other than Primary Care Specialties, which
physicians, either directly or through a practice group, or practices, have
contracted with us to provide medical and other health care services through
contracts negotiated by us.
The holders of the Referral Class Common Shares are entitled to one vote
for each share held of record on all matters submitted to a vote of the
shareholders. In addition, the holders of the Referral Class Common Shares are
entitled to vote as a group with special voting requirements on:
* election of all Referral Directors and all OB/GYN Directors;
* adoption of amendments to our Amended and Restated Articles of
Incorporation regarding classes of shares and the respective rights
of such classes;
* when a shareholder vote is required, approval of the sale or
transfer of all or substantially all of our assets, or our
dissolution;
* amendment to certain provisions of our Bylaws, as amended; and
* all matters on which such vote is required by the North Carolina
Business Corporation Act.
The vote of 65% of all of the issued and outstanding Referral Class Common
Shares, and 65% of all of the issued and outstanding Primary Class Common Shares
is required to adopt amendments to our Amended and Restated Articles of
Incorporation regarding classes of shares and the respective rights of such
classes, and/or, when shareholder vote is required, to approve the sale or
transfer of all or substantially all of our assets or our dissolution. The vote
of 65% of all of the issued and outstanding Referral Class Common Shares are
required to elect Referral Directors and OB/GYN Directors and the holders of
Referral Class Common Shares are the only shareholders allowed to vote on the
election of Referral Directors and OB/GYN Directors.
Holders of the Referral Class Common Shares are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. Holders of the Referral
41
Class Common Shares have no preemptive rights and no right to convert their
Referral Class Common Shares into any other securities. Upon any liquidation or
dissolution of Atlantic, the holders of the Referral Class Common Shares are
entitled to share, pro rata, in any distribution of our assets to shareholders.
NONPROFIT CLASS NONVOTING COMMON SHARES
As of May 15, 1999, there were 4,500 Nonprofit Class Nonvoting Common
Shares issued and outstanding, held by two holders of record. All of the issued
and outstanding Nonprofit Class Nonvoting Common Shares are fully paid and
nonassessable.
Pursuant to our Amended and Restated Articles of Incorporation, Nonprofit
Class Nonvoting Common Shares will be issued only to nonprofit entities or
public (local, state or federal government) corporations engaged in the delivery
of health care services, which have contracted with us to provide medical or
other health care services through contracts negotiated by us.
The holders of the Nonprofit Class Nonvoting Common Shares are not
entitled to vote on any matters submitted to our shareholders. The Nonprofit
Class Nonvoting Common Shares otherwise have all rights of common shares
pursuant to the North Carolina Business Corporation Act. Holders of the
Nonprofit Class Nonvoting Common Shares are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Holders of the Nonprofit Class Nonvoting Common Shares have
no preemptive rights and no right to convert their Nonprofit Class Nonvoting
Common Shares into any other securities. Upon any liquidation or dissolution of
Atlantic, the holders of the Nonprofit Class Nonvoting Common Shares are
entitled to share, pro rata, in any distribution of our assets to shareholders.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION
Our Amended and Restated Articles of Incorporation provide our Board of
Directors with the power and authority to limit the liability of our directors
to the fullest extent permitted by the North Carolina Business Corporation Act.
Our directors will not be personally liable to us or otherwise for monetary
damages for breach of any duty as a director, except for liability with respect
to (i) acts or omissions that the director at the time of such breach knew or
believed were clearly in conflict with the best interests of us; (ii) dividends
or other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions; or (iii) any transaction from which the
director derived an improper personal benefit.
The North Carolina Business Corporation Act requires that we indemnify any
director who was wholly successful, on the merits or otherwise, in the defense
of any proceeding to which the director was a party because he or she was a
director of Atlantic against reasonable expenses incurred by the director in
connection with the proceeding. "Proceeding" means a threatened, pending, or
contemplated action, suit, or proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal. Reference is
made to the detailed provisions of Sections 55-8-50 through 55-8-58 of the North
Carolina Business Corporation Act for a complete statement of such
indemnification rights. Our Bylaws, as amended, also require us to provide
indemnification to any person who at any time serves or has served as a director
or officer of Atlantic, or at the request of us is or was serving as an officer,
director, agent, partner, trustee, administrator, or employee for any other
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise, to the fullest extent permitted by the North
Carolina Business Corporation Act. Our Bylaws, as amended, also permit our Board
of Directors, in our discretion, to provide such indemnification to our
employees and agents.
42
We maintain a directors and officers and errors and omissions insurance
policy, the maximum coverage of which is $1,000,000 per claim.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of Atlantic pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
CERTAIN ANTI-TAKEOVER PROVISIONS
The North Carolina Shareholder Protection Act, N.C. Gen. Stat. ss. 55-9-01
et seq. (the "Shareholder Protection Act"), which was enacted to provide fair
price protection for shareholders in two-tier takeovers, generally applies to
corporations that have a class of shares registered under Section 12 of the
Securities Exchange Act of 1934 and are organized under the laws of North
Carolina. The Shareholder Protection Act provides that any business combination
of a corporation with an entity owning more than 20% of the voting shares of the
corporation must be approved by 95% of the voting shares. A purchaser may avoid
the 95% voting requirement by complying with, among other things, (i) fair price
formula provisions of N.C. Gen. Stat. ss. 55-9-03; (ii) certain restrictions in
N.C. Gen. Stat. ss. 55-9-03 (pertaining to board representation and acquisition
of shares) on such purchaser's conduct between the time of acquisition of the
20% threshold voting interest in the corporation and the consummation of the
business combination, and (iii) the requirements set forth in N.C. Gen. Stat.
ss. 55-9-03 (relating to the solicitation of proxies).
The North Carolina Control Share Acquisition Act, N.C. Gen. Stat. ss.
55-9A-01 et seq. (the "Control Share Act"), the provisions of which are
generally applicable to corporations that have a class of shares registered
under Section 12 of the Securities Exchange Act of 1934 and are organized under
the laws of North Carolina, becomes operative when an acquiring person purchases
shares entitling such person to voting power equal to or greater than one-fifth,
one-third or one-half of all voting power of the issuing corporation ("Control
Shares"). A "Control Share Acquisition" means, with certain exceptions, the
acquisition by any person of Control Shares. Control Shares acquired in a
Control Share Acquisition shall not have voting rights unless such rights are
granted by resolution adopted by the shareholders of the corporation. To be
granted voting rights under an approved resolution, the resolution must
generally be adopted by the affirmative vote of at least a majority of all the
outstanding shares of the corporation (not including Interested Shares) entitled
to vote for the election of directors. "Interested Shares" means shares of the
corporation beneficially owned by (i) any person who has acquired or proposes to
acquire Control Shares in a Control Share Acquisition; (ii) any officer of the
corporation; or (iii) any employee of the corporation who is also a director of
the corporation. Before a vote on the resolution occurs, the shareholders must
be provided both with notice of and information about the Control Share
Acquisition, including a description of the right of redemption available to
shareholders. The right of redemption by shareholders of the corporation under
the Control Shares Act provides that if the Control Shares acquired in a Control
Share Acquisition are accorded voting rights and if the holders of the Control
Shares have a majority of all voting power for the election of directors, all
shareholders of the corporation (other than holders of Control Shares) have
rights to have their shares redeemed by the corporation at the fair value of the
shares. Fair value of the shares is determined as of the day prior to the date
on which the referenced shareholders meeting was held relating to the grant of
voting rights to the Control Shares, but in no event is it a value less than the
highest price paid per share by the acquiring person in the Control Share
Acquisition. This right of redemption is granted subject to the satisfaction of
certain requirements by the shareholder after receiving notice of the grant of
voting rights to the Control Shares.
43
Although we are governed by the North Carolina Business Corporation Act,
we are not subject to the anti-takeover provisions of the Shareholder Protection
Act and the Control Share Act. We have "opted-out" of these provisions pursuant
to an express provision in our Amended and Restated Articles of Incorporation.
"Opting-out" of these anti-takeover provisions could limit the price that
certain investors might pay in the future for shares of our capital stock.
Sections 2(a) and 2(b) of our Amended and Restated Articles of
Incorporation provide that the affirmative vote of 65% of all of the issued and
outstanding Primary Class Common Shares, voting as a separate group, and the
affirmative vote of 65% of all of the issued and outstanding Referral Class
Common Shares, voting as a separate group, are required for shareholder
approval, if necessary, of a transfer of all or substantially all of our assets.
Such a provision may impede a change of control. See "Risk Factors--Effect of
Certain Articles of Incorporation and Bylaw Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 856,500 Primary Class
Common Shares, 1,426,000 Referral Class Common Shares and 152,000 Nonprofit
Class Nonvoting Common Shares issued and outstanding, if the maximum number of
Shares offered hereby is sold. All purchasers of shares of our capital stock
already issued by us and all purchasers of the shares offered hereby have been
and will be required to enter into subscription and shareholder buy/sell
agreements, which restrict the sale of the shares of our capital stock and the
shares offered hereby and provide to us the right to repurchase such shares upon
certain purchase events at fair market value, as determined in the sole
discretion of our Board of Directors. Accordingly, so long as the buy/sell
provisions in the subscription and Shareholder Buy/Sell Agreement are in effect,
development of a trading market for any of the shares of our capital stock,
including the shares offered hereby is precluded. Consequently, there is
currently no public or private trading market for the shares offered hereby and
unless all of the buy/sell provisions in the subscription and shareholder
buy/sell agreements are terminated, there will continue to be no public or
private trading market for the shares. See "Risk Factors -- Lack of Public
Trading Market; Limitations on Transfer."
In the event, the buy/sell provisions in the subscription and shareholder
buy/sell agreements are terminated, then out of all of the issued and
outstanding shares of our capital stock, all of the shares sold in this offering
will be freely tradable without restriction under the Securities Act unless held
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 185,000 shares of our capital stock held by
existing stockholders are "restricted securities" under the Securities Act. The
shares, and any shares purchased by one of our affiliates, may not be sold
unless they are registered under the Securities Act or unless an exemption from
registration, such as an exemption provided by Rule 144 or 144(k) under the
Securities Act is available.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of us, who has beneficially
owned "restricted securities" for at least one year is entitled to sell in any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the number of shares of capital stock then outstanding or (ii)
the average weekly trading volume of the capital stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to certain other requirements
relating to manner of sale, notice of sale and availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
an affiliate of us at any time during the 90 days
44
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, is entitled to sell such shares without regard to the
limitations described above.
In addition, if the buy/sell provisions in the subscription and
shareholder buy-sell agreements are terminated, then upon completion of this
offering, 156,500 Primary Class Common Shares, 26,000 Referral Class Common
Shares and 2,500 Nonprofit Class Nonvoting Common Shares will become eligible
for sale in the public market pursuant to Rule 144(k).
PLAN OF DISTRIBUTION
The shares offered hereby are offered by our officers and directors on a
"best efforts" basis. Since December 30, 1996, we have sold an aggregate of
156,000 Primary Class Common Shares, 428,000 Referral Class Common Shares and
2,000 Nonprofit Class Nonvoting Common Shares. We will continue to offer shares
under this prospectus for a period of 210 days from the date of this prospectus.
We will not pay any selling commissions to any of our officers or directors in
connection with the offer and sale of the shares, although we may reimburse any
out-of-pocket expenses.
PHYSICIAN INVESTORS
We are offering for sale only to selected physicians who have completed
our credentialing process up to 544,000 Primary Class Common Shares and up to
972,000 Referral Class Common Shares at the purchase price of $1.00 per Share.
Upon qualification, selected physicians will be permitted to purchase 2,000
Primary Class Common Shares per primary care physician or 2,000 Referral Class
Common Shares per referral physician. Ownership of our Primary Class Common
Shares and Referral Class Common Shares is restricted and limited to assure that
no physician shareholder owns 5% or more of the outstanding shares of our
capital stock and that no collection of physician shareholders who practice
together in any participating medical practice group own 10% or more of the
outstanding shares of our capital stock. See "Risk Factors -- Affiliated Service
Group," "Business -- Medical Services Provider Agreements, Structure and
Ownership and Management" and "Plan of Distribution -- Subscription and
Shareholder Buy/Sell Agreement".
PHYSICIAN QUALIFICATIONS
The offering of the Primary Class Common Shares and the Referral Class
Common Shares is being made only to physicians who
* are licensed to practice medicine in the State of North Carolina,
* have been qualified by us to become a member of our network of
health care providers and
* have agreed to enter into, or practice medicine through a medical
practice group which has agreed to enter into, a medical services
provider agreement with us.
In addition, the offering of the Primary Class Common Shares is being made
only to physicians practicing substantially (75% or more as determined by gross
practice revenues) in one or more of the Primary Care Specialties, is generally
not board certified in any other specialty other than a Primary Care Specialty,
and if board certified in any other specialty other than a Primary Care
Specialty, generally does not hold himself or herself out as practicing in any
specialty other than one or more of the Primary Care Specialties. The offering
of the Referral Class Common Shares is being made to only to physicians
practicing primarily in referral medical and surgical specialties other than the
Primary Care Specialties.
45
NON-PROFIT/PUBLIC HEALTH CARE ENTITY INVESTORS
We are offering for sale only to selected non-profit or public
corporations engaged in the delivery of health care services through contracts
negotiated by us up to 148,000 Non-Profit Class Nonvoting Common Shares. Upon
qualification, selected non-profit or public corporations will be permitted to
purchase 2,000 Non-Profit Class Nonvoting Common Shares per non-profit or public
entity.
RESIDENCY REQUIREMENTS
Investment in the Primary Class Common Shares and Referral Class Common
Shares is limited to physicians who are bona fide residents of North Carolina or
such other state or jurisdiction in which the offering is either registered or
exempt from registration. Investment in the Nonprofit Class Nonvoting Common
Shares is limited to entities whose principal place of business is in North
Carolina or such other state or jurisdiction in which the offering is either
registered or exempt from registration.
SUBSCRIPTION AND SHAREHOLDER BUY/SELL AGREEMENTS
At the time of purchase, you will be required to execute and deliver to us
a subscription and shareholder buy/sell agreement and a check made payable to
"Atlantic Integrated Health Incorporated" for the aggregate purchase price of
the shares to be purchased. We reserve the right to reject any Subscription
Agreement for any reason. The following summary of the subscription agreements
are qualified in their entirety to the forms of such agreements included as
exhibits to the Registration Statement, of which this prospectus is a part.
There are three different forms of subscription agreements, one for each class
of shares. The subscription agreements contain standard investment
representations and specific representations as to physician qualifications.
In addition, the subscription agreements provide that we have the option
to repurchase the shares offered hereby at a price equal to the fair value
thereof, as determined as of the date that we exercise such option to repurchase
the shares. Fair value of the shares will be determined annually on or before
March 1 of each year by our Board of Directors. Our Board of Directors
determined that, because we had not completed the development of our corporate
and operating structures and had little operating revenue, the fair market value
of one Share as of July 1998 was equal to $.02.
We will have the right to exercise this option upon:
* the appointment by a court of competent jurisdiction of a receiver,
trustee or assignee of the Shareholder;
* the voluntary application by the shareholder under applicable laws
for the relief of debtors;
* the expiration of 30 days after entry of a final judgment by a court
of competent jurisdiction against the shareholder, provided such
judgment remains unsatisfied;
* the institution of a levy, garnishment or attachment involving the
shares;
* the death of the shareholder;
* the termination for any reason of the medical services provider
agreement entered into by the shareholder, either, directly or
indirectly;
* any involuntary transfer of such shares by or from the shareholder;
46
* the expressed desire of the Shareholder to sell, assign, pledge,
transfer or otherwise dispose of or encumber such shares; or
* our determination of the need to redeem shares to preclude
individual shareholders from owning 5% or more of the outstanding
shares of our capital stock or collections of physician shareholders
who practice together in any participating medical group practice
from owning 10% or more of the outstanding shares of our capital
stock.
VALIDITY OF SHARES
The validity of the issuance of the shares offered hereby has been passed
upon for us by Wyrick, Robbins, Yates & Ponton L.L.P., Raleigh, North Carolina.
EXPERTS
The financial statements included in this prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
47
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996.................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the Years Ended December 31, 1998, 1997 and 1996....................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Consolidated Balance Sheets as of March 31, 1999 and December 31,
1998 (Unaudited)....................................................... F-12
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).................................... F-13
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).................................... F-14
Notes to Consolidated Financial Statements (Unaudited).................... F-15
F-1
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlantic Integrated Health Incorporated and Subsidiary:
We have audited the accompanying consolidated balance sheets of Atlantic
Integrated Health Incorporated and Subsidiary (a North Carolina corporation) as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Integrated
Health Incorporated and Subsidiary as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has yet to generate revenue in
excess of expenses and has an accumulated deficit at December 31, 1998, of
$472,849, which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
/s/ Arthur Andersen LLP
Charlotte, North Carolina,
March 12, 1999.
F-3
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
-------------------------------- ----------- -----------
CURRENT ASSETS:
Cash $ 115,507 $ 101,776
Accounts receivable, less allowance for uncollectible accounts
of $5,000 in 1998 and 1997 64,934 30,505
Prepaid expenses 3,562 5,297
----------- -----------
Total current assets 184,003 137,578
INVESTMENT 0 1,000
OFFICE EQUIPMENT, net 6,803 9,322
DEFERRED COSTS 82,711 17,107
----------- -----------
$ 273,517 $ 165,007
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
--------------------------------
CURRENT LIABILITIES - Accounts payable $ 45,766 $ 24,761
----------- -----------
LONG-TERM DEBT - Convertible debenture and accrued interest 92,700 0
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
STOCKHOLDERS' EQUITY:
Common stock - $1 par value-
Primary class, authorized 1,000,000 shares; 302,500 and
292,500 shares issued and outstanding in 1998 and 1997,
respectively 302,500 292,500
Referral class, authorized 1,800,000 shares; 370,000 and
262,000 shares issued and outstanding in 1998 and 1997,
respectively 370,000 262,000
Nonprofit class, nonvoting, authorized 200,000 shares;
2,500 shares issued and outstanding in 1998 and 1997,
respectively 2,500 2,500
Additional paid-in capital 74,000 74,000
Syndication costs (105,000) (95,000)
Stock subscription and stockholder notes receivable (36,100) (49,885)
Accumulated deficit (472,849) (345,869)
----------- -----------
Total stockholders' equity 135,051 140,246
----------- -----------
$ 273,517 $ 165,007
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
REVENUE $ 283,413 $ 283,240 $ 58,927
----------- ----------- -----------
EXPENSES:
Consulting fees 21,063 135,717 72,664
Salaries and wages 291,410 251,803 85,799
Relocation expenses 0 0 8,013
Recruiting and education 12,196 6,781 13,472
Office expense and other 67,246 44,907 17,210
Rent 10,018 4,420 4,000
Interest 2,700 0 0
Depreciation and amortization 8,320 7,458 1,473
Provision for uncollectible accounts 0 5,000 0
----------- ----------- -----------
Total expenses 412,953 456,086 202,631
----------- ----------- -----------
OPERATING LOSS (129,540) (172,846) (143,704)
INTEREST INCOME 2,560 977 0
----------- ----------- -----------
NET LOSS $ (126,980) $ (171,869) $ (143,704)
=========== =========== ===========
NET LOSS PER BASIC COMMON SHARE $ (.20) $ (.41) $ (1.31)
BASIC AVERAGE COMMON SHARES OUTSTANDING 620,167 416,688 109,875
=========== =========== ===========
The accompanying notes to combined financial statements
are an integral part of these statements.
F-5
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
STOCK
COMMON STOCK ADDITIONAL SUBSCRIPTION
----------------- PAID-IN SYNDICATION AND STOCKHOLDER ACCUMULATED
SHARES AMOUNT CAPITAL COSTS NOTES RECEIVABLE DEFICIT TOTAL
------- -------- --------- ----------- ---------------- ----------- ---------
BALANCE, December 31, 1995 91,000 $ 91,000 $ 24,000 $ 0 $ (64,500) $ (30,296) $ 20,204
Issuance of common stock for $1 per share 100,000 100,000 0 0 0 0 100,000
Collections of stock subscription receivable 0 0 0 0 46,125 0 46,125
Syndication costs 0 0 0 (75,000) 0 0 (75,000)
Net loss for the year ended December 31, 1996 0 0 0 0 0 (143,704) (143,704)
Capital contributions 0 0 50,000 0 0 0 50,000
------- -------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1996 191,000 191,000 74,000 (75,000) (18,375) (174,000) (2,375)
Issuance of common stock for $1 per share 372,000 372,000 0 0 (49,885) 0 322,115
Collections of stock subscription receivable 0 0 0 0 12,375 0 12,375
Write-off of stock subscription receivable (6,000) (6,000) 0 0 6,000 0 0
Syndication costs 0 0 0 (20,000) 0 0 (20,000)
Net loss for the year ended December 31, 1997 0 0 0 0 0 (171,869) (171,869)
------- -------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1997 557,000 557,000 74,000 (95,000) (49,885) (345,869) 140,246
Issuance of common stock for $1 per share 118,000 118,000 0 0 13,785 0 131,785
Syndication costs 0 0 0 (10,000) 0 0 (10,000)
Net loss for the year ended December 31, 1998 0 0 0 0 0 (126,980) (126,980)
------- -------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1998 675,000 $675,000 $ 74,000 $(105,000) $ (36,100) $(472,849) $ 135,051
======= ======== ========= ========= ========= ========= =========
The accompanying notes to combined financial statements
are an integral part of these statements.
F-6
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (126,980) $ (171,869) $ (143,704)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 8,320 7,458 1,473
Provision for uncollectible accounts 0 5,000 0
Increase in accounts receivable (34,429) (35,505) 0
Decrease (increase) in prepaid expenses 1,736 (5,297) 0
Noncash contributions of capital 0 0 50,000
Increase in accrued interest payable 2,700 0 0
Increase (decrease) in accounts payable 21,005 (53,492) 1,906
----------- ----------- -----------
Net cash used in operating activities (127,648) (253,705) (90,325)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment (1,240) (9,217) (3,334)
Purchase of investment, net of cash acquired 20,834 (1,000) 0
Payment of organization costs 0 0 (5,044)
----------- ----------- -----------
Net cash provided by (used in) investing
activities 19,594 (10,217) (8,378)
----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 121,785 302,115 146,125
Collection of stock subscription receivable 0 12,375 0
----------- ----------- -----------
Net cash provided by financing activities 121,785 314,490 146,125
----------- ----------- -----------
NET INCREASE IN CASH 13,731 50,568 47,422
CASH, beginning of year 101,776 51,208 3,786
----------- ----------- -----------
CASH, end of year $ 115,507 $ 101,776 $ 51,208
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Syndication costs financed through accounts payable $ 0 $ 20,000 $ 75,000
Write-off of subscriptions receivable 0 6,000 0
Common stock issued in exchange for notes 18,235 49,885 0
=========== =========== ===========
ACQUISITION OF THE BEACON COMPANY:
Fair market value of development costs acquired $ 70,166 $ 0 $ 0
Assumption of subordinated convertible debenture 90,000 0 0
=========== =========== ===========
The accompanying notes to combined financial statements
are an integral part of these statements.
F-7
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND CONTINUITY OF OPERATIONS:
Atlantic Integrated Health Incorporated, a North Carolina corporation (the
Company), was organized on December 5, 1994. The Company acquired The Beacon
Company (Beacon) during 1998 (see Note 4). The Company is an independent,
physician-owned and governed medical practice group network, organized to
provide administrative services to participating physicians and medical practice
groups. Currently, the Company is in the process of integrating, economically
and clinically, physicians now practicing primarily in single specialty practice
groups into a larger multi-specialty network of medical practice groups.
The Company operated in the development stage until late in 1996 when it began
to generate operating revenue. Since inception, the Company has expended
significant funds on raising capital, developing a business plan, addressing
other organizational matters and resolving legal and administrative matters.
Operating losses have resulted in an accumulated deficit of $472,849 at December
31, 1998. If the Company does not realize additional revenue in the near future,
it will require additional capital which may not be available.
The success of the Company is dependent upon its ability to maintain and expand
its integrated network of physicians and to further its managed care contracting
efforts. As such, the Company's ability to continue as a going concern is
dependent upon many factors, the most significant of which include:
* Being able to compete against established competitors with
substantially greater capital resources.
* Being able to maintain and expand its network of qualified
physicians and other health care providers.
* Being able to operate in an evolving regulatory environment,
particularly with respect to antitrust laws, fraud and abuse and
other anti-referral laws, insurance regulation and healthcare
reform.
Management's plans to address the above matters include:
* Seeking improvements in the delivery of healthcare services in order
to enhance the quality and cost-effectiveness of care provided to
patients served by the participating physician network.
* Integrating and coordinating the delivery of healthcare services by
participating medical practice groups.
* Developing a flexible organizational structure that will meet the
requirements of an evolving regulatory environment.
In October 1996, the Company filed a registration statement on Form SB-2 with
the Securities and Exchange Commission registering for sale shares of common
stock under federal securities laws. The minimum offering requirements were met
and the offering was extended through July 28, 1997. On September 22, 1997, the
Company filed Post-Effective Amendment #2 to the Company's Registration
Statement on Form SB-2 to update the prospectus to extend the offering period
through April 28, 1998.
F-8
The Commission declared Post-Effective Amendment #2 effective on September 30,
1997. On June 24, 1998, the Company filed a Post-Effective Amendment No. 3 to
its Registration Statement on Form SB-2 to extend its stock offering which
terminated on April 28, 1998. On August 7, 1998, the Company filed a
Post-Effective Amendment No. 4 to its Registration Statement in response to
comments received from the Securities and Exchange Commission. The Securities
and Exchange Commission declared the Post-Effective Amendment No. 4 effective on
August 12, 1998. Since the initial offering period which began December 30,
1996, the Company sold an aggregate of 146,000 Primary Class Common Shares,
344,000 Referral Class Common Shares and no Nonprofit Class Nonvoting Common
Shares. The Company sold an aggregate of 156,500 Primary Class Common Shares,
26,000 Referral Class Common Shares and 2,500 Nonprofit Class Nonvoting Common
Shares during the period from inception of the Company through the initial
offering period under federal and state securities offering exemptions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
Beacon. All significant intercompany accounts and transactions have been
eliminated in consolidation.
OFFICE EQUIPMENT
Office equipment acquisitions are recorded at cost. Depreciation is provided for
each class of depreciable asset and is computed using accelerated methods over
the estimated economic useful lives. These lives range from five to seven years.
DEFERRED COSTS
Deferred costs consist of costs incurred in connection with establishing the
legal structure of the Company and the development of Beacon service lines.
These costs are being amortized over a period of five years.
SYNDICATION COSTS
Certain fees and expenses relating to the sale of common stock were charged
against stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up
Activities," issued in April 1998, provides guidance on the financial reporting
of start-up costs and organization costs. SOP 98-5 applies to all
nongovernmental entities and requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 will be effective for
the Company for the fiscal year beginning January 1, 1999. As of December 31,
1998, the Company and Beacon had approximately $83,000, net of amortization, of
organization and start-up costs. Initial application of SOP 98-5 will be
reported as a cumulative effect of a change in accounting principle.
F-9
RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 financial statements have been reclassified
in order to conform to the 1998 presentation.
3. STOCK SUBSCRIPTION AND STOCKHOLDER NOTES RECEIVABLE:
The stock subscription and stockholder notes receivable consists of amounts due
from stockholders at December 31, 1998 and 1997, related to the issuance of
shares of the Company's $1 par common stock at a price of $1.00 per share.
4. INVESTMENT:
The Company, in conjunction with Kanawha Insurance Company (Kanawha), formed
Beacon in January 1997 and each contributed $1,000 of capital for a 50% interest
in Beacon. Beacon plans to market and sell health care services and related
employee benefit products, primarily in eastern North Carolina. The Company
accounted for its investment on the equity method.
On June 24, 1998, the Company purchased all of the shares of common stock of
Beacon held by Kanawha in exchange for $1,000 cash and the issuance by Beacon of
a convertible, subordinated debenture in the principal amount of $90,000 (the
Debenture). The Debenture is due and payable on June 30, 2003, and bears
interest at the rate of 6% per annum. The Debenture is convertible into 4% of
Beacon's outstanding common stock if Beacon completes a public offering of its
common stock. Beacon does not have any right to redeem the Debenture prior to
maturity. Upon the occurrence of an Event of Default, as defined under the
Debenture, the entire unpaid principal and accrued interest will become
immediately due and payable.
As a result, Beacon has been consolidated with the Company as of December 31,
1998, and for the period from June 24, 1998, through December 31, 1998.
5. BUY/SELL AGREEMENTS:
Stockholders are required to enter into a buy/sell agreement pursuant to which
the Company will have the option to repurchase the holders' shares under certain
circumstances. Such circumstances will include those in which the holder ceases
to be unconditionally licensed to practice medicine in the State of North
Carolina, ceases to meet the credentialing standards of the Company, ceases to
be actively engaged in the practice of medicine or ceases to be affiliated with
the Company through a medical services provider agreement.
6. MEMORANDUM OF UNDERSTANDING:
On May 23, 1996, the Company entered into a Memorandum of Understanding (MOU)
with several other eastern North Carolina-based providers. The purpose of the
MOU was to provide a medium through which participating entities could work
jointly to develop a business plan for the development and operation of a
management services organization. Pursuant to the provisions of the MOU, the
Company contributed $15,000 in cash along with certain organizational materials
previously developed by the Company. Additionally, the Company performed certain
services on behalf of the project and incurred direct costs of approximately
$78,000. The Company was reimbursed for these expenses in accordance with the
terms specified in the MOU.
F-10
7. INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." This
statement requires the use of the liability method of accounting for deferred
income taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax reporting purposes. At
December 31, 1998 and 1997, the Company had net operating loss carryforwards of
approximately $404,000 and $277,000, respectively, for income tax purposes. No
deferred tax asset has been recorded by the Company as the realization of such
an asset is uncertain at this time. The net operating loss carryforwards begin
expiring in 2010 for federal income tax purposes.
8. RELATED-PARTY TRANSACTIONS:
The Company's chief executive officer and Board chairman have provided
management services and office space at no cost to the Company. The estimated
fair market value of these items has been accounted for as expenses (salaries
and wages and rent) and contributions of capital in the accompanying
consolidated financial statements. The estimated fair market of services
provided under this arrangement was $46,000 for the year ended December 31,
1996. The estimated fair market value of office space provided for the year
ended December 31, 1996, was $4,000. Effective January 1, 1997, the Company
began reimbursing the officers for the estimated fair market value of services
and office space provided by them. The amounts incurred for services and office
space provided under these arrangements was $48,000 and $4,304, respectively,
for the year ended December 31, 1997, and $64,000 and $1,038, respectively, for
the year ended September 30, 1998.
The Company entered into an arrangement with Beacon to provide network
development services. Revenue under this arrangement was $70,000 for the year
ended December 31, 1997. In addition, the Company recognized $72,711 and
$185,350 in revenue from its referral class shareholders for administrative
service fees related to group purchasing, contracting and other services
provided for the years ended December 31, 1998 and 1997, respectively.
F-11
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheets
ASSETS March 31, December 31,
- ------ 1999 1998
------------ ------------
(Unaudited) (Note)
Cash ............................................................... $ 201,175 $ 115,507
Accounts receivable, less allowance for
uncollectible accounts of $5,000 in 1999 and 1998 ............. 80,793 64,934
Prepaid expenses ................................................... 2,756 3,562
------------ ------------
Total current assets ........................ 284,724 184,003
Office equipment, net .............................................. 6,427 6,803
Deferred costs and other intangible assets ......................... -- 82,711
------------ ------------
Total assets ....................................................... $ 291,151 $ 273,517
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities - Accounts payable ............................. $ 34,845 $ 45,766
------------ ------------
Long-term debt - Convertible debenture and accrued interest ........ 94,050 92,700
------------ ------------
Stockholders' equity:
Common stock - $1 par value-
Primary class, authorized 1,000,000 shares; 312,500
and 302,500 shares issued and outstanding in
1999 and 1998, respectively .......................... 312,500 302,500
Referral class, authorized 1,800,000 shares; 370,000
and 454,000 shares issued and outstanding in
1999 and 1998, respectively .......................... 454,000 370,000
Nonprofit class, nonvoting, authorized 200,000
shares; 4,500 and 2,500 shares issued and
outstanding in 1999 and 1998, respectively ........... 4,500 2,500
Additional paid-in capital .................................... 74,000 74,000
Syndication costs ............................................. (105,000) (105,000)
Stock subscription and stockholder notes receivable ........... (45,050) (36,100)
Accumulated deficit ........................................... (532,694) (472,849)
------------ ------------
Total stockholders' equity ......................................... 162,256 135,051
------------ ------------
Total liabilities and stockholders' equity ......................... $ 291,151 $ 273,517
============ ============
Note: The balance sheet as of December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles.
See accompanying notes to consolidated financial statements.
F-12
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
Revenue .............................................. $ 123,077 $ 65,031
----------- -----------
Expenses:
Consulting fees ................................. 8,217 3,102
Salaries and wages .............................. 68,201 78,897
Recruiting and education ........................ 5,945 2,653
Office expense and other ........................ 14,389 16,667
Rent ............................................ 2,398 1,038
Interest ........................................ 1,350 --
Depreciation and amortization ................... 625 2,033
----------- -----------
Total expenses ................ 101,125 104,390
----------- -----------
Operating income (loss) .............................. 21,952 (39,359)
Interest income ...................................... 914 330
----------- -----------
Income (loss) before cumulative effect of a change
in accounting principle ......................... 22,866 (39,029)
Cumulative effect of a change in accounting
principle ....................................... (82,711) --
----------- -----------
Net loss ............................................. $ (59,845) $ (39,029)
=========== ===========
Income (loss) per basic common share:
Income (loss) before cumulative effect of a
change in accounting principle ............... $ .03 $ (.07)
Cumulative effect of a change in accounting
principle .................................... (.12) --
----------- -----------
Net loss ........................................ $ (.09) $ (.07)
=========== ===========
Basic average common shares outstanding .............. 712,333 586,333
=========== ===========
See accompanying notes to consolidated financial statements.
F-13
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss ........................................................................ $ (59,845) $ (39,029)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization ..................................... 625 2,034
Cumulative effect of a change in accounting principle ............. 82,711 --
Increase in accounts receivable ................................... (15,859) (20,551)
Decrease in prepaid expenses ...................................... 806 2,886
Increase in accrued interest payable .............................. 1,350 --
(Decrease) increase in accounts payable ........................... (10,921) 21,124
----------- -----------
Net cash used in operating activities .................... (1,133) (33,536)
----------- -----------
Cash flows from investing activities:
Purchase of office equipment ............................................... (249) --
----------- -----------
Net cash used in investing activities .................... (249) --
----------- -----------
Cash flows provided by financing activities:
Proceeds from issuance of common stock ..................................... 87,050 39,035
----------- -----------
Net cash provided by financing activities ................ 87,050 39,035
----------- -----------
Net increase in cash ............................................................ 85,668 5,499
Cash, beginning of period ....................................................... 115,507 101,776
----------- -----------
Cash, end of period ............................................................. $ 201,175 $ 107,275
=========== ===========
Supplemental disclosure:
Common stock issued in exchange for notes .................................. $ 8,950 $ 2,965
=========== ===========
See accompanying notes to consolidated financial statements.
F-14
ATLANTIC INTEGRATED HEALTH INCORPORATED AND SUBSIDIARY
MARCH 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all necessary adjustments, which are of a normal
recurring nature, to present fairly the financial position of Atlantic
Integrated Health Incorporated and its wholly-owned subsidiary, The Beacon
Company, as of March 31, 1999 and 1998, the results of operations for the three
months ended March 31, 1999 and 1998, and the cash flows for the three months
ended March 31, 1999 and 1998, in conformity with generally accepted accounting
principles. Operating results for the three month periods ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
These unaudited interim consolidated financial statements should be read
in conjunction with the financial statements and related notes contained in the
Company's Annual Report on Form 10-KSB dated December 31, 1998.
2. INVESTMENT
The Company, in conjunction with Kanawha Insurance Company ("Kanawha"),
formed Beacon in January 1997 when each contributed $1,000 of capital for an
equal number of shares. Beacon plans to market and sell health care services and
related employee benefit products, primarily in eastern North Carolina. The
Company accounted for its investment on the equity method.
On June 24, 1998, the Company purchased all of the shares of common stock
of Beacon held by Kanawha in exchange for $1,000 cash and the issuance by Beacon
of a convertible, subordinated debenture in the principal amount of $90,000 (the
"Debenture"). The Debenture is due and payable on June 30, 2003 and bears
interest at the rate of 6% per annum. The Debenture is convertible into 4% of
Beacon's outstanding common stock if Beacon completes a public offering of its
common stock. Beacon does not have any right to redeem the Debenture prior to
maturity. Upon the occurrence of an "Event of Default," as defined under the
Debenture, the entire unpaid principal and accrued interest will become
immediately due and payable.
As a result of this transaction, Beacon has been consolidated with the
Company as of March 31, 1999 and for the period from June 24, 1998 through March
31, 1999.
3. NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss for the period by
the weighted average number of shares of common stock outstanding during the
period.
4. EXTENSION OF STOCK OFFERING
On June 24, 1998, the Company filed a Post-Effective Amendment No. 3 to
its Registration Statement on Form SB-2 to extend its stock offering which
terminated on April 28, 1998. On August 7,
F-15
1998, the Company filed a Post-Effective Amendment No. 4 to its Registration
Statement in response to comments received from the Securities and Exchange
Commission. The Securities and Exchange Commission declared the Post-Effective
Amendment No. 4 effective on August 12, 1998. From August 12, 1998 to March 10,
1999, Atlantic has sold an aggregate of 14,000 Primary Class Common Shares,
136,000 Referral Class Common Shares and 2,000 Nonprofit Class Nonvoting Common
Shares. During the initial offering period from December 30, 1996 through July
28, 1997, the Company sold an aggregate of 116,000 Primary Class Common Shares
and 216,000 Referral Class Common Shares. During the second offering period from
September 30, 1997 to April 28, 1998, the Company sold an aggregate of 26,000
Primary Class Common Shares, 76,000 Referral Class Common Shares and no
Nonprofit Class Nonvoting Common Shares. Atlantic plans to file Post-Effective
Amendment No. 5 to continue the offering and add additional physicians to the
Atlantic network.
5. NEWLY ISSUED ACCOUNTING STANDARD
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5 "Reporting on the Costs of Start-Up
Activities" (SOP 98-5) which provides guidance on the financial reporting of
start-up costs and organization costs and requires that all non-governmental
entities expense the costs of start-up activities as these costs are incurred
instead of being capitalized and amortized. Atlantic adopted SOP 98-5 on January
1, 1999. The initial impact of adopting SOP 98-5 resulted in a charge of
$82,711, which has been reflected as a cumulative effect of a change in
accounting principle in the accompanying consolidated statement of operations
for the quarter ended March 31, 1999.
F-16
================================================================================
544,000 PRIMARY CLASS
COMMON SHARES
972,000 REFERRAL
CLASS COMMON SHARES
148,000 NONPROFIT
CLASS NONVOTING COMMON SHARES
ATLANTIC INTEGRATED HEALTH
INCORPORATED
----------------
PROSPECTUS
----------------
____________, 1999
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The North Carolina Business Corporation Act requires that we indemnify
any director, who was wholly successful, on the merits or otherwise, in the
defense of any proceeding to which the director was a party because he or she
was a director of Atlantic, against reasonable expenses incurred by the director
in connection with the proceeding. "Proceeding" means a threatened, pending, or
contemplated action, suit, or proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal. Reference is
made to the detailed provisions of Sections 55-8-50 through 55-8-58 of the North
Carolina Business Corporation Act for a complete statement of such
indemnification rights. Our Bylaws, as amended, also require us to provide
indemnification to any person who at any time serves or has served as a director
or officer of Atlantic, or at the request of us is or was serving as an officer,
director, agent, partner, trustee, administrator, or employee for any other
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise, to the fullest extent permitted by the North
Carolina Business Corporation Act. Our Bylaws, as amended, also permit our Board
of Directors, in our discretion, to provide such indemnification to our
employees and agents. We maintain a directors and officers and errors and
omissions insurance policy.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses incurred by us in
connection with the issuance and distribution of the shares being registered.
All such expenses are estimated except for the SEC registration fee.
SEC registration fee.................................... $ 0
Printing expenses....................................... 1,000
Fees and expenses of counsel for Atlantic............... 2,500
Fees and expenses of accountants for Atlantic........... 1,000
Miscellaneous........................................... 500
-----------
Total.............................................. $ 5,000
-----------
The following table sets forth approximate expenses incurred and paid by
us in connection with this offering.
SEC registration fee.................................... $ 681.81
Printing expenses....................................... 15,000.00
Fees and expenses of counsel for Atlantic............... 75,000.00
Fees and expenses of accountants for Atlantic........... 9,000.00
Miscellaneous........................................... 5,000.00
-----------
Total.............................................. $104,681.81
-----------
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1996, we issued the following securities without
registration under the Securities Act:
1. From February 1996 through April 1996, we issued an aggregate of 33,000
shares of common stock to 14 physicians and medical practice groups for $1.00
per share.
2. In May 1996, we issued an aggregate of 39,500 shares of common stock to six
medical practice groups for $1.00 per share.
3. In July 1996, we issued an aggregate of 5,000 Primary Class Common Shares to
three physicians and medical practice groups for $1.00 per share (1).
4. In September 1996, we issued an aggregate of 14,000 Primary Class Common
Shares and 6,000 Referral Class Common Shares to two medical practice groups for
$1.00 per share.
5. From October 1996 through November 1996, we issued an aggregate of 26,500
Primary Class Common Shares and 12,000 Referral Class Common Shares to four
medical practice groups for $1.00 per share (2).
6. From January 1997 through April 1997, we issued an aggregate of 9,000 Primary
Class Common Shares and 6,000 Referral Class Common Shares to three medical
practice groups for $1.00 per share (2).
7. From June 1997 through July 1997, we issued 7,500 Primary Class Common Shares
to two medical practice groups for $1.00 per share (2).
8. Since July 1997, we have not issued any shares of capital stock without
registration under the Securities Act.
No underwriting commissions or discounts were paid with respect to the
sales of the unregistered securities described above. In addition, all of the
above sales were made in reliance on Section 4(2) of the Securities Act for
transaction not involving a public offering. With regard to the reliance by us
upon the exemption from registration provided under Section 4(2) of the
Securities Act for the sales of securities disclosed above, certain inquiries
were made by us to establish that such sales qualified for such exemption from
the registration requirements. In particular, we confirmed that with respect to
the exemption claimed under Section 4(2) of the Securities Act (i) all offers of
sales and sales were made by personal contact from our officers and directors or
other persons closely associated with us, (ii) each investor made
representations that he or she was sophisticated in relation to the investment
(and we had no reason to believe such representations were incorrect), (iii)
each purchaser gave assurance of investment intent and the certificates for the
shares bear a legend accordingly, and (iv) offers and sales within any offering
were made to a limited number of persons.
II-2
- --------------------
(1) Prior to July 1996, our authorized capital stock consisted of 100,000
shares of common stock, $1.00 par value per share. In July 1996, after we
amended and restated our Articles of Incorporation to reflect our current
capital structure, the shares of common stock previously issued and
outstanding were canceled and re-issued as either Primary Class Common
Shares, Referral Class Common Shares or Nonprofit Class Nonvoting Common
Shares, as the case may be, depending upon the qualifications of the
existing shareholders.
(2) We offered and sold these shares prior to their issuance pursuant to
subscription agreements dated from December 1995 through August 1996. We
do not issue any shares of capital stock to subscribers until payment in
full is received by us from such subscribers.
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Amended and Restated Articles of Incorporation of Atlantic
3.2 Bylaws of Atlantic, as amended
4.1 Specimen form of our Primary Class Common Share Certificate
4.2 Specimen form of our Referral Class Common Share Certificate
4.3 Specimen form of our Nonprofit Class Nonvoting Common Share
Certificate
5.1 Opinion and Consent of Wyrick, Robbins, Yates & Ponton L.L.P.
10.1 Form of Subscription and Shareholder Buy/Sell Agreement
(Primary Class Common Shareholder)
10.2 Form of Subscription and Shareholder Buy/Sell Agreement
(Referral Class Common Shareholder)
10.3 Form of Subscription and Shareholder Buy/Sell Agreement
(Nonprofit Class Nonvoting Common Shareholder)
10.4 Form of Non-Exclusive Medical Services Provider Agreement
(Primary Physicians)
10.5 Form of Non-Exclusive Medical Services Provider Agreement
(Referral Physicians)
10.6 Employment Agreement between Atlantic and Robert H. Blake, III
effective as of June 1, 1996
10.7 Form of Facility Participation Agreement
10.8 Contract and Lease dated April 23, 1998 between Atlantic and
Joseph E. Thomas
10.9 Contract and Lease dated April 23, 1998 between Atlantic and
Village Cedars, Inc.
10.10 Convertible, Subordinated Debenture in the principal amount of
$90,000 of The Beacon Company.
23.1 Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (included in
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on page II-5 of Registration
Statement on Form SB-2, page II-5 of the Post-Effective
Amendment No. 2 to the Registration Statement on Form SB-2 and
page II-7 of the Post-Effective Amendment No. 3 to the
Registration Statement on Form SB-2)
27.1 Financial Data Schedule
II-3
ITEM 28. UNDERTAKINGS.
1. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the North Carolina Business
Corporation Act, the Articles of Incorporation or the Bylaws of the Registrant,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
2. The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 5 to the Registration Statement on
Form SB-2 to be signed on our behalf by the undersigned, thereunto duly
authorized, in the City of New Bern and State of North Carolina, on June 21,
1999.
ATLANTIC INTEGRATED HEALTH
INCORPORATED
By /s/ J. Philip Mahaney, Jr., M.D.
--------------------------------------------
J. Philip Mahaney, Jr., M.D.
President and Chief Executive Officer
(principal executive officer)
By /s/ Stephen W. Nuckolls
--------------------------------------------
Stephen W. Nuckolls
Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 5 to the Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
SIGNATURE AND TITLE |
- ------------------- |
J. Philip Mahaney, Jr., M.D., Director |
|
W. James Stackhouse, M.D., Chairman of the |
Board, Treasurer and Director |
|
Charles J. Baio, M.D., Director |
|
Graham A. Barden, III, M.D., Director | By /s/ J. Philip Mahaney, Jr., M.D.
| --------------------------------
Michael L. Bramley, M.D., Director | J. Philip Mahaney, Jr., M.D.
| Pro Se and Attorney-in-Fact
John P. Emerick, M.D., Director | Dated June 21, 1999
|
A. Clark Gaither, M.D., Director |
|
Frank L. Gay, M.D., Director |
|
Robert A. Krause, M.D., Director |
|
Robert S. Meyer, M.D., Director |
|
Leo E. Waivers, M.D., Director |
|
John A. Williams, III, M.D., Director |
|
Kerry A. Willis, M.D., Director |
II-5
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Philip Mahaney, Jr., M.D. and Robert H. Blake
III, and each of them, as his or her true and lawful attorney-in-fact and agent,
each with full powers of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
(including additional post-effective amendments) to this Post Effective
Amendment No. 5 to the Registration Statement, and any additional Registration
Statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Post Effective
Amendment No. 5 to the Registration Statement on Form SB-2 has been signed by
the following persons in the capacities and on the dates stated.
/s/ Edwin P. Little, M.D.
- -------------------------------
Edwin P. Little, M.D.
Director
June 10, 1999
/s/ Michael J. Lobos, M.D.
- -------------------------------
Michael J. Lobos, M.D.
Director
June 10, 1999
/s/ Alice P. Seldon, M.D.
- -------------------------------
Alice P. Seldon, M.D.
Director
June 10, 1999
/s/ Daniel Whitley, Jr., M.D.
- -------------------------------
Daniel Whitley, Jr., M.D.
Director
June 10, 1999
II-6
EXHIBIT INDEX
TO
POST-EFFECTIVE AMENDMENT NO. 5 TO REGISTRATION STATEMENT ON FORM SB-2
ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
3.1 Amended and Restated Articles of Incorporation (1)
of Atlantic
3.2 Bylaws of Atlantic, as amended (1)
4.1 Specimen form of our Primary Class Common Share (1)
Certificate
4.2 Specimen form of our Referral Class Common (1)
Share Certificate
4.3 Specimen form of our Nonprofit Class Nonvoting (1)
Common Share Certificate
5.1 Opinion and Consent of Wyrick, Robbins, Yates & (1)
Ponton L.L.P.
10.1 Form of Subscription and Shareholder Buy/Sell (1)
Agreement (Primary Class Common Shareholder)
10.2 Form of Subscription and Shareholder Buy/Sell (1)
Agreement (Referral Class Common Shareholder)
10.3 Form of Subscription and Shareholder Buy/Sell (1)
Agreement (Nonprofit Class Nonvoting Common
Shareholder)
10.4 Form of Non-Exclusive Medical Services Provider (1)
Agreement (Primary Physicians)
10.5 Form of Non-Exclusive Medical Services Provider (1)
Agreement (Referral Physicians)
10.6 Employment Agreement between Atlantic and Robert (1)
H. Blake III effective as of June 1, 1996
10.7 Form of Facility Participation Agreement (3)
10.8 Contract and Lease dated April 23, 1998 between (4)
Atlantic and Joseph E. Thomas
10.9 Contract and Lease dated April 23, 1998 between (4)
Atlantic and Village Cedars, Inc.
10.10 Convertible, Subordinated Debenture in the (5)
principal amount of $90,000 of The Beacon
Company.
23.1 Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (1)
(included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP Filed herewith
24.1 Power of Attorney (included on page II-5 of
Registration Statement on Form SB-2, page II-5
of the Post-Effective Amendment No. 2 to the
Registration Statement on Form SB-2 and page
II-7 of the Post-Effective Amendment No. 3 to
the Registration Statement on Form SB-2)
27.1 Financial Data Schedule (6)(7)
II-7
- ------------------------------------
(1) Incorporated by reference to exhibits contained in our Registration
Statement on Form SB-2 (File No. 333-5826)
(2) Incorporated by reference to exhibits contained in our Post-Effective
Amendment No. 2 (File No. 333-5826)
(3) Incorporated by reference to exhibits contained in our Annual Report on
Form 10-KSB for the year ended December 31, 1997 (File No. 333-5826)
(4) Incorporated by reference to exhibits contained in our Post-Effective
Amendment No. 3 (File No. 333-5826).
(5) Incorporated by reference to exhibits contained in our Post-Effective
Amendment No. 4 (File No. 333-5826).
(6) Incorporated by reference to exhibits contained in our Annual Report on
Form 10-KSB for the year ended December 31, 1998 (File No. 333-5826).
(7) Incorporated by reference to exhibits contained in our Quarterly Report
on Form 10-QSB for the quarter ended March 31, 1999 (File No. 333-5826)
II-8