AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1996
REGISTRATION NO. 333-06283
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ADVANCED HEALTH CORPORATION
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 13-3893841
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
-------------------
560 WHITE PLAINS ROAD
TARRYTOWN, NEW YORK 10591
(914) 524-4200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------
JONATHAN EDELSON, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ADVANCED HEALTH CORPORATION
560 WHITE PLAINS ROAD
TARRYTOWN, NEW YORK 10591
(914) 524-4200
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
-------------------
WITH COPIES TO:
<TABLE>
<S> <C>
JOHN J. SUYDAM, ESQ. MARK KESSEL, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP SHEARMAN & STERLING
30 ROCKEFELLER PLAZA 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10022
(212) 408-2400 (212) 848-4000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box. / / ___________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE><CAPTION>
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock...................... 2,300,000 shares $14 $32,200,000 $11,104
</TABLE>
(1) Includes 300,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
ADVANCED HEALTH CORPORATION
CROSS REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(B),
SHOWING LOCATION OF INFORMATION REQUIRED BY ITEMS ON FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
- ------------------------------------------------------ ------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back Cover
Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................... Prospectus Summary; Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page;
Underwriting
6. Dilution........................................ Prospectus Summary; Risk Factors;
Dilution
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered...... Description of Capital Stock
10. Interests of Named Experts and Counsel.......... Not Applicable
11. Information with Respect to the Registrant:
(a) Description of Business..................... Prospectus Summary; Risk Factors;
The Company; Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Business
(b) Description of Property..................... Business
(c) Legal Proceedings........................... Business
(d) Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters......................... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Dividend
Policy; Capitalization; Description
of Capital Stock; Shares Eligible
for Future Sale
(e) Financial Statements........................ Prospectus Summary; Selected
Consolidated Financial Data;
Consolidated Financial Statements
(f) Selected Financial Data..................... Prospectus Summary; Selected
Consolidated Financial Data
(g) Supplementary Financial Information......... Not Applicable
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
- ------------------------------------------------------ ------------------------------------
<C> <S> <C>
(j) Directors and Executive Officers............ Management
(k) Executive Compensation...................... Management
(l) Security Ownership of Certain Beneficial
Owners and Management....................... Principal Stockholders
(m) Certain Relationships and Related
Transactions................................ Management; Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
DATED JULY 12, 1996
2,000,000 SHARES
[LOGO]
ADVANCED HEALTH CORPORATION
COMMON STOCK
----------------------
All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Advanced Health Corporation ("Advanced Health" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is estimated that the initial public offering price will be between $12.00
and $14.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"ADVH", subject to official notice of issuance.
----------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total (3)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $750,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 300,000
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional shares
are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
----------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected that
delivery of certificates for the shares will be made at the offices of Cowen &
Company, New York, New York, on or about , 1996.
----------------------
COWEN & COMPANY VOLPE, WELTY & COMPANY
, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
A diagram captioned "Advanced Health Corporation/Integrating Physician
Management Services with Information Technology", which includes a center circle
with the caption "Advanced Health Integrated Solutions for Physicians" with
boxes above it captioned "Physicians Practice Management Services", "Physician
Network Management Services" and "Clinical Information Systems" and boxes below
it captioned "Preserving Practice Ownership by Physicians", "Empowering
Physicians to Succeed in Managed Care", "Providing Point-of-Care Clinical
Decision Support", "Enhancing Physician Communication and Information Access",
"Providing Operations Support and Administrative Efficiencies", "Providing
Disease Management Program Services for High-Cost, High-Volume Specialties".
Med-E-PracticeTM, Smart ScriptsTM, Internet Script WriterTM, Med-E-VisitTM,
Practice Management IntegratorTM, Med-E-NetworkTM, Med-E-Net CentralTM,
Med-E-Net OfficeTM, Med-E-Net IntegratorTM and Med-E-Net CardiologyTM are
trademarks of the Company. Trade names and trademarks of other companies
appearing in this Prospectus are the property of their respective holders.
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) reflects a 1.5-for-1 split of the Common Stock effected in April
1996 and a .59581-for-1 reverse split of the Common Stock to be effected prior
to the date of this Prospectus (the "Stock Splits") and (iii) reflects the
conversion of all outstanding Convertible Preferred Stock of the Company into
Common Stock upon the consummation of this offering (the "Preferred Stock
Conversion"). Unless the context otherwise requires, all references in this
Prospectus to the Company refer collectively to Advanced Health Corporation, its
predecessor and its subsidiaries.
THE COMPANY
Advanced Health Corporation provides a full range of integrated management
services and clinical information systems to physician group practices and
physician networks under long-term contracts. The management services provided
by the Company include physician practice and network development, marketing,
payor contracting, financial and administrative management, clinical information
management, human resource management and practice and network governance. The
Company developed its clinical information systems to provide physicians, at the
point of care and on a real-time basis, with patient-specific clinical and payor
information and the ability to generate patient medical orders and facilitate
the implementation of disease management programs. The Company focuses its
management efforts on high-cost, high-volume disease specialties, such as
cardiology, oncology and orthopedics. The Company currently manages two
single-specialty physician group practices and one multi-specialty physician
group practice comprised of an aggregate of over 50 physicians in the New York
metropolitan area and six physician networks with over 350 physicians in the
greater New York and Atlanta metropolitan areas.
Health care expenditures in the U.S. totalled approximately $1 trillion in
1994, with approximately 85% of such expenditures controlled by physician
decisions. Increasing concern over the rising cost of health care has led to the
development of managed care programs, which have shifted traditional fee-
for-service reimbursement for physicians to capitated and other fixed-fee
arrangements. As the financial risk of delivering health care shifts from payors
to providers, physicians are faced with increasing management responsibilities
and declining compensation. Because the majority of physicians practice
individually or in two-person groups, they tend to have limited financial and
administrative capacity. Consequently, physician practice management companies
have emerged in recent years to manage the financial and administrative
requirements of physician organizations. More importantly, the Company believes
there exists an even greater need among physicians for clinical management
services and information systems. The Company believes that assisting physicians
in managing the clinical aspects of their practices represents the greatest
opportunity to enhance the quality and reduce the cost of health care.
The Company believes that it is well positioned to attract, organize and
manage physician group practices and networks by offering a full range of
integrated management services and clinical information systems. The Company
believes that its clinical information systems will allow physicians, at the
point of care and on a real-time basis, (i) to access patient-specific clinical
and payor information, (ii) to generate patient instructions, prescriptions and
orders for tests, specialty referrals and specialty procedures and (iii) to
access databases containing managed care and disease management protocols,
diagnostic/treatment preferences and guidelines affecting medical orders. By
combining its group practice and network management services with its clinical
information systems, the Company believes it can provide physicians with
integrated solutions for managing the increased financial opportunities and
risks associated with managed care contracts while allowing physicians to
improve the quality of care.
3
<PAGE>
The Company's strategy includes (i) establishing long-term contractual
alliances with physician organizations, (ii) managing high-cost, high-volume
disease specialties such as cardiology, oncology and orthopedics, (iii)
providing physicians with clinical information at the point of care, (iv)
focusing on selected geographic markets that offer concentrations of physicians
seeking the Company's services and (v) continuing to develop relationships with
key industry participants. The Company has entered into a software license and
integration agreement with Merck Medco Managed Care, Inc. for the Company's
prescription writing software. In addition, the Company has entered into a
contract with an affiliate of PCS Health Systems, Inc., the managed care unit of
Eli Lilly & Company, to provide disease management information services and
software for the treatment of certain diseases.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................... 2,000,000 shares
Common Stock to be outstanding after the 6,500,267 shares(1)
offering.......................................
Use of proceeds................................ To repay certain indebtedness and for
working capital and general corporate
purposes, which may include acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... ADVH
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE><CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED
INCEPTION DECEMBER 31, JUNE 30,
(AUGUST 27, 1993) TO ----------------- ---------------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
-------------------- ------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue.......................... $ -- $ 379 $ 1,054 $ 100 $ 7,617
Cost of sales.................... -- 12 340 22 3,512
------ ------- ------- ------- -------
Gross profit..................... -- 367 714 78 4,105
Operating expenses............... 66 1,318 3,255 617 4,034
Research and development
expenses....................... 455 1,582 3,157 1,512 1,875
------ ------- ------- ------- -------
Operating loss................... (521) (2,533) (5,698) (2,051) (1,804)
Other income (expense)........... -- (15) (8) 1 (54)
------ ------- ------- ------- -------
Net loss......................... $ (521) $(2,548) $(5,706) $(2,050) $(1,858)
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Net loss per share............... (0.30) (1.29) (1.68) (0.78) (0.41)
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Weighted average number of common
shares and common share
equivalents outstanding(2)..... 1,725 1,978 3,389 2,631 4,487
<CAPTION>
JUNE 30, 1996
---------------------------------
ACTUAL AS ADJUSTED (3)
--------------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash....................................................................... $ 837 $20,267
Working capital (deficit).................................................. (2,713) 20,717
Total assets............................................................... 8,191 27,621
Total debt................................................................. 4,504 504
Total stockholders' equity................................................. 863 24,293
</TABLE>
- ------------
(1) Excludes 976,681 shares issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $3.27 and 481,489 shares
issuable upon the exercise of outstanding warrants to purchase Common Stock
at a weighted average exercise price of $8.50. Also excluded are 306,769
shares and 113,995 shares issuable upon the exercise of options and
warrants, respectively, which, in each case, are contingent upon the
Company's achieving certain capitalization levels related to regulatory
requirements or upon the Company's achieving certain performance targets.
See "Management -- Stock Plans" and Notes 3 and 10 of Notes to Consolidated
Financial Statements.
(2) See Note 14 -- "Initial Public Offering" of Notes to Consolidated Financial
Statements.
(3) Adjusted to give effect to (i) the sale by the Company of 2,000,000 shares
of Common Stock offered hereby at an assumed initial public offering price
of $13.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses and (ii) the receipt and initial
application of the net proceeds therefrom. See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors should be carefully considered in
evaluating the Company and its business before purchasing the shares of Common
Stock offered hereby. The discussion in this Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company was incorporated in August 1993, began providing physician
practice and network management services in December 1995 and has not yet
commercially installed its clinical information systems. Accordingly, the
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. As of June 30, 1996, the Company had an
accumulated deficit of approximately $10.6 million. The Company has never
achieved profitability and expects to continue to incur operating losses through
at least the end of 1996. Due to anticipated increases in operating expenses,
the Company's operating results will be adversely affected if sales of its
management services and clinical information systems do not increase. In
addition, the Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in rapidly evolving markets. To
address these risks, the Company must, among other things, expand sales of its
physician practice and network management services, commercialize its clinical
information systems, respond to competitive developments and continue to attract
and retain qualified personnel. Accordingly, there can be no assurance that the
Company will be able to generate sufficient revenue to achieve profitability, to
maintain such profitability, if achieved, on a quarterly or annual basis or to
sustain or increase its revenue growth in future periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
DEPENDENCE ON MANAGEMENT CONTRACTS WITH AFFILIATED PHYSICIAN GROUPS AND NETWORKS
The Company's revenue to date has been derived from a limited number of
long-term management agreements between the Company and certain physician groups
and networks. See "Risk Factors -- Concentration of Revenues." The termination
of any one or more of such management agreements would have a material adverse
effect on the Company's revenues and results of operations. The Company's future
growth and profitability is substantially dependent upon obtaining new contracts
for the provision of services to physician groups and physician networks on
satisfactory terms and conditions. The Company must accurately assess the costs
it will incur in providing services in order to negotiate contracts on terms
under which the Company can expect to realize adequate profit margins or
otherwise meet its objectives. The future growth and profitability of the
Company is also dependent on the Company's ability to effectively integrate the
practices of its affiliated physicians, to manage and control costs and to
realize economies of scale. The integration of new physician practice and
network management contracts, as well as the maintenance of existing contracts,
is made more difficult by reduced reimbursement rates of health care payors at a
time when the cost of providing medical services continues to increase. There
can be no assurance that the Company will obtain new physician practice and
network management contracts on satisfactory terms, or at all. Any failure of
the Company to obtain new contracts and price its services appropriately would
have a material adverse effect on the Company's business, financial condition
and results of operations and the price of the Common Stock. See "Business --
Physician Practice and Network Services."
5
<PAGE>
UNCERTAINTY OF SUCCESSFUL COMMERCIALIZATION OF CLINICAL INFORMATION SYSTEMS
Since its inception in August 1993, the Company has focused on developing
its clinical information systems. However, to date, the Company has commercially
installed its clinical information systems only on a limited basis. The
Company's future growth and profitability is substantially dependent upon the
success of its clinical information systems. The Company believes that market
acceptance of such systems will depend upon the continued growth of managed care
in the Company's markets, the continued increase in the administrative and
clinical complexity of ambulatory medicine, the clinical efficacy of the disease
management programs developed by its affiliated physicians and third parties,
the continued downward trend in the cost of computer hardware, particularly
handheld computing devices and wireless network infrastructures, and the
continued consolidation of physician group practices. No assurance can be given
that the Company's clinical information systems will be accepted or competitive
or that the Company will be successful in taking systems from their current
state of limited commercial introduction to commercial acceptance. If the
Company's clinical information systems do not achieve market acceptance or if
the Company does not develop and maintain sales, marketing and service
expertise, the Company's growth, revenues and results of operations will be
materially adversely affected. See "Business -- Clinical Information Systems."
MANAGEMENT OF GROWTH
The Company recently has experienced, and expects to continue to experience,
substantial growth and has significantly expanded, and expects to continue to
expand, its operations. This growth and expansion has placed, and will continue
to place, significant demands on the Company's management, technical, financial
and other resources. To manage growth effectively, the Company must maintain a
high level of operational quality and efficiency, and must continue to enhance
its operational, financial and management systems and to expand, train and
manage its employee base. To date, the Company has only limited experience in
providing physician practice and network management services and clinical
information systems. To execute its growth strategy, the Company plans to
significantly increase the number of physician practices and networks under
management, expand its clinical information systems customer base, develop
disease management services and develop a sales and marketing organization.
There can be no assurance that the Company will be able to manage growth
effectively, and any failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations and the
price of the Common Stock.
RISKS ASSOCIATED WITH CAPITATED FEE ARRANGEMENTS
As an increasing percentage of patients are coming under the control of
managed care entities, the Company believes that its success will, in part, be
dependent upon the Company's ability to negotiate and manage, on behalf of
physician practice groups and networks, agreements with health maintenance
organizations ("HMOs"), employer groups and other private third-party payors
pursuant to which professional services will be provided on a risk-sharing or
capitated basis by some or all of the physicians affiliated with the Company.
Under some of such agreements, the health care provider accepts a pre-determined
amount per patient per month in exchange for providing all necessary covered
services to the patients covered by the agreement. Such agreements pass the
economic risk of providing care from the payor to the provider. In the Company's
target markets, capitated fee arrangements are relatively new and the Company
has limited experience in negotiating or managing capitated fee agreements. The
proliferation of such agreements in markets served by the Company could result
in greater predictability of revenues, but not necessarily of profits, for
physicians affiliated with the Company. There can be no assurance that the
Company will be able to negotiate, on behalf of the physicians, satisfactory
arrangements on a risk-sharing or capitated basis or that the physician
organizations managed by the Company will be able to provide medical services at
a profit under such arrangements. To the extent affiliated physicians incur
medical costs that limit such affiliated physicians' profitability, there can be
6
<PAGE>
no assurance that the Company will be able to derive revenues from its
relationship with any such affiliated physicians.
In addition, the Company anticipates entering into managed care or capitated
arrangements, either directly through the formation of an IPA or indirectly
through the assignment of managed care contracts entered into between its
affiliated physicians and third-party payors. The Company has little experience
in managing capitated-risk arrangements. Revenues under managed care or
capitated arrangements entered into by the Company, whether directly through an
IPA or through the assignment of a capitated contract entered into by its
affiliated physicians, will generally be a fixed amount per enrollee. Under such
an arrangement, the Company would contract with affiliated physicians for the
provision of health care services and the Company would be responsible for the
provision of all or a portion of the health care requirements of such enrollees.
To the extent that such enrollees require more care than is anticipated by the
Company upon entering into such a contract, the Company's revenues under such
contracts may be insufficient to cover its costs. Although the Company expects
to enter into reinsurance agreements with third-party insurers in respect of
such risk, no assurances can be given that the Company will be able to obtain
such reinsurance on favorable terms, if at all. See "Business -- Contractual
Relationships with Affiliated Physicians -- Capitated and Other Fixed-Fee
Arrangements."
HIGHLY COMPETITIVE INDUSTRY
The physician practice and network management industry is highly
competitive. The industry is also subject to continuing changes in how services
and products are provided and how providers are selected and paid. As prepaid
medical care continues to grow, the Company may encounter increased competition.
Certain companies are expanding their presence in the physician management
market through the use of several approaches. A number of companies provide
broad management services to primary, multi-specialty and specialty physician
groups, while other companies provide claims processing, utilization review and
other more focused management services. In addition, certain of the Company's
competitors are dedicated to the management of single-specialty practices
focused on diseases such as cardiology, oncology and orthopedics. Certain of the
Company's competitors are significantly larger, have access to greater
resources, provide a wider variety of services and products, have greater
experience in providing health care management services and products and/or have
longer established relationships with customers for these services and products.
The Company believes that competition for services is based on cost and quality
of services. There can be no assurance that the Company's strategy will allow it
to compete favorably in contracting with payors or expanding or maintaining its
physician group practices or networks in existing or new markets. In addition,
many health care providers are consolidating to create larger health care
delivery enterprises with greater regional market power. Such consolidation
could erode the Company's customer base and reduce the size of the Company's
target market. In addition, the resulting enterprises could have greater
bargaining power, which could lead to price erosion affecting the Company's
services. The reduction in the size of the Company's target market or the
failure of the Company to maintain adequate price levels could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock.
The market for health care information systems is highly competitive and
rapidly changing. The Company believes that the principal competitive factors
for clinical information systems are the usefulness of the data and reports
generated by the software, customer service and support, compatibility with the
customer's existing information systems, potential for product enhancement,
vendor reputation, price and the effectiveness of sales and marketing efforts.
Many of the Company's competitors and potential competitors have greater
financial, product development, technical and marketing resources than the
Company, and currently have, or may develop or acquire, substantial installed
customer bases in the health care industry. In addition, as the market for
clinical information systems develops, additional competitors may enter the
market and competition may intensify. While
7
<PAGE>
the Company believes that it has successfully differentiated itself from
competitors, for example, by offering clinical information systems that provide
patient-specific, point-of-care information, there can be no assurance that, in
the future, competition will not have a material adverse effect on the Company's
business, financial condition and results of operations and on the price of the
Common Stock. See "Business -- Competition."
CONCENTRATION OF REVENUES
In the year ended December 31, 1995, Madison Medical -- The Private Practice
Group of New York, L.L.P. ("Madison") accounted for approximately 36% of the
Company's revenues. In the six months ended June 30, 1996, Madison and the
Advanced Heart Physicians & Surgeons Network, P.C. ("AHP&S") accounted for
approximately 49% and 23% of revenues, respectively. The Company's management
services agreements generally have an initial term of five to 20 years and may
be terminated only for cause. The management services agreement with Madison,
however, gives Madison the right to terminate without cause following the first
year of the term and prior to the end of the tenth year of the term upon payment
of a penalty and thereafter without penalty. In addition, in the year ended
December 31, 1995, the Company's disease management software license and
integration agreement with an affiliate of PCS Health Systems, Inc., the managed
care unit of Eli Lilly & Company, accounted for approximately 32% of the
Company's revenues. Although such affiliate of PCS Health Systems has agreed to
sponsor two pilot programs involving the software applications developed by the
Company, it has no obligation thereafter to use or distribute the Company's
software. Although the Company seeks to build long-term customer relationships,
no assurance can be given that such relationships will continue. Any termination
or significant deterioration of the Company's relationships with its principal
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, a deterioration in
the financial condition of any of its principal customers would materially
adversely affect the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations and
relationships are subject to extensive and increasing regulation under numerous
laws administered by governmental entities at the federal, state and local
levels. These laws include the fraud and abuse provisions of the Medicare and
Medicaid statutes, which prohibit the solicitation, payment, receipt or offer of
any direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the order or provision of Medicare or Medicaid covered services,
items or equipment. These laws also impose restrictions on physicians' referrals
for designated health services to entities with which they have financial
relationships. Violations of these laws may result in substantial civil or
criminal penalties for individuals or entities, including large civil monetary
penalties and exclusion from participation in the Medicare and Medicaid
programs. Such exclusion, if applied to the physician groups or networks managed
by the Company, could result in significant loss of reimbursement. Several
states, including states in which the Company operates, have adopted similar
laws that cover patients in private programs as well as government programs. In
addition, the laws of many states prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities. New York State, for example, prohibits percentage
payments from physicians or physician groups to management entities for services
other than billing and collecting. The Company believes its operations are in
material compliance with applicable laws in all jurisdictions in which it
operates. Nevertheless, because of the structure of its relationship with its
affiliated physician groups and networks, many aspects of the Company's business
operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that a review of the Company's or
its affiliated physicians' businesses by courts or regulatory
8
<PAGE>
authorities will not result in a determination that could adversely affect the
operations of the Company or its affiliated physicians (for example, by
rendering the Company's management services agreements with a physician
organization unenforceable) or that the health care regulatory environment will
not change so as to restrict the Company's or its affiliated physicians'
existing operations or expansion. In addition, recently released regulations
dealing with the use of physician incentives may restrict the extent to which
payors or the Company may impose financial risk upon physicians (or other
providers). Violation of such regulations could result in substantial penalties.
Such regulations may reduce the Company's ability to control its expenses.
The confidentiality of patient records and the circumstances under which
such records may be released are subject to substantial regulation by state and
federal laws and regulations, which govern both the disclosure and use of
confidential patient medical record information. The Company believes that it
complies with the laws and regulations regarding the collection and distribution
of patient data in all jurisdictions in which it operates, but regulations
governing patient confidentiality rights are evolving rapidly and are often
unclear and difficult to apply in the rapidly restructuring health care market.
Additional legislation governing the dissemination of medical record information
is continually being proposed at both the state and federal level. Such proposed
legislation could require patient consent before even coded or anonymous patient
information may be shared with third parties and that holders or users of such
information implement security measures. In addition, the American Medical
Association (the "AMA") has issued a Current Opinion to the effect that a
physician who does not obtain a patient's consent to disclosure of patient
information for commercial purposes, including anonymous disclosure, violates
the AMA's ethical standards with respect to patient confidentiality. While the
AMA's Current Opinions are not law, they may influence physicians' willingness
to obtain patient consents or agree to permit the Company to access clinical
data in their systems without such consents. Any such restrictions could have a
material adverse effect on the Company's ability to market its services and
systems. Although the Company intends to safeguard patient privacy when clinical
data is accessed and to enter patient medical information into or receive such
information from its database only with the consent of the patient, if a
patient's privacy is violated, the Company could be liable for damages incurred
by such patients. There can be no assurance that changes to state or federal
laws will not materially restrict the ability of the Company to obtain or
disseminate patient information.
Products, including software applications, intended for use in the diagnosis
of disease or other conditions, or in the cure, treatment, mitigation or
prevention of disease, are subject to regulation by the United States Food and
Drug Administration (the "FDA") as medical devices. The laws administered by the
FDA impose substantial regulatory controls over the manufacturing, labeling,
testing, distribution, sale, marketing and promotion of medical devices and
other related activities. These regulatory controls can include compliance with
the following requirements: manufacturer establishment registration and device
listing; current good manufacturing practices; FDA clearance of a premarket
notification submission or FDA approval of a premarket approval application;
medical device adverse event reporting; and general prohibitions on misbranding
and adulteration. Violations of the laws concerning medical devices can result
in, among other things, severe criminal and civil penalties, product seizure,
recall, repair or refund orders, withdrawal or denial of premarket notifications
or premarket approval applications, denial or suspension of government contracts
and injunctions against unlawful product manufacture, labeling, promotion and
distribution or other activities. In its 1989 Draft Policy for the Regulation of
Computer Products (the "1989 Draft Policy Statement"), the FDA stated that it
intended to exempt certain clinical decision support software products from a
number of regulatory controls, and that until those regulations were issued it
would not require manufacturers of such products to comply with requirements
other than the prohibitions on misbranding and adulteration. The Company
believes that its clinical information systems are not medical devices and,
thus, are not subject to the controls imposed on manufacturers of such products
and do not fall within the scope of the 1989 Draft Policy Statement. The Company
further believes that to the extent that its systems were determined to be
medical devices, the systems would fall within the exemptions for decision
support
9
<PAGE>
systems provided by the 1989 Draft Policy Statement. The Company has not taken
action to comply with the controls that would otherwise apply if the Company's
systems were determined to be non-exempt medical devices. The FDA has stated
that it intends to revise its 1989 Draft Policy Statement and that it may
eliminate some or all of the exemptions that it currently allows. Accordingly,
there can be no assurance that the FDA will not now or in the future make a
determination that the Company's current or future clinical information systems
are medical devices subject to FDA regulations and are ineligible for the
exemptions from those regulations. Furthermore, there can be no assurance that
the Company would be able to comply in a timely manner, if at all, with FDA
regulations if the agency made such determinations. Thus, such determinations by
the FDA could significantly delay, or even prevent, the Company's ability to
offer its systems and could otherwise have a material adverse effect on the
Company's business, financial condition and results of operations and on the
price of the Common Stock. See "Business -- Government Regulation."
UNCERTAINTY RELATED TO HEALTH CARE REFORM; COST CONTAINMENT AND REIMBURSEMENT
TRENDS; CONSOLIDATION
The Company anticipates that Congress and state legislatures will continue
to review and assess alternative health care delivery and payment systems.
Potential approaches that have been considered include mandated basic health
care benefits, controls on health care spending through limitations on the
growth of private health insurance premiums and Medicare and Medicaid spending,
the creation of large insurance purchasing groups and other fundamental changes
to the health care delivery system. Proposals have also been discussed which
would provide incentives for the provision of cost-effective, quality health
care through formation of regional delivery systems. Private sector providers
and payors have embraced certain elements of reform, resulting in increased
consolidation of medical groups and competition among managers of medical
practice groups as these providers and payors seek to form alliances in order to
provide quality, cost-effective care. Due to uncertainties regarding the
ultimate features of reform initiatives and their enactment and implementation,
the Company cannot predict which, if any, of such reform proposals will be
adopted, when they may be adopted or what impact they may have on the Company,
and there can be no assurance that the adoption of reform proposals will not
have a material adverse effect on the Company's business, operating results or
financial condition. In addition, the announcement of reform proposals and the
investment community's reaction to such proposals, as well as announcements by
competitors and third-party payors of their strategies to respond to such
initiatives, could produce volatility in the trading and market price of the
Common Stock.
The health care industry is experiencing a trend toward cost containment as
government and private third-party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with service
providers. The federal government has implemented, through the Medicare program,
a resource-based relative value scale ("RBRVS") payment methodology for
physician services. This methodology went into effect in 1992 and is continuing
to be implemented in annual increments through December 31, 1996. RBRVS is a fee
schedule that, except for certain geographical and other adjustments, pays
similarly situated physicians the same amount for the same services. The RBRVS
is adjusted each year, and is subject to increases or decreases at the
discretion of Congress. To date, the implementation of RBRVS has reduced payment
rates for certain of the procedures historically provided by the physician
groups and networks managed by the Company. Management estimates that 35% of the
revenues of physician groups managed by the Company are derived from government
sponsored health care programs (principally, Medicare, Medicaid and state
reimbursed programs). RBRVS-type of payment systems have also been adopted by
certain private third-party payors and may become a predominant payment
methodology. Wider-spread implementation of such programs would reduce payments
by private third-party payors. Rates paid by many private third-party payors,
including those that provide Medicare supplemental insurance, are based on
established physician and hospital charges and are generally higher than
Medicare payment rates. A change in the patient mix of the practices under
Company management that results in a decrease in
10
<PAGE>
patients covered by private insurance could adversely affect the Company's
results of operations. The Company believes that cost containment trends will
continue to result in a reduction from historical levels in per-patient revenue
for medical practices. Further reductions in payments to physicians or other
changes in reimbursement for health care services could have an adverse effect
on the Company's operations, unless the Company is otherwise able to offset such
payment reductions. There can be no assurance that the effect of any or all of
these changes in third-party reimbursement could be offset by the Company
through cost reductions, increased volume, introduction of new services and
systems or otherwise. See "Business -- Government Regulation."
TECHNOLOGICAL CHANGE
The health care information industry is relatively new and is experiencing
rapid technological change, changing customer needs, frequent new product
introductions and evolving industry standards. In addition, as the computer and
software industries continue to experience rapid technological change, the
Company must be able to quickly and successfully adapt its clinical information
systems so that they continue to integrate well with the computer platforms and
other software employed by its customers. There can be no assurance that the
Company will not experience difficulties, including lack of necessary capital or
expertise, that could delay or prevent the successful development and
introduction of system enhancements or new systems in response to technological
changes. The Company's inability to respond to technological changes in a timely
and cost-effective manner could have a material adverse effect on the Company's
business, financial condition and results of operations and on the price of the
Common Stock. See "Business -- Clinical Information Systems."
DEPENDENCE ON PROPRIETARY ASSETS
The Company has made significant investments in its clinical information
systems and relies on a combination of patent, trade secret and copyright laws,
nondisclosure and other contractual provisions and technological measures to
protect its proprietary rights. The Company has two U.S. patent applications and
a foreign patent application commensurate with both U.S. applications but no
issued patents. There can be no assurance that any patent will be issued or, if
issued, that such patent or any other protections will be adequate or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to those of the Company. In addition, there
can be no assurance that the legal protections and precautions taken by the
Company will be adequate to prevent infringement or misappropriation of the
Company's proprietary assets.
Although the Company believes that its clinical information systems do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that a license or similar agreement will be available on
reasonable terms in the event of an unfavorable outcome on any such claim. In
addition, any such claim may require the Company to incur substantial litigation
expenses or subject the Company to significant liabilities and could have a
material adverse effect on the Company's business, financial condition and
results of operations and the price of the Common Stock. See "Business --
Proprietary Rights."
MANAGEMENT SERVICES ORGANIZATIONS NOT WHOLLY-OWNED; PHYSICIAN PUT RIGHTS;
DILUTION
The Company typically establishes a management service organization (an
"MSO") for each physician practice group or network to which it provides
services, which MSO is majority-owned by the Company. The physician group or
network served typically has a minority interest in the MSO. Although the
Company has sufficient interests in the MSOs to exercise control over them, the
Company may owe a fiduciary duty to the holders of various minority interests in
such MSOs. Accordingly, the Company may not be able to exercise unfettered
control over such MSOs and may be required to deal
11
<PAGE>
with them on terms no less favorable to such MSOs than could be obtained from
unaffiliated third parties.
Under certain specified circumstances, the Company has the option to cause
certain MSOs to be merged with and into a wholly-owned subsidiary of the Company
in a transaction in which the physicians' interests in such MSOs would be
exchanged for Common Stock of the Company (the "Roll Up Transaction"). The
Company has reserved 548,224 shares of Common Stock for issuance upon
consummation of the Roll Up Transaction, all of which shares are required to be
issued if the Company effects the Roll Up Transaction. Accordingly, the Roll Up
Transaction, if effected, will be dilutive to investors. In addition, certain of
the physician groups and networks managed by the Company have rights to require
the Company to purchase all or part of such physicians' interest in their
respective MSOs in the event that the Company does not consummate the Roll Up
Transaction within one year after the satisfaction of specified conditions.
There can be no assurance that the Company will have the financial resources to
purchase such interests in accordance with its obligations at the time any such
rights are exercised, or that the Company would be able to obtain financing on
satisfactory terms or conditions, if at all, to purchase such interests. To the
extent that any future financing requirements with respect to such put rights
are satisfied through the issuance of equity securities, investors may
experience dilution. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Contractual Relationships
with Affiliated Physicians."
DEPENDENCE ON KEY PERSONNEL
The Company's ability to market and deliver its services and systems and to
achieve and maintain a competitive position is dependent in large part upon the
efforts of its senior management, particularly Jonathan Edelson, M.D., the
Company's Chairman of the Board and Chief Executive Officer, and Steven
Hochberg, the Company's President. Although the Company is the beneficiary of
$250,000 "key man" life insurance policies on the lives of each of Dr. Edelson
and Mr. Hochberg, the Company does not believe such amount would be adequate to
compensate for the loss of the services of either executive. In addition,
although the Company plans to enter into employment agreements with most of its
senior executives, including Dr. Edelson and Mr. Hochberg, such agreements will
not assure the services of such employees. The loss of the services of one or
more members of its senior management could have a material adverse effect on
the Company. The Company's future success also will depend upon its ability to
attract and retain qualified management, technical and marketing employees to
support its future growth. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting or
retaining such personnel. The failure to attract and retain such persons could
materially adversely affect the Company. See "Management."
RISK OF LIABILITY CLAIMS
Customer reliance on the Company's services and systems could result in
exposure of the Company to liability claims if the Company's services and
systems fail to perform as intended or if patient care decisions based in part
on guidance from the Company's services and systems are challenged. Even
unsuccessful claims could result in the expenditure of funds in litigation,
diversion of management time and resources or damage to the Company's reputation
and the marketability of the Company's services and systems. While the Company
takes contractual steps to obtain indemnification for certain liabilities and
maintains general commercial liability insurance, there can be no assurance that
a successful claim could not be made against the Company, that the amount of
indemnification payments or insurance would be adequate to cover the costs of
defending against or paying such a claim or that the costs of defending against
such a claim or the payment of damages by the Company would not have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock.
12
<PAGE>
NO PRIOR PUBLIC MARKET; OFFERING PRICE DETERMINED BY AGREEMENT; VOLATILITY OF
STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance, there can be no
assurance that an active trading market for the Common Stock will develop or
continue after this offering. The initial public offering price of the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters, and may not be indicative of the market
price for the Common Stock after this offering. See "Underwriting." From time to
time after this offering, there may be significant volatility in the market
price for the Common Stock. Results of the Company's operations may fluctuate
significantly from quarter to quarter and will depend on numerous factors,
primarily the timing of the addition of new physician practice groups and
networks under management and the sale of clinical information systems and
associated services. Such fluctuations in quarterly operating results of the
Company, changes in general conditions in the economy, the financial markets or
the health care industry or other developments affecting the Company or its
competitors could cause the market price of the Common Stock to fluctuate
substantially. In addition, in recent years the stock market has experienced
extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to their operating performance.
DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma net tangible book value of
their shares of Common Stock in the amount of $9.56 per share, at an assumed
initial public offering price of $13.00 per share (after deducting underwriting
discounts and commissions and estimated offering expenses). Such investors will
experience additional dilution upon the exercise of outstanding options and
warrants. In addition, in the event the Company issues additional Common Stock
in the future, including shares that may be issued in connection with the Roll
Up Transaction or future acquisitions, investors may experience further
dilution. See "Dilution," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Contractual Relationships
with Affiliated Physicians."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock (including shares issued upon the exercise
of outstanding options) in the public market after this offering could adversely
affect the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate. Upon
completion of this offering, the Company will have approximately 6,500,267
shares of Common Stock outstanding. The 2,000,000 shares offered hereby will be
freely tradeable without restriction unless they are held by "affiliates" of the
Company as the term is used under the Securities Act of 1933 (the "Securities
Act") and the regulations promulgated thereunder. The remaining approximately
4,500,267 shares are restricted securities that may be sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144 promulgated under the Securities Act. As a result
of the contractual restrictions described below and the provisions of Rules 144,
144(k) and 701 under the Securities Act, additional shares will be available for
sale in the public market as follows: (i) no shares of Common Stock (other than
those shares sold hereby and not held by affiliates) will be available for
immediate sale in the public market on the date of this Prospectus, (ii) 19,272
shares of Common Stock subject to options exercisable within 90 days of the date
of this Prospectus will be freely tradeable by non-affiliates upon the
effectiveness of a registration statement relating to such stock options, (iii)
224,566 shares of Common Stock and 18,432 shares of Common Stock subject to
options exercisable within 90 days of the date of this Prospectus will be
eligible for sale 90 days after the date of this Prospectus, subject to the
volume, manner of sale and reporting
13
<PAGE>
requirements of Rule 144, and (iv) approximately 4,266,800 shares of Common
Stock and approximately 9,500 shares of Common Stock subject to options
exercisable within 180 days of the date of this Prospectus will be eligible for
sale upon expiration of the lock-up agreements 180 days after the date of this
Prospectus, subject to the volume, manner of sale and reporting requirements of
Rule 144. The holders of 2,941,985 shares of Common Stock have the right in
certain circumstances to require the Company to register their shares under the
Securities Act for resale to the public. If such holders, by exercising their
demand registration rights, cause a large number of shares to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the Company's Common Stock. If the Company were required to include in
a Company-initiated registration shares held by such holders pursuant to the
exercise of their "piggyback" registration rights, such sales may have an
adverse effect on the Company's ability to raise needed capital. See "Shares
Eligible for Future Sale," "Description of Capital Stock" and "Underwriting."
UNSPECIFIED USE OF PROCEEDS
Following this offering, the Company will have approximately $19.3 million
($23.0 million if the Underwriters' over-allotment option is exercised in full)
of the net proceeds of this offering available for working capital and general
corporate purposes, which may include acquisitions. The Company's management,
subject to approval by the Board of Directors in certain circumstances, will
have broad discretion with respect to the application of such proceeds. See "Use
of Proceeds."
POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BY-LAWS AND THE DGCL
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") and By-laws (the "By-laws") and the Delaware General Corporation
Law (the "DGCL") contain provisions which may have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Company's Board of
Directors. Such provisions may also render the removal of directors and
management more difficult. The Certificate of Incorporation and By-laws provide
for, among other things, a classified Board of Directors serving staggered terms
of three years, certain advance notice requirements for stockholder nominations
of candidates for election to the Board of Directors and certain other
stockholder proposals, restrictions on who may call a special meeting of
stockholders and a prohibition on stockholder action by written consent. In
addition, the Company's Board of Directors has the ability to authorize the
issuance of up to 5,000,000 shares of preferred stock in one or more series and
to fix the voting powers, designations, preferences and relative, participating,
optional and other special rights and qualifications, limitations or
restrictions thereof without stockholder approval. The DGCL also contains
provisions preventing certain stockholders from engaging in business
combinations with the Company, subject to certain exceptions. See "Description
of Capital Stock."
INVESTMENT COMPANY ACT CONSIDERATIONS
The Investment Company Act of 1940, as amended (the "1940 Act"), requires
the registration of, and imposes various substantive restrictions on, certain
companies that engage primarily, or propose to engage primarily, in the business
of investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding the composition of assets and sources of income, and
are not primarily engaged in business other than investing, holding, owning or
trading securities. The Company believes that it is, and it intends to remain,
primarily engaged in business other than investing, holding, owning or trading
securities. The Company will seek to invest temporarily the proceeds of this
offering, pending their use as described under the caption "Use of Proceeds,"
and to utilize the proceeds of this offering in the manner described under "Use
of Proceeds," so as to avoid becoming subject to the registration requirements
of the 1940 Act. Such investment is likely to result in the Company obtaining
lower yields on the funds invested than might be available in the securities
markets generally. There can be no assurance, however, that such investments and
utilization can be made. If the Company were required to register as an
investment company under the 1940 Act, it would become subject to substantial
regulation with respect to its capital structure, management, operations,
transactions with affiliates, and other matters.
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<PAGE>
THE COMPANY
The Company's predecessor, Med-E-Systems Corporation ("MES"), was
incorporated on August 27, 1993 as a clinical information systems development
company. Effective August 23, 1995, MES became a subsidiary of the Company
through a tax-free reorganization. The Company was subsequently merged with and
into Majean, Inc., a Delaware corporation, and the surviving corporation changed
its name to Advanced Health Corporation. The Company's executive offices are
located at 560 White Plains Road, Tarrytown, New York 10591, and its telephone
number at that address is (914) 524-4200.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
offered hereby are estimated to be approximately $23.4 million ($27.1 million if
the Underwriters' over-allotment option is exercised in full), at an assumed
initial public offering price of $13.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses.
The Company will use approximately $4.1 million of the net proceeds of this
offering to repay an aggregate of $4.0 million principal amount of indebtedness,
plus interest. The Company issued three 8% promissory notes in the principal
amounts of $1.5 million, $750,000 and $750,000 on February 28, April 26 and June
28, 1996, respectively. The Company issued a 9% promissory note in the principal
amount of $1.0 million on June 20, 1996. All of such notes will mature on the
earlier of the consummation of this offering and the one-year anniversary of
their issuance, in the case of the 8% notes, or July 31, 1997, in the case of
the 9% note. The proceeds of such notes are being used to finance working
capital.
The Company intends to use the balance of the net proceeds, approximately
$19.3 million, for working capital and general corporate purposes, which may
include acquisitions. From time to time in the ordinary course of its business,
the Company evaluates possible acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company
currently has no agreements or understandings, and is not engaged in active
negotiations, with respect to any such acquisition.
Pending the application of the net proceeds of this offering, the Company
intends to invest such proceeds in short-term, investment-grade,
interest-bearing instruments or money market funds.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
since inception and does not expect to pay dividends in the foreseeable future.
The Company presently intends to retain future earnings, if any, to finance the
expansion of its business. The payment of any cash dividends in the future will
depend on the Company's earnings, financial condition, results of operations,
capital needs, and other factors deemed pertinent by the Company's Board of
Directors, subject to laws and regulations then in effect.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on a pro forma basis giving effect to the Stock Splits and the
Preferred Stock Conversion and (ii) as adjusted to reflect the receipt and
initial application of the estimated net proceeds from the sale by the Company
of 2,000,000 shares of Common Stock offered hereby, at an assumed initial public
offering price of $13.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
----------- -----------
<S> <C> <C>
Current portion of long-term debt................................ $ 4,278,410 $ 278,410
----------- -----------
----------- -----------
Long-term debt, less current portion............................. 125,096 125,096
----------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized
and no shares issued and outstanding......................... -- --
Common Stock, $.01 par value, 15,000,000 shares authorized,
4,500,267 shares issued and outstanding pro forma; and
6,500,267 shares issued and outstanding as adjusted(1)........... 45,003 65,003
Additional paid-in capital....................................... 11,526,538 34,936,538
Accumulated deficit.............................................. (10,633,192) (10,633,192)
Treasury stock, at cost (8,937 shares pro forma and as
adjusted)........................................................ (75,000) (75,000)
----------- -----------
Total stockholders' equity..................................... 863,349 24,293,349
----------- -----------
Total capitalization......................................... $ 988,445 $24,418,445
----------- -----------
----------- -----------
</TABLE>
- ------------
(1) Excludes 976,681 shares issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $3.27 and 481,489 shares
issuable upon the exercise of outstanding warrants to purchase Common Stock
at a weighted average exercise price of $8.50 per share. Also excluded are
306,769 shares and 113,995 shares issuable upon the exercise of options and
warrants, respectively, which, in each case, are contingent upon the
Company's achieving certain capitalization levels related to regulatory
requirements or upon the Company's achieving certain performance targets.
See "Management -- Stock Plans" and Notes 3 and 10 of Notes to Consolidated
Financial Statements.
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<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1996 was
$(1,048,338), or $(0.23) per share of Common Stock on a pro forma basis, after
giving effect to the Stock Splits and the Preferred Stock Conversion. "Net
tangible book value per share" represents the amount of the Company's total
tangible assets less the Company's total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale of 2,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $13.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses), and the initial application of the
net proceeds therefrom, the pro forma net tangible book value of the Company at
June 30, 1996 would have been $22,381,662, or $3.44 per share of Common Stock.
This represents an immediate increase in pro forma net tangible book value of
$3.67 per share to existing stockholders and an immediate, substantial dilution
in pro forma net tangible book value per share of $9.56 per share to purchasers
of shares of Common Stock offered hereby, as illustrated in the following table:
<TABLE>
<CAPTION>
Assumed initial public offering price per share........... $13.00
<S> <C> <C>
Pro forma net tangible book value per share at June 30,
1996...................................................... $(0.23)
Increase per share attributable to new investors........ 3.67
------
Pro forma net tangible book value per share after this
offering.................................................. 3.44
------
Dilution per share to new investors....................... $ 9.56
------
------
</TABLE>
The following table sets forth, on a pro forma basis, after giving effect to
the Stock Splits and the Preferred Stock Conversion, as of June 30, 1996, the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and to be paid by purchasers of shares of Common Stock
offered hereby based upon assumed initial public offering price of $13.00 per
share (before deducting underwriting discounts and commissions and estimated
offering expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 4,500,267 69.2% $11,571,541 30.8% $ 2.57
New investors.......................... 2,000,000 30.8 26,000,000 69.2 13.00
--------- ------- ----------- -------
Total............................ 6,500,267 100.0% $37,571,541 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
The foregoing tables assume no exercise of stock options to purchase 976,681
shares of Common Stock outstanding at a weighted average exercise price of $3.27
per share and 481,489 shares issuable upon the exercise of outstanding warrants
to purchase Common Stock at a weighted average exercise price of $8.50 per
share. The foregoing tables also assume no exercise of 306,769 shares and
113,995 shares issuable upon the exercise of options and warrants, respectively,
which, in each case, are contingent upon the Company's achieving certain
capitalization levels related to regulatory requirements or upon the Company's
achieving certain performance targets. To the extent that any of such options or
warrants are exercised, there will be further dilution to new investors in this
offering. See "Management -- Stock Plans" and Notes 3 and 10 of Notes to
Consolidated Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the period from
inception (August 27, 1993) to December 31, 1993 and for the years ended
December 31, 1994 and 1995, and the balance sheet data as of December 31, 1994
and 1995, are derived from the Consolidated Financial Statements of the Company
included elsewhere in this Prospectus, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected consolidated balance
sheet data as of December 31, 1993 are derived from the consolidated financial
statements of the Company which have been audited by Arthur Andersen LLP,
independent public accountants, but which are not included in this Prospectus.
The selected consolidated statement of operations data for the six months ended
June 30, 1995 and 1996 and the selected consolidated balance sheet data as of
June 30, 1996 are derived from the Company's unaudited consolidated financial
statements, which include all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and results of operations as of and for the periods then
ended. The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996 or any future period. The selected consolidated
financial data set forth below is qualified by reference to, and should be read
in conjunction with, the Company's Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
PERIOD FROM INCEPTION DECEMBER 31, JUNE 30,
(AUGUST 27, 1993) TO ----------------- -----------------
DECEMBER 31, 1993 1994 1995 1995 1996
--------------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue................................ -$- $ 379 $ 1,054 $ 100 $ 7,617
Cost of sales.......................... -- 12 340 22 3,512
------- ------- ------- ------- -------
Gross profit........................... -- 367 714 78 4,105
Operating expenses..................... 66 1,318 3,255 617 4,034
Research and development expenses...... 455 1,582 3,157 1,512 1,875
------- ------- ------- ------- -------
Operating loss......................... (521) (2,533) (5,698) (2,051) (1,804)
Other income (expense)................. -- (15) (8) 1 (54)
------- ------- ------- ------- -------
Net loss............................... $ (521) $(2,548) $(5,706) $(2,050) $(1,858)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net loss per share..................... (0.30) (1.29) (1.68) (0.78) (0.41)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average number of common
shares and common share equivalents
outstanding(1)........................... 1,725 1,978 3,389 2,631 4,487
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1993 1994 1995 1996
----- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash................................................... $ 7 $ 7 $1,464 $ 837
Working capital (deficit).............................. (435) (1,032) (741) (2,713)
Total assets........................................... 27 913 6,462 8,191
Total debt............................................. -- 416 567 4,504
Total stockholders' equity (deficit)................... (416) (325) 2,675 863
</TABLE>
- ------------
(1) See Note 14 -- "Initial Public Offering" of Notes to Consolidated Financial
Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company provides a full range of integrated management services and
clinical information systems to physician group practices and physician
networks. The Company generates revenues from (i) fees for managing physician
group practices, (ii) fees for managing physician networks and (iii) fees for
use and support of its clinical information systems, including recurring
license, software installation, software integration, training and data
conversion fees. The Company contracts with its physician practice and network
management clients pursuant to long-term agreements with its MSOs, the results
of which MSOs are consolidated in the Consolidated Financial Statements. The
Company manages three medical practices in the greater New York metropolitan
area consisting of over 50 physicians. The Company also manages six physician
networks, and is developing additional networks, primarily in the fields of
cardiology, oncology and orthopedics.
Pursuant to the management services agreements that the Company enters into
with its physician practice clients, the physician practices outsource their
non-medical activities to the MSO. Fees are generated by the MSO through the
provision of these outsourced services, as well as certain additional management
and marketing services and clinical information systems. Fees are recognized by
the MSO as services are performed.
Pursuant to the management services agreements that the Company enters into
with physician networks, the MSOs recognize revenue from physician networks,
which contract with third-party payors for the delivery of health care services.
The payor contracts contain risk-sharing provisions whereby incentive revenue
can be earned or losses incurred, by the physician networks, based on the
utilization of physician and hospital services by assigned enrollees. There can
be no assurance that the Company will be able to negotiate, on behalf of the
physicians, satisfactory arrangements on a risk-sharing or capitated basis or
that the physician organizations managed by the Company will be able to provide
medical services at a profit under such arrangements. To the extent affiliated
physicians incur medical costs that limit their profitability, there can be no
assurance that the Company will be able to derive revenues from any such
affiliated relationship.
The Company anticipates entering into managed care or capitated
arrangements, either directly through the formation of an IPA or indirectly
through the assignment of managed care contracts entered into between its
affiliated physicians and third-party payors. The Company has little experience
in managing capitated-risk arrangements. Revenues under any such arrangements
entered into by the Company, whether directly through an IPA or through the
assignment of a capitated contract entered into by its affiliated physicians,
would generally be a fixed amount per enrollee. Under such an arrangement, the
Company would contract with affiliated physicians for the provision of health
care services and the Company would be responsible for the provision of all or a
portion of the health care requirements of such enrollees. To the extent that
enrollees require more care than is anticipated by the Company upon entering
into such a contract, the Company's revenues under such contracts may be
insufficient to cover its costs. The Company expects to enter into reinsurance
agreements with third-party insurers in respect of a portion of its risk under
such arrangements. See "Risk Factors -- Risks Associated with Capitated Fee
Arrangements" and "Business -- Contractual Relationships with Affiliated
Physicians -- Capitated and Other Fixed-Fee Arrangements."
The Company recognizes revenue from the sale and license of its clinical
information systems upon installation and acceptance, and from software
development and integration as services are provided. To
19
<PAGE>
date, the Company has not generated any significant revenues from the commercial
sale and installation of its clinical information systems. The Company has made
substantial investment in the development of its clinical information systems
and expects to continue such investment in the future.
To date, the Company has been dependent on a small number of contracts to
generate the majority of its revenues. In the year ended December 31, 1995,
approximately 68% of the Company's revenues were derived from its contracts with
Madison and an affiliate of PCS Health Systems, Inc., the managed care unit of
Eli Lilly & Company, while in the six months ended June 30, 1996, approximately
72% of the Company's revenues were derived from its contracts with Madison and
AHP&S. The Company expects that the concentration of its revenues will be
reduced as the Company enters into additional contracts to provide management
services and clinical information systems to physician organizations. See "Risk
Factors -- Concentration of Revenues."
The Company believes that its historical results of operations from period
to period are not comparable and that such results are not necessarily
indicative of results for any future periods because the Company was a
development stage company investing in technology development and did not
provide physician practice and network management services prior to December 11,
1995.
ACQUISITIONS
On August 28, 1995, the Company acquired certain assets and assumed certain
liabilities of Peltz Ventimiglia, Inc. ("Peltz"), a physician practice
management consulting company with physician clients located throughout the East
Coast of the United States, for 75,996 shares of Common Stock and contingent
warrants to purchase 113,995 shares of Common Stock at $4.38 per share. The
warrants are only exercisable, as contingent consideration, based on the
achievement of targeted operating performance criteria. The audited financial
statements of Peltz are included elsewhere in this Prospectus.
On September 1, 1995, the Company acquired U.S. Health Connections, Inc.
("Health Connections"), a network management company servicing the Southeastern
United States and headquartered in Atlanta, Georgia, for $150,000 in cash,
30,193 shares of the Common Stock and $150,000 in notes payable. As of June 30,
1996, $75,000 of notes payable remained outstanding. The purchase price also
included an additional 56,611 shares of Common Stock issued into escrow at
closing. These escrowed shares represent contingent consideration that will be
released from escrow based on the achievement of targeted operating performance
criteria. The audited financial statements of Health Connections are included
elsewhere in this Prospectus.
On April 1, 1996, the Company acquired certain assets of Benenson &
Associates, Inc. ("Benenson"), a physician network development company with
approximately 10 network clients located throughout the East Coast of the United
States, for 8,937 shares of Common Stock and $45,000 in cash, payable in two
installments of $22,500 each on the closing date and the first anniversary
thereof.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 and 1995
Net revenue for the six months ended June 30, 1996 increased to $7.6 million
from $100,000 for the comparable period ended June 30, 1995. The increase in
revenue primarily reflected the Company's initiation of management services to
Madison and AHP&S, as well as the provision of consulting and network management
services and the recognition of license revenues under the Company's contract
with Merck Medco Managed Care, Inc.
Cost of sales for the six months ended June 30, 1996 increased to $3.5
million from $21,822 for the comparable period ended June 30, 1995. The increase
in cost of sales related primarily to the non-medical and system expenses
outsourced to the Company from Madison and AHP&S.
20
<PAGE>
Operating expenses for the six months ended June 30, 1996 increased to $4.0
million from $616,503 for the comparable period ended June 30, 1995. The
increase in operating expenses reflected expenses related to the provision of
management services in the six months ended June 30, 1996 quarter, whereas the
Company was a development stage company in the comparable period ended June 30,
1995.
Research and development expenses for the six months ended June 30, 1996
increased to $1.9 million from $1.5 million for the comparable period ended June
30, 1995, due to an increase in the Company's development activities for its
clinical information systems.
Other expense for the six months ended June 30, 1996 was $53,628 and related
to interest on capital lease obligations and interest on $3.0 million and $1.0
million of indebtedness issued as of June 28, 1996, bearing interest at 8% and
9%, respectively. The Company incurred no interest expense for the comparable
period ended June 30, 1995.
The net loss for the six months ended June 30, 1996 was $1.9 million
compared to a loss of $2.0 million for the six months ended June 30, 1995.
Year Ended December 31, 1995 and 1994
Net revenue for the year ended December 31, 1995 increased to $1.1 million
from $378,878 for the year ended December 31, 1994. The increase in revenue
primarily reflected the provision of consulting and network management services,
as well as the initiation in September 1995 of the Company's contract with an
affiliate of PCS Health Systems, Inc., the managed care unit of Eli Lilly &
Company, and the initiation in December 1995 of the Company's management
services to Madison.
Operating expenses for the year ended December 31, 1995 increased to $3.3
million from $1.3 million for the year ended December 31, 1994. The increase in
operating expenses was due to the increases in staffing and general corporate
expenses required to fund the Company's transition from a development stage
company involved in the development of clinical information systems to a full
service physician practice and network management company.
Research and development expenses for the year ended December 31, 1995
increased to $3.2 million from $1.6 million, due to an increase in the Company's
development activities for its clinical information systems.
The net loss for the year ended December 31, 1995 was $5.7 million compared
to a loss of $2.5 million for the year ended December 31, 1994.
As of December 31, 1995, the Company had net operating loss carryforwards
("NOLs") available to offset future book and taxable income of approximately
$8.7 million and $6.2 million, respectively, which expire through 2010. The
difference between the book and tax NOLs relates principally to the differences
between book and tax accounting with respect to start-up costs, depreciation of
fixed assets, amortization of intangible assets and recognition of deferred
revenue. The book income tax benefits of $3.5 million and $1.3 million as of
December 31, 1995 and December 31, 1994, respectively, have been fully reserved
due to the uncertainty of their future realization.
Year Ended December 31, 1994 and Period from Inception (August 27, 1993) through
December 31, 1993
Net revenue for the year ended December 31, 1994 was $378,878, including
license revenues from a third party and development revenues from Physicians'
Online, Inc. See "Certain Transactions." The Company realized no revenue during
the period from inception through December 31, 1993. During both of such
periods, the Company was a development stage company primarily engaged in the
development of clinical information systems.
21
<PAGE>
Operating expenses for the year ended December 31, 1994 increased to $1.3
million, from $66,192 in the period from inception to December 31, 1993. The
increase in operating expenses was due, in part, to the inclusion of 12 months
of operating results in 1994 compared with approximately four months in 1993
and, in part, to the increase in staffing expenses and general corporate
expenses required to further develop the Company's clinical information systems.
Research and development expenses for the year ended December 31, 1994
increased to $1.6 million from $454,622 for the period from inception to
December 31, 1993. These expenses related to the Company's development
activities for its clinical information systems.
The net loss for the year ended December 31, 1994 was $2.5 million compared
to a loss of $520,814 for the period from inception through December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its capital requirements through the
sale of equity and debt securities. The Company issued three 8% promissory notes
in the principal amounts of $1.5 million, $750,000 and $750,000 on February 28,
April 26 and June 28, 1996, respectively. The Company issued a 9% promissory
note in the principal amount of $1.0 million on June 20, 1996. All of such notes
will mature on the earlier of the consummation of this offering and the one-year
anniversary of their issuance, in the case of the 8% notes, or July 31, 1997, in
the case of the 9% note. The proceeds of such notes are being used to finance
working capital. At June 30, 1996, the Company had cash and cash equivalents of
$836,863.
For the year ended December 31, 1995, the Company had a negative cash flow
from its operating activities of $4.3 million, compared with $4.0 million for
the six months ended June 30, 1996.
The Company believes that the net proceeds of this offering, cash on hand,
interest income and revenues from operations will be sufficient to fund planned
operations of the Company through at least the end of 1998. The Company has no
planned material capital expenditures or capital commitments.
From time to time in the ordinary course of its business, the Company
evaluates possible acquisitions of businesses, products and technologies that
are complementary to those of the Company. The Company currently has no
agreements or understandings, and is not engaged in active negotiations, with
respect to any such acquisition.
Under certain specified circumstances, the Company has the option to cause
the Roll Up Transaction to occur. The Company has reserved 548,224 shares of
Common Stock for issuance upon consummation of the Roll Up Transaction, all of
which will be issued if the Company effects the Roll Up Transaction.
Accordingly, the Roll Up Transaction, if effected, will be dilutive to
investors. In addition, certain of the physician groups and networks managed by
the Company have rights, to require the Company to purchase all or part of such
physicians' interest in their respective MSO in the event that the Company does
not consummate the Roll Up Transaction within one year after the satisfaction of
specified conditions. There can be no assurance that the Company will have the
financial resources to purchase such interests in accordance with its
obligations at the time any such rights are exercised, or that the Company would
be able to obtain financing on satisfactory terms or conditions, if at all, to
purchase such interests. See "Risk Factor--Management Service Organizations Not
Wholly-Owned; Physician Put Rights; Dilution" and "Business--Contractual
Relationships with Affiliated Physicians -- Capitated and Other Fixed-Fee
Arrangements."
22
<PAGE>
BUSINESS
OVERVIEW
Advanced Health Corporation provides a full range of integrated management
services and clinical information systems to physician group practices and
physician networks under long-term contracts. The management services provided
by the Company include physician practice and network development, marketing,
payor contracting, financial and administrative management, clinical information
management, human resource management and practice and network governance. The
Company developed its clinical information systems to provide physicians, at the
point of care and on a real-time basis, with patient-specific clinical and payor
information and the ability to generate patient medical orders and facilitate
the implementation of disease management programs. The Company focuses its
management efforts on high-cost, high-volume disease specialties, such as
cardiology, oncology and orthopedics. The Company currently manages two
single-specialty physician group practices and one multi-specialty physician
group practice comprised of an aggregate of over 50 physicians in the New York
metropolitan area and six physician networks with over 350 physicians in the
greater New York and Atlanta metropolitan areas. The Company believes its
management services and clinical information systems will enable physicians to
enhance the quality and reduce the cost of health care.
INDUSTRY
Health care expenditures in the United States have risen rapidly over the
past two decades and totalled approximately $1 trillion in 1994. One significant
factor affecting health care expenditures in the United States is the aging of
the population. Older Americans utilize more health care services. In 1992, the
number of Americans 65 years old or over represented 12% of the U.S. population,
but were responsible for approximately 23% of all health care expenditures. In
particular, older Americans spend more on certain medical specialties, such as
cardiology, oncology and orthopedics. In 1992, spending on cardiology, oncology
and orthopedics totalled approximately $200 billion and represented
approximately 17%, 5% and 5%, respectively, of total direct health care costs in
the United States.
Increasing concern over the rising cost of health care in the United States
has led to the development of managed care organizations and programs. Under
such programs, managed care payors typically govern the provision of health care
with the objective of ensuring delivery of quality care in a cost-effective
manner. The traditional fee-for-service method of compensating health care
providers offers few incentives for the efficient utilization of resources and
is generally believed to contribute to health care cost increases at rates
significantly higher than inflation. Consequently, fee-for-service reimbursement
is rapidly being replaced by alternative reimbursement models, including
capitated and other fixed-fee arrangements. The number of private insurance
beneficiaries who are enrolled in HMOs increased by approximately 40% from 1991
to 1994, with approximately 40 million beneficiaries enrolled in HMOs in 1991
and approximately 57 million beneficiaries enrolled in HMOs in 1994. In
addition, the number of Medicare beneficiaries enrolled in managed care programs
increased by approximately 52% from December 1994 to April 1996. The growth in
enrollment in these new reimbursement models is shifting the financial risk of
delivering health care from payors to providers.
As a result of this changing health care environment, health care cost
containment pressures have increased physician management responsibilities while
lowering reimbursement rates to physicians. Consequently, physician compensation
has declined; the average net income for physicians decreased by approximately
4% from 1993 to 1994. Because approximately 67% of all physicians currently
practice individually or in two-person groups, their ability to lower costs and
to negotiate with payors is limited. Individual physicians and small group
practices also tend to have limited administrative capacity, limited ties to
other health care providers (restricting their ability to coordinate care across
a variety of specialties), limited capital to invest in new clinical equipment
and technologies and limited purchasing power with vendors of medical supplies.
In addition, individual physicians and small group practices
23
<PAGE>
typically lack the information systems necessary to enter into and manage
risk-sharing contracts with payors and to implement disease management programs
efficiently.
In response to the foregoing factors, individual physicians and small group
practices are increasingly affiliating with larger group practices and physician
practice management companies ("PPMs"). From 1991 to 1995, the number of
physicians practicing in group practices increased by approximately 14% to a
total of 185,000 physicians, with approximately 5% of such physicians managed by
PPMs. By acquiring physician practices, PPMs are successfully providing
physicians with lower administrative costs, leverage with vendors and payors and
economies of scale necessary to attract capital resources. In addition,
management companies and consultants are organizing independent physician
practices, independent physician associations, physician hospital organizations
and other physician organizations for the purpose of enabling physicians to
contract with managed care payors.
The Company believes that significant opportunities exist, in the
consolidating health care industry, to assist physicians in managing the
administrative aspects of group practices and networks. More importantly, since
clinical decisions made by physicians impact 85% of overall health care
expenditures, the Company believes that even greater opportunities exist to
assist physicians in managing the clinical aspects of group practices and
networks. The Company believes its integrated physician practice and network
management services and clinical information systems will enable physicians to
more effectively control both the quality and cost of health care.
STRATEGY
The objective of the Company is to become a leading provider of integrated
management services and clinical information systems to physician organizations.
By enabling physicians to develop and efficiently manage group practices and
networks, the Company seeks to assist physicians in facilitating risk-based
managed care contracts, developing and implementing disease management programs
and monitoring and controlling health care outcomes and costs. The Company
intends to achieve its objective through the implementation of the following
strategy:
.Establishing Long-Term Alliances with Physician Organizations. The Company is
seeking to partner with physician group practices and networks through
long-term management contracts under which the Company provides a full range of
integrated management and information services. The Company believes that
contracting with physician organizations, rather than acquiring them, permits
physicians to remain independent while providing them with the proper
incentives and resources to improve their organizations. The Company typically
develops an alliance with each physician organization through the establishment
of an MSO. See "Business -- Contractual Relationships with Affiliated
Physicians."
. Managing High-Cost, High-Volume Disease Specialties. The Company believes that
the greatest opportunity for achieving clinical efficiencies is in high-cost,
high-volume disease specialties such as cardiology, oncology and orthopedics.
Total health care expenditures for these medical specialties are expected to
increase with the aging of the U.S. population. The Company seeks to integrate
physicians into comprehensive health care delivery systems to provide them
with greater access to managed care contracts and to implement disease
management programs. The Company believes that the evolution of disease
specialty treatment organizations will play a major role in managed care
contracting as payors recognize that the quality of care is improved and the
cost of care reduced when reimbursement and health care services target a
specific disease through coordinated networks of health care providers.
. Providing Physicians with Clinical Information at the Point of Care. The
Company has designed and developed point-of-care clinical information systems
that link physician users and their offices on a real-time basis to other
physicians, health care providers and third-party databases. By facilitating
the
24
<PAGE>
integration of clinical guidelines and efficient access to information, the
Company believes it can assist physicians in improving the quality and
lowering the cost of patient care.
. Focusing on Selected Geographic Markets. The Company seeks to provide its
services to physician group practices and networks located principally in
geographic markets where fee-for-service reimbursement is shifting to
capitated and other risk-based reimbursement and where there are significant
concentrations of physicians specializing in high-cost, high-volume disease
specialties. The Company's initial target markets include the greater New
York, Philadelphia and Atlanta metropolitan areas.
. Developing Strategic Industry Relationships. The Company believes that
developing strategic industry relationships will enhance its ability to
penetrate existing markets, gain access to new markets and develop new
products and services. The Company has entered into a software license and
integration agreement with Merck Medco Managed Care, Inc. for the Company's
prescription writing software. In addition, the Company has entered into a
contract with an affiliate of PCS Health Systems, Inc., the managed care unit
of Eli Lilly & Company, to provide disease management information services and
software for the treatment of certain diseases. The Company is continuing to
seek relationships for the development and distribution to third parties of
its clinical information systems.
PHYSICIAN PRACTICE AND NETWORK SERVICES
The Company provides physicians with a full range of integrated services to
develop group practices and networks, to manage group practice and network
operations, to develop disease management programs and to manage medical risk.
These integrated services include clinical support and administrative and
marketing services as well as point-of-care information systems and support. The
Company believes that its point-of-care clinical information systems provide
physicians with the information needed to improve the quality and reduce the
cost of health care.
The Company manages two single-specialty group practices and one
multi-specialty group practice located in the New York City metropolitan area.
The two single-specialty group practices are collectively comprised of more than
20 clinical cardiologists, interventional cardiologists and cardiothoracic
surgeons, including leading physicians in the areas of minimally invasive
coronary artery bypass grafts and angioplasties employing coronary stents. The
multi-specialty group practice is made up of over 35 physicians who have, with
the Company's assistance, aggregated their practices into a group practice. The
medical specialties represented by this group include adult primary care,
cardiology, oncology and orthopedics. The Company is currently negotiating with
additional physician group practices in the greater New York, Philadelphia and
Atlanta metropolitan areas.
The Company manages six physician networks covering approximately 738,000
lives, with a total of seven payor contracts among such networks. The Company
manages a network of approximately 110 cardiologists in New Jersey and is
developing additional cardiology networks in New York, Connecticut, Pennsylvania
and Delaware. The Company anticipates that these cardiovascular networks will
provide comprehensive cardiac care, including ancillary services. The Company
manages a community and medical center-based oncology network in Atlanta serving
approximately 150,000 lives that include both medical and radiation oncology.
The Company is currently developing an oncology network in New York. The Company
manages an orthopedic network in Atlanta, covering approximately 205,000 lives
and is developing orthopedic networks in New York, New Jersey, Pennsylvania and
Connecticut. In addition, the Company manages three additional networks in the
greater Atlanta area covering approximately 383,000 lives, including a
multi-specialty network, an obstetrics and gynecology network and a plastic
surgery network.
In addition to providing administrative management services to physician
organizations, the Company seeks to differentiate itself by assisting physicians
in managing the clinical aspects of their practices. The Company believes that
its integrated management services and clinical information systems will enhance
the ability of physician group practices and networks to implement disease
25
<PAGE>
management programs and to manage practices under risk-based contracts. The
Company is working to assist physicians in developing disease-specific clinical
practice guidelines and in practicing in accordance with applicable standards of
care. The Company has initially focused the implementation of its
single-specialty disease management strategy on the creation of an integrated
comprehensive cardiovascular care program, which includes physician group
practices, networks and medical support services. It is anticipated that this
disease management program will be delivered through linked practices and
networks of cardiovascular specialists under management and/or development by
the Company who will provide integrated, high-quality care for patients based on
clinical care guidelines developed by the physician network. The Company
anticipates that the physicians within these practices and networks will be
linked together by the Company's clinical information systems.
The Company has expanded its physician practice and network management
expertise through acquisitions. In August 1995, the Company acquired the assets
of Peltz, which provides consulting services to physicians seeking to form group
practices on the East Coast, including assistance in the legal, administrative,
technical, and logistical aspects of group formation and the subsequent
recruiting of new physicians. In September 1995, the Company acquired Health
Connections, an Atlanta-based physician network management company with over two
years of network management experience in disease-specific areas, including
oncology and orthopedics. In April 1996, the Company acquired certain assets of
Benenson, a physician network development company specializing in the formation
of state-wide and regional cardiology and orthopedic networks capable of
marketing and servicing risk-based contracts.
The Company markets its physician practice management and network management
services through (i) direct sales methods, (ii) consultative sales that include
providing advice on the development, consolidation and financing of group
practices and networks and (iii) cross-selling to customers of its clinical
information systems.
PHYSICIAN PRACTICE SERVICES
The Company offers a comprehensive set of physician practice management
services, including practice development and strategic planning, marketing,
payor contracting and management, financial and administrative management,
clinical information management, human resource management and practice
governance.
Practice Development and Strategic Planning. The Company assists physician
group practices in developing and expanding their practices through a
combination of physician recruitment, physician specialty mix analysis,
acquisition evaluation and integration, ancillary services evaluation, financial
consulting and strategic planning.
Marketing. The Company assists physician group practices in marketing their
medical services to HMOs, insurance companies, self-insured companies and the
patient community. Working closely with the physician group practice, the
Company develops public relations and community outreach programs designed to
educate managed care entities and the patient community about the medical
services provided by the physician group practice.
Payor Contracting and Management. The Company assists physician group
practices in negotiating and structuring managed care contracts with payors for
the provision of physician services. The Company works with physician group
practices to meet credentialling standards and specialty mix requirements of
payors. The Company administers payments to physician providers under payor
contracts.
Financial and Administrative Management. The Company offers a variety of
financial and administrative management services to physician group practices.
The Company's financial management services include accounting, payroll,
finance, payables management, financial reporting, financial
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controls, insurance negotiation and billing and collection. The Company's
administrative management services include lease negotiations, facilities
contracting and inventory management.
Clinical Information Management. The Company offers physician group
practices its proprietary clinical information management systems. The
Med-E-Practice suite of applications is delivered as an integrated system of
computer hardware, software and clinical information intended to provide a
physician, at the point of care and on a real-time basis, with access to
databases containing clinical, diagnostic, disease management, patient medical
record and other medical information. The Company's clinical information system
provides a seamless interface with third-party administrative software. See
"Business -- Clinical Information Systems."
Human Resource Management. The Company, through its MSOs, employs and
manages all non-medical personnel that perform administrative, clerical and
secretarial support, billing and collection and records management for a
physician practice. The Company evaluates such employees, establishes personnel
policies and procedures and manages employee benefit programs. The Company also
provides payroll administration on behalf of the physician practice for the
medical personnel.
Practice Governance. The management services agreement that the Company
enters into with a physician practice provides for the establishment of a
management advisory board. Such board is responsible for developing management
and administrative policies for the overall operation of the physician group
practice and guidelines for the delivery of medical services. The management
advisory board is controlled by licensed physicians within the physician group
practice.
PHYSICIAN NETWORK SERVICES
The Company's physician network management services include network
development and strategic planning, disease management program development,
payor marketing and contracting, financial and administrative management,
clinical information management and network governance.
Network Development and Strategic Planning. The Company provides network
development services including feasibility studies, organizational services,
financial services, payor identification services, physician recruiting and
credentialling services and strategic planning services.
Disease Management Program Development. The Company provides physician
networks with disease management program development services, including
clinical guidelines development, implementation and management services, data
collection, outcomes measurement and clinical trials development.
Payor Marketing and Contracting. The Company assists physician networks in
marketing their medical services to health care payors, including HMOs,
insurance companies, self-insured companies and other managed care entities. The
Company works with each physician network to educate payors about the medical
services provided by such network. The Company structures and negotiates risk-
based contracts on behalf of its affiliated physician networks. The Company
works with physician networks to meet credentialling standards and specialty mix
requirements of payors.
Financial and Administrative Management. The Company offers a variety of
financial and administrative services to physician networks. The financial
services provided by the Company include risk management, capitation allocation
and distribution, claims processing and accounting services. The administrative
services provided by the Company include records maintenance, utilization
management and communications.
Clinical Information Management. The Company offers clinical information
management services to physician networks. The Med-E-Network suite of
applications allows network physicians to process electronic referrals and
electronic claims. Med-E-Network also provides access to electronic
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payor and patient eligibility information, third-party databases and
patient-specific diagnostic and clinical information.
Network Governance. The Company assists network medical directors and
governance committees with a variety of governance issues.
CLINICAL INFORMATION SYSTEMS
The Company has developed clinical information systems that link physician
users at the point of care and on a real-time basis with patient data and
clinical guidelines maintained by the Company and third parties. The Company's
clinical information systems consist of proprietary software, third-party
hardware, proprietary and third-party databases and related support services.
The Company's clinical information systems are designed to allow physicians (i)
to access patient-specific clinical and payor information, (ii) to generate
patient instructions, prescriptions and orders for tests, specialty referrals
and specialty procedures and (iii) to access databases containing managed care
and disease management guidelines, diagnostic/treatment preferences and
guidelines affecting medical orders.
The Company's clinical information systems are designed to complement
existing health care information systems and to function with third-party
applications. The clinical information system connects to physician users either
through the use of a hand-held computer equipped with a wireless modem or a
desktop computer using a standard wireline modem. It is anticipated that access
to the Company's clinical information systems will be delivered to physician
users and other health care professionals via both private and public networks,
including the Internet. The Company's product suites operate within a
client/server-based open architecture. The Company's products support HL-7
interfaces, incorporate TCP/IP protocols for real-time data transmission and run
on the Microsoft Windows operating system and standard hardware platforms. The
Company employs proprietary processes and standard commercial security measures
to ensure the privacy of the data communication paths within its products.
The Company has made only limited commercial sales of its clinical
information systems to date. Since October 1994, the Company has provided its
clinical information systems, including user support, data center operations and
network operations, to two pilot sites in Michigan, consisting of approximately
10 physicians and, since December 1995, to a multi-specialty group, consisting
of approximately 35 physicians, that the Company manages in New York. The
Company has developed training and installation templates for its products and
has experience using these templates in its two pilot sites and in a New
York-based physician group practice. The Company has a contract with a
third-party to provide training to its clients. In addition to providing its
clinical information systems to its affiliated physicians, the Company intends
to continue licensing its clinical information systems to third-party health
care organizations. The Company has one employee dedicated to developing
distribution channels for its clinical information systems. In addition, the
Company markets its clinical information systems to physician group practices
and networks together with its management services.
On September 27, 1995, the Company entered into a software license and
integration agreement with Merck Medco Managed Care, Inc. for the Company's
prescription writing software, which provides formulary management, drug
utilization and review ("DUR") edits and linkage to drug therapy protocols. On
August 1, 1995, the Company signed an agreement to provide disease management
information systems and software to an affiliate of PCS Health Systems, Inc.,
the managed care unit of Eli Lilly & Company. The Eli Lilly & Company affiliate
has agreed to sponsor two pilot programs involving the software applications
developed by the Company.
The Company continues to pursue strategic relationships with health care
providers as well as hospital information systems companies, physician practice
management systems companies and on-line services companies for the purpose of
further developing and marketing its information systems.
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SYSTEMS
The Company offers a broad range of clinical information systems for
physician users through two suites of applications, Med-E-Practice and
Med-E-Network. Med-E-Practice is designed to be used directly by physician group
practices in support of clinical decision making, clinical ordering and
administrative management. Med-E-Network is designed to support administrative
and clinical decision making for physician networks engaged in capitated and
other fixed-fee arrangements under managed care contracts. These systems have
only been developed by the Company recently, and the initial limited commercial
installations of the Med-E-Practice suite of applications occurred in June 1996.
The Med-E-Network suite of applications is expected to be initially installed
during August 1996. See "Risk Factors -- Uncertainty of Successful
Commercialization of Clinical Information Systems."
The following table summarizes the two suites of applications offered and
being developed by the Company:
<TABLE>
<CAPTION>
PRODUCT NAME PRODUCT DESCRIPTION
- ------------------------------- ----------------------------------------------------------
<S> <C>
MED-E-PRACTICE
Smart Scripts................ Pharmaceutical prescription writing application providing
formulary management, DUR edits and diagnostic coding
linkage to drug therapy protocols.
Med-E-Visit.................. Patient encounter application generating a Superbill with
fully-qualified diagnostic coding linked to appropriate
billing codes required to support outcomes analysis.
Referral..................... Supports multiple referral networks by recording referral
information and providing both network-specific referral
rules and appropriate network specialists.
Conditions Editor............ Tracks and maintains an active conditions list by patient.
Allergies Editor............. Maintains active and inactive allergy conditions by
patient, supporting charting and DUR editing.
Practice Management
Integrator................. Allows Med-E-Practice applications to integrate with
third-party physician practice management systems using
industry-standard HL-7 records.
Clinical Note................ Allows physicians to complete clinical notes at the point
of care. Currently in development.
MED-E-NETWORK
Med-E-Net Central............ Provides centralized administrative functions necessary to
manage risk-taking specialty networks.
Med-E-Net Office............. Integrates physicians in geographically dispersed
networks.
Med-E-Net Integrator......... Provides integration and connectivity between the
applications in the Med-E-Network suite and third-party
databases.
Med-E-Net Cardiology......... Provides cardiology-specific extensions to Med-E-Network
for managing risk-taking cardiology networks.
</TABLE>
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Med-E-Practice provides administrative and clinical support for physician
group practices. The Med-E-Practice suite is designed for use by physicians at
the point of care and on a real-time basis and is intended to allow better care
decisions by providing better information. All of the applications in the
Med-E-Practice suite are designed to be run on a pen-based, portable, wireless
computer for use in a busy ambulatory practice. The Med-E-Practice suite
consists of the following applications:
Smart Scripts. Smart Scripts is a prescription writing application that
provides the clinician: (i) patient-specific prescription history, (ii)
real-time formulary management, specific to each patient's insurance coverage,
(iii) clinical intervention screening, using third-party DUR modules, (iv)
default dosing, (v) generic substitution, (vi) condition/drug relationship
maintenance and (vii) support for individual customer lists. The Company also
markets Smart Scripts as a stand-alone product. The Company is also developing
an Internet/intranet version of Smart Scripts, "Internet Script Writer."
Internet Script Writer is designed to allow any physician with access to the
Internet to gain the advantages of on-line prescription management. The Internet
Script Writer will provide (i) patient-specific prescription history, (ii)
real-time formulary management, specific to each patient's insurance coverage,
(iii) clinical intervention screening, using third-party DUR modules and (iv)
legible, printed prescriptions. The Company expects that the Internet Script
Writer will be commercially available in the fourth quarter of 1996.
Med-E-Visit. Med-E-Visit is a patient encounter management application that
records procedures and conditions. Med-E-Visit allows for the selection of
laboratory, x-ray, immunization, visit and procedure codes, using standard
diagnostic and billing coding. Med-E-Visit links all procedures with conditions
for outcomes analysis and facilitates correct insurance billing. Med-E-Visit
records follow-up visit requirements and, in conjunction with the Practice
Management Integrator, submits a Superbill to a third-party practice management
system.
Referral. The Referral application simplifies patient referrals through
real-time access to each individual patient's appropriate physician network. The
Referral application records referral information, provides network-specific
referral rules and helps to select the appropriate referral physician by
specialty and location and allows a complete referral form to be created and
printed.
Conditions Editor. The Conditions Editor automatically tracks a patient's
medical condition information generated by the other applications in the
Med-E-Practice suite. It uses disease-specific algorithms to monitor and permit
a physician to record a patient encounter. The Conditions Editor also allows the
clinical user to directly edit and manage the current conditions list.
Allergies Editor. The Allergies Editor allows the clinical user to easily
maintain allergy information for use in the Med-E-Practice suite. Allergy
information is provided by the Conditions Editor to the Smart Scripts
application and other Med-E-Practice applications.
Practice Management Integrator. The Practice Management Integrator
integrates the Med-E-Practice suite with third-party practice management systems
through a Company-designed interface using the industry standard HL-7 interface.
Clinical Note. The Clinical Note is designed to be an "at a glance" utility
bringing the most appropriate information to the physician at the point of care.
The Clinical Note application is intended to enable the physician to review the
most current information regarding the patient's medical history, including
current medications, active and inactive conditions, office visits, past
referrals and pertinent test results. The Clinical Note also permits the
physician to update patient information during the patient encounter with new
clinical findings, new prescriptions, new referrals and new procedure orders.
The automated Clinical Note application structures the input of information and
orders in a focused and customizable format to allow rapid physician-driven data
entry and retrieval. The Clinical Note is expected to be commercially available
in 1997.
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Med-E-Network is a suite of network management applications supporting
physician networks engaged in risk-based contracts with payors. Med-E-Network
automates network configuration, maintenance of network rules, referral
management, utilization review management, claims and encounter submissions and
financial and clinical reporting. Med-E-Network utilizes a relational database
engine which integrates various sources of information and provides a flexible
repository for developing administrative, financial and clinical reports. The
Med-E-Network suite consists of the following applications:
Med-E-Net Central. Med-E-Net Central is designed to centralize and support
the administrative functions of a risk-taking physician network by (i) providing
pre-certification, (ii) processing claims and encounters, (iii) generating,
managing and matching referrals, (iv) providing financial and clinical
utilization review reporting, (v) providing automated utilization review
approvals and denials and (vi) providing eligibility assistance.
Med-E-Net Office. Med-E-Net Office links physician offices to Med-E-Net
Central. Med-E-Net Office is a forms-based, scaleable, client/server application
supporting referral creation and receipt, claims and encounter submission and
the creation and submission of treatment plans.
Med-E-Net Integrator. The Med-E-Net Integrator provides connectivity between
the applications in the Med-E-Network suite and third-party databases.
Med-E-Net Cardiology. Med-E-Net Cardiology is designed to deliver
procedure-specific guidelines for the management of cardiac disease coupled with
an automated procedure approval and referral engine. Med-E-Net Cardiology is
expected to be commercially available in the third quarter of 1996.
CLINICAL INFORMATION SYSTEMS DEVELOPMENT
The Company believes that the timely development of new clinical information
applications and the enhancement of existing clinical information systems are
important to its competitive position. The Company's product development
strategy is directed toward creating new applications that (i) increase the
functionality of current products by providing enhanced interfaces to
third-party systems and data repositories, (ii) expand coverage along the
continuum of clinical care, (iii) increase coverage to additional disease and
procedure groups and (iv) provide customers with a range of decision support
systems at various price points. The Company has approximately 20 professionals
dedicated to systems development. See "Risk Factors -- Technological Change."
CONTRACTUAL RELATIONSHIPS WITH AFFILIATED PHYSICIANS
The Company typically establishes an MSO for each physician organization it
manages. The MSO is a joint venture between the physician organization and the
Company, with the Company owning at least 51% of the equity in the MSO. The MSO
enters into a long-term management services agreement with the physician
organization pursuant to which the MSO provides group practice management or
network management services that provide both administrative and clinical
support to members of the physician organization. The MSO concurrently enters
into a services agreement with the Company pursuant to which it gains access to
management services and clinical information systems from the Company. For each
MSO, a stockholders agreement is entered into among the MSO, the physician
organization and the Company. The stockholders agreement, among other things,
(i) restricts the transfer of MSO equity, (ii) provides the terms upon which the
MSO can, at the Company's option, be merged with and into a wholly-owned
subsidiary of the Company in a transaction in which the physician organization
will receive stock of the Company in exchange for shares in the MSO and (iii)
grants to the physician organization the right to put its equity in the MSO to
the Company if the Company does not exercise its option to merge the MSO into
the Company within one year after the Company's satisfaction of certain
specified targets. The Company has reserved 548,224 shares of Common Stock
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<PAGE>
for issuance upon the merger of the MSOs into the Company. See "Risk Factors --
Management Service Organizations Not Wholly-Owned; Physician Put Rights;
Dilution."
Physician Practices. The management services agreements between the MSO and
a physician practice group generally have an initial term of five to 20 years
and are automatically renewable for additional terms. Such agreements typically
are subject to early termination for cause. The management services agreements
generally obligate an MSO to provide certain non-medical practice management
services to the physician practice group for a monthly fee. The fee paid to the
MSO is generally a combination of fixed fees for certain services and percentage
fees for certain services. For risk-based contracts that the physician practice
group enters into, the management services agreement will generally provide for
additional management fees based upon savings recognized by the physician
practice group because of any cost efficiencies resulting from the MSO's
performance. The fees are set to be competitive within the geographic area in
which the physician practice group is located. A provision restricting the
physician practice group from competing against the MSO or employing the MSO's
employees is generally included in the agreement.
Physician Networks. The management services agreements between the MSO and a
physician network generally have an initial term of at least five years and are
automatically renewable for additional terms. Such agreements typically are
subject to early termination for cause. The management services agreements
generally obligate an MSO to provide certain non-medical practice management
services to the physician network for a fee. The fee paid to the MSO for
risk-based or capitated contracts is generally a service fee equal to the actual
cost, not to exceed a specified percentage of capitated revenues, for providing
the non-medical management services plus an incentive based on savings generated
by the network. The fee paid to the MSO for fee-for-service contracts is
generally equal to the administrative fees included in the managed care contract
plus a management processing fee agreed upon by the MSO and the physician
network. The fees are set to be competitive within the geographic area in which
the physician network is located. In the agreement, the physician network agrees
that the MSO will be the exclusive provider of non-medical management services
to the physician network.
Capitated and Other Fixed-Fee Arrangements. The Company anticipates entering
into managed care or capitated arrangements, either directly through the
formation of an IPA or indirectly through the assignment of managed care
contracts entered into between its affiliated physicians and third-party payors.
The Company has little experience in managing capitated-risk arrangements.
Revenues under any managed care or capitated arrangements entered into by the
Company, whether directly through an IPA or through the assignment of a
capitated contract entered into by its affiliated physicians, will generally be
a fixed amount per enrollee. Under such an arrangement, the Company would
contract with affiliated physicians for the provision of health care services
and the Company would be responsible for the provision of all or a portion of
the health care requirements of such enrollees. To the extent that enrollees
require more care than is anticipated by the Company upon entering into such a
contract, the Company's revenues under such contracts may be insufficient to
cover its costs. The Company expects to enter into reinsurance agreements with
third-party insurers in respect of a portion of such risk. See "Risk
Factors -- Risks Associated with Capitated Fee Arrangements."
PROPRIETARY RIGHTS
The Company is relying upon the effectiveness of protection provided by a
combination of patent, trade secret and copyright laws, nondisclosure and other
contractual provisions and technological measures to protect its proprietary
position in its methodologies, databases and software. The Company has two U.S.
patent applications and a foreign patent application commensurate with both U.S.
applications, but no issued patents. The patent applications are directed to the
Company's Smart Scripts prescription management system and related technologies.
No assurance can be provided that a patent or patents will be issued or will
provide the Company with adequate protection. Nor can any
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<PAGE>
assurance be given that patent, trade secret, copyright or other intellectual
property rights can be successfully asserted in any court action. The Company
has also filed applications for registration of copyrights in its software, user
documentation and databases. The copyright protection accorded to databases,
however, is fairly limited. While the arrangement and selection of data are
protectable, the actual data are not, and others are free to create databases
that perform the same function. The Company distributes its clinical information
systems products under agreements that grant customers non-exclusive licenses
and generally contain terms and conditions restricting the disclosure and use of
the Company's systems. In addition, the Company attempts to protect the secrecy
of its proprietary databases and other trade secrets and proprietary information
through confidentiality agreements with employees, consultants and third
parties.
The Company believes that, aside from the various legal protections of its
proprietary information and technologies, factors such as the technological and
creative skills of its personnel and product maintenance and support are
integral to establishing and maintaining its position within the health care
industry. Although the Company believes that its products do not infringe upon
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future.
See "Risk Factors -- Dependence on Proprietary Assets."
COMPETITION
The provision of physician practice and network management services is a
highly competitive business in which the Company competes for contracts with
several national and many regional and local companies. The Company also
competes with traditional managers of health care services that directly recruit
and manage physicians. In addition, certain of the Company's competitors are
dedicated to or specialize in the management of single-specialty practices
focused on diseases such as cardiology, oncology and orthopedics, specialties on
which the Company intends to focus. Certain of the Company's competitors have
access to substantially greater financial resources than the Company. The
Company believes that competition in this industry is generally based on cost
and quality of services.
The market for health care information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical information systems are the proprietary nature
of methodologies, databases and technical resources, the usefulness of the data
and reports generated by the software, customer service and support,
compatibility with the customer's existing information systems, potential for
product enhancement, vendor reputation, price and the effectiveness of marketing
and sales efforts.
The Company's competitors include other providers of clinical information
systems and practice management systems. Many of the Company's competitors and
potential competitors have greater financial, product development, technical and
marketing resources than the Company, and currently have, or may develop or
acquire, substantial installed customer bases in the health care industry. In
addition, as the market for clinical information systems and practice management
systems develops, additional competitors may enter the market and competition
may intensify. While the Company believes that it will successfully
differentiate its clinical information systems from those of its competitors,
there can be no assurance that future competition will not have a material
adverse effect on the Company. See "Risk Factors -- Highly Competitive
Industry."
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state, and local levels. The Company
believes its operations are in material compliance with applicable laws.
Nevertheless, because of the nature of the Company's relationship with physician
organizations, many aspects of the Company's business operations have not been
the subject of state or federal regulatory
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interpretations and there can be no assurance that a review by courts or
regulatory authorities of the Company's business or that of its affiliated
physician organizations will not result in a determination that could adversely
affect the operations of the Company or that the health care regulatory
environment will not change so as to restrict the Company's or the affiliated
physicians' existing operations or their expansion.
During the first six months of 1996, approximately 35% of the revenues of
the Company's affiliated physician group practices was derived from payments
made by government-sponsored health care programs (principally, Medicare,
Medicaid and state reimbursed programs). As a result, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The federal Medicare
program adopted a system of reimbursement of physician services, RBRVS, which
took effect in 1992 and is expected to be fully implemented by December 31,
1996. The Company expects that the RBRVS fee schedule and other future changes
in Medicare reimbursement will result in some cases in a reduction and in some
cases in an increase from historical levels in the per-patient Medicare revenue
received by certain of the physician organizations with which the Company
contracts. Although the Company does not believe such reductions will have a
material adverse effect on the Company's operating results, the RBRVS fee
schedule may be adopted by other payors, which could have a material adverse
effect on the Company.
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment, on
health care providers that fraudulently or wrongfully bill governmental or other
third-party payors for health care services. The federal law prohibiting false
billings allows a private person to bring a civil action in the name of the U.S.
government for violations of its provisions. The Company believes it is in
material compliance with such laws, but there is no assurance that the Company's
activities will not be challenged or scrutinized by governmental authorities.
Moreover, technical Medicare and other reimbursement rules affect the structure
of physician billing arrangements. The Company believes it is in material
compliance with such regulations, but regulatory authorities may differ and in
such event the Company may have to modify its relationship with physician
organizations. Noncompliance with such regulations may adversely affect the
business, financial condition and results of operations of the Company and
subject it and affiliated physician groups to penalties and additional costs.
The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. The
Company provides only non-medical services and clinical information systems to
physician organizations, does not represent to the public or its clients that it
offers medical services and does not exercise control over the practice of
medicine by the physician organizations with which it contracts. Accordingly,
the Company believes that it is not in violation of applicable state laws
relating to the practice of medicine. The laws in most states regarding the
corporate practice of medicine have been subjected to limited judicial and
regulatory interpretation and, therefore, no assurances can be given that the
Company's activities will be found to be in compliance, if challenged. There can
be no assurance that a review of the Company's or its affiliated physicians'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or its
affiliated physicians (for example, by rendering the Company's management
services agreements with a physician organization unenforceable). In addition to
prohibiting the practice of medicine, numerous states prohibit entities like the
Company from engaging in certain health care related activities such as
fee-splitting with physicians. New York State, for instance, prohibits
percentage-based payments from physicians or physician groups to management
companies for services other than billing and collection. Accordingly, expansion
of the operations of the Company to certain jurisdictions may require it to
comply with such jurisdictions' regulations which could lead to structural and
organizational modifications of the Company's form of relationships with
physician organizations. Such changes, if any, could have a material adverse
effect on the Company.
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Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. The Anti-kickback Statute is
broad in scope and has been broadly interpreted by courts in many jurisdictions.
Read literally, the statute places at risk many legitimate business
arrangements, potentially subjecting such arrangements to lengthy, expensive
investigations and prosecutions initiated by federal and state governmental
officials. Many states, including those in which the Company does business, have
adopted similar prohibitions against payments intended to induce referrals of
Medicaid and other third-party payor patients. The Company believes that,
although it is receiving remuneration under the management services agreements
for management services, it is not in a position to make or influence the
referral of patients or services reimbursed under government programs to the
physician groups and, therefore, believes it has not violated the Anti-kickback
Statute. The Company also is not a separate provider of Medicare or state health
program reimbursed services. To the extent the Company is deemed to be either a
referral source or a separate provider under its management services agreements
and to receive referrals from physicians, the financial arrangements under such
agreements could be subject to scrutiny and prosecution under the Anti-kickback
Statute. Violation of the Anti-kickback Statute 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 excluding
violators from participation in Medicare or state health programs.
In July 1991, in part to address concerns regarding the Anti-kickback
Statute, the federal government published regulations that provide exceptions,
or "safe harbors," for transactions that will be deemed not to violate the
Anti-kickback Statute. Among the safe harbors included in the regulations were
provisions relating to the sale of practitioner practices, management and
personal services agreements and employee relationships. Additional safe harbors
were published in September 1993 offering new protections under the
Anti-kickback Statute to eight activities, including referrals within group
practices consisting of active investors. Proposed amendments to clarify these
safe harbors were published in July 1994 which, if adopted, would cause
substantive retroactive changes to the 1991 regulations. Although the Company
believes that it is not in violation of the Anti-kickback Statute, its
operations may not fit within any of the existing or proposed safe harbors.
Significant prohibitions against physician referrals were enacted 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, Stark II prohibits, subject to certain exemptions, a
physician or a member of his immediate family from referring Medicare 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 including the physician's own group practice.
The designated health services include radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy services, durable
medical equipment, parenteral and enteral nutrients, equipment and supplies,
prosthetics, orthotics, outpatient prescription drugs, home health services and
inpatient and outpatient hospital services. The penalties for violating Stark II
include a prohibition on payment by these government programs and civil
penalties of as much as $15,000 for each violative referral and $100,000 for
participation in a "circumvention scheme." The Company believes that its
activities are not in violation of Stark I or Stark II. However, the Stark
legislation is broad and ambiguous. Interpretative regulations clarifying the
provisions of Stark II have not been issued. While the Company believes it is in
compliance with the Stark legislation, future regulations could require the
Company to modify the form of its relationships with physician organizations.
Moreover, the violation of Stark I or II by the Company's affiliated physician
organizations could result in significant fines and loss or reimbursement
35
<PAGE>
which could materially adversely affect the Company. Many states in which the
Company conducts business have enacted similar laws applicable to all services.
The Health Care Finance Administration ("HCFA") has issued final regulations
(the "PIP regulations") covering the use of physician incentive plans ("PIPs")
by HMOs and other managed care contractors and subcontractors ("Organizations"),
potentially including the Company. Any Organization that contracts with a
physician group that places the individual physician members of the group at
substantial financial risk for the provision of services (e.g., if a primary
care group takes risk but subcontracts with a specialty group to provide certain
services) must satisfy certain disclosure, survey and stop-loss requirements.
Under the PIP regulations, payments of any kind, direct or indirect, to induce
providers to reduce or limit covered or medically necessary services
("Prohibited Payments") are prohibited. Further, where there are no Prohibited
Payments but there is risk sharing among participating providers related to
utilization of services by their patients, the regulations contain three groups
of requirements: (i) requirements for physician incentive plans that place
physicians at "substantial financial risk;" (ii) disclosure requirements for all
Organizations with PIPs; and (iii) requirements related to subcontracting
arrangements. In the case of substantial financial risk (defined in the
regulations according to several methods, but essentially risk in excess of 25%
of the maximum payments anticipated under a plan with less than 25,000 covered
lives), Organizations must: (1) conduct enrollee surveys; and (2) ensure that
all providers have specified stop-loss protection. The violation of the
requirements of the PIP regulations may result in a variety of sanctions,
including suspension of enrollment of new Medicaid or Medicare members, or a
civil monetary penalty of $25,000 for each determination of noncompliance. In
addition, because of the increasing public concerns regarding PIPs, the PIP
regulations may become the model for the industry as a whole. The new
regulations could have an affect on the ability of the Company to effectively
reduce the costs of providing services, by limiting the amount of risk that may
be imposed upon physicians.
Because the affiliated physician organizations remain separate legal
entities, they may be deemed competitors subject to a range of antitrust laws
which prohibit anti-competitive conduct, including price fixing, concerted
refusals to deal and division of market. The Company intends to comply with such
state and federal laws as may affect its development of integrated health care
delivery networks, but there can be no assurance that a review of the Company's
business by courts or regulatory authorities will not result in a determination
that could adversely affect the operation of the Company and its affiliated
physician groups.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. There can be no assurance that regulatory authorities of
the states in which the Company operates would not apply these laws to require
licensure of the Company's operations as an insurer, as an HMO or as a provider
network. The Company believes that it is in compliance with these laws in the
states in which it does business, but there can be no assurance that future
interpretations of insurance laws and health care network laws by the regulatory
authorities in these states or in the states into which the Company may expand
will not require licensure or a restructuring of some or all of the Company's
operations.
As a result of the continued escalation of health care costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislatures
relating to health care reform. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which may
be material, on the Company.
The confidentiality of patient records and the circumstances under which
such records may be released is subject to substantial regulation under state
and federal laws and regulations. To protect patient confidentiality, data
entries to the Company's databases delete any patient identifiers, including
name, address, hospital and physician. The Company believes that its procedures
comply with the laws
36
<PAGE>
and regulations regarding the collection of patient data in substantially all
jurisdictions, but regulations governing patient confidentiality rights are
evolving rapidly and are often difficult to apply. Additional legislation
governing the dissemination of medical record information has been proposed at
both the state and federal level. This legislation may require holders of such
information to implement security measures that may be of substantial cost to
the Company. There can be no assurance that changes to state or federal laws
would not materially restrict the ability of the Company to obtain patient
information originating from records.
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of health care industry participants. During the past several years, government
regulation of reimbursement rates in the United States health care industry has
increased. Lawmakers continue to propose programs to reform the United States
health care system, which may contain proposals to increase governmental
involvement in health care, lower reimbursement rates and otherwise change the
operating environment for the Company's customers. Health care industry
participants may react to these proposals by curtailing or deferring
investments, including investments in the Company's products. The Company cannot
predict what impact, if any, such factors may have on its business, financial
condition and results of operations or on the price of the Common Stock.
Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the FDA under the Federal
Food, Drug and Cosmetic Act of 1938, as amended (the "FDCA"). The FDCA imposes
substantial regulatory controls over the manufacturing, testing, labeling, sale,
distribution, marketing and promotion of medical devices and other related
activities. These regulatory controls can include, for example, compliance with
the following: manufacturer establishment registration and device listing;
current good manufacturing practices; FDA clearance of a premarket notification
submission or FDA approval of a premarket approval application; medical device
adverse event reporting; and general prohibitions on misbranding and
adulteration. Violations of the FDCA can result in severe criminal and civil
penalties, and other sanctions, including, but not limited to, product seizure,
recall, repair or refund orders, withdrawal or denial of premarket notifications
or premarket approval applications, denial or suspension of government
contracts, and injunctions against unlawful product manufacture, labeling,
promotion, and distribution or other activities.
In its 1989 Draft Policy Statement, the FDA stated that it intended to
exempt certain clinical decision support software products from a number of
regulatory controls. Under the 1989 Draft Policy Statement, the FDA stated that
it intended to exempt decision support software products that involve "competent
human intervention before any impact on human health occurs (e.g., where
clinical judgment and experience can be used to check and interpret a system
output)" from the following controls: manufacturer establishment registration
and device listing, premarket notification, and compliance with the medical
device reporting and current good manufacturing practice regulations. In the
1989 Draft Policy Statement, the FDA stated that until it formally exempted
decision support software products from these requirements, manufacturers of
eligible decision support software products would to be required to comply with
those controls.
Since issuing the 1989 Draft Policy Statement, the FDA has not issued a
final policy on this issue and has not formally exempted any products as
discussed in the 1989 Draft Policy Statement. The FDA has referred to the 1989
Draft Policy Statement in official presentations regarding software regulation
and in decisions and opinions regarding the regulatory status of various
products. Over the last few years, however, the FDA has stated that it intends
to issue a new policy concerning computer products. Under this new policy,
exemptions from regulatory controls, if any, would be based upon a product
specific "risk factor" analysis. For purposes of this analysis, the FDA has
considered, among other things, the following: (i) seriousness of the disease to
be diagnosed or treated; (ii) time frame for use of
37
<PAGE>
the information; (iii) concordance with accepted medical practice; (iv) format
of data and its presentation; (v) individualized versus aggregate patient care
recommendations; and (vi) clarity of algorithms used in the software. Given the
FDA's intent to issue a new policy concerning the regulation of computer
software, there can be no assurance as to the effect of such a policy, if any,
upon the regulatory status of the Company's products.
The Company believes that its clinical information systems are not medical
devices under the FDCA and, thus, are not subject to the controls imposed on
manufacturers of medical devices and do not fall within the scope of the 1989
Draft Policy Statement. The Company further believes that to the extent that its
products are determined to be medical devices, they fall within the exemptions
for decision support systems provided by the 1989 Draft Policy Statement. The
Company has not taken action to comply with the requirements that would
otherwise apply if the Company's products were determined to be non-exempt
medical devices.
There can be no assurance that the FDA will not make a request or take other
action to require the Company to comply with any or all current or future
controls applicable to medical devices under the FDCA. There can be no assurance
that, if such a request were made or other action were taken, the Company could
comply in a timely manner, if at all, or that any failure to comply would not
have a material adverse effect on the Company's business, financial condition or
results of operations, or that the Company would not be subjected to significant
penalties or other sanctions. There can be no assurance that the FDA will
continue to permit any or all of the exemptions provided in the 1989 Draft
Policy Statement, or in a new policy statement, if any, or that the FDA will
promulgate regulations formally implementing such exemptions. There can be no
assurance that the Company's current or future clinical information systems will
qualify for future exemptions, if any, nor can there be any assurance that any
future requirements will not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk Factors --
Government Regulation."
LEGAL PROCEEDINGS
The Company is not a party to any litigation that would have a material
adverse effect on its business, results of operations or financial condition.
EMPLOYEES
As of June 30, 1996, the Company had a total of approximately 135 employees,
approximately 30 of whom were employed in the Company's information systems
subsidiary. None of the Company's employees is subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its employee relations are satisfactory.
PROPERTIES
The Company currently occupies 11,009 square feet of leased office space in
Tarrytown, New York, 4,065 square feet of leased office space in Marietta,
Georgia, 1,180 square feet of leased office space in Wayne, Pennsylvania and
10,742 square feet of leased office and data center space in Chicago, Illinois.
The current lease (including 4,500 square feet of space subleased from
Physicians' Online, Inc. as more fully described under "Certain Transactions")
for the Tarrytown office expires in March 1997 and has an annual rental of
approximately $220,207. The Company intends to sublease an additional 5,500
square feet of space in Tarrytown, effective September 1 and expiring in March
1997, for a rental of approximately $70,583 during such period. The Company has
entered into a lease, effective April 1, 1997, for 25,000 square feet at the
Tarrytown office. Such lease will have an annual rental of approximately
$500,000 and will expire March 2002. See "Certain Transactions". The lease for
the Marietta office expires in January 2001 and has an annual rental of
approximately $50,000. The lease for the Wayne office expires in April 1997 and
has an annual rental of approximately $20,000. The lease for the Chicago office
expires in March 2001 and has an annual rental of $180,000 for the current year.
The Company believes that these facilities are adequate for the foreseeable
future.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ----------------------------------------
<S> <C> <C>
Jonathan Edelson, M.D................... 36 Chairman of the Board and Chief
Executive Officer
Steven Hochberg......................... 34 President and Director
Richard W. Kaplan....................... 50 Executive Vice President and Director
Alan B. Masarek......................... 35 Chief Operating Officer and Chief
Financial Officer
Robert Alger............................ 41 Vice President and Chief Information
Officer
Andrew C. Garling, M.D.................. 50 Vice President and Chief Medical Officer
Barry Kurokawa(1)(2).................... 40 Director
Jonathan Lieber(1)(2)................... 30 Director
</TABLE>
- ------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
JONATHAN EDELSON, M.D. has been the Chairman of the Board and Chief
Executive Officer of the Company since its inception. Dr. Edelson is a
board-certified internist. Prior to co-founding the Company, Dr. Edelson served
as the Chief Executive Officer of Physicians' Online, Inc. from August 1993 to
December 1994 and as a director from August 1993 to the present. Dr. Edelson was
a senior vice president with ValueRx, Inc., the prescription drug benefits
management unit of Value Health, Inc., from October 1990 to June 1993. As a
practicing physician prior to joining ValueRx, Inc., Dr. Edelson founded Medical
Decision Resources, Inc., a physician profiling and education business, in March
1989, and served as its President through September 1990. Dr. Edelson attended
Yale University, University of Chicago School of Medicine and the Harvard School
of Public Health.
STEVEN HOCHBERG has been President and a director of the Company since its
inception. He is a co-founder of the Company and a co-founder of Physicians'
Online, Inc. Mr. Hochberg served as the President of Physicians' Online, Inc.
from January 1993 to June 1994. Mr. Hochberg served as the President of Ascent
Group, Inc., a financial consulting business that he founded, from February 1992
to January 1993, and as a Vice President of Sigoloff & Associates, management
consultants, from September 1989 to February 1992. In addition, he worked with
Alex. Brown & Sons as a Corporate Finance Associate in 1985 and with Bain &
Company as a Strategy Consultant from 1986 to 1987. Mr. Hochberg, a CPA, holds
an MBA from Harvard Business School.
RICHARD W. KAPLAN has been Executive Vice President and a director of the
Company since April 1995. Prior to joining the Company, Mr. Kaplan was President
of Coastal Managed Health Care, Inc., a subsidiary of Coastal Physician Group,
from September 1993 to April 1995. Before joining Coastal, Mr. Kaplan held
senior management positions at a variety of companies in the managed care area,
including Towers Perrin from April 1992 to September 1993 and CIGNA Healthplans
from July 1985 to February 1992. Mr. Kaplan received his Masters in Public
Health from the University of North Carolina at Chapel Hill.
ALAN B. MASAREK has been Chief Operating Officer and Chief Financial Officer
of the Company since November 1995. Prior to joining the Company, from April
1995 to November 1995, Mr. Masarek was acting as an independent consultant. Mr.
Masarek was President and Chief Executive Officer of the Scovill Group, an
international manufacturer of fasteners and other component items with annual
revenues of approximately $125 million, from February 1994 to April 1995. Prior
to Scovill, Mr. Masarek was President of two divisions of the Bibb Company, a
diversified textile manufacturer, from December 1991 to February 1994. Prior to
that, Mr. Masarek worked for three years as a buyout
39
<PAGE>
specialist with the NTC Group and for five years in the audit division of Arthur
Andersen & Co. Mr. Masarek, a CPA, holds an MBA from Harvard Business School.
ROBERT ALGER has been Vice President and Chief Information Officer of the
Company since February 1995. Prior to joining the Company, Mr. Alger was Chief
Information Officer and Vice President of Information Systems at Blue Shield of
California, from December 1991 to February 1995, and a partner at Scribner,
Jackson & Associates, a technology consulting group, from January 1986 to
December 1991. Mr. Alger received his B.S. from California State
University--Northridge.
ANDREW C. GARLING, M.D. has been Vice President and Chief Medical Officer of
the Company since November 1995. Dr. Garling's experience in medical information
systems includes serving as Vice President of Medical Affairs for TDS, Inc. from
August 1988 to December 1992 and as Chief Information Officer and Vice President
for the Prudential Health Care System's Southern Group Operations from December
1992 to November 1995. Dr. Garling completed his medical degree at Harvard
Medical School with initial specialty training in surgery. He later became board
certified in Emergency Medicine and practiced clinical medicine with the Kaiser
Permanente Medical Group of Northern California from July 1977 to August 1988.
At Kaiser, he also had administrative responsibilities, including serving as
staff president for the hospital system.
BARRY KUROKAWA has been a director of the Company since March 1996. Since
February 1996, Mr. Kurokawa has served as a Managing Director of ProMed Asset
Management, L.L.C. ("ProMed"), a private health care investment management and
services company, and as the President of Blackriver Capital Management, Ltd.,
the general partner of ProMed Partners, L.P. and a consultant to INVESCO Trust
Company, a mutual fund company. From May 1992 to January 1996, he was employed
by INVESCO Trust Company as Senior Vice President and portfolio manager of four
health care funds managed by the firm. From July 1992 to January 1996, Mr.
Kurokawa was also the Vice President of Global Health Services, a closed-end
mutual fund. Before he joined INVESCO, Mr. Kurokawa served as Vice President
Equity Research and health care analyst at Trust Company of the West, an
investment management company, from July 1987 to April 1992.
JONATHAN LIEBER has been a director of the Company since September 1995. Mr.
Lieber has served as an investment analyst focusing on special situation
investments, including the areas of healthcare, banking and other consumer
services, of GeoCapital Corp., since July 1992. Mr. Lieber has served since June
1992 as Vice President of Applewood Capital, where he specializes in consumer
services including healthcare, banking and finance. Additionally, Mr. Lieber has
served as a Vice President of Infomedia Management Co., Inc., the management
company for the general partner of the 21st Century investment partnerships
since February 1995. Prior to joining GeoCapital, Mr. Lieber was employed as a
research analyst at Gabelli & Co., an investment management and brokerage firm,
from 1990 to 1991.
Each of Barry Kurokawa and Jonathan Lieber were elected to the Board of
Directors pursuant to voting agreements which give the holders of the Series B
and C Preferred Stock of the Company the right to elect one director and the
holders of the Series D Preferred Stock of the Company the right to elect one
director. Such agreements will terminate upon the consummation of this offering.
The Board of Directors is divided into three classes, as nearly equal in
number as possible, having terms expiring at the annual meeting of the Company's
stockholders in 1997 (comprised of Mr. Kaplan), 1998 (comprised of Messrs.
Kurokawa and Lieber) and 1999 (comprised of Dr. Edelson and Mr. Hochberg). At
each annual meeting of stockholders, successors to the class of directors whose
term expires at such meeting will be elected to serve for three-year terms and
until their successors are elected and qualified.
40
<PAGE>
BOARD COMMITTEES
The Board of Directors has established two committees, the Audit Committee
and the Compensation Committee. The Audit Committee is comprised of Messrs.
Kurokawa and Lieber and oversees the activities of the Company's independent
auditors and the Company's internal controls. The Compensation Committee, which
is also comprised of Messrs. Kurokawa and Lieber, makes recommendations to the
Board of Directors with respect to general compensation and benefit levels,
determines the compensation and benefits for the Company's executive officers
and administers the Company's stock option plans and employee stock purchase
plan.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Non-employee directors of the Company are eligible to
receive options under the Company's Stock Option Plan for Non-Employee
Directors. See "Management -- Stock Plans."
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
The Company's Certificate of Incorporation provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director except for liability
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit. The effect of
these provisions will be to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from grossly negligent behavior), except
in the situations described above. These provisions will not limit the liability
of directors under federal securities laws.
The Company's Certificate of Incorporation provides that the Company shall
indemnify its directors, officers, employees and agents to the fullest extent
permitted by law. The Company's Certificate of Incorporation also permits it to
secure insurance on behalf of any director, officer, employee or agent against
any expense, liability or loss arising out of his or her actions in such
capacity.
The Company intends to obtain directors' and officers' liability insurance
("D&O Insurance") prior to the date of this Prospectus, and expects to continue
to carry D&O Insurance following this offering. In addition, the Company has
entered into an indemnification agreement with each of its directors and
officers under which the Company has indemnified each of them against expenses
and losses incurred for claims brought against them by reason of a director or
officer of the Company.
The Company believes that the limitation of liability and indemnification
provisions in its Certificate of Incorporation, the D&O Insurance and the
indemnification agreements will enhance the Company's ability to continue to
attract and retain qualified individuals to serve as directors and officers.
There is no pending litigation or proceeding involving a director, officer or
employee of the Company to which the indemnification provisions would apply.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned by the
Company's Chief Executive Officer and the other executive officers of the
Company whose combined salary and bonus for the year ended December 31, 1995 was
in excess of $100,000 (collectively, the "Named Executive
Officers") for services rendered in all capacities to the Company during the
Company's fiscal year ended December 31, 1995.
41
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
------------ OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) (#) COMPENSATION
- ------------------------------------------------ ---- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Jonathan Edelson, M.D........................... 1995 $187,115(1) 101,286 $ 0
Chief Executive Officer
Steven Hochberg................................. 1995 187,115(1) 101,286 0
President
Richard W. Kaplan(2)............................ 1995 142,000(3) 193,637 14,800(4)
Executive Vice President
Robert Alger.................................... 1995 123,937(5) 41,706 0
Vice President and Chief Information Officer
</TABLE>
- ------------
(1) Current annual salary is $220,000.
(2) Mr. Kaplan ceased to be an executive officer of the Company in August 1996.
(3) Mr. Kaplan joined the Company in April 1995. Includes a $17,000 signing
bonus.
(4) Includes living expenses as part of a relocation package for Mr. Kaplan.
(5) Mr. Alger joined the Company in February 1995. Mr. Alger's current annual
salary is $154,000.
The compensation of each of Alan B. Masarek, the Company's Chief Operating
Officer and Chief Financial Officer, and Andrew C. Garling, M.D., the Company's
Vice President and Chief Medical Officer, each of whom joined the Company in
November 1995, is currently in excess of $100,000 on an annual basis.
The following tables set forth, with respect to the Named Executive
Officers, the option grants made during the Company's fiscal year ended December
31, 1995 and the option values at the end of such fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------
NAME GRANTED (#)(3) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------------- -------------- ------------ -------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Edelson, M.D........... 53,622 4.25% $ 2.52 Mar. 31, 2005 $84,723 $215,560
47,664 3.78% 3.52 Dec. 31, 2005 105,337 267,395
Steven Hochberg................. 53,622 4.25% 2.52 Mar. 31, 2005 84,723 215,560
47,664 3.78% 3.52 Dec. 31, 2005 105,357 267,395
Richard W. Kaplan(2)............ 178,742 14.17% 2.52 -- -- --
14,895 1.18% 3.52 -- -- --
Robert Alger.................... 35,748 2.83% 2.52 Feb. 28, 2005 56,482 143,707
5,958 0.47% 3.52 Dec. 31, 2005 13,167 33,424
</TABLE>
- ------------
(1) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock. The amounts
reflected in this table may not necessarily be achieved.
(2) All options granted to Mr. Kaplan terminated upon the termination of his
employment with the Company.
(3) All options were granted under the Company's 1995 Stock Option Plan. All
options granted had an exercise price equal to the fair market value on the
date of grant. All options were granted on dates that
42
<PAGE>
were 10 years prior to such options' expiration dates. All options may
become fully exercisable on the occurrence of a change in control as
described in the Company's 1995 Stock Option Plan. Options vest at the rate
of one-third per year over a three-year period from the date of grant.
The following table sets forth information with respect to options exercised
during the fiscal year ended December 31, 1995 by each of the Named Executive
Officers and certain information regarding options held at December 31, 1995 by
each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
EXERCISE REALIZED --------------------------- ----------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(2)
- --------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Edelson, M.D...... 239,515 $840,413 0 101,286 $ 0 $ 356,527
Steven Hochberg............ 268,114 $940,761 0 101,286 $ 0 $ 356,527
Richard W. Kaplan(3)....... -- -- -- -- -- --
Robert Alger............... -- -- 0 41,706 $ 0 $ 146,805
</TABLE>
- ------------
(1) Value realized is based on a value of $3.52 per share of the Company's
Common Stock, the fair market value of the Company's Common Stock on
December 31, 1995, net of the exercise price paid.
Value realized based upon the $13 proposed offering price per share of the
Company's Common Stock, net of the exercise price paid, would be $3,111,015
for Dr. Edelson's options and $3,482,482 for Mr. Hochberg's options.
(2) Value of unexercised in-the-money options is based on a value of $3.52 per
share of the Company's Common Stock, the fair market value of the Company's
Common Stock on December 31, 1995. Amounts reflected are based on the
assumed value minus the exercise price and multiplying the result by the
number of shares subject to the option.
(3) All options granted to Mr. Kaplan terminated upon the termination of his
employment with the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with Jonathan Edelson, M.D., its Chairman and Chief Executive
Officer, Steven Hochberg, its President, Alan B. Masarek, its Chief Operating
Officer and Chief Financial Officer, Robert Alger, its Vice President and Chief
Information Officer, and Andrew C. Garling, M.D., its Vice President and Chief
Medical Officer (each, an "Employee"). The Employment Agreements provide that
the annual base salary of each of the Employees is: Dr. Edelson, $220,000; Mr.
Hochberg, $220,000; Mr. Masarek, $200,000; Mr. Alger, $154,000; and Dr. Garling,
$200,000. The Employees are also entitled to receive discretionary bonuses.
The Employment Agreements generally provide for a three-year term that is
automatically renewable for successive one-year terms unless either party gives
prior written notice of its intent not to renew. The Employment Agreements set
forth the compensation arrangements and the employee fringe benefits provided by
the Company to each Employee. In addition, the Employment Agreements set forth
the compensation payable to an Employee in the event of a termination of the
Employee's employment by the Company. Generally, upon the termination of an
Employee's employment by the Company for cause, the Employee is entitled to
receive earned but unpaid salary and reimbursement for business expenses
incurred during the performance of the Employee's duties. If an Employee's
employment with the Company is terminated without cause, due to the death or
incapacity of the Employee or within a specified period after a change of
control (as defined in the Employment Agreements), the Employee is entitled to
receive the amounts payable in the event of a termination for cause plus a cash
severance payment not to exceed the cash compensation received by the Employee
in the prior 12-month period and the vesting of certain shares of Common Stock
and options to purchase
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Common Stock of the Company then held by such Employee. Each Employment
Agreement provides a non-compete provision that restricts an Employee from
competing against the Company for a period of one-year following such Employee's
termination of employment with the Company.
STOCK PLANS
1995 Stock Option Plan. The Company has adopted the 1995 Stock Option Plan
(the "1995 Plan"). The 1995 Plan permits the grant of (i) options to purchase
shares of Common Stock intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
("Incentive Stock Options"), and (ii) options that do not so qualify
("Non-Qualified Options"). No award may be granted under the 1995 Plan after the
tenth anniversary of the Plan's adoption. The 1995 Plan is administered by the
Compensation Committee.
1,500,000 shares of Common Stock have been reserved for issuance under the
1995 Plan, subject to adjustment for stock splits, stock dividends,
recapitalizations, reclassifications and similar events. If an option granted
under the 1995 Plan expires unexercised or is terminated or cancelled for any
reason, the shares of Common Stock previously reserved for issuance thereunder
will be available for future option grants under the 1995 Plan.
Options may be granted to persons who are, at the time of grant, employees,
officers or directors of, or consultants or advisors to, the Company, provided
that Incentive Stock Options may only be granted to individuals who are
employees of the Company (within the meaning of Section 3401(c) of the Code).
Options granted under the 1995 Plan must be exercised within no more than
ten years of the grant date, except that an Incentive Stock Option granted to a
person owning more than 10% of the total combined voting power of all classes of
stock of the Company (a "Ten Percent Stockholder") must be exercised within no
more than five years of the grant date. No options may be assigned or
transferred by the optionee other than by will or the laws of descent or
distribution or pursuant to a qualified domestic relations order (as defined in
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder). Each option may be exercised only by the optionee during his or her
lifetime.
The exercise price for each option granted will be determined by the
Compensation Committee at the time of grant. For Incentive Stock Options granted
to a Ten Percent Stockholder, the exercise price shall not be less than 110% of
the fair market value per share of Common Stock.
Options may be made exercisable in installments, and the exercisability of
Options may be accelerated by the Compensation Committee. Options granted under
the 1995 Plan typically vest over a three-year period.
In the event of a consolidation or merger in which the Company is not the
surviving corporation, or sale of all or substantially all of the assets of the
Company in which outstanding shares of Common Stock are exchanged for
securities, cash or other property of any other corporation or business entity
or a liquidation of the Company (a "Corporate Transaction"), the Compensation
Committee, or the board of directors of any corporation assuming the obligations
of the Company, may, in its discretion, take any one or more of the following
actions, as to outstanding options: (i) provide that such options shall be
assumed, or equivalent options shall be substituted, by the acquiring or
succeeding corporation (or an affiliate thereof), provided that any such option
substituted for incentive stock options shall meet the requirements of Section
424(a) of the Code; (ii) upon written notice to the optionee, provide that all
unexercised options will terminate immediately prior to the consummation of such
transaction unless exercised by the optionee within a specified period following
the date of such notice; (iii) in the event of a Corporate Transaction under the
terms of which holders of the Common Stock of the Company will receive upon
consummation thereof a cash payment for each share surrendered in the Corporate
Transaction (the "Transaction Price"), make or provide for a cash payment to the
optionees equal to the difference between (A) the Transaction Price times the
number of shares of Common Stock subject to such outstanding options (to the
extent then exercisable at prices not in excess of the Transaction Price)
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<PAGE>
and (B) the aggregate exercise price of all such outstanding options in exchange
for the termination of such options, and (iv) provide that all or any
outstanding options shall become exercisable in full immediately prior to any
such event.
As of the date of this Prospectus, an aggregate of 843,846 outstanding
options had been granted to approximately 80 directors, officers, employees and
consultants at a weighted average exercise price of $3.13 per share and an
aggregate of 156,154 shares were available for future option grants. Of such
outstanding options, 101,288 were granted to Dr. Edelson, 101,288 to Mr.
Hochberg, 86,037 to Mr. Masarek, 43,196 to Mr. Alger, 39,472 to Dr. Garling,
7,507 to Mr. Kurokawa and 7,507 to Mr. Lieber.
Employee Stock Purchase Plan. The Company has adopted, effective upon the
date of this Prospectus, an employee stock purchase plan (the "Stock Purchase
Plan"). The purpose of the Stock Purchase Plan is to allow the employees of the
Company to acquire a proprietary interest in the Company through the purchase of
shares of Common Stock. Under the Stock Purchase Plan, eligible employees will
be granted options (exercisable by electing to participate in the Plan) to
purchase shares of Common Stock through regular payroll deductions. The Stock
Purchase Plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. The total number of shares of Common Stock that are
authorized for issuance under the Stock Purchase Plan is 1,200,000. All full-
time employees of the Company who have completed at least one year of employment
will be eligible to participate in the Stock Purchase Plan, subject to certain
limited exceptions. Options will be granted every six months to eligible
employees and, if not exercised, will expire on the last day of the six-month
period in which granted. Employees electing to participate for any plan year
will authorize payroll deductions at a stated whole percentage ranging from 2%
to 10% of compensation, as determined by the participant. Employees may also
elect to make payments by check payable to the Company to purchase shares of
Common Stock. Options will be nontransferable other than by will or by operation
of the laws of descent and distribution. The purchase price for shares offered
under the Stock Purchase Plan each year will be equal to a percentage designated
by the Board of Directors (not less than 85%) of the lower of the fair market
value of the Common Stock at the date of grant or the semi-annual date of
exercise as evidenced by the high and low sales prices of the Common Stock on
such date as reported on the Nasdaq National Market. The Stock Purchase Plan
will expire on the tenth anniversary of the date of this Prospectus, unless
sooner terminated by the Board of Directors. The Board of Directors of the
Company may amend, suspend or terminate the Stock Purchase Plan at any time and
from time to time, subject to certain limitations. The Stock Purchase Plan will
be administered by the Compensation Committee.
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<PAGE>
CERTAIN TRANSACTIONS
In connection with the formation of the Company, Jonathan Edelson, M.D., the
Chairman of the Board and Chief Executive Officer of the Company, was issued
157,293 shares of Common Stock for an aggregate purchase price of $1,760. In
February 1994, the Company issued Dr. Edelson 893 shares of Common Stock in lieu
of interest on advances made to the Company. In May 1995, Dr. Edelson exercised
options to purchase 239,515 shares, for which he paid the Company $2,680. In
August 1995, Dr. Edelson purchased 48,260 shares for $576. In 1994, Dr. Edelson
loaned the Company an aggregate of $50,000 to fund working capital. Such loans
have been repaid in full.
In connection with the formation of the Company, Steven Hochberg, President
and a director of the Company, was issued 128,694 shares of Common Stock for an
aggregate purchase price of $1,440. In March 1995, Mr. Hochberg exercised
options to purchase 268,114 shares, for which he paid the Company $3,000. In
August 1995, Mr. Hochberg purchased 48,260 shares for $576. In 1995, Mr.
Hochberg loaned the Company an aggregate of $32,000 to fund working capital.
Such loans have been repaid in full.
In August 1995, the Company issued 2,978 shares of Common Stock to Richard
W. Kaplan, a former officer and director of the Company, for $25,000. On March
15, 1996, the Company loaned Mr. Kaplan $15,000 at a 5% interest rate, to be
repaid over a twelve-month period beginning July 1, 1996. As of August 15, 1996,
Mr. Kaplan has repaid principal of such loan in the amount of $1,875.
In August 1993, the Company issued 971,800 shares of Series A Convertible
Preferred Stock to affiliates of INVESCO Trust Company, the principal
stockholder of the Company, for $97,180. In March 1994, the Company issued
282,900 shares of Series B Convertible Preferred Stock to affiliates of INVESCO
Trust Company for $2,000,103. In January 1995, the Company issued 200,000 shares
of Series C Convertible Preferred Stock to affiliates of INVESCO Trust Company
for $1,500,000. In August 1995, the Company issued 666,360 shares of Series D
Convertible Preferred Stock to certain 21st Century partnerships, a principal
stockholder of the Company, for $4,997,700. Each share of Series A, B, C and D
Convertible Preferred Stock (collectively, the "Preferred Stock") is convertible
into 1.1189249 shares of Common Stock upon the consummation of this offering.
In June 1996, the Company issued three 9% Series B Promissory Notes in the
aggregate principal amount of $1 million to certain 21st Century Partnerships.
In August 1996, the Company issued three additional 9% Series B Promissory Notes
in the aggregate principal amount of $1 million to certain 21st Century
Partnerships. 21st Century Partnerships is a principal stockholder of the
Company.
In connection with the formation of the Company in 1993, Christian Mayaud,
M.D., a principal stockholder of the Company, was issued 300,288 shares of
Common Stock for an aggregate purchase price of $3,360. In August 1994, Dr.
Mayaud was granted options to purchase 96,521 shares of Common Stock at an
exercise price of $.0112 per share. In March 1995, Dr. Mayaud was granted
options to purchase 11,171 shares of Common Stock at exercise prices of $2.52
per share. In March 1995, Dr. Mayaud exercised the 1994 options to purchase
96,521 shares of Common Stock for which he paid the Company $1,080. In August
1995, Dr. Mayaud purchased 32,174 shares of Common Stock for $360. In 1995, Mr.
Mayaud loaned the Company $25,000 to fund working capital. Such loan has been
repaid in full.
The Company currently subleases approximately 4,500 square feet of office
space in Tarrytown, New York from Physicians' Online, Inc. ("Physicians'
Online"), a Delaware corporation of which Dr. Edelson, Mr. Hochberg and Dr.
Mayaud own approximately 16% of the currently outstanding capital stock.
Physicians' Online was founded in January 1992 by Mr. Hochberg and Dr. Mayaud.
The yearly base rental on the Physicians' Online sublease equals $77,707, plus
escalations. During the
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period ended December 31, 1993, the years ended December 31, 1994 and 1995 and
the three months ended March 31, 1996, Physicians' Online incurred
administrative expenses totalling $105,116, $135,825, $180,631 and $25,500,
respectively, on behalf of the Company for which the Company reimbursed
Physicians' Online. During 1993, Physicians' Online paid the Company a $175,000
fee for the development and implementation of a wireless application. The
Company does not expect to continue to receive administrative services from
Physicians' Online in the future. During 1994, Physicians' Online loaned the
Company $300,000, which loan bore interest at the prime rate, which was
outstanding at December 31, 1994, and repaid in full in 1995. During 1995,
Physicians' Online borrowed $500,000 from the Company. Such amount bore interest
at the prime rate plus 1% and was repaid in full prior to December 31, 1995. See
Note 4 of Notes to Consolidated Financial Statements.
The Company has granted options to purchase shares of Common Stock to its
directors and executive officers. See "Management -- Stock Plans" and Note 10 of
Notes to Consolidated Financial Statements.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors of the Board of
Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Common Stock of the Company as of the
date of this Prospectus and as adjusted to reflect the sale of the shares of
Common Stock offered hereby with respect to (i) each person known by the Company
to own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors, (iii) each of the Named Executive Officers and
(iv) all directors and officers as a group. Unless otherwise indicated, the
address for each stockholder is c/o the Company, 560 White Plains Road,
Tarrytown, New York 10591.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF BENEFICIALLY OWNED(1)
SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- -------------------------------------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
INVESCO Trust Company(2)...................................... 1,300,086 28.9% 20.0%
7800 E. Union Avenue
Denver, CO 80237
21st Century Partnerships(3).................................. 595,535 13.2 9.2
767 Fifth Avenue
New York, NY 10153
Christian Mayaud, M.D.(4)..................................... 432,707 9.6 6.7
1235 Oenoke Ridge
New Canaan, CT 06840
Jonathan Edelson(5)........................................... 446,261 9.9 6.9
Steven Hochberg(5)............................................ 457,153 10.2 7.0
Robert Alger(6)............................................... 11,916 * *
Richard W. Kaplan............................................. 2,979 * *
Barry Kurokawa................................................ -- -- --
Jonathan Lieber............................................... -- -- --
All directors and executive officers as a group (8 925,403 20.4 14.2
persons)(7)...................................................
</TABLE>
- ------------
<TABLE>
<C> <S>
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission (the "Commission") and generally includes voting or investment
power with respect to securities and includes options exercisable within 60 days of the
date of this Prospectus. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have sole voting
and investment power with respect to all shares of Common Stock shown as beneficially
owned by them. Percentage of beneficial ownership is based on 4,500,267 shares of
Common Stock outstanding as of June 30, 1996 and 6,500,267 shares of Common Stock
outstanding upon the consummation of this offering.
(2) Includes 687,087 shares of Common Stock owned of record by INVESCO Strategic
Portfolios, Inc.--Health Sciences Portfolio ("ISP--HSP") and 618,999 shares of Common
Stock owned of record by The Global Health Sciences Fund ("GHS"). ISP--HSP and GHS are
mutual fund companies advised by INVESCO Funds Group, Inc., which is a subsidiary of
INVESCO PLC. INVESCO Trust Company is a subsidiary of INVESCO Funds Group, Inc.
(3) Includes shares owned by 21st Century Communications Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Foreign Partners, L.P.
(4) Includes options to purchase 3,723 shares of Common Stock that are exercisable within
60 days of the date of this Prospectus.
(5) Includes options to purchase 17,874 shares of Common Stock that are exercisable within
60 days of the date of this Prospectus.
(6) Includes options to purchase 11,916 shares of Common Stock that are exercisable within
60 days of the date of this Prospectus.
(7) See notes (5) and (6). Also includes options to purchase 7,092 shares of Common Stock
held by Alan B. Masarek that are exercisable within 60 days of the date of this
Prospectus.
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Following the closing of the sale of the shares offered hereby, the
Company's authorized capital stock will consist of 15,000,000 shares of Common
Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par
value $.01 per share. The following summaries of certain provisions of the
Common Stock and Preferred Stock do not purport to be complete and are subject
to, and qualified by, the provisions of the Company's Restated Certificate of
Incorporation and By-laws, which are included as exhibits to the Registration
Statement of which this Prospectus is a part, and by applicable law.
COMMON STOCK
As of July 12, 1996, there were 4,500,267 shares of Common Stock outstanding
that were held of record by approximately 80 stockholders, after giving effect
to the Stock Splits and the Preferred Stock Conversion. The holders of Common
Stock are entitled to one vote for each share on all matters voted upon by
stockholders, including the election of directors. Subject to the rights of any
then out Preferred Shares, the holders of the Common Stock are entitled to such
dividends as may be declared in the discretion of the Board of Directors out of
funds legally available therefor. Holders of the Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Shares then outstanding. The holders of Common Stock have no
preemptive rights to purchase shares of stock of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible into
any other securities of the Company. All outstanding shares of Common Stock are,
and the shares of Common Stock to be issued pursuant to this offering will be,
upon payment of consideration therefor, fully paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time by the Board of Directors as
shares of one or more classes or series. Subject to the provisions of the
Company's Restated Certificate of Incorporation and limitations prescribed by
law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for a change in the voting power,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. Although the Company has no present plans to issue any
shares of Preferred Stock following the consummation of this offering, the
issuance of shares of Preferred Stock, or the issuance of rights to purchase
such shares, may have the effect of delaying, deferring or preventing a change
in control of the Company or an unsolicited acquisition proposal.
REGISTRATION RIGHTS
The holders of 2,941,985 shares of the Company's Common Stock are entitled
to certain rights with respect to the registration of shares of Common Stock
under the Securities Act. Under the terms of the agreements between the Company
and the holders of such registrable securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein. These registration
rights have been waived in connection with this Offering. The stockholders
benefiting from these rights may also require the Company to file a registration
statement under the Securities Act at its expense
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<PAGE>
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect such registration. These registration rights will
expire within three years from the consummation of this Offering and have been
waived by such holders in connection with this Offering. In addition, these
stockholders have the right to require the Company to file up to two additional
registration statements on Form S-3. This right becomes available upon the
eligibility of the Company to use such Form S-3 and will expire within three
years from the consummation of this Offering. All of these rights are subject to
certain conditions and limitations, including the right of the underwriters of
an offering to limit the number of shares included in such registration.
In connection with the outstanding warrants, the holders of the Common Stock
issuable upon exercise of the warrants have certain rights to request the
Company to use its best efforts to effect the registration of the Common Stock
issuable upon the exercise of the warrants in connection with a registered
offering of Common Stock by the Company; provided that the Company will be
required to use its best efforts to include any such Common Stock issuable upon
the exercise of the warrants only after the registration of the Company's own
securities to the extent the underwriter for any such offering would not deem
any inclusion of such Common Stock issuable upon exercise of the warrants to
interfere with such offering. The warrant holders have waived these rights in
connection with this Offering. The rights to notice and inclusion in any
registration terminates with respect to each such share of Common Stock when
such shares issuable upon exercise of the warrants have been registered or sold.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
As described below, the Company's Restated Certificate of Incorporation and
By-laws contain certain provisions that are intended to enhance the likelihood
of continuity and stability in the composition of the Company's Board of
Directors and which may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company unless such takeover or
change in control is approved by the Company's Board of Directors. Such
provisions may also render the removal of the directors and management more
difficult.
Pursuant to the Restated Certificate of Incorporation, the Board of
Directors of the Company is divided into three classes serving staggered
three-year terms. The By-laws establish an advance notice procedure with regard
to the nomination, other than by or at the direction of the Board of Directors,
of candidates for election as directors and with regard to certain matters to be
brought before an annual meeting of stockholders of the Company. In general,
notice must be received by the Company not less than 130 days prior to the
meeting and must contain certain specified information concerning the person to
be nominated or the matter to be brought before the meeting and concerning the
stockholder submitting the proposal. Special meetings of stockholders may be
called only by the Chairman of the Board, the President of the Company or the
Board of Directors. In addition, the Certificate of Incorporation provides that
stockholders may act only at an annual or special meeting and stockholders may
not act by written consent.
SECTION 203 OF THE DGCL
Section 203 of the DGCL ("Section 203") prevents an "interested stockholder"
(defined in Section 203, generally, as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved either the business combination
or the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who
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<PAGE>
are also officers of the corporation and by employee stock plans that do not
provide employees with the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (iii)
following the transaction in which such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the affirmative vote
of the holders of two-thirds of the outstanding voting stock of the corporation
not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the shares of Common Stock of the
Company is The Bank of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the prevailing market price from time to time.
Furthermore, because only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future. See "Risk Factors -- Shares Eligible for Future
Sale."
Upon completion of this offering, the Company will have outstanding
6,500,267 shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option or outstanding options). Of these shares, the 2,000,000
shares sold in this offering will be freely transferable without restriction or
further registration under the Securities Act unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 of the Securities Act (an
"Affiliate"), which shares will be subject to the resale limitations of Rule 144
adopted under the Securities Act. The remaining 4,500,267 shares outstanding
upon completion of this offering and held by existing shareholders will be
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares"). Restricted Shares generally may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rules 144, 144(k) and 701, additional shares will be
available for sale in the public market as follows: (i) no shares of Common
Stock (other than those shares sold hereby and not held by Affiliates) will be
available for immediate sale in the public market on the date of this
Prospectus, (ii) 19,272 shares of Common Stock subject to options exercisable
within 90 days of the date of this Prospectus will be freely tradeable by
non-Affiliates upon the effectiveness of a registration statement relating to
such stock options, (iii) 224,566 shares of Common Stock and 18,432 shares of
Common Stock subject to options exercisable within 90 days of the Effective Date
will be eligible for sale 90 days after the Effective Date, subject to the
volume, manner of sale and reporting requirements of Rule 144 and (iv)
approximately 4,266,800 shares of Common Stock and approximately 9,500 shares of
Common Stock subject to options exercisable within 180 days of the Effective
Date will be eligible for sale upon expiration of the lock-up agreements 180
days after the Effective Date, subject to the volume, manner of sale and
reporting requirements of Rule 144.
The Company plans to file registration statements to register Common Shares
reserved for issuance under its stock option plans and employee stock purchase
plan. See "Management -- Stock Plans." Once registered, persons acquiring such
shares, whether or not they are Affiliates, will be permitted to resell their
shares in the public market without regard to the Rule 144 holding period.
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<PAGE>
Upon completion of this offering, the holders of 2,941,985 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Registration of such shares under the
Securities Act would result in such shares (except for shares purchased by
Affiliates) becoming eligible for sale immediately upon the effectiveness of
such registration.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, for a
period of 180 days after the Effective Date, without the prior written consent
of Cowen & Company, subject to certain limited exceptions. Additionally, all
directors and executive officers and certain other shareholders of the Company,
holding in the aggregate approximately 4,266,800 shares of Common Stock
outstanding prior to this offering, have agreed with the Underwriters not to
sell or otherwise dispose of any shares of Common Stock for a period of 180 days
after the Effective Date (the "Lockup Period") without the prior written consent
of Cowen & Company. See "Underwriting." The number of shares of Common Stock
available for sale in the public market is further limited by restrictions under
the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
persons who may be deemed "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the number of shares of Common Stock then outstanding
or the average weekly trading volume of the Common Stock as reported through the
Nasdaq National Market during the four calendar weeks preceding the filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned for at least
three years the Restricted Shares proposed to be sold, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitation, manner of
sale provisions, public information requirements or notice requirements. The
Commission has proposed certain amendments to Rule 144 and Rule 144(k) that
reduce the applicable requisite holding periods to one year and two years,
respectively.
Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to certain compensatory benefit plans and contracts commencing
90 days after the issuer becomes subject to the reporting requirements of the
Exchange Act, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144.
In addition, the Commission has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this Prospectus, may be sold by persons other than Affiliates subject
only to the manner of sale provisions of Rule 144 and by Affiliates under Rule
144 without compliance with its two-year minimum holding period requirements.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company and Volpe, Welty & Company, have severally agreed to purchase
from the Company the following respective number of shares at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------ ------------
<S> <C>
Cowen & Company...............................................................
Volpe, Welty & Company........................................................
------------
Total................................................................... 2,000,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may re-allow a
concession not in excess of $ per share to certain other dealers. The
Underwriters have informed the Company that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority. After the
initial public offering of the shares, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, set forth on the cover page of this
Prospectus, to cover over-allotments, if any. If the Underwriters exercise such
over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by each of them shown in
the foregoing table bears to the total number of shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover over-allotments
made in connection with the sale of shares of Common Stock offered hereby.
The Company's officers and directors and certain other shareholders of the
Company holding in the aggregate approximately 4,266,800 shares of Common Stock
and approximately 9,500 shares of Common Stock subject to options exercisable
within 180 days of the effective date have agreed that they
53
<PAGE>
will not, without the prior written consent of Cowen & Company, offer, sell,
contract or grant any option to purchase or otherwise dispose of any shares of
Common Stock, options, rights or warrants to acquire shares of Common Stock, or
securities exchangeable for or convertible into shares of Common Stock owned by
them during the 180-day period commencing on the Effective Date. In addition,
the Company has agreed that it will not, without the prior written consent of
Cowen & Company, offer, sell, contract or grant any option to purchase or
otherwise dispose of any shares of Common Stock, options, rights or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during such 180-day period except in certain limited
circumstances.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price will be prevailing
market and economic conditions, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors, if any, deemed relevant.
The estimated initial public offering price range set forth on the cover of this
Prospectus is subject to change as a result of market conditions and other
factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Sullivan Graev & Karabell, LLP, New York, New York and
for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 under the Securities Act, including
amendments thereto, relating to Common Stock offered hereby has been filed by
the Company with the Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus concerning the
provisions or contents of any contract or other document referred to herein are
not necessarily complete. With respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description, and each such statement is deemed to be
qualified in all respects by such reference. The Registration Statement and the
exhibits and schedules thereto filed with the Commission may be inspected,
without charge, at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at Seven World Trade Center,
Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Company is
required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ADVANCED HEALTH CORPORATION
(FORMERLY MED-E-SYSTEMS CORPORATION)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of:
December 31, 1994 and December 31, 1995 and June 30, 1996 (unaudited)........ F-3
Consolidated Statements of Operations:
For the period from inception to December 31, 1993 and for the years ended
December 31, 1994 and 1995
For the six months ended June 30, 1995 and 1996 (unaudited).................. F-4
Consolidated Statement of Shareholders' Equity (Deficit):
From inception to December 31, 1995
For the six months ended June 30, 1996 (unaudited)........................... F-5
Consolidated Statements of Cash Flows:
For the period from inception to December 31, 1993 and for the years ended
December 31, 1994 and 1995
For the six months ended June 30, 1995 and 1996 (unaudited).................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................... F-7-F-18
PELTZ VENTIMIGLIA, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-19
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1994 and August 31, 1995................... F-20
Statements of Operations for the years ended December 31, 1993 and 1994 and
for the eight months ended August 31, 1995..................................... F-21
Statement of Shareholders' Equity for the years ended December 31, 1993 and
1994 and for the eight months ended August 31, 1995............................ F-22
Statements of Cash Flows for the years ended December 31, 1993 and 1994 and
for the eight months ended August 31, 1995..................................... F-23
NOTES TO FINANCIAL STATEMENTS.................................................. F-24
U.S. HEALTH CONNECTIONS, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-25
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1994 and August 31, 1995................... F-26
Statements of Operations for the year ended December 31, 1994 and
for the eight months ended August 31, 1995................................. F-27
Statement of Shareholders' Equity for the year ended December 31, 1994 and
for the eight months ended August 31, 1995................................. F-28
Statements of Cash Flows for the year ended December 31, 1994 and
for the eight months ended August 31, 1995................................. F-29
NOTES TO FINANCIAL STATEMENTS.................................................. F-30-F-31
PRO FORMA FINANCIAL INFORMATION
Pro Forma Statement of Operations of Advanced Health Corporation and
Subsidiaries for the year ended December 31, 1995.............................. F-32
</TABLE>
F-1
<PAGE>
After the conversion and reverse stock split transactions discussed in Note 14
to the consolidated financial statements of Advanced Health Corporation and
subsidiaries are effected, we expect to be in a position to render the following
audit report.
ARTHUR ANDERSEN LLP
July 8, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying consolidated balance sheets of Advanced
Health Corporation (formerly Med-E-Systems Corporation) (a Delaware corporation)
and subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception (August 27, 1993) to December 31, 1993 and for the years
ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Health Corporation
(formerly Med-E-Systems Corporation) and subsidiaries as of December 31, 1994
and 1995, and the results of their operations and their cash flows for the
period from inception to December 31, 1993 and for the years ended December 31,
1994 and 1995 in conformity with generally accepted accounting principles.
New York, New York
June 19, 1996 (except for the matters described in Note 14, as to which the date
is )
F-2
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................... $ 6,903 $ 1,464,427 $ 836,863
Accounts receivable.................................... -- 1,020,558 3,302,583
Note receivable........................................ -- 125,000 15,000
Prepaid expenses and deferred registration costs....... 7,134 278,305 335,958
---------- ----------- -----------
Total current assets............................... 14,037 2,888,290 4,490,404
PROPERTY AND EQUIPMENT, net............................. 773,333 1,538,898 1,614,947
DEFERRED INCOME TAXES, net of valuation allowance of
$1,290,849, $3,506,540 and $4,253,278, respectively..... -- -- --
INTANGIBLE ASSETS, net.................................. -- 1,875,611 1,911,687
OTHER ASSETS............................................ 125,711 159,112 173,943
---------- ----------- -----------
Total assets....................................... $ 913,081 $ 6,461,911 $ 8,190,981
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 319,126 $ 1,312,571 $ 971,331
Accrued expenses....................................... 126,845 407,241 851,795
Due to affiliate....................................... 375,825 -- 50,500
Deferred revenue....................................... -- 1,500,000 950,000
Promissory notes....................................... -- -- 4,000,000
Loan payable related to acquisitions................... 50,000 150,000 100,500
Current portion of capital lease obligations........... 174,247 259,805 278,410
---------- ----------- -----------
Total current liabilities.......................... 1,046,043 3,629,617 7,202,536
---------- ----------- -----------
CAPITAL LEASE OBLIGATIONS............................... 191,799 157,254 125,096
---------- ----------- -----------
Total liabilities.................................. 1,237,842 3,786,871 7,327,632
---------- ----------- -----------
COMMITMENTS (Note 13)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding.......... -- -- --
Common stock, $.01 par value; 15,000,000 shares
authorized; 2,051,539, 4,491,270 and 4,500,267 shares
issued and outstanding, respectively................. 20,516 44,913 45,003
Additional paid-in capital............................. 2,727,587 11,481,478 11,526,538
Common stock subscriptions receivable.................. (3,120) -- --
Accumulated deficit.................................... (3,069,744) (8,776,351) (10,633,192)
Less: Treasury stock, at cost (0, 8,937 and 8,937
shares, respectively)................................ -- (75,000) (75,000)
---------- ----------- -----------
Total shareholders' equity (deficit)............... (324,761) 2,675,040 863,349
---------- ----------- -----------
Total liabilities and shareholders' equity
(deficit)........................................ $ 913,081 $ 6,461,911 $ 8,190,981
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEARS FOR THE SIX
FROM INCEPTION ENDED DECEMBER 31, MONTHS ENDED JUNE 30,
(AUGUST 27, 1993) TO ------------------------- -------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
-------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUE..................... $ -- $ 378,878 $ 1,053,949 $ 100,000 $ 7,617,064
COST OF SALES............... -- 12,297 340,326 21,822 3,511,787
----------- ----------- ----------- ----------- -----------
Gross profit.......... -- 366,581 713,623 78,178 4,105,277
OPERATING EXPENSES.......... 66,192 1,318,145 3,254,978 616,503 4,033,502
RESEARCH AND DEVELOPMENT
EXPENSES.................... 454,622 1,582,332 3,157,389 1,511,681 1,874,988
----------- ----------- ----------- ----------- -----------
Operating loss........ (520,814) (2,533,896) (5,698,744) (2,050,006) (1,803,213)
OTHER INCOME (EXPENSE)...... -- (15,034) (7,863) 1,341 (53,628)
----------- ----------- ----------- ----------- -----------
Net loss.............. $ (520,814) $(2,548,930) $(5,706,607) $(2,048,665) $(1,856,841)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER SHARE INFORMATION:
Net loss per share.......... $ (0.30) $ (1.29) $ (1.68) $ (0.78) $ (0.41)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common
shares outstanding.......... 1,724,659 1,977,736 3,388,767 2,631,303 4,486,658
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplementary net loss per
share (Note 14)(unaudited).. $ (0.39)
-----------
-----------
Supplementary weighted
average common shares
outstanding............... 4,695,753
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
SUBSCRIPTIONS
COMMON STOCK ADDITIONAL RECEIVABLE TREASURY STOCK
--------------------- PAID-IN ----------------- ACCUMULATED -------------------
SHARES PAR VALUE CAPITAL SHARES AMOUNT DEFICIT SHARES AMOUNT TOTAL
--------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION
(August 27, 1993)... -- $ -- $ -- -- $-- $ -- -- $ -- $ --
Common stock
subscriptions........ 185,893 1,859 1,261 185,893 (3,120) -- -- -- --
Issuance of common
stock.............. 718,984 7,190 855 -- -- -- -- -- 8,045
Issuance of Series A
Convertible
Preferred
Stock--Converted to
Common Stock (Notes
8 and 14)......... 868,512 8,685 88,495 -- -- -- -- -- 97,180
Net loss............. -- -- -- -- -- (520,814) -- -- (520,814)
--------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, December 31,
1993................. 1,773,389 17,734 90,611 185,893 (3,120) (520,814) -- -- (415,589)
Sale and issuance of
common stock (Note
7c)................ 25,319 253 639,402 -- -- -- -- -- 639,655
Issuance of Series B
Convertible
Preferred
Stock--Converted to
Common Stock (Notes
8 and 14)........... 252,831 2,529 1,997,574 -- -- -- -- -- 2,000,103
Net loss............. -- -- -- -- -- (2,548,930) -- -- (2,548,930)
--------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, December 31,
1994................. 2,051,539 20,516 2,727,587 185,893 (3,120) (3,069,744) -- -- (324,761)
Issuance of Common
Stock (Note 7c)..... 84,995 506 (506) -- -- -- -- -- --
Issuance of Series C
Convertible
Preferred
Stock--Converted to
Common Stock (Notes
8 and 14)........... 300,000 1,787 1,498,213 -- -- -- -- -- 1,500,000
Issuance of common
stock in private
placement............ 79,780 798 624,261 -- -- -- -- -- 625,059
Redemption of common
stock
subscriptions........ -- -- -- (185,893) 3,120 -- -- -- 3,120
Exercise of stock
options.............. 885,279 8,853 10,864 -- -- -- -- -- 19,717
Common stock issued
for acquisitions.... 649,753 6,498 1,629,314 -- -- -- -- -- 1,635,812
Issuance of Series D
Convertible
Preferred
Stock--Converted to
Common Stock (Notes
8 and 14)........... 595,535 5,955 4,991,745 -- -- -- -- -- 4,997,700
Purchase of treasury
stock................ -- -- -- -- -- -- 8,937 (75,000) (75,000)
Net loss............. -- -- -- -- -- (5,706,607) -- -- (5,706,607)
--------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, December 31,
1995............... 4,491,270 44,913 11,481,478 -- -- (8,776,351) 8,937 (75,000) 2,675,040
Net loss
(unaudited).......... -- -- -- -- -- (1,856,841) -- -- (1,856,841)
Common stock issued
for acquisition..... 8,937 89 44,911 -- -- -- -- -- 45,000
Exercise of stock
options.............. 60 1 149 -- -- -- -- -- 150
--------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
BALANCE, June 30,
1996 (unaudited).... 4,500,267 $45,003 $11,526,538 -- $-- $(10,633,192) 8,937 $ (75,000) $ 863,349
--------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
--------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEARS FOR THE SIX MONTHS
FROM INCEPTION ENDED DECEMBER 31, ENDED JUNE 30,
(AUGUST 27, 1993) TO -------------------------- --------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
-------------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $ (520,814) $(2,548,930) $(5,706,607) $(2,048,665) $(1,856,841)
Adjustments to reconcile net loss
to net cash used in operating
activities-
Depreciation and amortization... 1,552 146,681 456,819 167,940 422,746
Changes in operating assets and
liabilities-
Accounts receivable........... -- -- (1,020,558) -- (2,282,025)
Note receivable............... -- -- (125,000) -- 110,000
Prepaids and deferred
registration costs.......... -- (7,134) (271,171) (49,176) (57,653)
Other assets.................. -- (125,711) (33,401) -- (14,831)
Accounts payable.............. 118,413 200,713 993,445 305,288 (341,240)
Accrued expenses.............. 43,872 82,973 280,396 9,904 444,554
Due to affiliate.............. 105,116 270,709 (375,825) -- 50,500
Deferred revenue.............. 175,000 (175,000) 1,500,000 -- (550,000)
------- ----------- ----------- ----------- -----------
Net cash used in operating
activities................. (76,861) (2,155,699) (4,301,902) (1,614,709) (4,074,790)
------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Issuance of note receivable from
affiliate...................... -- -- (500,000) -- --
Proceeds from repayment of note
receivable from affiliate....... -- -- 500,000 -- --
Net purchase price of
acquisitions.................... -- -- (150,000) -- --
Purchases of property and
equipment, net.................. (21,088) (505,997) (881,531) (75,799) (249,056)
------- ----------- ----------- ----------- -----------
Net cash used in investing
activities................. (21,088) (505,997) (1,031,531) (75,799) (249,056)
------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Repayment of) proceeds from
loans payable related to
acquisitions................... -- 50,000 (50,000) -- (94,500)
Net proceeds from sale and
issuance of common stock....... 8,045 639,655 628,179 -- --
Net proceeds from exercise of
stock options.................. -- -- 19,717 -- 150
Net proceeds from promissory
notes.......................... -- -- -- -- 4,000,000
Purchase of treasury stock....... -- -- (75,000) -- --
Net proceeds from issuance of
Series A Convertible Preferred
Stock.......................... 97,180 -- -- -- --
Net proceeds from issuance of
Series B Convertible Preferred
Stock.......................... -- 2,000,103 -- -- --
Net proceeds from issuance of
Series C Convertible Preferred
Stock.......................... -- -- 1,500,000 1,815,362 --
Net proceeds from issuance of
Series D Convertible Preferred
Stock.......................... -- -- 4,997,700 -- --
Repayment of capital lease
obligations.................... -- (28,435) (229,639) (100,552) (209,368)
------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities....... 105,225 2,661,323 6,790,957 1,714,810 3,696,282
------- ----------- ----------- ----------- -----------
Net change in cash........... 7,276 (373) 1,457,524 24,302 (627,564)
CASH, beginning of period........ -- 7,276 6,903 6,903 1,464,427
------- ----------- ----------- ----------- -----------
CASH, end of period.............. $ 7,276 $ 6,903 $ 1,464,427 $ 31,205 $ 836,863
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest....................... $-- $ 3,267 $ 21,497 $ 4,557 $ 46,440
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
Income taxes..................... $-- $ 3,189 $ 14,854 $ -- $ 573
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Capital lease obligations
incurred....................... $-- $ 394,481 $ 280,652 $ 152,177 $ 195,815
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND BUSINESS
Advanced Health Corporation and subsidiaries (collectively, the "Company" or
"AHC"), provides physician groups and networks with practice and network
management services and clinical information systems and services. The Company's
wholly-owned subsidiary was incorporated on August 27, 1993 as Med-E-Systems
Corporation (formerly Med-E-Mail Corporation), and was engaged at inception to
design and develop clinical information systems for physician users. Effective
August 1995, Med-E-Systems Corporation became a wholly-owned subsidiary of AHC,
an entity incorporated in March 1995, through a stock-for-stock transfer in
which preferred and common shareholders of Med-E-Systems Corporation exchanged
their interests for the same amounts and classes of preferred and common stock
in AHC as those then outstanding in Med-E-Systems Corporation. The Company was
subsequently merged with and into Majean, Inc. (Note 3), a Delaware corporation,
and the surviving corporation changed its name to Advanced Health Corporation.
Concurrent with this transaction, the Company raised approximately $5 million in
a private placement of its securities for the principal purposes of funding the
ongoing development of the Company's clinical information systems and services
and the Company's forward integration into physician practice and network
management services. Management of the Company believes that this financing, as
well as the bridge financing described in Note 14, will be adequate to fund the
Company's operations at least through January 1997.
The Company operates in a highly-regulated environment in which its sources
of revenues are dependent on the Company's ability to successfully negotiate
with third parties for its various services. Currently, the Company depends on
revenue generated by a limited number of customers, including physician groups
and networks which are under long-term contracts.
For a discussion of risks associated with the Company and its business, see
"Risk Factors" in the accompanying initial public offering (Note 14)
registration statement of which these consolidated financial statements and
notes to consolidated financial statements are a part.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AHC and its wholly-owned subsidiaries: Advanced Health Management Corporation
("AHM", formerly Advanced Clinical Networks Corporation), Med-E-Systems
Corporation ("MES") and Management Service Organization subsidiaries ("MSOs")
established to facilitate the provision of management services to physician
practice and network clients. These consolidated financial statements include
the results of operations of the Company from the inception of MES in August
1993, including other entities formed or acquired from their formation or
acquisition, through December 31, 1995. Intercompany accounts and transactions
have been eliminated in consolidation.
REVENUE RECOGNITION
Operating revenues are generated from three principal sources:
(a) Physician Practice Revenues: Through its majority or wholly-owned
consolidated MSOs, the Company enters into management services agreements
with its physician practice clients,
F-7
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
whereby physician practices outsource their non-medical and administrative
functions to the MSO. Fees are generated by the MSO through the provision of
these outsourced services as well as certain additional management,
marketing and information services. Fees are recognized as these services
are rendered.
(b) Physician Network Revenues: Through its majority-owned consolidated
MSOs, the Company enters into management services agreements with its
network clients whereby the MSOs recognizes capitation revenue from health
maintenance organizations ("HMOs") contracting with physician networks for
the delivery of health care. The HMO contracts typically contain shared-risk
provisions whereby additional incentive revenue can be earned or losses
incurred based on the utilization of physician and hospital services by
assigned HMO enrollees.
(c) Information Systems and Services Revenue: The Company recognizes
revenue from the sale of its information systems and services (upon
installation and acceptance), and from the licensing of its software to
third parties (upon delivery). Certain of these third parties provide
payment in advance for the development and installation of software,
databases and systems. The Company accounts for these advance payments as
deferred revenue when received, and recognizes revenue ratably over the
period of time during which the software is delivered and services are
performed. In December 1991, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 91-1, "Software Revenue
Recognition". The Company's revenue recognition policy is in compliance with
the provisions of this SOP.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade receivables from physician practice
revenues, physician network revenues and information systems and services
revenues.
PROPERTY AND EQUIPMENT
Property and equipment, consisting primarily of electronic data processing
equipment, are stated at cost and depreciated on a straight-line basis over the
useful lives of the assets (3 to 5 years). Equipment held under capital leases
is amortized utilizing the straight-line method over the lesser of the term of
the lease or the estimated useful life of the asset.
INTANGIBLE ASSETS
The Company is in the process of allocating the excess of purchase price
over tangible net assets acquired in the acquisitions described in Note 3 to
specific categories of intangible assets. The total of such excess purchase
price is included in intangible assets and is presently being amortized over
periods of 15 to 20 years.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the Company.
F-8
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
At inception, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", which requires recognition of
deferred tax liabilities and assets for the estimated future tax effects of
events that have been recognized in the financial statements or income tax
returns. Under this method, deferred tax liabilities and assets are determined
based on (1) differences between the financial accounting and income tax bases
of assets and liabilities, and (2) carry-forwards, using enacted tax rates in
effect for the years in which the differences and carry-forwards are expected to
reverse and be utilized, respectively (Note 11).
NET LOSS PER COMMON SHARE
Net loss per common share was computed by dividing net loss by the weighted
average number of common shares outstanding during the respective years, which
includes, for all periods, the retroactive effect of (i) the conversion of Class
A, B, C and D Convertible Preferred Stock to common stock and (ii) the reverse
stock split, both described in Note 14, which will occur concurrent with the
consummation of the Company's initial public offering. Fully diluted net loss
per common share has not been presented since the inclusion of the impact of
stock options and warrants outstanding (Notes 3, 8, 10 and 14) would be
antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
During March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement is effective
for financial statements for fiscal years beginning after December 15, 1995,
although earlier application is encouraged. The Company does not expect the
impact of the adoption of this pronouncement to be material.
During October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 encourages entities to adopt a fair value based
method of accounting for stock compensation plans. However, SFAS No. 123 also
permits the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. If the fair value based method of accounting is not
adopted, SFAS No. 123 requires
F-9
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
pro forma disclosures of net income (loss) and net income (loss) per common
share in the notes to consolidated financial statements. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995, though they may be adopted on
issuance. The disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning after December 15, 1995, or for
an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The Company has not yet quantified the expected
impact of the adoption of this pronouncement.
3. ACQUISITION OF BUSINESSES
ACQUISITIONS
The transaction with Majean, Inc. described in Note 1 was accounted for as a
purchase through the issuance of 543,564 shares of the Company's stock to the
shareholders of Majean, Inc. for an aggregate purchase price of $1,368,471.
Additionally, options to purchase 283,010 shares of common stock at $.0112 per
share were issued as part of this transaction. These options are only
exercisable, as contingent consideration, upon the achievement of certain
capitalization levels related to regulatory requirements. The entire purchase
price of this acquisition has been allocated to intangible assets in the
accompanying consolidated balance sheet, as will any contingent consideration
which arises due to the option described above, based on a twenty-year contract
with a MSO, which was contributed to Majean, Inc. by its shareholders upon its
formation prior to the transaction. Accordingly, this intangible asset is being
amortized over a period of twenty years.
Pursuant to an asset purchase agreement with Peltz Ventimiglia, Inc.
("Peltz") dated August 28, 1995, AHC acquired certain assets and assumed certain
liabilities of Peltz for 75,996 shares of common stock for an aggregate purchase
price of $191,327. Additionally, the former owners of Peltz received warrants to
purchase 113,995 shares of the Company's common stock at $4.38 per share, which
management believes to be in excess of the fair market value of such shares at
the date of grant. These warrants are only exercisable, as contingent
consideration, based on the achievement of targeted operating performance.
Pursuant to a purchase agreement with U.S. Health Connections, Inc. ("Health
Connections") dated September 1, 1995, the Company acquired, through its
subsidiary AHM, all of the outstanding stock of Health Connections for $150,000
in cash, a note for $150,000 due in two installments within one year of the
acquisition and 30,193 shares of common stock, for an aggregate purchase price
of $376,014. Furthermore, the Health Connections purchase agreement calls for
the issuance of an additional 56,611 shares of common stock, as contingent
consideration, based on the achievement of targeted operating performance by
this entity.
These acquisitions described above were valued based on management's
estimate of the fair value of common stock at the date of acquisition. Costs in
excess of net assets acquired were recorded as intangible assets and are being
amortized as described in Note 6.
F-10
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
3. ACQUISITION OF BUSINESSES--(CONTINUED)
PRO FORMA RESULTS OF OPERATIONS
Summarized below are the unaudited pro forma results of operations of the
Company as though these acquisitions had occurred at the beginning of 1994.
Adjustments have been made for pro forma income taxes and amortization of
intangible assets related to these transactions.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-----------------------------
1994 1995
----------- -----------
<S> <C> <C>
Pro Forma:
Revenues................................... $ 1,228,409 $ 1,619,621
Net loss................................... (2,467,198) (5,742,954)
Net loss per share......................... $ (1.18) $ (1.66)
</TABLE>
These pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the acquisitions been
made at the beginning of 1994, or of results which may occur in the future.
4. RELATED PARTY TRANSACTIONS
The Company shares office space and administrative services with Physicians'
Online, Inc. ("POL"), a healthcare information services company which is partly
owned by several of the Company's shareholders, including certain officers and
directors.
During the period ended December 31, 1993 and the years ended December 31,
1994 and 1995, POL also incurred expenses totaling $105,116, $135,825 and
$180,631, respectively, and $117,362 and $50,500, respectively, for the six
months ended June 30, 1995 and 1996 (unaudited), on behalf of the Company for
which the Company has reimbursed POL. The amount due POL, as well as a loan from
POL in the amount of $300,000, which has been repaid, is reflected as due to
affiliate in the accompanying consolidated balance sheet at December 31, 1994.
In addition, during 1995, POL borrowed $500,000 from the Company. POL repaid
this amount in full prior to December 31, 1995.
Management of the Company believes that these related party transactions
were effected on terms which approximate fair market value.
F-11
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- 1996
1994 1995 (UNAUDITED)
-------- ---------- ------------
<S> <C> <C> <C>
Computer equipment and software.......................... $486,155 $1,152,077 $ 1,378,407
Equipment under capital leases........................... 394,481 681,988 877,803
Leasehold improvements................................... 37,930 60,236 27,049
Furniture and fixtures................................... 3,000 189,448 245,361
-------- ---------- ------------
921,566 2,083,749 2,528,620
Less: Accumulated depreciation and amortization.......... 148,233 544,851 913,673
-------- ---------- ------------
Property and equipment, net.............................. $773,333 $1,538,898 $ 1,614,947
-------- ---------- ------------
-------- ---------- ------------
</TABLE>
Depreciation and amortization aggregated $1,552, $146,681 and $396,618,
respectively, for the period ended December 31, 1993 and for the years ended
December 31, 1994 and 1995, and $167,940 and $368,822, respectively, for the six
months ended June 30, 1995 and 1996 (unaudited).
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
------------ -----------
<S> <C> <C>
Excess of purchase price over net assets acquired.................. $1,917,261 $ 2,007,261
Less: Accumulated amortization..................................... 41,650 95,574
------------ -----------
Intangible assets, net......................................... $1,875,611 $ 1,911,687
------------ -----------
------------ -----------
</TABLE>
Amortization aggregated $41,650 for the year ended December 31, 1995 and
$53,924 for the six months ended June 30, 1996 (unaudited). There were no
intangible assets or related amortization prior to 1995.
7. COMMON STOCK
In connection with the formation of the Company, the Company entered into
two common stock agreements as follows:
(a) On August 30, 1993, the Company entered into agreements for the
subscription of 185,893 shares of common stock for $3,120.
(b) On December 27, 1993, the Company sold 718,984 shares of common
stock for $8,045 pursuant to a private placement agreement dated November 8,
1993. The shares were offered only to the holders of POL stock on a
one-for-one basis pro rata to their shareholdings in POL as of the close of
business on August 30, 1993. In accordance with this agreement, the holders
of these
F-12
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
7. COMMON STOCK--(CONTINUED)
shares have the right, on two occasions, to participate on a "piggy-back"
basis in a registration by the Company under the Securities Act of 1933, as
amended, subject to certain restrictions, for a period ending on December
27, 1998, and commencing twelve months from the closing of an initial public
offering of the securities of the Company.
(c) In November 1994, the Company sold 75,960 shares of common stock
pursuant to a private placement agreement dated August 22, 1994 for an
aggregate of $639,655. Of these shares sold, all of which were paid for in
1994, 25,319 were issued prior to December 31, 1994 and 50,641 were issued
in January 1995. In accordance with this agreement, the holders of these
shares have the right, on two occasions, to participate on a "piggy-back"
basis in a registration by the Company under the Securities Act of 1933, as
amended, subject to certain restrictions, for a period ending on October 31,
1999, and commencing twelve months from the closing of an initial public
offering of the securities of the Company.
(d) In 1995, the Company sold 79,780 shares of common stock pursuant to
a private placement agreement dated April 21, 1995 for an aggregate of
$625,059. In accordance with this agreement, the holders of these shares
have the right, on two occasions, to participate on a "piggy-back" basis in
a registration by the Company under the Securities Act of 1933, as amended,
subject to certain restrictions, for a period ending on September 30, 2000,
and commencing twelve months from the closing of an initial public offering
of the securities of the Company.
8. CONVERTIBLE PREFERRED STOCK
During 1993, the Company's shareholders authorized 2,000,000 shares of
Preferred Stock with a par value of $.01 per share, of which 971,800 shares were
designated Series A Convertible Preferred Stock. On August 31, 1993, the Company
sold 971,800 shares of Series A Convertible Preferred Stock for $97,180. In
March 1994, the Company authorized and sold 282,900 shares of Series B
Convertible Preferred Stock for $2,000,103 pursuant to a Private Placement
Agreement. In January 1995, the Company authorized and sold 200,000 shares of
Series C Convertible Preferred Stock for $1,500,000 pursuant to a Private
Placement Agreement. In August 1995, the Company authorized and sold 666,360
shares of Series D Convertible Preferred Stock for $4,997,700 pursuant to a
Private Placement Agreement. All of the above shares are not redeemable.
Each individual share of Series A, B, C and D Convertible Preferred Stock
was convertible into 1.5 common shares (see Note 14) at the holder's option,
subject to adjustment for antidilution. The holders of Series A, B, C and D
Convertible Preferred Stock were entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation, dissolution or
winding up of the Company, the holders of Series A, B, C and D Convertible
Preferred Stock were entitled to receive all accrued dividends, if applicable,
plus the liquidation price per share of $.07, $4.71, $5.00 and $5.00,
respectively.
As described in Note 14, all information contained in the accompanying
consolidated financial statements has been retroactively restated to give effect
to both the conversion of Class A, B, C and D Convertible Preferred Stock to
common stock and the reverse stock split, both of which transactions will be
effected concurrent with the consummation of the pending initial public
offering. Accordingly, the sale of Series A, B, C and D Convertible Preferred
Stock is reflected as the sale of 868,512, 252,831,
F-13
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
8. CONVERTIBLE PREFERRED STOCK--(CONTINUED)
178,743 and 595,535 shares of common stock, respectively, in the accompanying
consolidated financial statements.
Subject to certain provisions, prior to the conversion to common stock,
registration rights, as defined in the agreement, were to be exercisable after
the earlier of (1) August 23, 1999, or (2) the effective date of the first
registration statement for a public offering of securities of the Company.
Holders of Series B, C and D Convertible Preferred Stock have voting rights.
Furthermore, holders of Series D Convertible Preferred Stock have the right to
purchase 446,858 shares of common stock at $8.39 per share.
9. STOCK SPLITS
In January 1995, the Company authorized a 100 for 1 stock split on its
Series A and B Preferred Stock and a 100 for 1 stock split on the common stock
sold in 1993 (Note 7 a). In March 1996, the Company authorized a 1.5 for 1 stock
split on its common stock. All information in the accompanying consolidated
financial statements and footnotes has been retroactively restated to give
effect to these stock splits.
10. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During 1994, the Company issued options to employees to purchase 970,860
shares of common stock at prices ranging from $.0112 to $2.52 per share. During
1995, the Company issued options to employees to purchase 851,380 shares of
common stock at prices ranging from $2.52 to $3.52 per share. During the six
months ended June 30, 1996, the Company issued options to employees, directors
and advisors to purchase 105,244 shares of common stock at $5.04 per share. In
the opinion of management, these option prices represented the fair market value
of such shares at the dates of grant.
Transactions involving the Stock Option Plan for the years ended December
31, 1994 and 1995 and for the six months ended June 30, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- 1996
1994 1995 (UNAUDITED)
------------ ----------- -----------
<S> <C> <C> <C>
Outstanding at beginning of period.................. -- 970,860 888,924
Granted........................................... 970,860 851,380 105,244
Exercised......................................... -- (885,279) (60)
Canceled.......................................... -- (48,037) (17,427)
------------ ----------- -----------
Outstanding at end of period........................ 970,860 888,924 976,681
------------ ----------- -----------
------------ ----------- -----------
Range of exercise prices............................ $.0112-$2.52 $2.52-$3.52 $2.52-$5.04
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
F-14
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
10. STOCK OPTIONS AND WARRANTS--(CONTINUED)
STOCK WARRANTS
In October 1995, the Company issued warrants to a financial advisor to
purchase 17,874 shares of common stock at $3.52 per share. In the opinion of
management, the exercise price of $3.52 per share represents the fair value of
such shares at the date the warrants were issued. Accordingly, management has
determined that the intrinsic value of these warrants is not material to the
Company's consolidated financial statements.
11. INCOME TAXES
There is no provision for income taxes in the accompanying consolidated
financial statements because the Company has incurred net operating losses from
inception. As of December 31, 1995, the Company had net operating loss carry
forwards ("NOLs") available to offset future book and taxable income of
approximately $8.7 million and $6.2 million, respectively, which expire through
2010. The difference between the book and tax NOLs relates principally to the
differences between book and tax accounting related to start-up costs,
depreciation of fixed assets, amortization of intangible assets and recognition
of deferred revenue. The future book income tax benefits of $1.3 million and
$3.5 million as of December 31, 1994 and December 31, 1995, respectively, have
been fully reserved due to the uncertainty of their future realization.
12. CAPITAL LEASE OBLIGATIONS
The Company is the lessee of certain equipment under capital leases expiring
through 1998. The assets and liabilities are recorded at the lower of the
present value of minimum lease payments or the fair market value of the asset.
The interest rates on the capital leases vary from 2.63% to 17.00%.
Future minimum payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1996............................................................ $277,842
1997............................................................ 126,767
1998 and thereafter............................................. 39,994
--------
Total minimum lease payments.................................... 444,603
Less: Amount representing interest.............................. 27,544
--------
Present value of net minimum lease payments..................... $417,059
--------
--------
</TABLE>
13. COMMITMENTS
The Company leases certain office space for its operations. Leases for this
space expire through 2002 and call for annual rent with immaterial escalations
through the end of the leases.
The Company has also entered into several operating leases for office
equipment.
F-15
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
13. COMMITMENTS--(CONTINUED)
Future minimum payments for operating leases at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1996........................................................... $ 247,447
1997........................................................... 673,317
1998........................................................... 784,772
1999........................................................... 781,844
2000 and thereafter............................................ 1,539,750
</TABLE>
Rent expense for the period ended December 31, 1993 and for the years ended
December 31, 1994 and 1995 was $20,000, $69,774 and $125,881, respectively, and
$60,750 and $180,973 for the six months ended June 30, 1995 and 1996
(unaudited).
14. SUBSEQUENT EVENTS
ACQUISITION
On April 1, 1996, the Company acquired certain assets and assumed certain
liabilities of a network development company in exchange for 8,937 shares of the
Company's common stock and $45,000, to be paid in two installments of $22,500 on
the closing date and the first anniversary thereof, for an aggregate purchase
price of approximately $90,000, all of which is included in intangible assets
(Note 6) in the accompanying unaudited balance sheet as of June 30, 1996. The
pro forma effects of this transaction have not been presented, as the results
are immaterial to the Company's consolidated financial statements taken as a
whole.
FORMATION OF MSOS
In July 1996, the Company obtained a 51% interest in Cardiology First
Management Company ("CFMC"), a newly formed MSO. The Company acquired this
interest as part of the formation of CFMC and concurrent with the signing of a
long-term management services agreement between CFMC and Cardiology First of New
Jersey, P.A., which is a network of cardiologists based in the State of New
Jersey.
In July 1996, the Company obtained a 51% interest in Diamond Physician
Management, Inc. ("Diamond"), a newly formed MSO. The Company acquired this
interest as part of the formation of Diamond and concurrent with the signing of
a long-term management services agreement between Diamond and Long Island
Interventional Cardiology, which is a private cardiovascular physician practice
based in Long Island, New York.
In forming these MSOs, the Company conveyed 49% interests to the physician
practice or network in exchange for the execution of the long-term management
services agreements described above. The Company will record the fair value of
this arrangement, which is, in the opinion of management, more readily
determinable than the 49% MSO interest conveyed. These intangible assets, which
the Company does not expect to be material, will be amortized over the life of
the related contracts.
F-16
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
14. SUBSEQUENT EVENTS--(CONTINUED)
The stockholders agreements for these MSOs, among other things, (i) restrict
the transfer of MSO equity, (ii) provide the terms upon which the MSO can, at
the Company's option, be merged with and into a wholly-owned subsidiary of the
Company in a transaction in which the physician practice or network will receive
stock of the Company in exchange for shares in the MSO, and (iii) grant to the
physician practice or network the right to put its equity share in the MSO to
the Company within one year of the Company's satisfaction of certain specified
targeted operating results.
INITIAL PUBLIC OFFERING
The Company is pursuing an initial public offering of its securities. The
proposed offering presently contemplates the sale of 2,000,000 shares of common
stock at $13 per share. The Company plans to use a portion of the proceeds of
the proposed offering to repay the Bridge Financing described below, of which
$4,000,000 was outstanding at June 30, 1996. Supplementary net loss per share
for the six months ended June 30, 1996 (unaudited) gives supplemental effect to
the issuance of 307,692 shares of common stock for the entire period during
which the related Bridge Financing was outstanding, which is the number of
shares to be issued in the proposed initial public offering, the proceeds of
which would be used to repay the $4,000,000 outstanding at June 30, 1996, as
well as to the effect of the reduction of related interest expense in that
period. These shares are presumed outstanding for supplementary purposes only,
and were neither issued nor outstanding for any purpose during the six months
ended June 30, 1996.
CONVERSION OF CONVERTIBLE PREFERRED STOCK
Pursuant to the terms of the Series A, B, C and D Convertible Preferred
Stock (Note 8), these securities will be converted, on a 1.5 to 1 share basis,
to common stock concurrent with the consummation of the pending public offering
described above. All information contained in the accompanying consolidated
financial statements and footnotes has been retroactively restated to give
effect to this conversion.
REVERSE STOCK SPLIT AND RECAPITALIZATION
In connection with the pending initial public offering described above, the
Company will effect a recapitalization whereby the presently outstanding common
stock (including converted Series A, B, C and D Convertible Preferred Stock)
will be converted to shares of common stock on a .59581 to 1 share basis. After
this reverse split is effected, the Company will have 5,000,000 shares of
preferred stock authorized and 15,000,000 shares of common stock authorized. All
information contained in the accompanying financial statements and footnotes has
been retroactively restated to give effect to this transaction.
BRIDGE FINANCING
On February 28, 1996, the Company entered into an agreement to issue three
8% promissory notes to an investor for an aggregate amount of $3,000,000. The
Company issued one promissory note and received $1,500,000 upon the closing,
issued a second promissory note and received $750,000 at the second closing
date, April 26, 1996, and issued a third promissory note and recieved the
remaining
F-17
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E-SYSTEMS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1995
14. SUBSEQUENT EVENTS--(CONTINUED)
$750,000 on the third closing date, June 28, 1996. Each note is due on the
earlier of the initial public offering of the Company's securities or one year
from the respective closing dates. Interest is due quarterly on each of the
notes.
In addition, the investor received warrants to purchase 16,757 shares of
common stock of the Company at $16.78 per share which expire on June 28, 2001.
The exercise price of $16.78 per share is, in the opinion of management, greater
than the fair market value of such shares at the date the warrants were issued.
The investor also received 8,937 contingent warrants to purchase the Company's
stock at $8.39 per share. These contingent warrants may be exercised during the
period of January 1, 1997 through June 28, 2001 if payment has not been made on
the notes by the agreed upon payment dates described above or if an initial
public offering is not consummated prior to January 1, 1997; however, if
payments on the notes are made by the specified dates, these contingent warrants
will be canceled.
The Company has entered into an agreement with the owners of the Company's
Series D Convertible Preferred Stock and related warrants (Note 8) for
additional bridge financing in the amount of approximately $2,000,000. This
financing is unsecured, bears interest at 9% and expires on the earlier of the
consummation of an initial public offering or July 31, 1997. As of June 30,
1996, the Company has borrowed $1 million under this agreement.
15. UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The unaudited consolidated financial information for the six months ended
June 30, 1995 and 1996 has been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of the
Company, these unaudited consolidated financial statements reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The consolidated results of operations for interim periods are
not necessarily indicative of the results to be expected for a full year.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying balance sheets of Peltz Ventimiglia, Inc.
(a New York corporation) as of December 31, 1994 and August 31, 1995, and the
related statements of operations, shareholders' equity and cash flows for the
years ended December 31, 1993 and 1994 and for the eight months ended August 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peltz Ventimiglia, Inc. as
of December 31, 1994 and August 31, 1995, and the results of its operations and
its cash flows for the years ended December 31, 1993 and 1994 and for the eight
months ended August 31, 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
June 4, 1996
F-19
<PAGE>
PELTZ VENTIMIGLIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................... $ 3,179 $ 4,344
Accounts receivable................................................ 45,173 41,552
------------ ----------
Total current assets........................................... 48,352 45,896
OTHER ASSETS......................................................... 7,108 7,817
------------ ----------
Total assets................................................... $ 55,460 $ 53,713
------------ ----------
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 17,297 $ 30,394
Accrued expenses................................................... 7,337 3,385
------------ ----------
Total liabilities.............................................. 24,634 33,779
------------ ----------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 1,000 shares authorized; 1,000
shares issued and outstanding, respectively...................... 1 1
Additional paid-in capital......................................... 3,085 3,085
Retained earnings.................................................. 27,740 16,848
------------ ----------
Total shareholders' equity..................................... 30,826 19,934
------------ ----------
Total liabilities and shareholders' equity..................... $ 55,460 $ 53,713
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-20
<PAGE>
PELTZ VENTIMIGLIA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED EIGHT MONTHS
DECEMBER 31, ENDED
-------------------- AUGUST 31,
1993 1994 1995
-------- -------- ------------
<S> <C> <C> <C>
REVENUE................................................... $377,032 $499,543 $351,066
OPERATING EXPENSES........................................ 182,205 408,925 363,047
-------- -------- ------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR STATE AND
LOCAL INCOME TAXES........................................ 194,827 90,618 (11,981)
(BENEFIT) PROVISION FOR STATE AND LOCAL INCOME TAXES...... 17,712 8,238 (1,089)
-------- -------- ------------
Net (loss) income................................... $177,115 $ 82,380 $(10,892)
-------- -------- ------------
-------- -------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
PELTZ VENTIMIGLIA, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993.................... 1,000 $ 1 $3,085 $ 3,960 $ 7,046
Distributions to shareholders............. -- -- -- (164,139) (164,139)
Net income................................ -- -- -- 177,115 177,115
------ -- ---------- -------- --------
BALANCE, December 31, 1993.................. 1,000 1 3,085 16,936 20,022
Distributions to shareholders............. -- -- -- (71,576) (71,576)
Net income................................ -- -- -- 82,380 82,380
------ -- ---------- -------- --------
BALANCE, December 31, 1994.................. 1,000 1 3,085 27,740 30,826
Net (loss)................................ -- -- -- (10,892) (10,892)
------ -- ---------- -------- --------
BALANCE, August 31, 1995.................... 1,000 $ 1 $3,085 $ 16,848 $ 19,934
------ -- ---------- -------- --------
------ -- ---------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
PELTZ VENTIMIGLIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, AUGUST 31,
------------------- 1995
1993 1994
-------- ------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................ $177,115 $82,380 $(10,892)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities-
Changes in operating assets and liabilities-
Accounts receivable.................................... (34,369) (10,804) 3,621
Other assets........................................... 5,171 (7,108) (709)
Accounts payable....................................... 24,143 (7,171) 13,097
Accrued expenses....................................... -- 7,337 (3,952)
-------- ------- ------------
Net cash provided by operating activities............ 172,060 64,634 1,165
-------- ------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders............................ (164,139) (71,576) --
-------- ------- ------------
Net cash used in financing activities................ (164,139) (71,576) --
-------- ------- ------------
Net change in cash................................... 7,921 (6,942) 1,165
CASH, beginning of period.................................. 2,200 10,121 3,179
-------- ------- ------------
CASH, end of period........................................ $ 10,121 $ 3,179 $ 4,344
-------- ------- ------------
-------- ------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
PELTZ VENTIMIGLIA, INC.
NOTES TO FINANCIAL STATEMENTSE
DECEMBER 31, 1994 AND AUGUST 31, 1995
1. ORGANIZATION AND BUSINESS
Peltz Ventimiglia, Inc. (the "Company") provides physician practice
management consulting services for physicians in the Eastern United States.
On August 28, 1995, the Company entered into a purchase agreement with
Advanced Health Management Corporation ("AHM", formerly Advanced Clinical
Networks Corporation), a wholly-owned subsidiary of Advanced Health Corporation
("AHC"), whereby the Company sold its net assets to AHM for 75,996 shares of AHC
common stock for an aggregate sale price of $191,327.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Fees for physician practice management consulting services are recognized as
services are rendered.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax liabilities and assets for the estimated future tax
effects of events that have been recognized in the financial statements or
income tax returns. Under this method, deferred tax liabilities and assets are
determined based on (1) differences between the financial accounting and income
tax bases of assets and liabilities, and (2) carry-forwards, using enacted tax
rates in effect for the years in which the differences and carry-forwards are
expected to reverse and be utilized, respectively.
The Company operates under Subchapter S of the Internal Revenue Code and,
consequently, is not subject to Federal and certain state income taxes. The
stockholders include their pro rata share of the Company's income in their
personal income tax returns. It is the Company's policy to reimburse its
stockholders for any tax liability resulting from their inclusion of the
Company's income in their respective tax returns.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying balance sheets of U.S. Health Connections,
Inc. (a Georgia corporation) as of December 31, 1994 and August 31, 1995, and
the related statements of operations, shareholders' equity and cash flows for
the year ended December 31, 1994 and for the eight months ended August 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Health Connections,
Inc. as of December 31, 1994 and August 31, 1995, and the results of its
operations and its cash flows for the year ended December 31, 1994 and for the
eight months ended August 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
June 5, 1996
F-25
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................... $ 4,708 $ --
Accounts receivable................................................ 72,596 40,775
------------ ----------
Total current assets........................................... 77,304 40,775
PROPERTY AND EQUIPMENT, net.......................................... 20,052 23,736
OTHER ASSETS......................................................... 1,592 1,652
------------ ----------
Total assets................................................... $ 98,948 $ 66,163
------------ ----------
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 24,834 $ 10,436
Accrued expenses................................................... 27,414 15,953
Current portion of long-term debt.................................. 2,838 8,309
Loan payable to shareholder........................................ -- 6,000
Deferred revenue................................................... 10,002 --
------------ ----------
Total current liabilities...................................... 65,088 40,698
LONG-TERM DEBT, net of current portion............................... 8,513 --
------------ ----------
Total liabilities.............................................. 73,601 40,698
------------ ----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000 shares authorized; 100 shares
issued and outstanding............................................... 1 1
Additional paid-in capital......................................... 99 99
Retained earnings.................................................. 25,247 25,365
------------ ----------
Total shareholders' equity..................................... 25,347 25,465
------------ ----------
Total liabilities and shareholders' equity..................... $ 98,948 $ 66,163
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
REVENUE............................................................ $349,988 $214,606
OPERATING EXPENSES................................................. 318,506 212,002
------------ ------------
Operating income............................................. 31,482 2,604
INTEREST EXPENSE, net.............................................. 948 690
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................... 30,534 1,914
PROVISION FOR INCOME TAXES......................................... 5,287 1,796
------------ ------------
Net income................................................... $ 25,247 $ 118
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
AND FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
------ --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994............................. -- $ -- $ -- $ -- $ --
Issuance of common stock............................. 100 1 99 -- 100
Net income........................................... -- -- -- 25,247 25,247
------ --- --- -------- -------
BALANCE, December 31, 1994........................... 100 1 99 25,247 25,347
Net income........................................... -- -- -- 118 118
------ --- --- -------- -------
BALANCE, August 31, 1995............................. 100 $ 1 $ 99 $ 25,365 $25,465
------ --- --- -------- -------
------ --- --- -------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 25,247 $ 118
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation................................................... 5,200 5,200
Changes in operating assets and liabilities-
Accounts receivable.......................................... (72,596) 31,821
Other assets................................................. (1,592) (60)
Accounts payable............................................. 24,834 (14,398)
Accrued expenses............................................. 27,414 (11,461)
Deferred revenue............................................. 10,002 (10,002)
------------ ------------
Net cash provided by operating activities.................. 18,509 1,218
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net......................... (25,252) (8,884)
------------ ------------
Net cash used in investing activities...................... (25,252) (8,884)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt................................. 11,351 (3,042)
Proceeds from loan payable from related party.................... -- 6,000
Proceeds from sale and issuance of common stock.................. 100 --
------------ ------------
Net cash provided by financing activities.................. 11,451 2,958
------------ ------------
Net change in cash......................................... 4,708 (4,708)
CASH, beginning of period.......................................... -- 4,708
------------ ------------
CASH, end of period................................................ $ 4,708 $ --
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND AUGUST 31, 1995
1. ORGANIZATION AND BUSINESS
U.S. Health Connections, Inc. (the "Company") commenced operations on
January 1, 1994. The Company provides physician network management services for
physician groups in the Southeastern United States.
On September 1, 1995, the Company entered into a purchase agreement with
Advanced Health Management Corporation ("AHM", formerly Advanced Clinical
Networks Corporation), a wholly-owned subsidiary of Advanced Health Corporation
("AHC"), whereby the Company's shareholders sold all of their outstanding stock
to AHM for $150,000 in cash, a $150,000 note receivable and 30,193 shares of AHC
common stock, for an aggregate sale price of $376,014.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company enters into management services agreements with its network
clients whereby the Company recognizes administrative fees for managing
capitated contracts between health maintenance organizations ("HMOs") and
physician networks for the delivery of health care.
PROPERTY AND EQUIPMENT
Property and equipment, consisting primarily of electronic data processing
equipment, are stated at cost and depreciated on a straight-line basis over the
useful lives of the assets (5 years).
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax liabilities and assets for the estimated future tax
effects of events that have been recognized in the financial statements or
income tax returns. Under this method, deferred tax liabilities and assets are
determined based on (1) differences between the financial accounting and income
tax bases of assets and liabilities, and (2) carry-forwards, using enacted tax
rates in effect for the years in which the differences and carry-forwards are
expected to reverse and be utilized, respectively. The provision for income
taxes for each period includes both federal and state income taxes.
F-30
<PAGE>
U.S. HEALTH CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND AUGUST 31, 1995
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
Vehicle............................................. $ 14,888 $ 14,888
Computer equipment and software..................... 7,618 12,499
Furniture and fixtures.............................. 2,746 6,749
------------ ----------
25,252 34,136
Less: Accumulated depreciation...................... 5,200 10,400
------------ ----------
Property and equipment, net......................... $ 20,052 $ 23,736
------------ ----------
------------ ----------
</TABLE>
Depreciation aggregated $5,200 for each of the year ended December 31, 1994
and the eight months ended August 31, 1995, respectively.
4. LONG-TERM DEBT
The Company had a loan payable with a bank related to the acquisition of a
vehicle. This loan was payable, with interest at 7.5%, in equal installments
through December 1997 and was repaid in full subsequent to the sale of the
Company to AHC. Accordingly, all long-term debt is reflected as a current
liability in the accompanying balance sheet as of August 31, 1995.
5. RELATED PARTY TRANSACTION
In 1995, the Company borrowed $6,000 from a related party of the majority
shareholder. The loan is due on demand and interest is payable, and is accrued
by the Company at August 31, 1995, at the payment date at a rate equal to the
Company's average borrowing rate.
F-31
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
The following pro forma statement of operations for the year ended December
31, 1995 includes the results of operations of Advanced Health Corporation,
Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. as if the acquisitions
of Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. by Advanced Health
Corporation were made on January 1, 1995. The Company believes that this pro
forma statement of operations includes all necessary pro forma adjustments to
give pro forma effect to these transactions as if they had occurred on January
1, 1995.
The pro forma financial information presented below does not purport to be
indicative of the operating results which would have been achieved had the
acquisitions taken place on January 1, 1995 and should not be construed as
representative of the Company's results of operations for any future period.
<TABLE>
<CAPTION>
ADVANCED PELTZ U.S. HEALTH
HEALTH VENTIMIGLIA, CONNECTIONS, PRO FORMA PRO FORMA
CORPORATION(1) INC.(2) INC.(2) SUBTOTAL ADJUSTMENTS(3) OPERATIONS
-------------- ------------ ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE................... $ 1,053,949 $351,066 $214,606 $ 1,619,621 $-- $ 1,619,621
COST OF SALES............. 340,326 -- -- 340,326 -- 340,326
-------------- ------------ ------------ ----------- -------------- -----------
Gross Profit.......... 713,623 351,066 214,606 1,279,295 -- 1,279,295
OPERATING EXPENSES........ 6,412,367 363,047 212,002 6,987,416 26,280 7,013,696
-------------- ------------ ------------ ----------- -------------- -----------
Operating income(loss) (5,698,744) (11,981) 2,604 (5,708,121) (26,280) (5,734,401)
OTHER INCOME (EXPENSE).... (7,863) -- (690) (8,553) -- (8,553)
-------------- ------------ ------------ ----------- -------------- -----------
Income (loss) before
income taxes............ (5,706,607) (11,981) 1,914 (5,716,674) (26,280) (5,742,954)
PROVISION (BENEFIT) FOR
INCOME TAXES.............. -- (1,089) 1,796 707 (707) --
-------------- ------------ ------------ ----------- -------------- -----------
Net loss.............. $ (5,706,607) $(10,892) $ 118 $(5,717,381) $(25,573) $(5,742,954)
-------------- ------------ ------------ ----------- -------------- -----------
-------------- ------------ ------------ ----------- -------------- -----------
Pro forma net loss per
share................... $ (1.66)
-----------
-----------
Pro forma weighted average
common shares
outstanding(4).......... 3,458,838
-----------
-----------
</TABLE>
- ------------
(1) Includes the results of operations of Advanced Health Corporation for the
full year, and the results of operations of Peltz Ventimiglia, Inc. and U.S.
Health Connections, Inc. from September 1, 1995 through December 31, 1995.
(2) Includes the results of operations of Peltz Ventimiglia, Inc. and U.S.
Health Connections, Inc. from January 1, 1995 through August 31, 1995.
(3) Pro forma adjustments give effect to amortization of intangible assets
related to the acquisitions of Peltz Ventimiglia, Inc. and U.S. Health
Connections, Inc., as well as to the tax provision (benefit) which would
have resulted from the combined results of operations, had the acquisitions
been made at the beginning of the year.
(4) Includes the pro forma effect of shares of common stock issued in connection
with the acquisitions of Peltz Ventimiglia, Inc. and U.S. Health
Connections, Inc. as if those shares were issued and outstanding for the
period from January 1, 1995 to December 31, 1995.
F-32
<PAGE>
Graphic captioned "Integrating Physician Management Services with
Information Technology", which includes (i) a photograph of a physician holding
a pen-based, portable, wireless computer, captioned "Med-E-Practice/All of the
applications in the Med-E-Practice suite are designed to be run on a pen-based,
portable, wireless computer for use in a busy ambulatory practice.", (ii) a
photograph of a computer screen from the Med-E-Visit application, captioned
"Med-E-Visit/A patient encounter application generating a Superbill with fully-
qualified diagnostic coding linked to appropriate billing codes required to
support outcomes analysis.", (iii) a photograph of a computer screen from the
Referral application, captioned "Referral/Support multiple referral
networks by recording referral information and providing both network-specific
referral rules and information regarding appropriate network specialists." and
(iv) a photograph of a computer screen from the Smart Scripts application,
captioned "Smart Scripts/A pharmaceutical prescription-writing application
providing formulary management, DUR edits and diagnostic coding linkage to
drug therapy protocols." The graphic also contains the Company's logo.
<PAGE>
========================================= ====================================
- ----------------------------------------- ------------------------------------
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS 2,000,000 SHARES
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY
OF THE UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT [LOGO]
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY A
SECURITY OTHER THAN THE SHARES OF
COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A ADVANCED HEALTH
SOLICITATION OF AN OFFER TO BUY ANY CORPORATION
OF THE SECURITIES OFFERED HEREBY, TO
ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY COMMON STOCK
CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT
TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................ 3
Risk Factors...................... 5
The Company....................... 15
Use of Proceeds................... 15
Dividend Policy................... 15 ----------------------
Capitalization.................... 16 PROSPECTUS
Dilution.......................... 17 ----------------------
Selected Consolidated
Financial Data.................. 18
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations................... 19
Business.......................... 23
Management........................ 39
Certain Transactions.............. 47
Principal Stockholders............ 49
Description of Capital Stock...... 50
Shares Eligible for Future
Sale............................ 52
Underwriting...................... 54
Legal Matters..................... 55 COWEN & COMPANY
Experts........................... 55
Additional Information............ 55
Index to Consolidated
Financial Statements............ F-1 VOLPE, WELTY & COMPANY
-------------------
UNTIL , 1996 (25 DAYS AFTER THE , 1996
DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER APROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ----------------------------------------- ------------------------------------
========================================= ====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 11,104
NASD filing fee................................................ 3,520
Nasdaq National Market listing fee............................. *
Blue sky fees and expenses..................................... 25,000
Printing and engraving expenses................................ *
Legal fees and expenses........................................ ]*
Accounting fees and expenses................................... *
Transfer agent and registrar fees.............................. *
Miscellaneous.................................................. *
----------
Total...................................................... $ *
----------
----------
</TABLE>
- ------------
* To be provided by amendment.
The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL authorizes a court to award or a corporation's Board
of Directors to grant indemnification to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities (including reimbursement for expenses incurred) arising under
the Act. Articles Nine and Ten of the Registrant's Certificate of Incorporation
provide for indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum extent permitted by
the DGCL. Reference is made to the form of Director Indemnification Agreement
filed as Exhibit 10.20 hereto, which provides for indemnification of directors.
Reference is also made to the Underwriting Agreement filed as Exhibit 1.1
hereto, which sets forth certain indemnification provisions. In addition, the
Registrant maintains liability insurance for its officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities during the past
three years:
On August 30, 1993, the Company sold 185,893 shares of Common Stock to the
Chairman and an employee of the Company, for an aggregate of $3,120.
On December 27, 1993, the Company sold 718,984 shares of Common Stock for
$8,045 pursuant to a rights offering. The shares were offered only to the
holders of Physicians' On-Line, Inc. stock on a one-for-one basis pro rata to
their shareholdings in Physicians' On-Line, Inc.
In November 1994, the Company sold 75,965 shares of Common Stock for an
aggregate of $639,655. Of these shares sold, all of which were paid for in 1994,
25,319 were issued prior to December 31, 1994 and 50,641 were issued in January
1995.
II-1
<PAGE>
In August 1995, the Company issued 2,978 shares of Common Stock to a
director of the Company for $25,000.
In August 1995, the Company issued 543,564 shares of Common Stock to
purchase Majean, Inc. and 75,996 shares of common stock to purchase Peltz
Ventimiglia, Inc. and in September 1995, 30,193 shares of common stock to
purchase U.S. Health Connections, Inc., as more fully described in Note 3 to the
accompanying Consolidated Financial Statements.
In 1995, the Company sold 76,802 shares of Common Stock to investors for an
aggregate of $625,059.
In August 1993, the Company issued 971,800 shares of Series A Convertible
Preferred Stock to investors for $97,180. In March 1994, the Company issued
282,900 shares of Series B Convertible Preferred Stock to investors for
$2,000,103. In January 1995, the Company issued 200,000 shares of Series C
Convertible Preferred Stock to investors for $1,500,000. In August 1995, the
Company issued 666,360 shares of Series D Convertible Preferred Stock to
investors for $4,997,700. Each share of the Preferred Stock is convertible into
1.1189249 shares of Common Stock upon the consummation of this offering.
In February, April and June 1996, the Company issued three 8% Promissory
Notes in the aggregate principal amount of $3 million to an investor.
In June 1996, the Company issued three 9% Series B Promissory Notes in the
aggregate principal amount of $1 million to investors. In August 1996 the
Company issued three additional 9% Series B Promissory Notes in the aggregate
principal amount of $1 million to investors.
During 1995, the Chairman, the President, the principal stockholder and
certain employees exercised stock options for 288,681, 316,376, 128,695 and
151,547 shares, respectively, for $19,717.
During 1996, an employee exercised stock options for 60 shares of Common
Stock for $150.
In April 1996, the Company issued 8,937 shares of Common Stock to purchase
the assets of Benenson & Associates, Inc. The Registrant issued rights to
acquire Common Stock in the Roll Up Transaction to one physician organization in
December 1995 and two physician organizations in July 1996.
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering or (ii) Rule
701 under the Securities Act. No underwriters were involved in connection with
the sales of securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE><CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*2.1 Agreement and Plan of Merger dated as of August 2, 1995, among Med-E-Systems
Corporation, MES Acquisition Corp. and the Registrant
*2.2 Agreement and Plan of Merger dated as of August 7, 1995, between the Registrant
and Majean, Inc.
***2.3 Asset Purchase Agreement dated as of August 28, 1995, among Advanced Clinical
Networks Corporation, Peltz Ventimiglia, Inc., Richard Ventimiglia and Steven
Peltz
</TABLE>
II-2
<PAGE>
<TABLE><CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <S>
***2.4 Agreement and Plan of Merger dated as of September 1, 1995, among U.S. Health
Connections, Inc., the Registrant and Advanced Clinical Networks Corporation
*3.1 Restated Certificate of Incorporation of the Registrant, as in effect on the
effective date of the Registration Statement
*3.2 Restated Certificate of Incorporation of the Registrant, as to be in effect upon
the consummation of the Initial Public Offering
*3.3 By-laws of the Registrant
*5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm)
+**10.1 Development and Marketing Agreement dated as of August 1, 1995, between Med-E-
Systems Corporation and Integrated Disease Management, Inc.
+**10.2 Software License Agreement dated as of September 27, 1995, between Med-E-Systems
Corporation and Medco Containment Services Inc.
+**10.3 System Implementation Agreement dated September 14, 1995, between IDX Systems
Corporation and the Registrant
***10.4 Investors' Rights Agreement dated as of August 31, 1993, among Med-E-Mail
Corporation, Financial Strategic Portfolios, Inc.--Health Sciences Portfolio and
The Global Health Sciences Fund
***10.5 Amended and Restated Investors' Rights Agreement dated as of March 16, 1994,
among Med-E-Mail Corporation, Financial Strategic Portfolios, Inc.--Health
Sciences Portfolio and The Global Health Sciences Fund
***10.6 Amended and Restated Investors' Rights Agreement dated as of January 27, 1995,
among Med-E-Systems Corporation, Invesco Strategic Portfolios, Inc.--Health
Sciences Portfolio and The Global Health Sciences Fund
***10.7 Investors' Rights Agreement dated as of August 23, 1995, among the Registrant,
21st Century Communucations Partners, L.P., 21st Century Communications T-E
Partners, L.P. and 21st Century Communications Foreign Partners, L.P.
***10.8 Registration Rights Agreement dated February 28, 1996, among the Registrant,
Park Avenue Capital, L.P. and Access Industries, LLC
+**10.9 Management Services Agreement dated as of December 11, 1995, between Madison
Medical--The Private Practice Group of New York, L.L.P. and Uptown Physician
Management, Inc.
**10.10 Stockholders' Agreement dated as of December 11, 1995, among Uptown Physician
Management, Inc. and certain stockholders
+**10.11 Management Services Agreement dated as of August 7, 1995, among Advanced Heart
Institute of New York, P.C., Valavanur A. Subramanian, M.D., Jeffrey Moses, M.D.
and Majean Sub 2, Inc.
+**10.12 Management Services Agreement dated as of July 1, 1996 between Specialist
Physicians Management, Inc. and Cardiology First of New Jersey, P.A.
*10.13 Stockholders' Agreement among Specialist Physicians Management, Inc., Specialist
Physicians MSO, L.L.C. and Advanced Health Management Corporation
+**10.14 Management Services Agreement dated as of July 1, 1996 between Diamond Physician
Management, Inc. and Long Island Interventional Cardiology
**10.15 Stockholders' Agreement dated as of July 1, 1996 among Diamond Physician
Management, Inc., Long Island Interventional Cardiology and Advanced Health
Management Corporation
+***10.16 Administrative Services Base Agreement dated as of June 30, 1994, between U.S.
Health Connections, Inc. and The Emory Clinic, Inc.
</TABLE>
II-3
<PAGE>
<TABLE><CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <S>
***10.17 Tarrytown, New York Office Lease Agreement dated November 30, 1995, between
Tarrytown Corporate Center IV, L.P. and the Registrant
***10.18 Tarrytown, New York Office Sublease Agreement dated October 31, 1995, between
American Software, USA, Inc. and the Registrant
***10.19 Chicago Office Lease Agreement dated December 8, 1995, between Adams Family,
L.L.C. and the Registrant
*10.20 Form of Director Indemnification Agreement
**10.21 Employment Agreement between the Registrant and Jonathan Edelson, M.D.
**10.22 Employment Agreement between the Registrant and Steven Hochberg
**10.23 Employment Agreement between the Registrant and Alan B. Masarek
*10.24 Advanced Health Corporation 1995 Stock Option Plan, as amended
*10.25 Employee Stock Purchase Plan
**11.1 Supplemental Net Loss Per Common Share Computation
***21 List of Subsidiaries
*23.1 Consent of O'Sullivan Graev & Karabell, LLP (to be included as part of its
opinion to be filed as Exhibit 5 hereto)
**23.2 Consent of Arthur Andersen LLP
***24 Powers of Attorney
***27 Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
+ Portions of such exhibit have been deleted therefrom pursuant to Rule 406
promulgated under the Securities Act of 1966, as amended, and confidential
treatment has been requested therefor.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements or related notes.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws,
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 such Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it
II-4
<PAGE>
is against public policy as expressed in such Securities Act and will be
governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Tarrytown, State of New York, on the 15th day of August, 1996.
ADVANCED HEALTH CORPORATION
By: *
..................................
Jonathan Edelson, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed on the 15th day of August, 1996,
by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>
* Chairman of the Board, Chief Executive
............................................. Officer and Director (Principal Executive
Jonathan Edelson, M.D Officer)
* President and Director
.............................................
Steven Hochberg
/s/ ALAN B. MASAREK Chief Operating Officer and Chief Financial
............................................. Officer (Principal Financial and Accounting
Alan B. Masarek Officer)
* Director
.............................................
Jonathan Lieber
* Director
.............................................
Barry Kurokawa
</TABLE>
*By: /s/ ALAN B. MASAREK
........................................
Alan B. Masarek
As Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- --------------------------------------------------------------------------- ----
<C> <S> <C>
*1.1 Form of Underwriting Agreement
*2.1 Agreement and Plan of Merger dated as of August 2, 1995, among
Med-E-Systems Corporation, MES Acquisition Corp. and the Registrant
*2.2 Agreement and Plan of Merger dated as of August 7, 1995, between the
Registrant and Majean, Inc.
***2.3 Asset Purchase Agreement dated as of August 28, 1995, among Advanced
Clinical Networks Corporation, Peltz Ventimiglia, Inc., Richard Ventimiglia
and Steven Peltz
***2.4 Agreement and Plan of Merger dated as of September 1, 1995, among U.S.
Health Connections, Inc., the Registrant and Advanced Clinical Networks
Corporation
*3.1 Restated Certificate of Incorporation of the Registrant, as in effect on
the effective date of the Registration Statement
*3.2 Restated Certificate of Incorporation of the Registrant, as to be in effect
upon the consummation of the Initial Public Offering
*3.3 By-laws of the Registrant
*5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such
firm)
+**10.1 Development and Marketing Agreement dated as of August 1, 1995, between
Med-E-Systems Corporation and Integrated Disease Management, Inc.
+**10.2 Software License Agreement dated as of September 27, 1995, between Med-E-
Systems Corporation and Medco Containment Services Inc.
+**10.3 System Implementation Agreement dated September 14, 1995, between IDX
Systems Corporation and the Registrant
***10.4 Investors' Rights Agreement dated as of August 31, 1993, among Med-E-Mail
Corporation, Financial Strategic Portfolios, Inc.--Health Sciences
Portfolio and The Global Health Sciences Fund
***10.5 Amended and Restated Investors' Rights Agreement dated as of March 16,
1994, among Med-E-Mail Corporation, Financial Strategic Portfolios,
Inc.--Health Sciences Portfolio and The Global Health Sciences Fund
***10.6 Amended and Restated Investors' Rights Agreement dated as of January 27,
1995, among Med-E-Systems Corporation, Invesco Strategic Portfolios,
Inc.--Health Sciences Portfolio and The Global Health Sciences Fund
***10.7 Investors' Rights Agreement dated as of August 23, 1995, among the
Registrant, 21st Century Communucations Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications Foreign
Partners, L.P.
***10.8 Registration Rights Agreement dated February 28, 1996, among the
Registrant, Park Avenue Capital, L.P. and Access Industries, LLC
+**10.9 Management Services Agreement dated as of December 11, 1995, between
Madison Medical--The Private Practice Group of New York, L.L.P. and Uptown
Physician Management, Inc.
**10.10 Stockholders' Agreement dated as of December 11, 1995, among Uptown
Physician Management, Inc., and certain stockholders
+**10.11 Management Services Agreement dated as of August 7, 1995, among Advanced
Heart Institute of New York, P.C., Valavanur A. Subramanian, M.D., Jeffrey
Moses, M.D. and Majean Sub 2, Inc.
+**10.12 Management Services Agreement between Specialist Physicians Management,
Inc. and Cardiology First of New Jersey, P.A.
*10.13 Stockholders' Agreement among Specialist Physicians Management, Inc.,
Specialist Physicians MSO, L.L.C. and Advanced Health Management
Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- --------------------------------------------------------------------------- ----
<C> <S> <C>
+**10.14 Management Services Agreement between Diamond Physician Management, Inc.
and Long Island Interventional Cardiology
**10.15 Stockholders' Agreement among Diamond Physician Management, Inc., Long
Island Interventional Cardiology and Advanced Health Management Corporation
+**10.16 Administrative Services Base Agreement dated June 30, 1994, between U.S.
Health Connections, Inc. and The Emory Clinic, Inc.
***10.17 Tarrytown, New York Office Lease Agreement dated November 30, 1995, between
Tarrytown Corporate Center IV, L.P. and the Registrant
***10.18 Tarrytown, New York Office Sublease Agreement dated October 31, 1995,
between American Software, USA, Inc. and the Registrant
***10.19 Chicago Office Lease Agreement dated December 8, 1995, between Adams
Family, L.L.C. and the Registrant
*10.20 Form of Director Indemnification Agreement
10.21 Employment Agreement between the Registrant and Jonathan Edelson, M.D.
10.22 Employment Agreement between the Registrant and Steven Hochberg
10.23 Employment Agreement between the Registrant and Alan B. Masarek
*10.24 Advanced Health Corporation 1995 Stock Option Plan, as amended
*10.25 Employee Stock Purchase Plan
*10.26 Non-Employee Director Stock Option Plan
**11.1 Supplemental Net Loss Per Common Share Computation
***21 List of Subsidiaries
*23.1 Consent of O'Sullivan Graev & Karabell, LLP (to be included as part of its
opinion to be filed as Exhibit 5 hereto)
**23.2 Consent of Arthur Andersen LLP
***24 Powers of Attorney
***27 Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
+ Portions of such exhibit have been deleted therefrom pursuant to Rule 406
promulgated under the Securities Act of 1966, as amended, and confidential
treatment has been requested therefor.
Exhibit 10.10
EXECUTION COPY
===========================================================================
STOCKHOLDERS' AGREEMENT
AMONG
UPTOWN PHYSICIAN MANAGEMENT, INC.
AND
THE STOCKHOLDERS LISTED
ON SCHEDULE I
----------
DATED AS OF DECEMBER 11, 1995
===========================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Page No.
--------
SECTION 1. Definitions . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Board of Directors . . . . . . . . . . . . . . . . . . . 2
SECTION 3. Rollup of the Medical Group's Stock . . . . . . . . . . 3
SECTION 4. Mandatory Repurchase of Medical Group's Stock . . . . . 3
SECTION 5. Restrictions on Sales of Stock . . . . . . . . . . . . . 4
5.1. General Restrictions . . . . . . . . . . . . . . . . . . . . 4
5.2. Right of First Refusal . . . . . . . . . . . . . . . . . . . 5
SECTION 6. Certain Repurchase Rights of ACN and/or the Corporation 6
6.1. Repurchase from the Medical Group . . . . . . . . . . . . . . 6
SECTION 7. Legend . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 8. Governing Law . . . . . . . . . . . . . . . . . . . . . 8
SECTION 9. Benefits of Agreement . . . . . . . . . . . . . . . . . 8
SECTION 10. Notices . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 11. Entire Agreement . . . . . . . . . . . . . . . . . . . . 9
SECTION 12. Modification . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 13. Headings . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 14. Nouns and Pronouns . . . . . . . . . . . . . . . . . . . 9
SECTION 15. Counterparts . . . . . . . . . . . . . . . . . . . . . . 10
<PAGE>
STOCKHOLDERS' AGREEMENT dated as of
December 11, 1995 (the "Agreement"), among
UPTOWN PHYSICIAN MANAGEMENT, INC., a Delaware
corporation (the "Corporation"), and the
parties listed on Schedule I (collectively,
----------
the "Stockholders").
The Stockholders have caused the Corporation to be formed for the
purpose of providing certain non-medical management, administrative and
information management services to Madison Medical - The Private Practice
Group of New York, L.L.P. in accordance with the terms of the Management
Services Agreement dated as of December 11, 1995, between the Corporation
and the Medical Group (the "Management Services Agreement"). Each
Stockholder is acquiring that number of shares of common stock (the "Common
Stock"), $.001 par value, of the Corporation set forth opposite such
Stockholder's name on Schedule I. The Stockholders and the Corporation
----------
deem it to be advisable and in their respective best interests to enter
into certain agreements with respect to the management, continuity and
stability of the business and policies of the Corporation and certain other
matters as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual agreements and obligations contained herein, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS. As used herein, the following terms
-----------
shall have the following respective meanings:
(a) "AHC" shall mean the Advanced Health Corporation, a Delaware
corporation, and any successors thereto.
(b) "AHC Stock" shall have the meaning given to such term in
Section 3(a) hereof.
(c) "Affiliate", with respect to any Stockholder, shall mean any
Person that directly or indirectly Controls, is Controlled by or is under
common Control with such Stockholder.
(d) "ACN" shall mean the Advanced Clinical Networks Corporation,
a Delaware corporation, and any successors thereto.
(e) "Control" shall mean, with respect to any Person, the power
to direct or cause the direction of the management and policies of such
Person, whether directly or indirectly, through ownership of voting
securities, by contract or otherwise.
(f) "Medical Group" shall mean Madison Medical - The Private
Practice Group of New York, L.L.P., a New York limited liability
partnership, and any successors thereto.
<PAGE>
(g) "Non-selling Stockholder" shall mean any Stockholder except
a Selling Stockholder.
(h) "Person" shall mean any individual, partnership,
corporation, group, trust or other legal entity.
(i) "Sell" (or "Sale"), as to any Stock, shall mean to sell, or
in any other way directly or indirectly transfer, assign, pledge,
hypothecate, distribute, exchange, encumber or otherwise dispose of, either
voluntarily or involuntarily and with or without consideration.
(j) "Selling Stockholder" shall mean ACN, if ACN is proposing to
Sell Stock, or the Medical Group, if the Medical Group is proposing to Sell
Stock.
(k) "Stock" shall mean (i) common stock outstanding on the date
hereof, (ii) any additional shares of common stock or other capital stock
(or options or warrants to acquire capital stock) of the Corporation
hereafter issued and outstanding or (iii) any shares of capital stock of
the Corporation into which such shares may be converted or for which they
may be exchanged or exercised.
(l) "Trigger Event" shall have the meaning set forth in Section
3(b) hereof.
SECTION 2. BOARD OF DIRECTORS. The business and affairs of the
------------------
Corporation shall be managed by or under the direction of a Board of
Directors (the "Board of Directors") consisting of three directors, two of
whom shall be designated by ACN and one of whom shall be designated by the
Medical Group. At each annual meeting of the stockholders of the
Corporation, and at each special meeting of the stockholders of the
Corporation called for the purpose of electing directors of the
Corporation, and at any time at which the Stockholders shall have the right
to, or shall, vote or give their written consent to elect directors of the
Corporation, then, and in each event, the Stockholders shall vote all
shares of Stock owned by them (or shall consent in writing in lieu of a
meeting of stockholders of the Corporation, as the case may be) for the
election of the directors designated in accordance with the preceding
sentence. In the event of the removal, resignation or death of a director,
the Stockholders shall vote, or give their written consent, to fill the
resulting vacancy with a nominee selected by the Stockholder originally
entitled to designate such director. Notwithstanding anything contained
herein to the contrary, the Medical Group's right to designate one director
to serve on the Board of Directors shall be nonassignable and shall
terminate as of the date the Medical Group owns in the aggregate less than
five percent of the Corporation's Stock. ACN shall at all times have the
right to elect the Chairman of the Board of Directors.
-2-
<PAGE>
SECTION 3. ROLLUP OF THE MEDICAL GROUP'S STOCK.
-----------------------------------
(a) If ACN's Board of Directors determines that the Trigger
Event (as defined below) has occurred, then ACN may elect to merge the
Corporation with and into ACN in a transaction in which the Medical Group
shall receive voting common stock of AHC (the "AHC Stock") in exchange for
its Stock of the Corporation (the "Rollup"). Each share of Stock owned by
the Medical Group shall be convertible into that number of shares of AHC
Stock to be determined at the time of the Rollup in accordance with Exhibit
-------
A.
- -
(b) A "Trigger Event" shall be deemed to have occurred if each
of the following conditions is satisfied in full: (i) ACN is providing
practice management services to at least 300 physicians, (ii) ACN is
providing network management services to at least 2,000 physicians, (iii)
AHC has at least $75,000,000 in stockholders' equity according to AHC's
most recent financial statements, (iv) AHC maintains stock outstanding
which is publicly traded on a national stock exchange and (v) AHC's Board
of Directors has authorized the Rollup.
(c) The right of the Medical Group to participate in the Rollup
and to receive shares of AHC Stock pursuant to Section 3(a) shall
automatically terminate if the Medical Group terminates the Management
Services Agreement without cause pursuant to Section 10(b) thereof or the
Corporation terminates the Management Services Agreement with cause
pursuant to Section 10(c) thereof prior to the completion of the Rollup.
(d) The Medical Group's right to receive shares of AHC Stock
pursuant to Section 3(a) is personal in nature and nonassignable.
Accordingly, the Medical Group acknowledges that such right hereunder will
not transfer to any purchaser of shares of Stock held by the Medical Group.
SECTION 4. MANDATORY REPURCHASE OF MEDICAL GROUP'S STOCK.
---------------------------------------------
(a) If ACN has failed to commence the Rollup by the first
anniversary of the occurrence of the conditions set forth in Section
3(b)(i) through (iv), the Medical Group shall be entitled to require ACN,
and ACN shall be obligated (subject to the following sentence), to
repurchase all of the outstanding Stock of the Medical Group (the "Put
Option") at a purchase price equal to 110 percent of the fair market value
of such Stock had the Rollup been consummated pursuant to Section 3. The
fair market value of the Stock subject to the Put Option shall be the
average publicly traded price per share of AHC's Stock quoted on a national
stock exchange for the 30 consecutive trading days immediately prior to the
Medical Group's exercise of the Put Option multiplied by the number of
----------
shares of such Stock then owned by the Medical Group. In the event that a
quote of the
-3-
<PAGE>
price of AHC's Stock is unavailable on a national stock exchange, the
determination of fair market value shall be made by a nationally recognized
independent public accounting firm or an investment banking firm mutually
agreed to by ACN and the Medical Group which is independent of and not
affiliated with ACN, the Medical Group or any of their Affiliates. Any
determination of fair market value shall be conclusive and binding on ACN
and the Medical Group. ACN and the Medical Group shall equally bear the
cost of any such appraisal.
(b) The Medical Group may exercise the Put Option by
delivering a written notice (the "Put Notice") to ACN which notice shall
specify the number and percentage of shares of Stock owned by the Medical
Group to be repurchased.
(c) The closing of such repurchase by ACN shall occur on a
date determined by ACN (the "Put Closing Date") which date shall be no more
than 30 days after the determination by the independent appraiser of fair
market value of the Stock subject to the Put Option. On the Put Closing
Date, the Medical Group shall surrender to ACN the Stock owned by the
Medical Group being repurchased without any representation or warranty
(other than that the holder has good and valid title thereto free and clear
of liens, claims, encumbrances and restrictions of any kind), against
payment therefor by ACN to the Medical Group by (at the option of the
Medical Group), (1) wire transfer to an account in a bank located in the
United States designated by the Medical Group for such purpose or (2) a
certified or official bank check drawn on a member of the New York Clearing
House payable to the order of the Medical Group.
SECTION 5. RESTRICTIONS ON SALES OF STOCK.
------------------------------
5.1. GENERAL RESTRICTIONS. No Stockholder shall, at any time
--------------------
during the term of this Agreement, Sell any Stock, except:
(i) by pledge which creates a mere security interest in the
Stock, provided that (a) all Stockholders consent to such pledge and
(b) the pledgee thereof shall agree in writing in advance with the
parties hereto to be bound by and comply with all applicable
provisions of this Agreement to the same event as if it were the
Stockholder making such pledge;
(ii) the Medical Group shall Sell its Stock to the
Corporation in accordance with Section 3 hereof;
(iii) by Sale in accordance with Section 5.2;
(iv) ACN shall have the right to Sell all or any part of its
Stock to any Affiliate, or any employee of ACN or any Affiliate, who
or which agrees in writing to be bound
-4-
<PAGE>
by and to comply with the applicable provisions of this Agreement as
if such purchaser were ACN for the purposes hereof;
(v) the Medical Group shall be permitted to sell its Stock
to ACN or the Corporation;
(vi) pursuant to a liquidation or winding-up of the
Corporation.
5.2. RIGHT OF FIRST REFUSAL. Except as otherwise provided in
----------------------
Section 5.1, the Medical Group and ACN shall not Sell any shares of Stock
unless (i) the prior written consent of the Corporation is obtained or (ii)
the following procedure is followed:
(a) The Selling Stockholder shall first deliver to the Corpora-
tion and the Non-selling Stockholders a written notice (the "Offer
Notice"), which shall be irrevocable for a period of 90 days after delivery
thereof, offering (the "Offer") all of the Stock proposed to be Sold by the
Selling Stockholder at the purchase price and on the terms specified in the
Offer Notice. The Corporation (or its designee) shall then have the right
and option, for a period of 30 days after delivery of the Offer Notice, to
accept all or any part of the Stock so offered at the purchase price and on
the terms stated in the Offer Notice. Such acceptance shall be made by
delivering a written notice to the Selling Stockholder and the Non-selling
Stockholders within said 30-day period.
(b) If the Corporation (or its designee) shall fail to accept
all of the Stock offered for sale pursuant to, or shall reject in writing,
the Offer (the Corporation being required to notify in writing the Selling
Stockholder and the Non-selling Stockholders of its rejection or failure to
accept all of the Stock in the event of the same), then, upon the earlier
of the expiration of such 30-day period or the receipt of such written
notice of rejection or failure to accept such Offer by the Corporation, the
Non-selling Stockholders shall have the right and option, for a period of
30 days thereafter, to accept all or any part of the Stock so offered and
not accepted by the Corporation (the "Refused Stock") at the purchase price
and on the terms stated in the Offer Notice. Such acceptance shall be made
by delivering a written notice to the Corporation and the Selling
Stockholder within said 30-day period.
(c) Sales of Stock under the terms of Sections 5.2(a) and 5.2(b)
shall be made at the offices of the Corporation on a mutually satisfactory
business day within 30 days after the expiration of the last applicable
period described in Section 5.2(b). Delivery of certificates or other in-
struments evidencing such Stock duly endorsed for transfer shall be made on
such date against payment of the purchase price therefor.
-5-
<PAGE>
(d) If effective acceptance shall not be received pursuant to
Sections 5.2(a) and 5.2(b) with respect to all Stock offered for Sale
pursuant to the Offer Notice, then the Selling Stockholder may Sell all or
any part of the Stock so offered and not so accepted to a party or parties
reasonably acceptable to the Non-selling Stockholders (determined in
accordance with Section 5.2(e) hereof) at a price not less than the price,
and on terms not more favorable to the purchaser thereof than the terms
stated in the Offer Notice at any time within 60 days after the expiration
of the Offer required by Sections 5.2(a) and 5.2(b). In the event that the
Stock is not Sold by the Selling Stockholder during such 60-day period to
such party or parties, the right of the Selling Stockholder to Sell such
Stock shall expire and the obligations of this Section 5.2 shall be rein-
stated.
(e) The Selling Stockholder shall, at least 20 days prior to the
proposed date of Sale of Stock by the Selling Stockholder to any party
other than the Non-selling Stockholders, provide in writing to the Non-
selling Stockholders the identity of such proposed purchaser and such other
information concerning such purchaser as shall be reasonably requested by
the Non-selling Stockholders to enable the Non-selling Stockholders to
determine the acceptability of the proposed purchaser as a Stockholder.
Within such 20 day period, the Non-selling Stockholders shall provide to
the Selling Stockholder in writing either such Stockholder's consent or
disapproval of such proposed purchaser. The Selling Stockholder shall be
entitled to consummate such Sale of Stock to such proposed purchaser if the
Non-selling Stockholders shall consent to such proposed purchaser.
(f) Anything contained herein to the contrary notwithstanding,
any purchaser of Stock pursuant to this Section 5.2 who or which is not a
Stockholder shall agree in writing in advance with the parties hereto to be
bound by and comply with all applicable provisions of this Agreement and
shall be deemed to be a Stockholder for all purposes of this Agreement.
(g) The Selling Stockholder shall comply in all respects with
Rule 144 under the Securities Act in connection with any Sale of Stock
pursuant to this Section 5.
SECTION 6. CERTAIN REPURCHASE RIGHTS OF ACN AND/OR THE
-------------------------------------------
CORPORATION.
- -----------
6.1. REPURCHASE FROM THE MEDICAL GROUP. (a) In the event of:
---------------------------------
(i) the termination of the Management Services Agreement by
the Corporation as a result of a material default by the Medical Group
in the performance of any duty
-6-
<PAGE>
or obligation imposed upon it by the Management Services Agreement;
(ii) the breach by the Medical Group of the terms of this
Agreement or by the Medical Group of the terms of any services,
subcontracting or other agreement entered into between the Medical
Group and the Corporation (or any subcontractor thereof) or entered
into among the Medical Group, the Corporation (or any subcontractor
thereof) and one or more third parties, if such breach is not cured
within 30 days following the Medical Group's receipt from the
Corporation of written notification of such breach; or
(iii) the commencement of a voluntary or involuntary
bankruptcy proceeding (provided, with respect to an involuntary
proceeding, that such proceeding has not been stayed or dismissed
within 60 days of such commencement) by or against the Medical Group;
then, ACN (or the Corporation or any other designee of ACN) shall have the
- ----
right, but not the obligation, to purchase from the Medical Group and the
Medical Group shall be obligated to sell to ACN (or the Corporation or such
other designee), upon the exercise of such right, at a purchase price per
share (as constituted on the date hereof) equal to the book value of the
Stock at the time of such event as determined by the accountants of the
Corporation, up to that number of shares of Stock then owned by the Medical
Group.
(b) ACN (or the Corporation or any other designee of ACN) may
exercise its right to purchase Stock owned by the Medical Group pursuant to
Section 6.1(a) by delivering a written notice to such effect to the Medical
Group within 30 days following the event giving rise to such right, which
notice shall specify the number of shares of Stock which the Corporation so
elects to purchase. Any purchase of Stock pursuant to Section 6.1(a) shall
be made on a business day designated by ACN (or the Corporation or other
designee) which shall be within 10 days of the delivery of such notice, by
delivery of the purchase price against receipt of one or more certificates,
properly endorsed, evidencing the Stock to be so purchased.
SECTION 7. LEGEND. Each certificate evidencing Stock shall be
------
stamped or otherwise imprinted with a legend in substantially the following
form:
"THE REGISTERED HOLDER HEREOF HAS REPRESENTED TO THE ISSUER OF
THE SHARES REPRESENTED HEREBY THAT IT HAS ACQUIRED SUCH SHARES
FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION. ACCORDINGLY,
SUCH SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES OR BLUE SKY LAWS, AND
MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
-7-
<PAGE>
UNLESS SUBSEQUENTLY REGISTERED THEREUNDER OR AN EXEMPTION FROM
REGISTRATION THEREUNDER IS AVAILABLE."
"CERTAIN OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO REPURCHASE UNDER THE TERMS AND CONDITIONS OF A
STOCKHOLDERS' AGREEMENT DATED AS OF DECEMBER 11, 1995, AMONG
UPTOWN PHYSICIAN MANAGEMENT, INC. AND THE OTHER STOCKHOLDERS
LISTED ON SCHEDULE I THERETO. COPIES OF SUCH AGREEMENT MAY BE
----------
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF UPTOWN PHYSICIAN
MANAGEMENT, INC."
SECTION 8. GOVERNING LAW. This Agreement shall be governed by,
-------------
and construed in accordance with, the laws of the State of New York without
regard to the laws and principles thereof or of any other jurisdiction that
would direct the application of the laws of another jurisdiction. The
parties to this Agreement agree that jurisdiction and venue in any action
brought by any party hereto pursuant to this Agreement shall exclusively
lie in any federal or state court located in the State of New York. By
execution and delivery of this Agreement, the parties hereto irrevocably
submit to the jurisdiction of such courts for themselves and in respect of
their property with respect to such action. The parties hereto irrevocably
agree that venue would be proper in such court and hereby waive any
objection that such court is an improper or inconvenient forum for the
resolution of such action.
SECTION 9. BENEFITS OF AGREEMENT. Except as otherwise provided
---------------------
herein, this Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns, legal
representatives and heirs.
SECTION 10. NOTICES. All notices, claims, certificates,
-------
requests, demands and other communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered or if
sent by telecopy, nationally-recognized overnight courier or by registered
or certified mail, return receipt requested and postage prepaid, addressed
as follows:
(i) if to the Corporation, to:
Uptown Physician Management, Inc.
560 White Plains Road, 2nd Floor
Tarrytown, New York 10591
Attention: Alan Masarek
Telephone: (914) 332-6688
Telecopy: (914) 332-1186
-8-
<PAGE>
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
Telephone: (212) 408-2400
Telecopy: (212) 408-2420; and
(ii) if to the Stockholders, to their respective
addresses set forth on Schedule I attached hereto;
----------
with a copy to:
Jankoff, Sakofsky, Yegelwel & Gabe, P.C.
575 Lexington Avenue
New York, New York 10022
Attention: John J. Jankoff, Esq.
or to such other address as the party to whom notice is to be given may
have furnished to the other parties hereto in writing in accordance
herewith. Any such notice or communication shall be deemed to have been
received (a) in the case of delivery by telecopy or personal delivery, on
the date of such delivery, (b) in the case of nationally-recognized
overnight courier, on the next business day after the date when sent and
(c) in the case of mailing, on the third business day following that on
which the piece of mail containing such communication is posted.
SECTION 11. ENTIRE AGREEMENT. This Agreement and the letter
----------------
agreement dated the date hereof between AHC and the Medical Group and the
other writings and agreements referred to herein or delivered pursuant
hereto contain the entire understanding of the parties with respect to
their subject matter. This Agreement and such other writings and
agreements referred to herein supersede all prior agreements and
understandings among the parties with respect to their subject matter.
SECTION 12. MODIFICATION. The terms and provisions of this
------------
Agreement may not be modified or amended, or any of the provisions hereof
waived, temporarily or permanently, except pursuant to the written consent
of the Corporation, ACN and the Medical Group.
SECTION 13. HEADINGS. The section and paragraph headings
--------
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
SECTION 14. NOUNS AND PRONOUNS. Whenever the context may
------------------
require, any pronouns used herein shall include the corresponding
masculine, feminine or neuter forms, and the singular
-9-
<PAGE>
form of names and pronouns shall include the plural and vice-versa.
SECTION 15. COUNTERPARTS. This Agreement may be executed in one
------------
or more counterparts, each of which shall be deemed to be an original, but
all of which taken together shall constitute one and the same instrument.
* * *
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
UPTOWN PHYSICIAN MANAGEMENT, INC.
By:
--------------------------------
Name:
Title:
ADVANCED CLINICAL NETWORKS
CORPORATION
By:
--------------------------------
Name:
Title:
MADISON MEDICAL - THE PRIVATE
PRACTICE GROUP OF NEW YORK, L.L.P.
By Its Executive Committee on
behalf of Madison Medical - The
Private Practice Group of New
York, LLP
By:
-------------------------------
By:
-------------------------------
By:
-------------------------------
By:
-------------------------------
ACCEPTED AND AGREED AS TO
SECTIONS 3 AND 4:
ADVANCED HEALTH CORPORATION
By:___________________________
Name:
Title:
Exhibit 10.15
================================================================================
STOCKHOLDERS' AGREEMENT
AMONG
DIAMOND PHYSICIAN MANAGEMENT, INC.
and
THE STOCKHOLDERS LISTED
ON SCHEDULE I
Dated as of July 1, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page No.
--------
SECTION 1. Definitions............................................... 1
SECTION 2. Board of Directors........................................ 2
SECTION 3. Rollup of the Medical Group's Stock....................... 3
SECTION 4. Mandatory Repurchase of Medical Group's Stock............. 3
SECTION 5. Restrictions on Sales of Stock............................ 5
5.1. General Restrictions...................................... 5
5.2. Right of First Refusal.................................... 6
SECTION 6. Certain Repurchase Rights of ACN and/or the
Corporation......................................... 8
6.1. Repurchase from the Medical Group and its
Affiliates.......................................... 8
SECTION 7. Legend.................................................... 9
SECTION 8. Governing Law............................................. 9
SECTION 9. Benefits of Agreement..................................... 9
SECTION 10. Notices................................................... 9
SECTION 11. Entire Agreement......................................... 10
SECTION 12. Modification............................................. 10
SECTION 13. Headings................................................. 11
SECTION 14. Nouns and Pronouns....................................... 11
SECTION 15. Counterparts............................................. 11
<PAGE>
STOCKHOLDERS' AGREEMENT
dated as of July 1, 1996 (the
"Agreement"), among DIAMOND
PHYSICIAN MANAGEMENT, INC., a
Delaware corporation (the
"Corporation"), and the parties
listed on Schedule I (collectively,
the "Stockholders").
The Stockholders have caused the Corporation to be formed for the purpose
of providing certain non-medical management, administrative and information
management services to Long Island Interventional Cardiology, a New York
partnership and any successors thereto (the "Medical Group"), in accordance with
the terms of the Management Services Agreement, dated as of July 1, 1996,
between the Corporation and the Medical Group (the "Management Services
Agreement"). The Medical Group and ACN are stockholders of the Corporation. Each
Stockholder is acquiring that number of shares of common stock (the "Common
Stock"), $.001 par value, of the Corporation set forth opposite such
Stockholder's name on Schedule I. The Stockholders and the Corporation deem it
to be advisable and in their respective best interests to enter into certain
agreements with respect to the management, continuity and stability of the
business and policies of the Corporation and certain other matters as set forth
in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements and obligations contained herein, the parties hereto agree as
follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
following respective meanings:
(a) "AHC" shall mean the Advanced Health Corporation, a Delaware
corporation, and any successors thereto.
(b) "AHC Stock" shall have the meaning given to such term in Section 3(a)
hereof.
(c) "Affiliate", with respect to any Stockholder, shall mean any Person
that directly or indirectly Controls, is Controlled by or is under common
Control with such Stockholder.
(d) "ACN" shall mean the Advanced Clinical Networks Corporation, a Delaware
corporation, and any successors thereto.
(e) "Control" shall mean, with respect to any Person, the power to direct
or cause the direction of the management and policies of such Person, whether
directly or indirectly, through ownership of voting securities, by contract or
otherwise.
(f) "Non-selling Stockholder" shall mean any Stockholder except a Selling
Stockholder.
<PAGE>
(g) "Person" shall mean any individual, partnership, corporation, group,
trust or other legal entity.
(h) "Sell" (or "Sale"), as to any Stock, shall mean to sell, or in any
other way directly or indirectly transfer, assign, pledge, hypothecate,
distribute, exchange, encumber or otherwise dispose of, either voluntarily or
involuntarily and with or without consideration.
(i) "Selling Stockholder" shall mean ACN, if ACN is proposing to Sell
Stock, or the Medical Group, if the Medical Group is proposing to Sell Stock.
(j) "Stock" shall mean (i) common stock outstanding on the date hereof,
(ii) any additional shares of common stock or other capital stock (or options or
warrants to acquire capital stock) of the Corporation hereafter issued and
outstanding or (iii) any shares of capital stock of the Corporation into which
such shares may be converted or for which they may be exchanged or exercised.
(k) "Trigger Event" shall have the meaning set forth in Section 3(b)
hereof.
SECTION 2. Board of Directors. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors (the "Board
of Directors") consisting of seven directors, four of whom shall be designated
by ACN and three of whom shall be designated by the Medical Group. At each
annual meeting of the stockholders of the Corporation, and at each special
meeting of the stockholders of the Corporation called for the purpose of
electing directors of the Corporation, and at any time at which the Stockholders
shall have the right to, or shall, vote or give their written consent to elect
directors of the Corporation, then, and in each event, the Stockholders shall
vote all shares of Stock owned by them (or shall consent in writing in lieu of a
meeting of stockholders of the Corporation, as the case may be) for the election
of the directors designated in accordance with the preceding sentence. In the
event of the removal, resignation or death of a director, the Stockholders shall
vote, or give their written consent, to fill the resulting vacancy with a
nominee selected by the Stockholder originally entitled to designate such
director. Notwithstanding anything contained herein to the contrary, the Medical
Group's right to designate three directors to serve on the Board of Directors
shall be nonassignable and shall terminate as of the date the Medical Group
and/or its Affiliates (including, without limitation, its partners or the
individual stockholders of its partners) owns in the aggregate less than five
percent of the Corporation's Stock. ACN shall at all times have the right to
elect the Chairman of the Board of Directors.
-2-
<PAGE>
SECTION 3. Rollup of the Medical Group's Stock.
(a) If ACN's Board of Directors determines that the Trigger Event (as
defined below) has occurred, then ACN may elect to merge the Corporation with
and into ACN in a transaction in which the Medical Group shall receive voting
common stock of AHC (the "AHC Stock") in exchange for its Stock of the
Corporation (the "Rollup"). Each share of Stock owned by the Medical Group shall
be convertible into that number of shares of AHC Stock to be determined at the
time of the Rollup in accordance with Exhibit A. The AHC Stock received by the
Medical Group pursuant to the Rollup shall be registered in compliance with the
federal and state securities laws or exempt therefrom.
(b) A "Trigger Event" shall be deemed to have occurred if each of the
following conditions is satisfied in full: (i) ACN and its Affiliates are
providing practice management services to at least 300 physicians, (ii) ACN and
its Affiliates are providing network management services to at least 2,000
physicians, (iii) AHC has at least $75,000,000 in stockholders' equity according
to AHC's most recent financial statements, (iv) AHC maintains stock outstanding
which is publicly traded on a national stock exchange, the NASDAQ National
Market System, the NASDAQ SmallCap System or the over-the-counter market and (v)
AHC's Board of Directors has authorized the Rollup.
(c) The right of the Medical Group to participate in the Rollup and to
receive shares of AHC Stock pursuant to Section 3(a) shall automatically
terminate if the Corporation terminates the Management Services Agreement
pursuant to Section 8(d) thereof prior to the completion of the Rollup.
(d) Except as provided in Section 5.1(a), the Medical Group's right to
receive shares of AHC Stock pursuant to Section 3(a) is personal in nature and
nonassignable. Accordingly, the Medical Group acknowledges that such right
hereunder will not transfer to any purchaser of shares of Stock held by the
Medical Group.
SECTION 4. Mandatory Repurchase of Medical Group's Stock.
(a) (i) If ACN has failed to commence the Rollup by the first anniversary
of the occurrence of the events set forth in Section 3(b)(i) through (iv), the
Medical Group shall be entitled at any time thereafter to require ACN, and ACN
shall be obligated (subject to the following sentence), to repurchase all of the
outstanding Stock of the Medical Group (the "Rollup Put Option") at a purchase
price equal to 110 percent of the fair market value of such Stock had the Rollup
been consummated pursuant to Section 3. The fair market value of the Stock
subject to the Rollup Put Option shall be the average Closing
-3-
<PAGE>
Price (as defined below) per share of AHC's Stock for the 30 consecutive trading
days immediately prior to the Medical Group's exercise of the Rollup Put Option
multiplied by the number of shares of AHC's Stock the Medical Group would have
owned had the Rollup been consummated. In the event that AHC's Stock is not
admitted or listed for trading on a national stock exchange, the NASDAQ National
Market System, the NASDAQ SmallCap System or the over-the-counter market and is
not otherwise quoted by NASDAQ or any similar organization, the determination of
fair market value shall be made by a nationally recognized independent public
accounting firm or an investment banking firm mutually agreed to by ACN and the
Medical Group which is independent of and not affiliated with ACN, the Medical
Group or any of their Affiliates. Any determination of fair market value shall
be conclusive and binding on ACN and the Medical Group. ACN and the Medical
Group shall equally bear the cost of any such appraisal. The "Closing Price" for
each trading day shall be the last reported sales price regular way on the
principal securities exchange or market system (including, for purposes hereof,
the NASDAQ National Market System or the NASDAQ SmallCap System) on which the
AHC Stock is listed or admitted to trading or, in case no such reported sale
takes place on such day, if the principal market for the AHC Stock is a
securities exchange, the average of the closing bid and asked prices regular way
on such exchange on such day, or if the principal market for the AHC Stock is
the NASDAQ National Market System on NASDAQ SmallCap System, the average of the
highest reported bid and asked prices regular way on such system on such day, or
if the AHC Stock is not listed or admitted to trading on any national securities
exchange or the NASDAQ National Market System or NASDAQ SmallCap System, the
average of the highest reported bid and asked prices for the AHC Stock as
furnished by the National Association of Securities Dealers, Inc. through NASDAQ
or a similar organization if NASDAQ is no longer reporting such information.
(ii) If the Medical Group terminates the Management Services Agreement
pursuant to Section 8(b)(i), 8(b)(ii) or 8(c) thereof and subsequently (A) the
Rollup is consummated pursuant to Section 3 or (B) ACN has failed to commence
the Rollup by the first anniversary of the occurrence of the events set forth in
Section 3(b)(i) through (iv), the Medical Group shall be entitled to require
that ACN, and ACN shall be obligated (subject to the following sentence), to
repurchase at the time set forth in Section 4(c) all of the outstanding Stock of
the Medical Group (the "Termination Put Option") at a purchase price equal to
the fair market value of such Stock had the Rollup been consummated or 110
percent of the fair market value of the Stock if ACN has failed to commence the
Rollup by the first anniversary of the occurrence of the events set forth in
Section 3(b)(i) through (iv). The determination of the fair market value of the
Stock subject to the Termination Put Option shall be (X) determined in
accordance with the provisions of Section 4(a)(i) above and clause (Y) of this
Section 4(a)(ii) and
-4-
<PAGE>
(Y) based on the number of Tranche I, Tranche II, Tranche III and Tranche IV (as
defined in Exhibit A) shares, if any, allocable to the Corporation as of the
effective date of the exercise of the Termination Put Option.
(b) The Medical Group may exercise the Rollup Put Option and/or the
Termination Put Option by delivering a written notice (the "Put Notice") to ACN
which notice shall specify the number of shares of Stock owned by the Medical
Group to be repurchased.
(c) The closing of such repurchase by ACN shall occur on a date determined
by ACN (the "Put Closing Date") which date shall be no more than 30 days after
the determination by the independent appraiser of fair market value of the Stock
subject to the Rollup Put Option and/or the Termination Put Option. On the Put
Closing Date, the Medical Group shall surrender to ACN the Stock owned by the
Medical Group being repurchased without any representation or warranty (other
than that the holder has good and valid title thereto free and clear of liens,
claims, encumbrances and restrictions of any kind), against payment therefor by
ACN to the Medical Group by (at the option of the Medical Group), (1) wire
transfer to an account in a bank located in the United States designated by the
Medical Group for such purpose or (2) a certified or official bank check drawn
on a member of the New York Clearing House payable to the order of the Medical
Group.
SECTION 5. Restrictions on Sales of Stock.
5.1. General Restrictions. No Stockholder shall, at any time during the
term of this Agreement, Sell any Stock, except:
(i) by pledge which creates a mere security interest in the Stock,
provided that (a) all Stockholders consent to such pledge and (b) the
pledgee thereof shall agree in writing in advance with the parties hereto
to be bound by and comply with all applicable provisions of this Agreement
to the same event as if it were the Stockholder making such pledge;
(ii) the Medical Group shall Sell its Stock to the Corporation in
accordance with Section 3 hereof;
(iii) the Medical Group shall be permitted to Sell all or any part of
its Stock to an Affiliate (including, without limitation, the partners and
the individual stockholders of its partners) and such Affiliate shall be
permitted to Sell all or any part of its Stock to another Affiliate of the
Medical Group, who or which agrees in writing to be bound by and to comply
with the applicable
-5-
<PAGE>
provisions of this Agreement as if such purchaser were the Medical Group
for the purposes hereof;
(iv) by Sale in accordance with Section 5.2;
(v) ACN shall have the right to Sell all or any part of its Stock to
any Affiliate, or any employee of ACN or any Affiliate, who or which agrees
in writing to be bound by and to comply with the applicable provisions of
this Agreement as if such purchaser were ACN for the purposes hereof;
(vi) the Medical Group shall be permitted to sell its Stock to ACN or
the Corporation, including, without limitation, pursuant to Section 4;
(vii) pursuant to a liquidation or winding-up of the Corporation.
5.2. Right of First Refusal. Except as otherwise provided in Section 5.1,
the Medical Group and ACN shall not Sell any shares of Stock unless (i) the
prior written consent of the Corporation is obtained or (ii) the following
procedure is followed:
(a) The Selling Stockholder shall first deliver to the Corporation and the
Non-selling Stockholders a written notice (the "Offer Notice"), which shall be
irrevocable for a period of 90 days after delivery thereof, offering (the
"Offer") all of the Stock proposed to be Sold by the Selling Stockholder at the
purchase price and on the terms specified in the Offer Notice. The Corporation
(or its designee) shall then have the right and option, for a period of 30 days
after delivery of the Offer Notice, to accept all or any part of the Stock so
offered at the purchase price and on the terms stated in the Offer Notice. Such
acceptance shall be made by delivering a written notice to the Selling
Stockholder and the Non-selling Stockholders within said 30-day period.
(b) If the Corporation (or its designee) shall fail to accept all of the
Stock offered for sale pursuant to, or shall reject in writing, the Offer (the
Corporation being required to notify in writing the Selling Stockholder and the
Non-selling Stockholders of its rejection or failure to accept all of the Stock
in the event of the same), then, upon the earlier of the expiration of such
30-day period or the receipt of such written notice of rejection or failure to
accept such Offer by the Corporation, the Non-selling Stockholders shall have
the right and option, for a period of 30 days thereafter, to accept all or any
part of the Stock so offered and not accepted by the Corporation (the "Refused
Stock") at the purchase price and on the terms stated in the Offer Notice. Such
acceptance shall be
-6-
<PAGE>
made by delivering a written notice to the Corporation and the Selling
Stockholder within said 30-day period.
(c) Sales of Stock under the terms of Sections 5.2(a) and 5.2(b) shall be
made at the offices of the Corporation on a mutually satisfactory business day
within 30 days after the expiration of the last applicable period described in
Section 5.2(b). Delivery of certificates or other instruments evidencing such
Stock duly endorsed for transfer shall be made on such date against payment of
the purchase price therefor.
(d) If effective acceptance shall not be received pursuant to Sections
5.2(a) and 5.2(b) with respect to all Stock offered for Sale pursuant to the
Offer Notice, then the Selling Stockholder may Sell all or any part of the Stock
so offered and not so accepted to a party or parties reasonably acceptable to
the Non-selling Stockholders (determined in accordance with Section 5.2(e)
hereof) at a price not less than the price, and on terms not more favorable to
the purchaser thereof than the terms stated in the Offer Notice at any time
within 60 days after the expiration of the Offer required by Sections 5.2(a) and
5.2(b). In the event that the Stock is not Sold by the Selling Stockholder
during such 60-day period to such party or parties, the right of the Selling
Stockholder to Sell such Stock shall expire and the obligations of this Section
5.2 shall be reinstated.
(e) The Selling Stockholder shall, at least 20 days prior to the proposed
date of Sale of Stock by the Selling Stockholder to any party other than the
Non-selling Stockholders, provide in writing to the Non-selling Stockholders the
identity of such proposed purchaser and such other information concerning such
purchaser as shall be reasonably requested by the Non-selling Stockholders to
enable the Non-selling Stockholders to determine the acceptability of the
proposed purchaser as a Stockholder. Within such 20 day period, the Non-selling
Stockholders shall provide to the Selling Stockholder in writing either such
Stockholder's consent or disapproval of such proposed purchaser. The Selling
Stockholder shall be entitled to consummate such Sale of Stock to such proposed
purchaser if the Non-selling Stockholders shall consent to such proposed
purchaser.
(f) Anything contained herein to the contrary notwithstanding, any
purchaser of Stock pursuant to this Section 5.2 who or which is not a
Stockholder shall agree in writing in advance with the parties hereto to be
bound by and comply with all applicable provisions of this Agreement and shall
be deemed to be a Stockholder for all purposes of this Agreement.
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<PAGE>
SECTION 6. Certain Repurchase Rights of ACN and/or the Corporation.
6.1. Repurchase from the Medical Group and its Affiliates. (a) In the event
of:
(i) the termination of the Management Services Agreement by the
Corporation as a result of a material default by the Medical Group in the
performance of any duty or obligation imposed upon it by the Management
Services Agreement;
(ii) the breach by the Medical Group or any Affiliate thereof of the
terms of this Agreement or by the Medical Group or any Affiliate thereof of
the terms of any services, subcontracting or other agreement entered into
between the Medical Group or any Affiliate thereof and the Corporation (or
any subcontractor thereof) or entered into among the Medical Group, any
Affiliate thereof, the Corporation (or any subcontractor thereof) and one
or more third parties, if such breach is not cured within 30 days following
the Medical Group's or any Affiliate's receipt from the Corporation of
written notification of such breach; or
(iii) the commencement of a voluntary or involuntary bankruptcy
proceeding (provided, with respect to an involuntary proceeding, that such
proceeding has not been stayed or dismissed within 60 days of such
commencement) by or against the Medical Group;
then, ACN (or the Corporation or any other designee of ACN) shall have the
right, but not the obligation, to purchase from the Medical Group and/or any
such Affiliate thereof and the Medical Group and/or such Affiliate shall be
obligated to sell to ACN (or the Corporation or such other designee), upon the
exercise of such right, at a purchase price per share (as constituted on the
date hereof) equal to the book value of the Stock at the time of such event as
determined by the accountants of the Corporation, up to that number of shares of
Stock then owned by the Medical Group and/or any such Affiliate.
(b) ACN (or the Corporation or any other designee of ACN) may exercise its
right to purchase Stock owned by the Medical Group and/or any Affiliate thereof
pursuant to Section 6.1(a) by delivering a written notice to such effect to the
Medical Group and/or any Affiliate thereof within 30 days following the event
giving rise to such right, which notice shall specify the number of shares of
Stock which the Corporation so elects to purchase. Any purchase of Stock
pursuant to Section 6.1(a) shall be made on a business day designated by ACN (or
the Corporation or other designee) which shall be within 10 days of the delivery
of such notice, by delivery of the purchase price
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<PAGE>
against receipt of one or more certificates, properly endorsed,
evidencing the Stock to be so purchased.
SECTION 7. Legend. Each certificate evidencing Stock shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"THE REGISTERED HOLDER HEREOF HAS REPRESENTED TO THE ISSUER OF THE SHARES
REPRESENTED HEREBY THAT IT HAS ACQUIRED SUCH SHARES FOR INVESTMENT
PURPOSES AND NOT FOR DISTRIBUTION. ACCORDINGLY, SUCH SHARES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES OR BLUE SKY LAWS, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS SUBSEQUENTLY REGISTERED THEREUNDER OR AN EXEMPTION
FROM REGISTRATION THEREUNDER IS AVAILABLE."
"CERTAIN OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
REPURCHASE UNDER THE TERMS AND CONDITIONS OF A STOCKHOLDERS' AGREEMENT
DATED AS OF JULY 1, 1996, AMONG DIAMOND PHYSICIAN MANAGEMENT, INC. AND THE
OTHER STOCKHOLDERS LISTED ON SCHEDULE I THERETO. COPIES OF SUCH AGREEMENT
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD
OF THIS CERTIFICATE TO THE SECRETARY OF DIAMOND PHYSICIAN MANAGEMENT,
INC."
SECTION 8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York without regard
to the laws and principles thereof or of any other jurisdiction that would
direct the application of the laws of another jurisdiction. The parties to this
Agreement agree that jurisdiction and venue in any action brought by any party
hereto pursuant to this Agreement shall exclusively lie in any federal or state
court located in the State of New York. By execution and delivery of this
Agreement, the parties hereto irrevocably submit to the jurisdiction of such
courts for themselves and in respect of their property with respect to such
action. The parties hereto irrevocably agree that venue would be proper in such
court and hereby waive any objection that such court is an improper or
inconvenient forum for the resolution of such action.
SECTION 9. Benefits of Agreement. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, legal representatives and heirs.
SECTION 10. Notices. All notices, claims, certificates, requests, demands
and other communications hereunder shall be in writing and shall be deemed to
have been duly given if personally delivered or if sent by telecopy,
nationally-recognized overnight courier or by registered or certified mail,
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<PAGE>
return receipt requested and postage prepaid, addressed as
follows:
(i) if to the Corporation, to:
Diamond Physician Management, Inc.
560 White Plains Road, 2nd Floor
Tarrytown, New York 10591
Attention: Alan Masarek
Telephone: (914) 332-6688
Telecopy: (914) 332-1186
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
Telephone: (212) 408-2400
Telecopy: (212) 408-2420; and
(ii) if to the Stockholders, to their respective
addresses set forth on Schedule I attached hereto;
with a copy to:
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
Attention: Stephen J. Gulotta, Jr., Esq.
Telephone: (212) 661-6500
Telecopy: (212) 697-6686
or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (a) in the
case of delivery by telecopy or personal delivery, on the date of such delivery,
(b) in the case of nationally-recognized overnight courier, on the next business
day after the date when sent and (c) in the case of mailing, on the third
business day following that on which the piece of mail containing such
communication is posted.
SECTION 11. Entire Agreement. This Agreement and the other writings and
agreements referred to herein or delivered pursuant hereto contain the entire
understanding of the parties with respect to their subject matter. This
Agreement and such other writings and agreements referred to herein supersede
all prior agreements and understandings among the parties with respect to their
subject matter.
SECTION 12. Modification. The terms and provisions of this Agreement may
not be modified or amended, or any of the
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<PAGE>
provisions hereof waived, temporarily or permanently, except pursuant to the
written consent of the Corporation, ACN and the Medical Group.
SECTION 13. Headings. The section and paragraph head- ings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 14. Nouns and Pronouns. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice-versa.
SECTION 15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
DIAMOND PHYSICIAN MANAGEMENT, INC.
By:__________________________________
Name:
Title:
ADVANCED CLINICAL NETWORKS CORPORATION
By:__________________________________
Name:
Title:
LONG ISLAND INTERVENTIONAL CARDIOLOGY
By: Ronnie Hershman, M.D., P.C.,
Its General Partner
By:__________________________________
Name:
Title: President
<PAGE>
SCHEDULE I
STOCKHOLDERS
------------
STOCKHOLDER COMMON SHARES %
- ----------- ------------- ---
ADVANCED CLINICAL NETWORKS 51 51
CORPORATION
560 White Plains Road, 2nd Fl.
Tarrytown, New York 10591
Attention: Richard Kaplan
LONG ISLAND INTERVENTIONAL 49 49
CARDIOLOGY
100 Port Washington Boulevard
Roslyn, New York 11575
Attention: Ronnie Hershman, M.D.
<PAGE>
EXHIBIT A
The Rollup
AHC has established and reserved 548,224 shares of its common stock as
adjusted by a stock split, reverse stock split, stock dividend or
recapitalization of AHC's shares of common stock (the "MSO Pool") for issuance
to all medical personnel which own, from time to time, any equity interest in
any Affiliate of AHC which provides management services to physicians or
physician groups (each an "MSO"). AHC has organized, and from time to time after
the date hereof shall organize, MSO's to provide physician management and
network services and grant equity interests in such entities, which equity
interests will participate in the MSO Pool or any Rollup.
The MSO Pool will only be issued if AHC determines, in its discretion, to
consummate the Rollup. The Rollup of all MSO equity interests must be done at
one time and in one transaction. The shares in the MSO Pool have been divided
into four tranches, of 17.5%, 22.5% 27.5% and 32.5%, respectively. AHC will
allocate the first tranche of the MSO Pool ("Tranche I") to be divided among the
physician networks and physician practices (each a "PPN") which own equity in
the MSO's which are established on or prior to December 31, 1996 (the "Tranche I
Period"). AHC will allocate the second tranche of the MSO Pool ("Tranche II") to
be divided among the PPNs which own equity in all MSO's which operate (including
MSO's formed during the Tranche I Period) during calendar year 1997 (the
"Tranche II Period"). AHC will allocate the third tranche of the MSO Pool
("Tranche III") to be divided among the PPN's which own equity in all MSO's
which operate during calendar year 1998 (the "Tranche III Period"). AHC will
allocate the fourth tranche of the MSO Pool ("Tranche IV") to be divided among
the PPNs which own equity in MSO's which operate during calendar year 1999 (the
"Tranche IV Period").
At the time AHC shall determine to effect the Rollup, the MSO Pool shall be
allocated as follows:
1. All PPNs which qualify for Tranche I shares shall receive an allocation
of Tranche I shares based upon their proportionate percentage of Qualifying
Revenues for the Tranche I Period. To determine the proportionate percentage for
each PPN, a numerator for each PPN will be established by taking the Qualifying
Revenues of such MSO for the Tranche I Period. The denominator shall be equal to
the sum of the numerators for the PPNs. As used herein, Qualifying Revenues for
each MSO shall mean all revenues other than revenues derived from referrals for
"designated health services" (as such term is defined by applicable law and
regulations or similarly referral regulated services) by physicians if
consideration for such referrals is prohibited by state or federal law,
including federal "STARK" law and regulations.
<PAGE>
2. All PPNs which qualify for Tranche II shares shall receive an allocation
of Tranche II shares based upon their proportionate percentage of Qualifying
Revenue for the Tranche II Period. The proportionate percentage shall be
calculated as provided in 1 above.
3. All PPNs which qualify for Tranche III shares shall receive an
allocation of Tranche III shares based upon their proportionate percentage of
Qualifying Revenue for the Tranche III Period. The proportionate percentage
shall be calculated as provided in 1 above
4. All PPNs which qualify for Tranche IV shares shall receive an allocation
of Tranche IV shares based upon their proportionate percentage of Qualifying
Revenue for the Tranche IV Period. The proportionate percentage shall be
calculated as provided in 1 above.
5. If the Rollup shall occur prior to the end of the Tranche IV Period but
after the end of the Tranche III Period, the Tranche IV shares shall be
allocated as if the Tranche IV Period ended on the date of the Rollup. If the
Rollup shall occur prior to the end of the Tranche III Period but after the end
of the Tranche II Period, the Tranche III shares shall be allocated as if the
Tranche II Period had ended on the date of the Rollup and the Tranche IV shares
shall be allocated pro rata to all PPNs receiving Tranche I, Tranche II and
Tranche III shares based upon the number of shares received. If the Rollup shall
occur prior to the end of the Tranche II Period, the Tranche II shares shall be
allocated as if the Trance II Period had ended on the date of the Rollup and the
Tranche III and IV shares shall be allocated pro rata to all PPNs receiving
Tranche I and II shares based upon the number of shares received.
EXHIBIT 10.21
EXECUTION COPY
EMPLOYMENT AGREEMENT dated as of
July 11, 1996, between ADVANCED HEALTH
CORPORATION, a Delaware corporation (the
"Company"), and JONATHAN EDELSON, M.D.
(the "Employee").
The Company desires to formalize the employment arrangements between the
Company and the Employee and to continue to employ the Employee as the Chairman
and Chief Executive Officer of the Company and the Employee desires to accept
such continued employment by the Company, on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
hereinafter set forth, the parties hereto hereby agree as follows:
1. Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The employment of the Employee hereunder shall be for the
three-year period commencing on the date hereof and ending on July 11, 1999 (the
"Base Term"). The Base Term shall automatically renew for consecutive one-year
terms (each, a "Renewal Term" and together with the Base Term, collectively, the
"Employment Period") unless either the Company or the Employee gives the other
party hereto at least 90 days' prior written notice before the end of the
Employment Period of such party's intent not to renew this Agreement.
3. Duties. The Employee shall be employed as the Chairman and Chief
Executive Officer of the Company or in such other position as the Company and
the Employee shall agree in writing. The Employee shall perform such duties and
services as are appropriate and commensurate with the Employee's position as
Chairman and Chief Executive Officer of the Company and would otherwise be
consistent in stature and prestige with the position of Chairman and Chief
Executive Officer of a corporation with similar operations as the Company, as
the same may be assigned to him from time to time by the Board of Directors of
the Company (the "Board").
4. Time to be Devoted to Employment; Place of Employment. (a) Except for
three weeks vacation per year (in addition to public holidays), absences due to
temporary illness and time spent as a director of Physicians' Online, Inc., a
Delaware corporation ("Physicians' Online"), during the Employment Period the
Employee shall devote substantially all of his business time, attention and
energies to the business and affairs of the Company.
<PAGE>
(b) During the Employment Period, the Employee shall not be engaged in any
other business activity which conflicts with the duties of the Employee
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage.
(c) During the Employment Period, the Company shall maintain its primary
business location in the greater New York City metropolitan area and the
Employee shall not be required to relocate outside such area without his written
consent.
5. Compensation; Reimbursement. (a) During the Employment Period, the
Company (or at the Company's option, any subsidiary or affiliate thereof) shall
pay to the Employee an annual salary (the "Base Salary") of not less than
$220,000, payable in such installments as is the policy of the Company with
respect to its senior executive officers. Such Base Salary will be reviewed at
least annually and may be increased by the Board (or, if such authority shall be
delegated by the Board to the Compensation Committee thereof, then by such
Committee) in its sole discretion.
(b) From time to time the Employee may also receive cash bonuses at the
discretion of the Board or the Compensation Committee.
(c) The Employee shall maintain a suitable automobile for business use.
During the Employment Period, the Company shall pay the Employee a $600 per
month car allowance towards the costs of leasing, using, insuring, repairing and
maintaining such automobile.
(d) Following the expiration or termination of this Agreement for any
reason, the Employee shall have the right to maintain any (i) health and life
insurance benefits provided by the Company to the extent provided under
applicable law and (ii) any life insurance benefits provided by the Company so
long as the Employee makes the premium payments relating to such life insurance.
(e) During the Employment Period and to the extent available to employees
of the Company, the Employee shall be entitled to participate in all of the
Company's benefit plans, pension and retirement plans, life insurance,
hospitalization and surgical and major medical coverages, sick leave, vacation
and holiday policies, long-term disability coverage and such other fringe
benefits enjoyed by other employees at substantially the same employment level
as the Employee. Notwithstanding anything to the contrary contained in this
Section 5(e), at no time during the Employment Period shall the long-term
disability coverage and life insurance benefits that the Company provides to the
Employee be reduced to a level below that being provided to the Employee as of
the date hereof.
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<PAGE>
(f) The Company shall reimburse the Employee, in accordance with the
practice from time to time for other employees of the Company, for all
reasonable and necessary travelling expenses, disbursements and other reasonable
and necessary incidental expenses incurred by him for or on behalf of the
Company in the performance of his duties hereunder upon presentation by the
Employee to the Company of appropriate vouchers.
6. Involuntary Termination. (a) If the Employee is incapacitated or
disabled by accident, sickness or other cause so as to render him mentally or
physically incapable of performing the services required to be performed by him
under this Agreement for a period of 90 days or longer during any six-month
period (such condition being herein referred to as a "Disability"), prior to the
Employee resuming the performance of his duties as contemplated herein, the
Company may terminate the employment of the Employee under this Agreement (an
"Involuntary Termination"). Until the Company or the Employee shall have
terminated the Employee's employment hereunder, the Employee shall be entitled
to receive his compensation and other benefits as set forth in this Agreement
notwithstanding any such physical or mental disability.
(b) If the Employee dies during the Employment Period, his employment
hereunder shall be deemed to cease as of the date of his death, and the
termination of his employment occasioned thereby shall be deemed an Involuntary
Termination.
7. Termination for Cause. The Company may terminate the Employee's
employment hereunder for "Cause" (a "Termination for Cause"). For purposes of
this Agreement, "Cause" shall be limited to:
(i) the willful and continued failure by the Employee substantially to
perform the duties described in Section 3 (other than any failure resulting
from an illness or other similar incapacity or disability), for 30 days
after a written demand for performance is delivered to the Employee on
behalf of the Board that specifically identifies the manner in which it is
alleged that the Employee has not substantially performed his duties;
(ii) the commission by the Employee of misappropriation of funds,
properties or assets of the Company, sexual harassment of employees of the
Company, chronic alcoholism or drug addiction, slander or libel concerning
the Company or a material tort relating to his office or employment with
the Company that has a material adverse effect on the Company; or
(iii) the Employee's conviction of a crime constituting a felony.
-3-
<PAGE>
8. Termination Without Cause. (a) The Company may terminate the employment
of the Employee hereunder at any time during the Employment Period without
"Cause" and (b) the Employee may terminate his employment hereunder at any time
during the Employment Period in the event of (i) the willful and continued
failure by the Company to perform its obligations hereunder for 30 days
hereunder for 30 days after a written demand for performance is delivered to the
Board on behalf of the Company by the Employee that specifically identifies the
manner in which it is alleged that the Company has not performed its
obligations; or (ii) the commission by the Company of slander or libel
concerning the Employee or a material tort relating to his office or employment
with the Company of slander or liber concerning the Employee or a material tort
relating to his office or employment with the Company that has a material
adverse effect on the Employee (each, a "Termination Without Cause"). It is
expressly acknowledged that non-renewal of this Agreement as contemplated by
Section 2 shall not constitute a Termination Without Cause.
9. Voluntary Termination. Any termination of the employment of the Employee
hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause shall be deemed to be a
"Voluntary Termination." A Voluntary Termination shall be deemed to be effective
immediately upon written notice of such termination to the Company.
10. Change in Control. Anything contained in this Agreement to the contrary
notwithstanding, if, within 12 months of a Change in Control (as herein
defined), the employment of the Employee shall terminate for any reason, then
such termination shall be deemed to constitute a Termination Without Cause. For
purposes of this Agreement, a "Change in Control" of the Company shall be deemed
to have occurred if (a) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the common stock of the Company (the
"Common Stock") would be converted into cash, securities or other property,
other than a merger of the Company in which the holders of the Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company; or (b) the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or (c) any person (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the Company's
outstanding Common Stock; or (d) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire Board of
Directors
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<PAGE>
shall cease for any reason to constitute a majority thereof unless the election,
or the nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
11. Effect of Termination of Employment. (a) Upon the termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his beneficiary or estate shall
have any further rights or claims against the Company under this Agreement
except to receive:
(i) any unpaid portion of the Base Salary provided for in Section
5(a), computed on a pro rata basis to the date of termination;
(ii) cash compensation equal to the product of (A) the number of days
of accrued vacation, if any, accumulated by the Employee to the effective
date of termination divided by the total number of work days per annum for
which the Employee receives a Base Salary multiplied by (B) the Base
Salary; and
(iii) reimbursement for any expenses for which the Employee shall not
have theretofore been reimbursed as provided in Section 5(e).
(b) Upon the termination of the Employee's employment hereunder pursuant to
an Involuntary Termination, neither the Employee nor his beneficiary or estate
shall have any further rights or claims against the Company under this Agreement
except the right (i) to receive a termination payment equal to that provided for
in Section 11(a) hereof, plus (ii) to receive a cash severance payment in an
aggregate amount equal to the cash compensation received by the Employee during
the 3-month period immediately prior to the effective date of the Involuntary
Termination, payable in equal monthly installments, plus (iii) to be immediately
vested in the 445,000 shares of Common Stock issued to the Employee by the
Company referred to in Section 1(a) of the Co-Sale Agreement dated as of August
23, 1995 (the "Co- Sale Agreement"), between the Holders and the Investors
thereto, plus any additional shares of Common Stock issued to the Employee by
the Company from time to time thereafter as such shares may be adjusted for any
stock split, reverse stock split, stock dividend, combination, reclassification
or recapitalization of the Common Stock of the Company and plus (iv) to be
immediately vested in all stock options granted to the Employee by the Company
pursuant to the Nontransferable, Qualified Incentive Stock Option Agreements
dated as of June 30, 1995, and December 31, 1995 (the "Stock Option
Agreements"), entered into between the Company and the Employee, and any
additional stock options issued to the Employee by the Company from time to time
-5-
<PAGE>
thereafter that would have vested during the three-month period immediately
following the effective date of the Involuntary Termination.
(c) Upon the termination of the Employee's employment hereunder pursuant to
a Termination Without Cause, neither the Employee nor his beneficiary or estate
shall have any further rights or claims against the Company under this Agreement
except the right (i) to receive a termination payment equal to the amount
provided for in Section 11(a) hereof, plus (ii) to receive a cash severance
payment in an aggregate amount equal to the cash compensation received by the
Employee during the 12-month period immediately prior to the effective date of
the Termination Without Cause, payable in equal monthly installments, plus (iii)
to be immediately vested in the 445,000 shares of Common Stock issued to the
Employee by the Company referred to in Section 1(a) of the Co-Sale Agreement
plus any additional shares of Common Stock issued to the Employee by the Company
from time to time thereafter as such shares may be adjusted for any stock split,
reverse stock split, stock dividend, combination, reclassification or
recapitalization of the Common Stock of the Company and plus (iv) to be
immediately vested in all stock options granted to the Employee by the Company
pursuant to the Stock Option Agreements and any additional stock options issued
to the Employee by the Company from time to time thereafter that would have
vested during the one-year period immediately following the effective date of
the Termination Without Cause.
12. Non-Competition; Non-Disclosure of Information. (a) The Employee shall
not, for a period of one year following the termination of the Employment
Period, (i) directly or indirectly engage in any Competitive Business (as
defined below), whether such engagement shall be as an employee, employer,
owner, consultant, partner or other participant in any Competitive Business,
(ii) assist others in engaging in any Competitive Business in the manner
described in the foregoing clause (i), (iii) induce employees of the Company to
terminate their employment with the Company or engage in any Competitive
Business or (iv) induce customers or vendors of the Company to alter or
terminate their business relationship with the Company; provided, however, that
the Employee may own directly or indirectly, solely as a passive investment,
securities of any Competitive Business traded on any national securities
exchange if the Employee is not a controlling person of, nor a member of a group
which controls such person and does not, directly or indirectly, own 5% or more
of any class of securities of such person. As used herein, the term "Competitive
Business" shall mean any business which, directly or indirectly, competes with
the Company in the business of primarily providing physician practice
management, physician network management and/or clinical information technology
to or for physicians; provided, however, that a business conducted directly by
the Employee which provides physician practice management, physician network
management and/or clinical
-6-
<PAGE>
information technology to or for physician groups consisting of three or fewer
physicians shall not be deemed to be a "Competitive Business". Notwithstanding
any other provision of this Agreement to the contrary, any business activities
engaged in by the Employee on behalf of, or in connection with Employee's
employment by, or service as a director or consultant to, any subsidiary or
affiliate of the Company or Physicians' Online, a corporation engaged in the
business of providing wireline medical reference and communications services to
health care professionals and consumers, shall not be deemed to violate the
provisions of this Agreement.
(b) The Employee understands that the foregoing restrictions may limit his
ability to earn a livelihood in a Competitive Business, but he nevertheless
believes that he has received and will receive sufficient consideration and
other benefits in connection with his employment to clearly justify such
restrictions which, in any event, the Employee does not believe would prevent
him from earning a living. Nothing herein contained shall prohibit the Employee
from engaging in a business that is not a Competitive Business.
(c) The Employee agrees that he will not, at any time during or after the
Employment Period, disclose to any person, firm, corporation or other entity,
except as required by law, any secret or confidential information concerning the
business, clients or affairs of the Company or any subsidiary or affiliate
thereof for any reason or purpose whatsoever other than in furtherance of the
Employee's work for the Company nor shall the Employee make use of any of such
secret or confidential information for his own purpose or for the benefit of any
person, firm, corporation or other business entity except the Company or any
subsidiary or affiliate thereof.
13. Company Right to Inventions. The Employee shall promptly disclose,
grant and assign to the Company for its sole use and benefit any and all
inventions, improvements, technical information, methods and suggestions (the
"Inventions") relating in any way to the business of providing physician
practice management, physician network management and/or clinical information
technology to or for physicians, which he may develop or acquire during the
period of the Employee's employment with the Company prior to any termination of
employment (whether or not during usual working hours), together with all patent
applications, patents, copyrights and reissues thereof that may at any time be
granted for or upon any such Inventions, excluding those Inventions directly
relating to any business activities engaged in by the Employee on behalf of or
in connection with the Employee's employment by, or service as a director or
consultant to Physicians' Online. In connection therewith:
(a) the Employee shall without charge, but at the expense of the
Company, promptly at all times hereafter
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<PAGE>
execute and deliver such applications, assignments, descriptions and other
instruments as may be reasonably necessary or proper in the reasonable
opinion of the Company to vest title to any such inventions, improvements,
technical information, methods, patent applications, patents, copyright
applications, copyrights or reissues of any thereof in the Company and to
enable it to obtain and maintain the entire right and title thereto
throughout the world; and
(b) the Employee shall render to the Company at its expense (including
a reasonable payment for the time involved in case he is not then in its
employ) all such assistance as it may reasonably require in the prosecution
of applications for said patents, copyrights or reissues thereof, in the
prosecution or defense or interferences which may be declared involving any
said applications, patents or copyrights and in any litigation in which the
Company may be involved relating to any such patents, copyrights,
inventions, improvements, technical information or methods.
14. Enforcement. It is the desire and intent of the parties hereto that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated to be invalid or unenforceable, such provision
shall be deemed amended to delete therefrom the portion thus adjudicated to be
invalid or unenforceable, such amendment to apply only with respect to the
operation of such provision in the particular jurisdiction in which such
adjudication is made; provided, however, that if any one or more of the
provisions contained in this Agreement shall be adjudicated to be invalid or
unenforceable because such provision is held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
deemed amended by limiting and reducing it so as to be valid and enforceable to
the maximum extent compatible with the applicable laws of such jurisdiction,
such amendment to apply only with respect to the operation of such provision in
the particular jurisdiction in which such adjudication is made.
15. Remedies; Survival. (a) The Employee acknowl- edges and understands
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be accurately compensated for in damages by an action at
law, and that the breach of the provisions of this Agreement would cause the
Company irreparable harm. In the event of a breach by the Employee of the
provisions of Section 12 or 13 hereof, the Company shall be entitled to an
injunction restraining him from such breach. Nothing herein contained shall be
construed as prohibiting the Company from pursuing any other remedies available
for any breach of this Agreement.
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<PAGE>
(b) Notwithstanding anything contained in this Agree- ment to the contrary,
the provisions of Sections 12, 13, 14 and this Section 15 shall survive the
expiration or other termination of this Agreement until, by their terms, such
provisions are no longer operative.
(c) It is understood and agreed that the provisions of Sections 12 and 13
of this Agreement are separate and distinct from any other agreement between the
parties hereto. Accordingly, in the event of a breach of such provisions, the
breaching party shall only be held responsible for damages arising under such
provisions and not for any damages which may be claimed to arise under or with
respect to any other agreement that is not separately breached.
16. Notices. Notices and other communications hereun- der shall be in
writing and shall be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
If to the Employee:
Jonathan Edelson, M.D.
212 Mamaroneck Road
Scarsdale, New York 10583
If to the Company:
Advanced Health Corporation
560 White Plains Road, Second Floor
Tarrytown, New York 10591
Attention: President
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All notices and
other communications hereunder shall be deemed to have been given on the date of
delivery if personally delivered; on the business day after the date when sent
if sent by air courier; and on the third business day after the date when sent
if sent by mail, in each case addressed to such party as provided in this
Section 16.
17. Binding Agreement. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors,
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<PAGE>
heirs, distributees and devisees. If the Employee should die while any amount
would still be payable to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the beneficiary designated by the Employee in a
writing delivered to the Company, or if there be no such designated beneficiary,
to his estate.
18. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York applicable to
contracts made and to be performed wholly therein.
19. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and shall not
operate or be construed as a waiver of any subsequent breach by such other
party.
20. Entire Agreement; Amendments; Execution. This Agreement, the
Indemnification Agreement to be entered into between the Company and the
Employee, the Stock Option Agreements and the other agreements referred to
herein contain the entire agreement between the parties with respect to the
subject matter contained herein and supersede all prior agreements or
understandings among the parties with respect thereto. This Agreement may be
amended only by an agreement in writing signed by the parties hereto. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original document but all of which shall constitute but one agreement.
21. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
22. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
23. Assignment. With respect to the Employee, this Agreement is personal in
its nature and the Employee shall not assign or transfer this Agreement or any
rights or obligations hereunder. The Company may in its sole discretion assign
or otherwise transfer this Agreement and the provisions hereof (including,
without limitation, Sections 12, 13 and 14) shall inure to the benefit of, and
be binding upon, each successor of the Company, whether by merger,
consolidation, transfer of all or substantially all assets, or otherwise.
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
ADVANCED HEALTH CORPORATION
By:___________________________
Name: Steve Hochberg
Title: President
------------------------------
Jonathan Edelson, M.D.
-11-
EXHIBIT 10.22
EXECUTION COPY
EMPLOYMENT AGREEMENT dated as of
July 11, 1996, between ADVANCED HEALTH
CORPORATION, a Delaware corporation (the
"Company"), and STEVEN HOCHBERG (the
"Employee").
The Company desires to formalize the employment arrangements between the
Company and the Employee and to continue to employ the Employee as the President
of the Company and the Employee desires to accept such continued employment by
the Company, on the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
hereinafter set forth, the parties hereto hereby agree as follows:
1. Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The employment of the Employee hereunder shall be for the
three-year period commencing on the date hereof and ending on July 11, 1999 (the
"Base Term"). The Base Term shall automatically renew for consecutive one-year
terms (each, a "Renewal Term" and together with the Base Term, collectively, the
"Employment Period") unless either the Company or the Employee gives the other
party hereto at least 90 days' prior written notice before the end of the
Employment Period of such party's intent not to renew this Agreement.
3. Duties. The Employee shall be employed as the President of the Company
or in such other position as the Company and the Employee shall agree in
writing. The Employee shall perform such duties and services as are appropriate
and commensurate with the Employee's position as President of the Company and
would otherwise be consistent in stature and prestige with the position of
President of a corporation with similar operations as the Company, as the same
may be assigned to him from time to time by the Board of Directors of the
Company (the "Board").
4. Time to be Devoted to Employment; Place of Employment. (a) Except for
three weeks vacation per year (in addition to public holidays), absences due to
temporary illness and time spent as a consultant to Physicians' Online, Inc., a
Delaware corporation ("Physicians' Online") during the Employment Period the
Employee shall devote substantially all of his business time, attention and
energies to the business and affairs of the Company.
<PAGE>
(b) During the Employment Period, the Employee shall not be engaged in any
other business activity which conflicts with the duties of the Employee
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage.
(c) During the Employment Period, the Company shall maintain its primary
business location in the greater New York City metropolitan area and the
Employee shall not be required to relocate outside such area without his written
consent.
5. Compensation; Reimbursement. (a) During the Employment Period, the
Company (or at the Company's option, any subsidiary or affiliate thereof) shall
pay to the Employee an annual salary (the "Base Salary") of not less than
$220,000, payable in such installments as is the policy of the Company with
respect to its senior executive officers. Such Base Salary will be reviewed at
least annually and may be increased by the Board (or, if such authority shall be
delegated by the Board to the Compensation Committee thereof, then by such
Committee) in its sole discretion.
(b) From time to time the Employee may also receive cash bonuses at the
discretion of the Board or the Compensation Committee.
(c) The Employee shall maintain a suitable automobile for business use.
During the Employment Period, the Company shall pay the Employee a $600 per
month car allowance towards the costs of leasing, using, insuring, repairing and
maintaining such automobile.
(d) Following the expiration or termination of this Agreement for any
reason, the Employee shall have the right to maintain any (i) health and life
insurance benefits provided by the Company to the extent provided under
applicable law and (ii) any life insurance benefits provided by the Company so
long as the Employee makes the premium payments relating to such life insurance.
(e) During the Employment Period and to the extent available to employees
of the Company, the Employee shall be entitled to participate in all of the
Company's benefit plans, pension and retirement plans, life insurance,
hospitalization and surgical and major medical coverages, sick leave, vacation
and holiday policies, long-term disability coverage and such other fringe
benefits enjoyed by other employees at substantially the same employment level
as the Employee. Notwithstanding anything to the contrary contained in this
Section 5(e), at no time during the Employment Period shall the long-term
disability coverage and life insurance benefits that the Company provides to the
Employee be reduced to a level below that being provided to the Employee as of
the date hereof.
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<PAGE>
(f) The Company shall reimburse the Employee, in accordance with the
practice from time to time for other employees of the Company, for all
reasonable and necessary travelling expenses, disbursements and other reasonable
and necessary incidental expenses incurred by him for or on behalf of the
Company in the performance of his duties hereunder upon presentation by the
Employee to the Company of appropriate vouchers.
6. Involuntary Termination. (a) If the Employee is incapacitated or
disabled by accident, sickness or other cause so as to render him mentally or
physically incapable of performing the services required to be performed by him
under this Agreement for a period of 90 days or longer during any six-month
period (such condition being herein referred to as a "Disability"), prior to the
Employee resuming the performance of his duties as contemplated herein, the
Company may terminate the employment of the Employee under this Agreement (an
"Involuntary Termination"). Until the Company or the Employee shall have
terminated the Employee's employment hereunder, the Employee shall be entitled
to receive his compensation and other benefits as set forth in this Agreement
notwithstanding any such physical or mental disability.
(b) If the Employee dies during the Employment Period, his employment
hereunder shall be deemed to cease as of the date of his death, and the
termination of his employment occasioned thereby shall be deemed an Involuntary
Termination.
7. Termination for Cause. The Company may terminate the Employee's
employment hereunder for "Cause" (a "Termination for Cause"). For purposes of
this Agreement, "Cause" shall be limited to:
(i) the willful and continued failure by the Employee substantially to
perform the duties described in Section 3 (other than any failure resulting
from an illness or other similar incapacity or disability), for 30 days
after a written demand for performance is delivered to the Employee on
behalf of the Board that specifically identifies the manner in which it is
alleged that the Employee has not substantially performed his duties;
(ii) the commission by the Employee of misappropriation of funds,
properties or assets of the Company, sexual harassment of employees of the
Company, chronic alcoholism or drug addiction, slander or libel concerning
the Company or a material tort relating to his office or employment with
the Company that has a material adverse effect on the Company; or
(iii) the Employee's conviction of a crime constituting a felony.
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<PAGE>
8. Termination Without Cause. (a) The Company may terminate the employment
of the Employee hereunder at any time during the Employment Period without
"Cause" and (b) the Employee may terminate his employment hereunder at any time
during the Employment Period in the event of (i) the willful and continued
failure by the Company to perform its obligations hereunder for 30 days after a
written demand for performance is delivered to the Board on behalf of the
Company by the Employee that specifically identifies the manner in which it is
alleged that the Company has not performed its obligations; or (ii) the
commission by the Company of slander or libel concerning the Employee or a
material tort relating to his office or employment with the Company that has a
material adverse effect on the Employee (each, a "Termination Without Cause").
It is expressly acknowledged that non-renewal of this Agreement as contemplated
by Section 2 shall not constitute a Termination Without Cause.
9. Voluntary Termination. Any termination of the employment of the Employee
hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause shall be deemed to be a
"Voluntary Termination." A Voluntary Termination shall be deemed to be effective
immediately upon written notice of such termination to the Company.
10. Change in Control. Anything contained in this Agreement to the contrary
notwithstanding, if, within 12 months of a Change in Control (as herein
defined), the employment of the Employee shall terminate for any reason, then
such termination shall be deemed to constitute a Termination Without Cause. For
purposes of this Agreement, a "Change in Control" of the Company shall be deemed
to have occurred if (a) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the common stock of the Company (the
"Common Stock") would be converted into cash, securities or other property,
other than a merger of the Company in which the holders of the Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company; or (b) the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or (c) any person (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the Company's
outstanding Common Stock; or (d) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire Board of
Directors shall cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the
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<PAGE>
Company's stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
11. Effect of Termination of Employment. (a) Upon the termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his beneficiary or estate shall
have any further rights or claims against the Company under this Agreement
except to receive:
(i) any unpaid portion of the Base Salary provided for in Section
5(a), computed on a pro rata basis to the date of termination;
(ii) cash compensation equal to the product of (A) the number of days
of accrued vacation, if any, accumulated by the Employee to the effective
date of termination divided by the total number of work days per annum for
which the Employee receives a Base Salary multiplied by (B) the Base
Salary; and
(iii) reimbursement for any expenses for which the Employee shall not
have theretofore been reimbursed as provided in Section 5(e).
(b) Upon the termination of the Employee's employment hereunder pursuant to
an Involuntary Termination, neither the Employee nor his beneficiary or estate
shall have any further rights or claims against the Company under this Agreement
except the right (i) to receive a termination payment equal to that provided for
in Section 11(a) hereof, plus (ii) to receive a cash severance payment in an
aggregate amount equal to the cash compensation received by the Employee during
the 3-month period immediately prior to the effective date of the Involuntary
Termination, payable in equal monthly installments, plus (iii) to be immediately
vested in the 444,000 shares of Common Stock issued to the Employee by the
Company as referred to in Section 1(a) of the Co-Sale Agreement dated as of
August 23, 1995 (the "Co-Sale Agreement"), between the Holders and the Investors
thereto, plus any additional shares of Common Stock issued to the Employee by
the Company from time to time thereafter as such shares may be adjusted for any
stock split, reverse stock split, stock dividend, combination, reclassification
or recapitalization of the Common Stock of the Company and plus (iv) to be
immediately vested in all stock options granted to the Employee by the Company
pursuant to the Nontransferable, Qualified Incentive Stock Option Agreements
dated as of June 30, 1995, and December 31, 1995 (the "Stock Option
Agreements"), entered into between the Company and the Employee, and any
additional stock options issued to the Employee by the Company from time to time
thereafter that would have vested during the three-month period
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<PAGE>
immediately following the effective date of the Involuntary Termination.
(c) Upon the termination of the Employee's employment hereunder pursuant to
a Termination Without Cause, neither the Employee nor his beneficiary or estate
shall have any further rights or claims against the Company under this Agreement
except the right (i) to receive a termination payment equal to the amount
provided for in Section 11(a) hereof, plus (ii) to receive a cash severance
payment in an aggregate amount equal to the cash compensation received by the
Employee during the 12-month period immediately prior to the effective date of
the Termination Without Cause, payable in equal monthly installments, plus (iii)
to be immediately vested in the 444,000 shares of Common Stock issued to the
Employee by the Company referred to in Section 1(a) of the Co-Sale Agreement
plus any additional shares of Common Stock issued to the Employee by the Company
from time to time thereafter as such shares may be adjusted for any stock split,
reverse stock split, stock dividend, combination, reclassification or
recapitalization of the Common Stock of the Company and plus (iv) to be
immediately vested in all stock options granted to the Employee by the Company
pursuant to the Stock Option Agreements and any additional stock options issued
to the Employee by the Company from time to time thereafter that would have
vested during the one-year period immediately following the effective date of
the Termination Without Cause.
12. Non-Competition; Non-Disclosure of Information. (a) The Employee shall
not, for a period of one year following the termination of the Employment
Period, (i) directly or indirectly engage in any Competitive Business (as
defined below), whether such engagement shall be as an employee, employer,
owner, consultant, partner or other participant in any Competitive Business,
(ii) assist others in engaging in any Competitive Business in the manner
described in the foregoing clause (i), (iii) induce employees of the Company to
terminate their employment with the Company or engage in any Competitive
Business or (iv) induce customers or vendors of the Company to alter or
terminate their business relationship with the Company; provided, however, that
the Employee may own directly or indirectly, solely as a passive investment,
securities of any Competitive Business traded on any national securities
exchange if the Employee is not a controlling person of, nor a member of a group
which controls such person and does not, directly or indirectly, own 5% or more
of any class of securities of such person. As used herein, the term "Competitive
Business" shall mean any business which, directly or indirectly, competes with
the Company in the business of primarily providing physician practice
management, physician network management and/or clinical information technology
to or for physicians; provided, however, that a business conducted directly by
the Employee which provides physician practice management, physician network
management and/or clinical information technology to or for physician groups
consisting of
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<PAGE>
three or fewer physicians shall not be deemed to be a "Competitive Business".
Notwithstanding any other provision of this Agreement to the contrary, any
business activities engaged in by the Employee on behalf of, or in connection
with Employee's employment by, or service as a consultant to, any subsidiary or
affiliate of the Company or Physicians' Online corporation engaged in the
business of providing wireline medical reference and communications services to
health care professionals and consumers, shall not be deemed to violate the
provisions of this Agreement.
(b) The Employee understands that the foregoing restrictions may limit his
ability to earn a livelihood in a Competitive Business, but he nevertheless
believes that he has received and will receive sufficient consideration and
other benefits in connection with his employment to clearly justify such
restrictions which, in any event, the Employee does not believe would prevent
him from earning a living. Nothing herein contained shall prohibit the Employee
from engaging in a business that is not a Competitive Business.
(c) The Employee agrees that he will not, at any time during or after the
Employment Period, disclose to any person, firm, corporation or other entity,
except as required by law, any secret or confidential information concerning the
business, clients or affairs of the Company or any subsidiary or affiliate
thereof for any reason or purpose whatsoever other than in furtherance of the
Employee's work for the Company nor shall the Employee make use of any of such
secret or confidential information for his own purpose or for the benefit of any
person, firm, corporation or other business entity except the Company or any
subsidiary or affiliate thereof.
13. Company Right to Inventions. The Employee shall promptly disclose,
grant and assign to the Company for its sole use and benefit any and all
inventions, improvements, technical information, methods and suggestions (the
"Inventions") relating in any way to the business of providing physician
practice management, physician network management and/or clinical information
technology to or for physicians, which he may develop or acquire during the
period of the Employee's employment with the Company prior to any termination of
employment (whether or not during usual working hours), together with all patent
applications, patents, copyrights and reissues thereof that may at any time be
granted for or upon any such Inventions, excluding those Inventions directly
relating to any business activities engaged in by the Employee on behalf of, or
in connection with the Employee's employment by, or service as a consultant to
Physicians' Online. In connection therewith:
(a) the Employee shall without charge, but at the expense of the
Company, promptly at all times hereafter execute and deliver such
applications, assignments, descrip-
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<PAGE>
tions and other instruments as may be reasonably necessary or proper in the
reasonable opinion of the Company to vest title to any such inventions,
improvements, technical information, methods, patent applications, patents,
copyright applications, copyrights or reissues of any thereof in the
Company and to enable it to obtain and maintain the entire right and title
thereto throughout the world; and
(b) the Employee shall render to the Company at its expense (including
a reasonable payment for the time involved in case he is not then in its
employ) all such assistance as it may reasonably require in the prosecution
of applications for said patents, copyrights or reissues thereof, in the
prosecution or defense or interferences which may be declared involving any
said applications, patents or copyrights and in any litigation in which the
Company may be involved relating to any such patents, copyrights,
inventions, improvements, technical information or methods.
14. Enforcement. It is the desire and intent of the parties hereto that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated to be invalid or unenforceable, such provision
shall be deemed amended to delete therefrom the portion thus adjudicated to be
invalid or unenforceable, such amendment to apply only with respect to the
operation of such provision in the particular jurisdiction in which such
adjudication is made; provided, however, that if any one or more of the
provisions contained in this Agreement shall be adjudicated to be invalid or
unenforceable because such provision is held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
deemed amended by limiting and reducing it so as to be valid and enforceable to
the maximum extent compatible with the applicable laws of such jurisdiction,
such amendment to apply only with respect to the operation of such provision in
the particular jurisdiction in which such adjudication is made.
15. Remedies; Survival. (a) The Employee acknowl- edges and understands
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be accurately compensated for in damages by an action at
law, and that the breach of the provisions of this Agreement would cause the
Company irreparable harm. In the event of a breach by the Employee of the
provisions of Section 12 or 13 hereof, the Company shall be entitled to an
injunction restraining him from such breach. Nothing herein contained shall be
construed as prohibiting the Company from pursuing any other remedies available
for any breach of this Agreement.
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<PAGE>
(b) Notwithstanding anything contained in this Agree- ment to the contrary,
the provisions of Sections 12, 13, 14 and this Section 15 shall survive the
expiration or other termination of this Agreement until, by their terms, such
provisions are no longer operative.
(c) It is understood and agreed that the provisions of Sections 12 and 13
of this Agreement are separate and distinct from any other agreement between the
parties hereto. Accordingly, in the event of a breach of such provisions, the
breaching party shall only be held responsible for damages arising under such
provisions and not for any damages which may be claimed to arise under or with
respect to any other agreement that is not separately breached.
16. Notices. Notices and other communications hereun- der shall be in
writing and shall be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
If to the Employee:
Steve Hochberg
428 Columbus Avenue, #4F
New York, New York 10024
If to the Company:
Advanced Health Corporation
560 White Plains Road, Second Floor
Tarrytown, New York 10591
Attention: Chairman and Chief Executive Officer
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All notices and
other communications hereunder shall be deemed to have been given on the date of
delivery if personally delivered; on the business day after the date when sent
if sent by air courier; and on the third business day after the date when sent
if sent by mail, in each case addressed to such party as provided in this
Section 16.
17. Binding Agreement. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors,
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<PAGE>
heirs, distributees and devisees. If the Employee should die while any amount
would still be payable to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the beneficiary designated by the Employee in a
writing delivered to the Company, or if there be no such designated beneficiary,
to his estate.
18. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York applicable to
contracts made and to be performed wholly therein.
19. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and shall not
operate or be construed as a waiver of any subsequent breach by such other
party.
20. Entire Agreement; Amendments; Execution. This Agreement, the
Indemnification Agreement to be entered into between the Company and the
Employee, the Stock Option Agreements and the other agreements referred to
herein contain the entire agreement between the parties with respect to the
subject matter contained herein and supersede all prior agreements or
understandings among the parties with respect thereto. This Agreement may be
amended only by an agreement in writing signed by the parties hereto. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original document but all of which shall constitute but one agreement.
21. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
22. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforce- ability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
23. Assignment. With respect to the Employee, this Agreement is personal in
its nature and the Employee shall not assign or transfer this Agreement or any
rights or obligations hereunder. The Company may in its sole discretion assign
or otherwise transfer this Agreement and the provisions hereof (including,
without limitation, Sections 12, 13 and 14) shall inure to the benefit of, and
be binding upon, each successor of the Company, whether by merger,
consolidation, transfer of all or substantially all assets, or otherwise.
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
ADVANCED HEALTH CORPORATION
By:
-----------------------------------
Name: Jonathan Edelson, M.D.
Title: Chairman and
Chief Executive Officer
-----------------------------------
Steven Hochberg
EXHIBIT 10.23
EXECUTION COPY
EMPLOYMENT AGREEMENT dated as of
July 11, 1996, between ADVANCED HEALTH
CORPORATION, a Delaware corporation (the
"Company"), and ALAN B. MASAREK (the
"Employee").
The Company desires to formalize the employment arrangements between the
Company and the Employee and to continue to employ the Employee as the Chief
Operating Officer and Chief Financial Officer of the Company and the Employee
desires to accept such continued employment by the Company, on the terms and
subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
hereinafter set forth, the parties hereto hereby agree as follows:
1. Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The employment of the Employee hereunder shall be for the
four-year period commencing on November 12, 1995, and ending on November 12,
1999 (the "Base Term"). The Base Term shall automatically renew for consecutive
one-year terms (each, a "Renewal Term" and together with the Base Term
collectively, the "Employment Period") unless either the Company or the Employee
gives the other party hereto at least 90 days' prior written notice before the
end of the Employment Period of its intent not to renew this Agreement.
3. Duties. The Employee shall be employed as the Chief Operating Officer
and the Chief Financial Officer of the Company or in such other position as the
Company and the Employee shall agree in writing. The Employee shall perform such
duties and services as are appropriate and commensurate with the Employee's
position as Chief Operating Officer and Chief Financial Officer of the Company
and would otherwise be consistent in stature and prestige with the position of
Chief Operating Officer and Chief Financial Officer of a corporation with
similar operations as the Company, as the same may be assigned to him from time
to time by the Board of Directors of the Company (the "Board").
4. Time to be Devoted to Employment; Place of Employment. (a) Except for
three weeks vacation per year (in addition to public holidays) and absences due
to temporary illness, during the Employment Period the Employee shall devote
substantially all of his business time, attention and energies to the business
and affairs of the Company.
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(b) During the Employment Period, the Employee shall not be engaged in any
other business activity which conflicts with the duties of the Employee
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage.
(c) During the Employment Period, the Company shall maintain its primary
business location in the greater New York City metropolitan area and the
Employee shall not be required to relocate outside such area without his written
consent.
5. Compensation; Reimbursement. (a) Commencing on January 1, 1996, and
continuing during the Employment Period, the Company (or at the Company's
option, any subsidiary or affiliate thereof) shall pay to the Employee an annual
salary (the "Base Salary") of not less than $200,000, payable in such
installments as is the policy of the Company with respect to its senior
executive officers. Such Base Salary will be reviewed at least annually and may
be increased by the Board (or, if such authority shall be delegated by the Board
to the Compensation Committee thereof, then by such Committee) in its sole
discretion.
(b) From time to time the Employee may also receive cash bonuses at the
discretion of the Board or the Compensation Committee.
(c) Following the expiration or termination of this Agreement for any
reason, the Employee shall have the right to maintain any (i) health and life
insurance benefits provided by the Company to the extent provided under
applicable law and (ii) any life insurance benefits provided by the Company so
long as the Employee makes the premium payments relating to such life insurance.
(d) During the Employment Period and to the extent available to employees
of the Company, the Employee shall be entitled to participate in all of the
Company's benefit plans, pension and retirement plans, life insurance,
hospitalization and surgical and major medical coverages, sick leave, vacation
and holiday policies, long-term disability coverage and such other fringe
benefits enjoyed by other employees at substantially the same employment level
as the Employee. Notwithstanding anything to the contrary contained in this
Section 5(d), at no time during the Employment Period shall the long-term
disability coverage and life insurance benefits that the Company provides to the
Employee be reduced to a level below that being provided to the Employee as of
the date hereof.
(e) The Company shall reimburse the Employee, in accordance with the
practice from time to time for other employees of the Company, for all
reasonable and necessary travelling expenses, disbursements and other reasonable
and necessary incidental expenses incurred by him for or on behalf of
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the Company in the performance of his duties hereunder upon presentation by the
Employee to the Company of appropriate vouchers.
(f) The Company shall reimburse the Employee for reasonable relocation
expenses incurred by the Employee in order to relocate to the greater New York
City metropolitan area (the "Relocation Expenses"), including expenses relating
to housing search visits to the greater New York City metropolitan area for the
Employee and the Employee's spouse, packing and moving of the Employee's and the
Employee's family's goods, closing costs in connection with the purchase of a
house upon relocation to the greater New York City metropolitan area and real
estate commissions incurred in connection with the sale of the Employee's house
in Atlanta, Georgia; provided, however, that the Company shall not be obligated
to reimburse the Employee more than $28,500 for closing costs on a house
purchased in the greater New York City metropolitan area; provided, further,
that the Company shall not be obligated to reimburse the Employee more than
$50,000 in the aggregate for all Relocation Expenses. All Relocation Expenses
shall be approved in advance by another officer of the Company. The Employee
shall be fully relocated to the greater New York City metropolitan area as of
July 1, 1996. Prior to July 1, 1996, the Company shall reimburse the Employee
for the expenses incurred by the Employee in connection with the Employee's
trips to and from Atlanta, Georgia made at the request of the Company for
business purposes.
6. Involuntary Termination. (a) If the Employee is incapacitated or
disabled by accident, sickness or other cause so as to render him mentally or
physically incapable of performing the services required to be performed by him
under this Agreement for a period of 90 days or longer during any six-month
period (such condition being herein referred to as a "Disability"), prior to the
Employee resuming the performance of his duties as contemplated herein, the
Company may terminate the employment of the Employee under this Agreement (an
"Involuntary Termination"). Until the Company or the Employee shall have
terminated the Employee's employment hereunder, the Employee shall be entitled
to receive his compensation and other benefits as set forth in this Agreement
notwithstanding any such physical or mental disability.
(b) If the Employee dies during the Employment Period, his employment
hereunder shall be deemed to cease as of the date of his death, and the
termination of his employment occasioned thereby shall be deemed an Involuntary
Termination.
7. Termination for Cause. The Company may terminate the Employee's
employment hereunder for "Cause" (a "Termination for Cause"). For purposes of
this Agreement, "Cause" shall be limited to:
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(i) the willful and continued failure by the Employee substantially to
perform the duties described in Section 3 (other than any failure resulting
from an illness or other similar incapacity or disability), for 30 days
after a written demand for performance is delivered to the Employee on
behalf of the Board that specifically identifies the manner in which it is
alleged that the Employee has not substantially performed his duties;
(ii) the commission by the Employee of misappropriation of funds,
properties or assets of the Company, sexual harassment of employees of the
Company, chronic alcoholism or drug addiction, slander or libel concerning
the Company or a material tort relating to his office or employment with
the Company that has a material adverse effect on the Company; or
(iii) the Employee's conviction of a crime constituting a felony.
8. Termination Without Cause. (a) The Company may terminate the employment
of the Employee hereunder at any time during the Employment Period without
"Cause" and (b) the Employee may terminate his employment hereunder at any time
during the Employment Period in the event of the willful and continued failure
by the Company to perform its obligations hereunder for 30 days after a written
demand for performance is delivered to the Board on behalf of the Company by the
Employee that specifically identifies the manner in which it is alleged that the
Company has not performed its obligations (each, a "Termination Without Cause").
It is expressly acknowledged and agreed that nonrenewal of this Agreement as
contemplated by Section 2 shall not constitute a Termination Without Cause.
9. Voluntary Termination. Any termination of the employment of the Employee
hereunder otherwise than as a result of an Involuntary Termination, a
Termination For Cause or a Termination Without Cause shall be deemed to be a
"Voluntary Termination." A Voluntary Termination shall be deemed to be effective
immediately upon written notice of such termination to the Company.
10. Change in Control. Anything contained in this Agreement to the contrary
notwithstanding, if, within six months of a Change in Control (as herein
defined), Jonathan Edelson, M.D. and Steven Hochberg do not continue serving or
being employed by the Company in any two of the positions of Chairman, Chief
Executive Officer or President of the Company, then in such event all stock
options granted to the Employee by the Company shall become immediately vested
as of the date of such event. For purposes of this Agreement, a "Change in
Control" of the Company shall be deemed to have occurred if (a) there shall be
consummated (x) any consolidation or merger of the Company in
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which the Company is not the continuing or surviving corporation or pursuant to
which shares of the common stock of the Company (the "Common Stock") would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (y) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company; or (b) the stockholders of
the Company approve any plan or proposal for the liquidation or dissolution of
the Company; or (c) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), shall become the beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act) of 30% or more of the Company's outstanding Common
Stock; or (d) during any period of two consecutive years, individuals who at the
beginning of such period constitute the entire Board of Directors shall cease
for any reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period.
11. Effect of Termination of Employment. (a) Upon the termination of the
Employee's employment hereunder pursuant to a Voluntary Termination or a
Termination For Cause, neither the Employee nor his beneficiary or estate shall
have any further rights or claims against the Company under this Agreement
except to receive:
(i) any unpaid portion of the Base Salary provided for in Section
5(a), computed on a pro rata basis to the date of termination;
(ii) cash compensation equal to the product of (A) the number of days
of accrued vacation, if any, accumulated by the Employee to the effective
date of termination divided by the total number of work days per annum for
which the Employee receives a Base Salary multiplied by (B) the Base
Salary; and
(iii) reimbursement for any expenses for which the Employee shall not
have theretofore been reimbursed as provided in Section 5(e) and (f).
(b) Upon the termination of the Employee's employment hereunder pursuant to
an Involuntary Termination, neither the Employee nor his beneficiary or estate
shall have any further rights or claims against the Company under this Agreement
except the right (i) to receive a termination payment equal to that provided for
in Section 11(a) hereof and (ii) to receive a cash severance payment in an
aggregate amount equal to the cash
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compensation received by the Employee during the 3-month period immediately
prior to the effective date of the Involuntary Termination, payable in equal
monthly installments.
(c) Upon the termination of the Employee's employment hereunder pursuant to
a Termination Without Cause, neither the Employee nor his beneficiary or estate
shall have any further rights or claims against the Company under this Agreement
except the right (i) to receive a termination payment equal to the amount
provided for in Section 11(a) hereof and (ii) to receive a cash severance
payment in an aggregate amount equal to the cash compensation received by the
Employee during the 12-month period immediately prior to the effective date of
the Termination Without Cause, payable in equal monthly installments; provided,
however, that in the event that the Employee obtains full-time employment of
comparable scope and duties to the Employee's current position with the Company
during the 12-month period following the Termination Without Cause, then the
severance payments contemplated by clause (ii) above shall terminate on the
later of (A) the date when the Employee commences such employment and (B) the
six-month anniversary of the effective date of the Termination Without Cause.
12. Non-Competition; Non-Disclosure of Information. (a) Except as provided
in Section 12(d) below, the Employee shall not, for a period of one year
following the termination of the Employment Period, (i) directly or indirectly
engage in any Competitive Business (as defined below), whether such engagement
shall be as an employee, employer, owner, consultant, partner or other
participant in any Competitive Business, (ii) assist others in engaging in any
Competitive Business in the manner described in the foregoing clause (i), (iii)
induce employees of the Company to terminate their employment with the Company
or engage in any Competitive Business or (iv) induce customers or vendors of the
Company to alter or terminate their business relationship with the Company;
provided, however, that the Employee may own directly or indirectly, solely as a
passive investment, securities of any Competitive Business traded on any
national securities exchange if the Employee is not a controlling person of, nor
a member of a group which controls such person and does not, directly or
indirectly, own 5% or more of any class of securities of such person. As used
herein, the term "Competitive Business" shall mean any business which, directly
or indirectly, competes with the Company in the business of primarily providing
physician practice management, physician network management and/or clinical
information technology to or for physicians to physician groups and physician
networks consisting, at any time during the one year period following the
termination of the Employment Period, of greater than three physicians;
provided, however, that a business conducted directly by the Employee which
provides physician practice management, physician network management and/or
clinical information technology to or for
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physician groups consisting of three or fewer physicians shall not be deemed to
be a "Competitive Business".
(b) The Employee understands that the foregoing restrictions may limit his
ability to earn a livelihood in a Competitive Business, but he nevertheless
believes that he has received and will receive sufficient consideration and
other benefits in connection with his employment to clearly justify such
restrictions which, in any event, the Employee does not believe would prevent
him from earning a living. Nothing herein contained shall prohibit the Employee
from engaging in a business that is not a Competitive Business.
(c) The Employee agrees that he will not, at any time during or after the
Employment Period, disclose to any person, firm, corporation or other entity,
except as required by law, any secret or confidential information concerning the
business, clients or affairs of the Company or any subsidiary or affiliate
thereof for any reason or purpose whatsoever other than in furtherance of the
Employee's work for the Company nor shall the Employee make use of any of such
secret or confidential information for his own purpose or for the benefit of any
person, firm, corporation or other business entity except the Company or any
subsidiary or affiliate thereof.
13. Company Right to Inventions. The Employee shall promptly disclose,
grant and assign to the Company for its sole use and benefit any and all
inventions, improvements, technical information, methods and suggestions
relating in any way to the business of providing physician practice management,
physician network management and/or clinical information technology to or for
physicians, which he may develop or acquire during the period of the Employee's
employment with the Company prior to any termination of employment (whether or
not during usual working hours), together with all patent applications, patents,
copyrights and reissues thereof that may at any time be granted for or upon any
such invention, improvement, technical information or method. In connection
therewith:
(a) the Employee shall without charge, but at the expense of the
Company, promptly at all times hereafter execute and deliver such
applications, assignments, descriptions and other instruments as may be
reasonably necessary or proper in the reasonable opinion of the Company to
vest title to any such inventions, improvements, technical information,
methods, patent applications, patents, copyright applications, copyrights
or reissues of any thereof in the Company and to enable it to obtain and
maintain the entire right and title thereto throughout the world; and
(b) the Employee shall render to the Company at its expense (including
a reasonable payment for the time involved in case he is not then in its
employ) all such
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assistance as it may reasonably require in the prosecution of applications
for said patents, copyrights or reissues thereof, in the prosecution or
defense or interferences which may be declared involving any said
applications, patents or copyrights and in any litigation in which the
Company may be involved relating to any such patents, copyrights,
inventions, improvements, technical information or methods.
14. Enforcement. It is the desire and intent of the parties hereto that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated to be invalid or unenforceable, such provision
shall be deemed amended to delete therefrom the portion thus adjudicated to be
invalid or unenforceable, such amendment to apply only with respect to the
operation of such provision in the particular jurisdiction in which such
adjudication is made; provided, however, that if any one or more of the
provisions contained in this Agreement shall be adjudicated to be invalid or
unenforceable because such provision is held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
deemed amended by limiting and reducing it so as to be valid and enforceable to
the maximum extent compatible with the applicable laws of such jurisdiction,
such amendment to apply only with respect to the operation of such provision in
the particular jurisdiction in which such adjudication is made.
15. Remedies; Survival. (a) The Employee acknowl- edges and understands
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be accurately compensated for in damages by an action at
law, and that the breach of the provisions of this Agreement would cause the
Company irreparable harm. In the event of a breach by the Employee of the
provisions of Section 12 or 13 hereof, the Company shall be entitled to an
injunction restraining him from such breach. Nothing herein contained shall be
construed as prohibiting the Company from pursuing any other remedies available
for any breach of this Agreement.
(b) Notwithstanding anything contained in this Agree- ment to the contrary,
the provisions of Sections 12, 13, 14 and this Section 15 shall survive the
expiration or other termination of this Agreement until, by their terms, such
provisions are no longer operative.
(c) It is understood and agreed that the provisions of Sections 12 and 13
of this Agreement are separate and distinct from any other agreement between the
parties hereto. Accordingly, in the event of a breach of such provisions, the
breaching party shall only be held responsible for damages
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arising under such provisions and not for any damages which may be claimed to
arise under or with respect to any other agreement that is not separately
breached.
16. Notices. Notices and other communications hereun- der shall be in
writing and shall be delivered personally or sent by air courier or first class
certified or registered mail, return receipt requested and postage prepaid,
addressed as follows:
If to the Employee:
Alan B. Masarek
38 Davis Hill Road
Weston, Connecticut 06883
If to the Company:
Advanced Health Corporation
560 White Plains Road, Second Floor
Tarrytown, New York 10591
Attention: President
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All notices and
other communications hereunder shall be deemed to have been given on the date of
delivery if personally delivered; on the business day after the date when sent
if sent by air courier; and on the third business day after the date when sent
if sent by mail, in each case addressed to such party as provided in this
Section 16.
17. Binding Agreement. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees and devisees. If the Employee
should die while any amount would still be payable to him hereunder if he had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the beneficiary
designated by the Employee in a writing delivered to the Company, or if there be
no such designated beneficiary, to his estate.
18. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of
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the State of New York applicable to contracts made and to be performed wholly
therein.
19. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and shall not
operate or be construed as a waiver of any subsequent breach by such other
party.
20. Entire Agreement; Amendments; Execution. This Agreement and the other
agreements referred to herein contain the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements or
understandings among the parties with respect thereto. This Agreement may be
amended only by an agreement in writing signed by the parties hereto. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original document but all of which shall constitute but one agreement.
21. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
22. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforce- ability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
23. Assignment. With respect to the Employee, this Agreement is personal in
its nature and the Employee shall not assign or transfer this Agreement or any
rights or obligations hereunder. The Company may in its sole discretion assign
or otherwise transfer this Agreement and the provisions hereof (including,
without limitation, Sections 12, 13 and 14) shall inure to the benefit of, and
be binding upon, each successor of the Company, whether by merger,
consolidation, transfer of all or substantially all assets, or otherwise.
* * *
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
ADVANCED HEALTH CORPORATION
By:___________________________
Name: Steve Hochberg
Title: President
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Alan B. Masarek
EXHIBIT 11.1
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
(FORMERLY MED-E SYSTEMS CORPORATION)
SUPPLEMENTAL NET LOSS
PER COMMON SHARE COMPUTATION
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED JUNE 30, 1996
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<S> <C>
(UNAUDITED)
CALCULATION OF SUPPLEMENTAL SHARES OUTSTANDING:
Debt to be repaid by offering proceeds................................... $ 4,000,000
Proceeds per share....................................................... 13.00
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Additional shares assumed outstanding.................................... 307,692
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Additional weighted average common shares outstanding.................... 209,095
Weighted average common shares outstanding............................... 4,486,658
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Supplemental weighted average common shares outstanding.................. 4,695,753
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SUPPLEMENTAL NET LOSS PER SHARE:
Net loss................................................................. $ (1,856,841)
Pro forma impact of use of proceeds on interest expense.................. 46,440
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Supplemental net income loss............................................. (1,810,401)
Supplemental weighted average common shares outstanding.................. 4,695,753
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Supplemental net income loss per common share............................ $ (0.39)
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EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
NetLive Communications, Inc.
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated April 25, 1996, on
the financial statements of NetLive Communications, Inc. as of March 31,
1996 and for the period from August 23, 1995 (date of inception) to March
31, 1996, which appear in such Prospectus. We also consent to the
reference to our firm under the caption "Experts" in such Prospectus.
GOLDSTEIN GOLUB KESSLER & COMPANY,
May 17, 1996
New York, New York
