AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1997
REGISTRATION NO. 333-35115
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
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>
----------------
555 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
555 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>
JULIE M. ALLEN, 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 and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ] ----------------
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. [ ]
----------------
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.
================================================================================
<PAGE>
PROSPECTUS (Subject to Completion)
DATED SEPTEMBER 30, 1997
2,500,000 SHARES
[LOGO]
ADVANCED HEALTH CORPORATION
COMMON STOCK
--------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,000,000 are being
sold by Advanced Health Corporation ("Advanced Health Corporation" or the
"Company") and 500,000 are being offered by Selling Stockholders. The Company
will not receive any of the proceeds of the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders." The Common Stock is
quoted on the Nasdaq National Market under the symbol "ADVH." On September 9,
1997, the last reported sale price of the Common Stock as reported on the Nasdaq
National Market was $22.125 per share. See "Price Range of Common Stock and
Dividend Policy."
--------------
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.
================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
---------- ---------------- ------------- ------------
Per Share ...... $ $ $ $
Total(3) ...... $ $ $ $
================================================================================
(1) The Company and the Selling Stockholders have 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 $ .
(3) The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days of the date hereof, to purchase an
aggregate of up to 375,000 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, Proceeds to Company and Proceeds
to Selling Stockholders 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 , 1997.
--------------
COWEN & COMPANY
HAMBRECHT & QUIST
SBC WARBURG DILLON READ INC.
VOLPE BROWN WHELAN & COMPANY
, 1997
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>
AVAILABLE INFORMATION
A Registration Statement on Form S-1 under the Securities Act of 1933, as
amended (the "Securities Act"), including amendments thereto, relating to the
Common Stock offered hereby has been filed by the Company with the Securities
and Exchange Commission (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.go that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company with the Commission may be inspected at the offices listed above as
well as on the Commission's Web site.
------------------
Advanced HealthTM, Med-E-PracticeTM, Smart ScriptsTM, Med-E-VisitTM,
Med-E-ReferralTM, Practice Management IntegratorTM, EOS 2000TM, E-RxTM,
E-ReferralTM, Med-E-NetTM, Med-E-Net CentralTM and Med-E-Net OfficeTM are
trademarks of the Company. Trade names and trademarks of other companies
appearing in this Prospectus are the property of their respective holders.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE
"UNDERWRITING."
2
<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 assumes no exercise of the Underwriters' over-allotment option.
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, single
legal entities comprised of multiple physicians, and to physician networks,
aggregations of individual physicians and physician groups formed for the
purpose of entering into contracts with third-party payors. 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. Through the management of multi-specialty and single-specialty
physician group practices and networks, the Company focuses its management
efforts on high-cost, high-volume areas of medical care, including disease
specialties such as cardiology, oncology and orthopedics. The Company currently
manages eight multi-specialty physician group practices and four
single-specialty physician group practices comprised of more than 225 providers
in the greater New York and Philadelphia metropolitan areas and 13 physician
networks with approximately 1,550 physicians in the greater New York,
Philadelphia and Atlanta metropolitan and surrounding areas, and provides
physician group consulting services to more than 50 physicians.
In response to the impact of the development of managed care programs on
the delivery of health care services, 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.
The Company's strategy includes (i) establishing long-term contractual
alliances with physician organizations, (ii) managing high-cost, high-volume
areas of medical care, including 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) developing
relationships with key industry participants. The Company has entered into
information technology agreements with Merck Medco Managed Care, Inc., PCS
Health Systems, Inc., the managed care unit of Eli Lilly & Company, Physicians'
Online, Inc. ("Physicians' Online") and Rush Presbyterian - St. Luke's Medical
Center.
3
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock offered:
By the Company ............ 2,000,000 shares
By the Selling Stockholders 500,000 shares
Common Stock to be outstanding after
the offering ............... 9,455,647 shares(1)
Use of proceeds ............. For working capital and general corporate pur-
poses, which may include acquisitions. See "Use
of Proceeds."
Nasdaq National Market symbol ....... ADVH
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues .................................... $ 379 $ 1,054 $ 19,136 $ 7,617 $23,028
Cost of revenues ........................... 12 340 9,707 5,580 17,309
-------- -------- -------- -------- -------
Gross profit .............................. 367 714 9,429 2,037 5,719
Operating expenses ........................ 2,901 6,412 11,886 3,840 4,185
-------- -------- -------- -------- -------
Operating income (loss) ..................... (2,534) (5,698) (2,457) (1,803) 1,534
Other income (expense) ..................... (15) (9) 15 (53) 343
-------- -------- -------- -------- -------
Net income (loss) before income taxes ...... (2,549) (5,707) (2,442) (1,856) 1,877
Benefit (provision) for income taxes ...... - - 977 - (66)
-------- -------- -------- -------- -------
Net income (loss) ........................... $ (2,549) $ (5,707) $ (1,465) $ (1,856) $ 1,811
======== ======== ======== ======== =======
Net income (loss) per share ............... $ (1.29) $ (1.68) $ (0.29) $ (0.41) $ 0.22
======== ======== ======== ======== =======
Weighted average number of common shares
and common share equivalents
outstanding(2) ........................... 1,978 3,389 5,130 4,489 8,190
</TABLE>
JUNE 30, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
--------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents(4) ...... $ 4,840 $45,546
Investments in marketable securities 7,336 7,336
Working capital .................. 21,645 62,351
Total assets ..................... 36,999 77,705
Total debt ........................ 53 53
Total stockholders' equity(5)....... 33,965 74,671
- ----------
(1) Excludes 2,397,187 shares issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $12.42 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. Also excludes 313,203 shares and 113,995 shares issuable upon the
exercise of options and warrants, respectively, which, in each case, are
contingent upon the Company achieving certain capitalization levels related
to regulatory requirements or upon the Company achieving certain
performance targets. Also excludes 548,224 shares issuable in the Roll Up
Transaction (as defined herein). See "Business - Contractual Relationships
with Affiliated Physicians," "Management - Stock Plans" and Notes 3, 9 and
10 of Notes to Consolidated Financial Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements.
(3) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company hereby, assuming a public offering price of $22.125
per share, after deducting underwriting discounts and commissions and
estimated offering expenses.
(4) Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased.
(5) Excludes 254,047 shares issued upon the exercise of options since June 30,
1997
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; DIRECT CAPITATION
The Company was incorporated in August 1993, began providing physician
practice and network management services in December 1995 and has made only
limited commercial sales of its clinical information systems to date.
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, 1997,
the Company had an accumulated deficit of approximately $8.4 million. The
Company achieved profitability for the first time in the fourth quarter ended
December 31, 1996, although there can be no assurance that the Company will
continue to be profitable in the future. 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, continue to 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 maintain profitability on a quarterly or
annual basis or to sustain or increase its revenue growth in future periods. In
addition, the Company has recently begun to enter into, and in the future the
Company anticipates entering into additional, managed care or capitated
arrangements pursuant to which the Company would be subject to significant risk
if its revenues were insufficient to cover increased variable costs resulting
from requirements of greater than expected levels of medical care. See "- Risks
Associated with Direct Capitation," "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 physician practice and network management revenue to date has
been derived from a limited number of management agreements between the Company
and certain physician groups and networks. Such management agreements generally
have an initial term of five to 30 years and are automatically renewable for
additional terms. See "- Concentration of Revenues" and "Business - Contractual
Relationships with Affiliated Physicians." The termination of 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. In addition, the Company must perform services in sufficient volume
to generate revenues to support its infrastructure. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview." 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" and " - Legal Proceedings."
CONCENTRATION OF REVENUES
In the year ended December 31, 1996, Madison Medical - The Private
Practice Group of New York, L.L.P. ("Madison") accounted for approximately 46%
of the Company's revenues. In the six months ended June 30, 1997, Madison and
the Advanced Heart Physicians & Surgeons Network, P.C. ("AHP&S") accounted for
approximately 19% and 16% of revenues, respectively. The Company's management
services agreements generally have an initial term of five to 30 years and may
typically be terminated only for cause. The management services agreement with
Madison, however, gives Madison the right to terminate without cause after May
1, 2007. The management services agreement with AHP&S restricts the Company's
ability to provide management services to certain cardiology physician groups
in the New York metropolitan area. 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."
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 expand its 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.
GROWTH THROUGH ACQUISITIONS
The Company may use a portion of the proceeds of this offering to further
expand its business through acquisitions. Although the Company has no current
agreements or understandings, and is not engaged in active negotiations, with
respect to any material acquisitions, the Company evaluates acqui-
6
<PAGE>
sition opportunities on an ongoing basis. There can be no assurance that the
Company will successfully identify, complete or integrate additional
acquisitions or that any acquisitions will perform as expected or will
contribute significant revenues or profits to the Company. In addition, the
Company may pursue and consummate acquisitions that are dilutive to
stockholders if it believes that such acquisitions are in the best interests of
the Company. Additionally, in the future, the Company may face increased
competition for acquisition opportunities, which may inhibit the Company's
ability to consummate acquisitions on terms favorable to the Company.
Any acquired companies may provide services that complement or expand the
services offered by the Company. Such acquired companies may include clinical
information systems developers, physician practice management companies,
physician group practices or other businesses in the health care services
industry. There can be no assurance that the anticipated benefits of any
acquisitions will be achieved. Moreover, the Company has had limited experience
in making acquisitions. Thus, the Company has not yet demonstrated the
long-term ability to manage successfully an acquired business. There can be no
assurance that the Company will be able to manage successfully any new service
areas of the Company, the employees of such service areas or the customer base
supported by such service areas.
The ability of the Company to manage growth through acquisitions depends
on its ability to maintain the high quality of services that it provides to
customers; to successfully integrate the different services that it provides;
to recruit, motivate and retain qualified personnel; and to train existing
sales representatives or recruit new sales representatives to cross-sell
different services. There can be no assurance that the Company will be able to
manage its expanding operations effectively.
COST CONTAINMENT AND REIMBURSEMENT TRENDS
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 continued 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
approximately 35% of the revenues of physician groups managed by the Company are
derived from government sponsored health care programs (principally, Medicare,
Medicaid and state reimbursement programs). RBRVS-type payment systems have also
been adopted by certain private third-party payors and may become a predominant
payment methodology. More wide-spread implementation of such programs would
reduce payments by private third-party payors. Rates paid by many private
third-party payors 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 patients
covered by private insurance could adversely affect the Company's results of
operations if the Company is unable to assist physicians in containing the cost
of the provision of medical services. To the extent that affiliated physicians
receive lower revenue for medical services, there can be no assurance that the
Company will be able to derive sufficient revenues from its relationship with
any such affiliated physicians to achieve or maintain profitability. 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 "- Uncertainty Related to Health Care Reform" and "Business -
Government Regulation."
7
<PAGE>
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 and/or the Company
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 and/or the Company. 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 the Company and
physicians affiliated with the Company. There can be no assurance that the
Company will be able to negotiate satisfactory arrangements on a risk-sharing or
capitated basis. Under such an arrangement, the Company would contract with
physician practices for the provision of all or a portion of the health care
requirements of network 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,
in which event the Company would suffer a loss. The Company expects to enter
into floating rate reimbursement arrangements with network physicians and
reinsurance agreements with third-party insurers in respect of such risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business - Contractual Relationships with Affiliated Physicians
- - Capitated and Other Fixed-Fee Arrangements."
RISKS ASSOCIATED WITH DIRECT CAPITATION
The Company has recently begun to enter into, and in the future the Company
anticipates entering into additional, managed care or capitated arrangements,
either indirectly, through the assignment of managed care contracts entered into
between its affiliated physicians and third-party payors, or directly to the
Company or, in New York, through the formation of an independent physician
association ("IPA"). The Company enters into such contracts only with licensed
insurance companies and HMOs, and only if allowed by state law. To the extent
such contracts are prohibited by the law of any particular state, the Company
would not enter into such contracts in that state. On August 10, 1995, the
National Association of Insurance Commissioners (the "NAIC") issued a report
opining that such risk-transferring arrangements may entail the business of
insurance, to which state licensure laws apply, but that licensure laws would
not apply where the unlicensed entity contracts to assume "downstream risk" from
a duly licensed health insurer or HMO for health care provided to that carrier's
enrollees. In addition, in December 1996, the NAIC issued a report entitled
"Regulation of Health Risk Bearing Entities," which sets forth issues to be
considered by state insurance regulators when considering new regulations, and
encourages states to adopt a uniform body of regulation. Certain states have
enacted statutes or adopted regulations affecting risk assumption in the health
care industry. In some states, including those in which the Company does
business, these statutes and regulations subject any physician or physician
network engaged in risk-based contracting, even if through HMOs and insurance
companies, to regulations providing for minimum capital requirements and other
safety and soundness requirements. Although the NAIC's conclusions are not
binding on the states, the Company believes that additional regulation at the
state level will be forthcoming in response to the NAIC initiatives. There can
be no assurance that any such additional state regulation would not have a
material adverse effect on the Company's business.
To the extent that the Company accepts capitation and is not regulated as
an insurer, regulatory provisions that might mitigate losses by insurers will
not apply to reduce the Company's risk. In addition, the Company has little
experience in managing capitated-risk arrangements. With respect to the
assignment of capitated revenues to the Company, the Company will be dependent
on the physician group practices and networks entering into such agreements,
the terms and conditions of which are
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determined by the physicians in their sole discretion, and providing medical
services thereunder. In addition, the Company is dependent upon the continued
alliance of the physicians with the group practice and network clients of the
Company. Revenues under managed care or capitated arrangements entered into by
the Company directly 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, in which event the Company
would suffer a loss. Although the Company expects to enter into floating rate
reimbursement arrangements with network physicians and reinsurance agreements
with third-party insurers in respect of such risk, no assurances can be given
that the Company will be fully protected against such risk by such floating rate
reimbursement arrangements or will be able to obtain such reinsurance on
favorable terms, if at all. There can be no assurance that the Company will
enter into additional managed care or capitated arrangements or, if it does so,
that it will realize a profit from such additional arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "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 care, multi-specialty and
single-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 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
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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."
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.
Fraud and Abuse Statutes. Federal anti-kickback provisions prohibit the
solicitation, payment, receipt or offer of any direct or indirect remuneration
for the referral of federal health care program patients (including Medicare
and Medicaid patients) or for the order or provision of covered services, items
or equipment. Other fraud and abuse laws also impose restrictions on
physicians' referrals for designated health services to entities with which
they have financial relationships (known as the "Stark" laws). In addition,
federal law imposes significant penalties for false or improper billings.
Violations of any 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. Several
states, including states in which the Company operates, have adopted similar
laws that cover patients in private and workers' compensation programs as well
as government programs. Violations of any of the fraud and abuse laws by the
Company or any physician groups or networks managed by the Company could have a
material adverse effect on the Company's business and financial condition and
on the price of the Common Stock.
Corporate Practice of Medicine and Fee Splitting. The laws of many states
prohibit non-physician entities from practicing medicine and employing
physicians to practice medicine. The Company, through its majority-owned
management service organizations ("MSOs"), provides only non-medical
administrative 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. These limitations on MSO
activities are incorporated into each management service agreement - the
contract governing the relationship between an MSO and the physician group
practice or network it serves. Physician group practices or networks, which
deliver medical care, are independent entities from MSOs, which perform
administrative functions and are controlled by the Company. 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 formal 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 authorities would 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. A
recent letter by the general counsel of the New York State Department of Health
has called into question commonplace practices with regard to management
services fees charged to physician practices by corporations such as the
Company. Specifically, this letter took the position that per visit fees and
billing fees based on a percentage of collections violated New York's
prohibition on fee-splitting by licensed professionals. The Company has included
such percentage of collection fees in substantially all of the management
services agreements with physicians in New York. No assurance can be given that
such agreements will be enforceable. See "Business - Government Regulation."
Confidentiality of Patient Records. 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 infor-
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mation. 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
restructuring health care market. Additional legislation governing the
dissemination of medical record information is continually being proposed at
both the state and federal level. For example, the Health Insurance Portability
and Accountability Act of 1996 requires the Secretary of Health and Human
Services to recommend legislation or promulgate regulations governing privacy
standards for individually identified health information and creates a federal
criminal offense for knowing disclosure and misuse of such information.
Additional 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 transmitted over private and public networks,
including the Internet, 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. See "Business - Government Regulation."
FDA REGULATION
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 systems provided
by the 1989 Draft Policy Statement. The Company has not sought or obtained a
formal opinion of counsel with respect to the issues of whether its systems are
medical devices or whether any FDA policy exempting certain clinical information
systems from any FDA regulatory controls applies to the Company's systems and
the Company has not taken action to comply with the regulatory controls that
would otherwise apply if its systems were determined to be medical devices to
which no exemptions under the 1989 Draft Policy Statement applied. The FDA is
currently in the process of developing a new policy concerning FDA regulation of
computer products that would
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replace the 1989 Draft Policy Statement. The FDA's new policy may eliminate some
or all of the exemptions provided under the 1989 Draft Policy. 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 or that no exemptions from those
regulations apply to the Company's clinical information systems. 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 prevent, the
Company from developing, testing, manufacturing, distributing, selling or
promoting its current or future clinical information systems in the United
States 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
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. 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,
one of which has been allowed and is expected to issue by the end of 1997. In
addition, foreign patent applications having subject matter common with both
U.S. applications have been filed. There can be no assurance that any patent
will be issued or, if issued, that such patent or any other protections
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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.
The Company is aware of actual and potential oppositions with respect to
certain of the Company's pending trademark registration applications containing
the suffix "e-systems". Although the Company believes that it will be able to
obtain the registrations applied for, no assurance can be given that it will be
able to do so. In the event of any successful opposition, the Company might be
required to change the trademark used for certain of its clinical information
systems. The Company does not believe that such a result would have a material
adverse effect on its business. See "Business - Proprietary Rights."
MANAGEMENT SERVICES ORGANIZATIONS NOT WHOLLY-OWNED; PHYSICIAN PUT RIGHTS;
DILUTION
The Company typically establishes 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. The MSO's assets consist primarily of its management
service contracts with the physician group or network served and its
liabilities consist primarily of its obligations under its agreements with the
Company and its obligations to its employees. 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, in exercising control over such MSOs, may be required
to deal 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 interests of the physician groups and
networks 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, would 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, Steven Hochberg,
the Company's Vice Chairman, and Alan B. Masarek, the Company's President, Chief
Operating Officer and Acting Chief Financial Officer. Although the Company is
the beneficiary of $1,000,000 "key man" life insurance policies on the lives of
each of Dr. Edelson, Mr. Hochberg and Mr.
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Masarek, the Company does not believe such amount would be adequate to
compensate for the loss of the services of any such executive. In addition,
although the Company has entered into employment agreements with most of its
senior executives, including Dr. Edelson, Mr. Hochberg and Mr. Masarek, 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 no such
claims have been made against the Company to date, and although 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.
Volatility of Stock Price
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. See "Price Range of Common Stock and
Dividend Policy."
DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $14.59 per share (assuming a public
offering price of $22.125 per share and 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
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securities in the future at a time and price that the Company deems appropriate.
Upon completion of this offering, the Company will have approximately 9,455,647
shares of Common Stock outstanding. Approximately 7,690,817 shares of Common
Stock, including the 2,500,000 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 and the regulations promulgated
thereunder. The remaining approximately 1,764,830 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
or Rule 144(k) promulgated under the Securities Act. As a result of the
contractual restrictions described below and the provisions of Rule 144, such
shares will be available for sale in the public market upon the expiration of
the lockup agreements 90 days after the date of this Prospectus, subject in
certain cases, to the volume, manner of sale and reporting requirements of Rule
144. In addition, the holders of 945,681 shares of Common Stock outstanding
after this offering (including 50,000 shares of Common Stock subject to the
Underwriters' over-allotment option) 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 $40.7 million
($46.0 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, assuming a public offering
price of $22.125 per share and after deducting underwriting discounts and
commissions and estimated offering expenses. 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 "- Growth
Through Acquisitions" and "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."
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" RELATING TO
(i) DECREASED CONCENTRATION OF REVE NUES, (ii) THE ADEQUACY OF THE NET PROCEEDS
FROM THIS OFFERING, TOGETHER WITH CASH ON HAND, INTEREST INCOME AND REVENUES
FROM OPERATIONS, TO FUND PLANNED OPERATIONS OF THE COMPANY THROUGH
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AT LEAST THE END OF 1999, (iii) THE COMPANY'S BUSINESS OBJECTIVES AND STRATEGY
AND (iv) THE COMPANY'S DEVELOPMENT AND STRATEGIES RELATING TO ITS CLINICAL
INFORMATION SYSTEMS. THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE
REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (i) THE COMPANY'S CLINICAL INFORMATION SYSTEMS DO NOT
ACHIEVE MARKET ACCEPTANCE, (ii) THE COMPANY DOES NOT DEVELOP SUCCESSFULLY NEW
CLINICAL INFORMATION SYSTEMS, (iii) CHANGES IN GOVERNMENT REGULATIONS, (iv)
COMPETITIVE PRESSURE IN THE COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY, (v)
COSTS OR DIFFICULTIES RELATED TO ANY ACQUIRED BUSINESSES INTEGRATED WITH THE
BUSINESSES OF THE COMPANY ARE GREATER THAN EXPECTED AND (vi) GENERAL ECONOMIC
CONDITIONS ARE LESS FAVORABLE THAN EXPECTED.
16
<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 555 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 Stock
offered by the Company hereby are estimated to be approximately $40.7 million
($46.0 million if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $22.125 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company intends to use the net proceeds for working capital and general
corporate purposes, which may include acquisitions. The principal categories of
the Company's anticipated working capital expenditures include continued
research and development of the Company's clinical information systems, as well
as ongoing business development and marketing. 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 material acquisition. See
"Risk Factors - Growth through Acquisitions" and "- Unspecified Use of
Proceeds."
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.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has been quoted on the Nasdaq National Market
since October 3, 1996 under the symbol "ADVH." the following table sets forth
the range of high and low per-share closing sale prices for the Common Stock as
reported on the Nasdaq National Market during the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter (beginning October 3, 1996) ...... $16 5/8 $12 1/2
YEAR ENDING DECEMBER 31, 1997:
First Quarter .................................... 18 1/8 9 3/8
Second Quarter ................................. 20 1/8 15 1/8
Third Quarter (through September 9, 1997) ...... 24 5/8 17 5/8
</TABLE>
On September 9, 1997, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $22.125 per share. There are
currently approximately 80 holders of record of the Common Stock.
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.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 and as adjusted to reflect the receipt of the estimated net proceeds
from the sale of the 2,000,000 shares of Common Stock offered by the Company
hereby (assuming a public offering price of $22.125 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- ------------
(IN THOUSANDS,)
<S> <C> <C>
Current portion of long-term debt .................................... $ 53 $ 53
======== ========
Long-term debt, less current portion ................................. $ - $ -
-------- --------
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,
7,201,600 shares issued and outstanding actual; and 9,201,600
shares issued and outstanding as adjusted(1) ..................... 72 92
Additional paid-in capital .......................................... 42,339 83,025
Unrealized gain on marketable securities, net of deferred income
taxes ............................................................ 60 60
Accumulated deficit ................................................ (8,431) (8,431)
Treasury stock, at cost (8,937 shares actual and as adjusted) ...... (75) (75)
-------- --------
Total stockholders' equity ....................................... 33,965 74,671
-------- --------
Total capitalization ............................................. $ 33,965 $ 74,671
======== ========
</TABLE>
- ----------
(1) Excludes 254,047 shares issued upon the exercise of options since June 30,
1997 and 2,397,187 shares issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $12.42 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. Also excludes 313,203 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. Also excludes 548,224 shares issuable in the Roll Up
Transaction. See "Business - Contractual Relationships with Affiliated
Physicians," "Management - Stock Plans" and Notes 3, 9 and 10 of Notes to
Consolidated Financial Statements.
18
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
$28,706,000, or $3.99 per share of Common Stock. "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 by the Company hereby (assuming a public offering price of $22.125 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses), the pro forma net tangible book value of the Company at June
30, 1997 would have been $69,412,000 or $7.54 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $3.55
per share to existing stockholders and an immediate, substantial dilution in pro
forma net tangible book value per share of $14.59 per share to purchasers of
shares of Common Stock offered hereby, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share ........................... $22.13
Net tangible book value per share at June 30, 1997 ............ $3.99
Increase per share attributable to new investors ............... 3.55
------
Pro forma net tangible book value per share after this offering ... 7.54
-------
Dilution per share to new investors .............................. $14.59
=======
</TABLE>
The foregoing table assumes no issuance of 254,047 shares of Common Stock
issued upon the exercise of options since June 30, 1997 and no exercise of stock
options to purchase 2,397,187 shares of Common Stock outstanding at a weighted
average exercise price of $12.42 per share and warrants to purchase 481,489
shares of Common Stock outstanding at a weighted average exercise price of $8.50
per share. The foregoing table also assumes no exercise of options and warrants
to purchase 313,203 shares of Common Stock and 113,995 shares of Common Stock,
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. Finally, the foregoing table
assumes no issuance of the 548,224 shares of Common Stock reserved for issuance
in the Roll Up Transaction. To the extent that any of such options or warrants
are exercised, or such shares are issued, there will be further dilution to new
investors in this offering. See "Business - Contractual Relationships with
Affiliated Physicians," "Management - Stock Plans" and Notes 3, 9 and 10 of
Notes to Consolidated Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
December 31, 1994, 1995 and 1996, and the balance sheet data as of December 31,
1995 and 1996, 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 and 1994, and the statement of
operations data for the period from inception (August 27, 1993) to 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, 1996 and 1997
and the selected consolidated balance sheet data as of June 30, 1997 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, 1997 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1997 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>
SIX MONTHS ENDED
PERIOD FROM YEAR ENDED DECEMBER 31, JUNE 30,
INCEPTION -------------------------------------- -----------------------
(AUGUST 27, 1993)
TO DECEMBER 31,
1993 1994 1995 1996 1996 1997
------------------- ----------- ------------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues ........................ $ - $ 379 $ 1,054 $ 19,136 $ 7,617 $23,028
Cost of revenues .................. - 12 340 9,707 5,580 17,309
------- -------- --------- -------- -------- -------
Gross profit ..................... - 367 714 9,429 2,037 5,719
Operating expenses ............... 521 2,901 6,412 11,886 3,840 4,185
------- -------- --------- -------- -------- -------
Operating income (loss) ......... (521) (2,534) (5,698) (2,457) (1,803) 1,534
Other income (expense) ............ - (15) (9) 15 (53) 343
------- -------- --------- -------- -------- -------
Net income (loss) before in-
come taxes (521) (2,549) (5,707) (2,442) (1,856) 1,877
Benefit (provision) for income
taxes ........................... - - - 977 - (66)
------- -------- --------- -------- -------- -------
Net income (loss) ............... $ (521) $ (2,549) $ (5,707) $ (1,465) $ (1,856) $ 1,811
======= ======== ========= ======== ======== =======
Net income (loss) per share ...... $ (0.30) $ (1.29) $ (1.68) $ (0.29) $ (0.41) $ 0.22
======= ======== ========= ======== ======== =======
Weighted average number of
common shares and com-
mon share equivalents out-
standing(1) ..................... 1,725 1,978 3,389 5,130 4,489 8,190
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- -------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(2) ............... $ 7 $1,464 $12,086 $ 837 $4,840
Investments in marketable securities ....... - - 7,390 - 7,336
Working capital (deficit) .................. (1,032) (742) 26,684 (2,712) 21,645
Total assets .............................. 913 6,462 35,400 8,191 36,999
Total debt ................................. 416 567 235 4,504 53
Total stockholders' equity (deficit) ...... (325) 2,675 31,884 863 33,965
</TABLE>
- ----------
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased.
20
<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 and
providing consulting services to physician group practices, (ii) fees for
managing physician networks and (iii) fees for use and support of its clinical
information systems, including 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.
To date, the Company has been dependent on a small number of contracts to
generate the majority of its revenues. See "Risk Factors - Concentration of
Revenues." 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.
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.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
Net revenue for the six months ended June 30, 1997 increased to $23.0
million from $7.6 million in the comparable period ended June 30, 1996,
primarily as a result of the addition of new physician group practices under
management, provision of additional network management services and fees for
the use and support of clinical information systems. The Company began
providing network management services in September 1995 and physician group
practice management and related services in December 1995. The provision of
physician group practice management and related services and network management
services accounted for approximately $17.0 million of the Company's net revenue
for the six months ended June 30, 1997, as compared to $6.1 million in the
comparable period ended June 30, 1996. The Company earned fees for the use and
support of its clinical information systems, including the recognition of
license revenues and software and training revenues, of approximately $6.0
million for the six months ended June 30, 1997, as compared to $1.5 million in
the comparable period ended June 30, 1996.
Cost of revenues for the six months ended June 30, 1997 increased to $17.3
million from $5.6 million for the comparable period ended June 30, 1996. The
increase in cost of revenues related primarily to the expenses outsourced to
the Company from physician group practices under management and expenses
related to clinical information systems sales.
Operating expenses for the six months ended June 30, 1997 increased to
$4.2 million from $3.8 million for the comparable period ended June 30, 1996.
The increase in operating expenses related to the increased provision of
physician group practice management and related services.
For the six months ended June 30, 1997, the Company also earned interest
income in the amount of $300,000 from investments in marketable securities as a
result of the investment of proceeds from the Company's initial public offering
in October 1996 (the "Initial Public Offering"). The Company incurred interest
expense of approximately $53,000 for the comparable period ended June 30, 1996,
which related primarily to interest on $4.0 million of then-outstanding
indebtedness bearing interest at 8% per annum and interest on capital lease
obligations.
21
<PAGE>
The net income for the six months ended June 30, 1997 was $1.8 million
compared to a net loss of $1.9 million for the six months ended June 30, 1996
due to the factors described above.
As of June 30, 1997, the Company had net operating loss carryforwards
("NOLs") available to offset future book and taxable income of approximately
$8.3 million and $6.8 million, respectively, which will expire in 2011. 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 $3.3 million and $2.7 million as of
June 30, 1997 and December 31, 1996, respectively, have been fully reserved due
to the uncertainty of their future realization, although management is
evaluating these reserve levels based on expected earnings, and they may be
revised in the future.
As discussed under "Business -- Legal Proceedings," Advanced Health
Corporation commenced an action in September 1997 to collect $1 million owing by
a licensee to the Company under a software license agreement. The Company
recognized this amount as revenue in the fiscal quarter ended June 30, 1997, and
the dispute between the parties arose thereafter. See Note 2 to Notes to
Consolidated Financial Statements. The Company expects to make final delivery of
software to the licensee under the software license agreement on September 30,
1997, at which time the Company believes it will have fully performed its
obligations under the software license agreement and the licensee will be
required to make a final payment of $500,000 to the Company. This payment
obligation of the licensee is independent of its obligation to make the $1
million payment that is the subject matter of the foregoing action instituted by
the Company. The Company believes that the ultimate resolution of the foregoing
action will not have a material effect on the Company's financial position as of
June 30, 1997 or the results of operations for the three and six months then
ended.
Years Ended December 31, 1996 and 1995
Total revenues for the year ended December 31, 1996 increased to $19.1
million from $1.1 million in the year ended December 31, 1995, primarily as a
result of the increased activity in the Company's physician group practice and
network management services. The provision of physician group practice
management and related services and network management services accounted for
approximately $15.1 million of the Company's net revenue for the year ended
December 31, 1996 as compared to $300,000 in the year ended December 31, 1995.
The Company earned fees for the use and support of its clinical information
systems, including the recognition of license revenues and software systems and
training revenues, of approximately $4.0 million for the year ended December
31, 1996, as compared to $700,000 in the year ended December 31, 1995.
Cost of revenues for the year ended December 31, 1996 increased to $9.7
million from approximately $300,000 for the year ended December 31, 1995. The
increase in cost of revenues related primarily to the expenses outsourced to
the Company from physician group practices under management.
Operating expenses for the year ended December 31, 1996 increased to $11.9
million from $6.4 million for the year ended December 31, 1995. The increase in
operating expenses reflected expenses related to the provision of physician
group practice management services for the full year ended December 31, 1996.
The Company did not begin to provide such services until December 1995.
An income tax benefit of approximately $1.0 million was recorded in 1996
as a result of the Company's determination, based on profitable fourth quarter
operations, that the related deferred income tax asset would be realized
through the generation of taxable income in the future. No such benefit was
recorded in 1995.
The net loss for the year ended December 31, 1996 was $1.5 million
compared to a loss of $5.7 million for the year ended December 31, 1995.
Years Ended December 31, 1995 and 1994
Total revenues for the year ended December 31, 1995 increased to $1.1
million from $379,000 in the year ended December 31, 1994, primarily as a
result of the initiation of the Company's physician group practice services to
Madison in December 1995, which generated approximately $505,000 of the
Com-
22
<PAGE>
pany's net revenue for the year ended December 31, 1995. The Company began to
provide physician network management services in September 1995, which accounted
for approximately $163,000 of the Company's net revenue for the year ended
December 31, 1995. The Company earned fees for the use and support of its
clinical information systems, including the recognition of license revenues
under its contract with an affiliate of PCS Health Systems, Inc., the managed
care unit of Eli Lilly & Company, and software installation and training
revenues, of approximately $386,000 for the year ended December 31, 1995, as
compared to $379,000 of such revenues for the year ended December 31, 1994.
Operating expenses for the year ended December 31, 1995 increased to $6.4
million from $2.9 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Effective October 3, 1996, the Company made its Initial Public Offering of
2,645,000 shares of Common Stock, including shares offered pursuant to the
underwriters' over-allotment option. The Initial Public Offering generated net
proceeds to the Company of approximately $31.0 million. Prior to the Initial
Public Offering and since its inception, the Company financed its capital
requirements through the sale of equity and debt securities. In 1996, the
Company issued three 8% promissory notes in the aggregate principal amount of
$3.0 million and six 9% promissory notes in the aggregate principal amount of
$2.0 million. All such notes were repaid in October 1996 using proceeds from
the Initial Public Offering.
For the six months ended June 30, 1997, the Company had positive cash
flow from its operating activities of $549,000, compared with a negative $4.1
million for the comparable period ended June 30, 1996. Net cash used in
investing activities was $7.9 million for the six months ended June 30, 1997,
compared with $249,000 for the comparable period ended June 30, 1996. This
increase primarily related to advances to, and investments in, physician group
practices under Company management, purchases of fixed assets and a minority
investment in Caresoft, Inc. ("Caresoft"), a developer of disease management
tools. Net cash provided by financing activities was $88,000 for the six months
ended June 30, 1997, and related to proceeds from the exercise of stock options
and the repayment of capital lease obligations. Net cash provided by financing
activities for the six months ended June 30, 1996 was $3.7 million, principally
attributable to net proceeds from the issuance of $4.0 million in indebtedness
during the period and the repayment of capital lease obligations.
The Company's operations used net cash of $11.0 million and $4.3 million in
1996 and 1995, respectively. The increased use of cash in 1996 resulted
primarily from the purchase of accounts receivable from AHP&S, a physician group
practice under Company management, for an aggregate amount of $4.5 million and
from the recognition of $1.1 million of revenue deferred at December 31, 1995.
Net cash used in investing activities increased, as a result of the investment
of proceeds from the Initial Public Offering in marketable securities, to $8.6
million for the year ended December 31, 1996, compared with $1.0 million for the
year ended December 31, 1995. Net cash provided by financing activities was
$30.2 million for the year ended December 31, 1996, and related to the
completion of the Initial Public Offering. Net cash provided by financing
activities for the year ended December 31, 1995 was $6.8 million primarily
attributable to the private placement of equity securities.
During the first quarter ended March 31, 1997, the Company loaned an
aggregate principal amount of $2.0 million to Madison. Such loan bears interest
at a rate equal to 2% over the prime rate (not to exceed 10%) and is required to
be repaid over 12 months, beginning in January 1998. In conjunction with this
loan, the Company has guaranteed a letter of credit of Madison, in the amount
$1.7 million, by depositing restricted cash in the same amount with the same
financial institution providing that letter of credit. These obligations are
secured by the 49% ownership interest in Uptown Physician Management,
23
<PAGE>
Inc., the MSO related to Madison. In addition, in June 1997, the Company forgave
approximately $3.6 million of accounts receivable due from Madison in connection
with an amendment to the management services agreement with Madison, which
increased the fees payable by Madison, increased the term from 20 years to 30
years and eliminated Madison's right to terminate the agreement without cause
prior to the end of the tenth year of the term. This consideration has been
added to intangible assets and amortized over the remaining life of the related
contract, as amended. As of June 30, 1997, Long Island Interventional
Cardiology, a physician group practice under Company management, owed the
Company approximately $985,000 pursuant to certain lending and accounts
receivable transactions between the Company and Long Island Interventional
Cardiology which occurred in the quarter ended December 31, 1996 and the quarter
ended March 31, 1997. The Company expects that from time to time it may advance
funds to group practices and/or forgive amounts owed to the Company in
connection with the negotiation or renegotiation of the terms of management
services agreements.
The Company's operating plan for the remainder of 1997 includes continued
development of its integrated management services and clinical information
systems. The principal categories of expenditures include research and
development of the Company's clinical information systems as well as ongoing
business development and marketing. The Company believes that the net proceeds
of this offering, together with 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 1999. 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 material acquisition. See "Risk Factors - Growth Through
Acquisitions."
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. In addition, pursuant to its agreement with
one of its physician group practice clients, the Company has agreed, under
certain circumstances, to advance funds to such group practice to finance
working capital. To date, the Company has not made any advances to such group
practice under the agreement and it does not expect to do so in the future. See
"Business - Contractual Relationships with Affiliated Physicians."
24
<PAGE>
BUSINESS
OVERVIEW
Advanced Health Corporation provides a full range of integrated management
services and clinical information systems to physician group practices, single
legal entities comprised of multiple physicians, and physician networks,
aggregations of individual physicians and physician groups formed for the
purpose of entering into contracts with third-party payors. 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. Through the management of multi-specialty and single-specialty
physician group practices and networks, the Company focuses its management
efforts on high-cost, high-volume areas of medical care, including disease
specialties such as cardiology, oncology and orthopedics. The Company currently
manages eight multi-specialty physician group practices and four
single-specialty physician group practices comprised of more than 225 providers
in the greater New York and Philadelphia metropolitan areas and 13 physician
networks with approximately 1,550 physicians in the greater New York,
Philadelphia and Atlanta metropolitan and surrounding areas, and provides
physician group consulting services to more than 50 physicians.
INDUSTRY
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 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. Because the majority 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
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"). By affiliating with physician
practices, PPMs are 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, the
Company believes that even greater opportunities exist to assist physicians in
managing
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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:
o Establishing Long-Term Alliances with Physician Organizations. The Company
partners 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 "-- Contractual Relationships with Affiliated
Physicians."
o Managing High-Cost, High-Volume Disease Specialties. The Company believes
that the greatest opportunity for achieving clinical efficiencies is in
high-cost, high-volume areas of medical care, including 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 integrates physicians into multi-specialty and
single-specialty practices and networks 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.
o 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 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.
o Focusing on Selected Geographic Markets. The Company provides 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 areas of
medical care. The Company's initial target markets include the greater New
York, Philadelphia and Atlanta metropolitan and surrounding areas.
o 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 information technology
agreements with Merck Medco Managed Care, Inc., PCS Health Systems, Inc., the
managed care unit of Eli Lilly & Company, Physicians' Online and Rush
Presbyterian - St. Luke's Medical Center. 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 form and 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
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and administrative and marketing services as well as point-of-care information
systems and support. The Company often initially provides physician practice
and network services pursuant to a consulting arrangement. 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 eight multi-specialty group practices and four
single-specialty physician group practices located in the greater New York and
Philadelphia metropolitan areas. The eight multi-specialty physician group
practices are made up of more than 150 providers who have, with the Company's
assistance, aggregated their practices into group practices. The medical
specialties represented by these eight groups include, among others, primary
care, cardiology, oncology and orthopedics. The four single-specialty group
practices are collectively comprised of more than 70 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 Company is currently negotiating
the terms of management agreements with additional physician group practices in
the greater New York, Philadelphia and Atlanta metropolitan and surrounding
areas.
The Company currently provides physician group consulting services to more
than 50 physicians. Such services have traditionally included group formation
services. More recently, the Company has begun to provide operations
development and strategic planning services to established groups. The Company
believes that the provision of consulting services, particularly operations
development and strategic planning services, may lead to the establishment of
long-term practice management agreements.
The Company manages three multi-specialty and ten single-specialty
physician networks with approximately 1,550 physicians. The single-specialty
networks cover approximately 922,000 lives, with a total of ten payor contracts
among such networks. The Company is currently seeking to arrange payor contracts
for the multi-specialty networks. The Company has in the past, and believes it
can, in the future, market its physician group practice management services to
its network customers.
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 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. It is anticipated that disease management
programs will be delivered through linked practices and networks of physicians
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 physicians. The Company anticipates that the physicians within these
practices and networks will be linked together by the Company's clinical
information systems.
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 formation, operations development and strategic
planning, marketing, payor contracting and management, financial and
administrative management, clinical information management, human resource
management and practice governance.
Practice Formation, Operations 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 operations development and strategic
planning.
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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 controls,
insurance negotiation and billing and collection. The Company's administrative
management services include lease negotiations, facilities contracting,
purchasing 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
systems provide a seamless interface with certain third-party administrative
software. See "- 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,
credentialling services and operations development 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.
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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 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 systems connect 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.
In addition to providing its clinical information systems to its affiliated
physicians, the Company from time to time licenses its clinical information
systems to third-party health care organizations. To date, the Company has
entered into such agreements with Merck Medco Managed Care, Inc., PCS Health
Systems, Inc., the managed care unit of Eli Lilly, Physicians' Online and Rush
Presbyterian - St. Luke's Medical Center. In addition, the Company markets its
clinical information systems to physician group practices and networks together
with its management services.
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.
The Company offers a broad range of clinical information systems for
physician users, presently through three suites of applications, Med-E-Practice,
EOS 2000 and Med-E-Net. Med-E-Practice is designed to be used directly by
physician group practices in support of clinical decision making, clinical
ordering and administrative management. EOS 2000 is the
Internet/Intranet-enabled version of certain Med-E-Practice applications.
Med-E-Net is designed to support administrative and clinical decision making for
physician networks engaged in capitated and other fixed-fee arrangements under
managed care contracts. The initial commercial installations of the
Med-E-Practice and Med-E-Net suites of applications occurred in June 1996 and
February 1997, respectively. EOS 2000 is in beta testing and is expected to be
commerically available in the fourth quarter of 1997. See "Risk Factors --
Uncertainty of Successful Commercialization of Clinical Information Systems" and
" -- Legal Proceedings."
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The following table summarizes the three 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 formu-
lary management, drug utilization and review ("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 re-
quired to support outcomes analysis.
Med-E-Referral ......... Supports multiple referral networks by recording referral infor-
mation and providing both network-specific referral rules and ap-
propriate network specialists.
Conditions Editor ...... Tracks and maintains an active conditions list by patient.
Allergies Editor ...... Maintains active and inactive allergy conditions by patient, sup-
porting 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.
EOS 2000
E-Rx .................. Internet/Intranet-enabled pharmaceutical prescription writing ap-
plication providing formulary management, DUR edits and diag-
nostic coding linkage to drug therapy protocols.
E-Referral ............ Internet/Intranet-enabled application supporting multiple referral
networks by recording referral information and providing both
network-specific referral rules and appropriate network specialists.
MED-E-NET
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.
================================================================================
</TABLE>
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.
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.
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Med-E-Referral. Med-E-Referral 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 certain third-party practice
management systems through a Company-designed interface using the industry
standard HL-7 interface.
EOS 2000 is a suite of Internet/Intranet-enabled versions of certain
Med-E-Practice applications. The applications entered the beta testing phase in
September 1997 and are expected to be commercially available in the fourth
quarter of 1997. E-Rx is designed to allow any physician with access to the
Internet to gain the advantages of on-line prescription management. E-Rx 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. E-Referral is intended to simplify patient referrals through
real-time access to each individual patient's appropriate physician network.
Med-E-Net is a suite of network management applications supporting
physician networks engaged in risk-based contracts with payors. Med-E-Net
automates network configuration, maintenance of network rules, referral
management, utilization review management, claims and encounter submissions and
financial and clinical reporting. Med-E-Net 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-Net 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.
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 or enhanced 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. One new application being
developed by the Company is a clinical trials information management
application. The Company has approximately 30 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
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<PAGE>
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. The MSO's assets consist primarily of its management service contracts
with the physician group or network served and its liabilities consist
primarily of its obligations under its agreement with the Company and its
obligations to its employees. For certain MSOs, 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, after the occurrence of the Trigger
Event (as hereinafter defined), 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 interests of the physician groups and networks in such MSO would be
exchanged for Common Stock and (iii) grants to the physician organization the
right to put its equity in the MSO to the Company at a price equal to 110% of
the then-current fair market value of the shares of Common Stock that would
have otherwise been issued in the Roll Up Transaction if the Company does not
exercise its option to cause the Roll Up Transaction to occur within one year
after the occurrence of the Trigger Event. In the case of each such MSO, a
Trigger Event will occur at such time as (i) the Company is providing physician
practice management services to at least 300 physicians, (ii) the Company is
providing physician network management services to at least 2,000 physicians,
(iii) the Company has at least $75,000,000 in stockholders' equity and (iv) the
Company's Common Stock is publicly traded. The Company has reserved 548,224
shares of Common Stock for issuance upon the merger of such MSOs into the
Company. See "Risk Factors - Dependence on Management Contracts with Affiliated
Physician Groups and Networks" and "Risk Factors - Management Services
Organizations Not Wholly-Owned; Physician Put Rights; Dilution."
Physician Practices. The management services agreements between the MSO
and a physician group practice generally have an initial term of five to 30
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 group practice 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 group practice enters into, the management services agreement will
generally provide for additional management fees based upon savings recognized
by the physician group practice attributable to any cost efficiencies resulting
from the MSO's performance. The fees are set to be competitive within the
geographic area in which the physician group practice is located. A provision
restricting the physician group practice from competing against the MSO or
employing the MSO's employees is generally included in the agreement. See "Risk
Factors - Dependence on Management Contracts with Affiliated Physician Groups
and Networks."
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 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. See "Risk Factors - Dependence on Management
Contracts with Affiliated Physician Groups and Networks."
Capitated and Other Fixed-Fee Arrangements. The Company has recently begun
to enter into, and in the future the Company anticipates entering into
additional, managed care or capitated arrangements, either indirectly through
the assignment of managed care contracts entered into between its affiliated
physicians and third-party payors or directly to the Company or, in New York,
through the formation of
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<PAGE>
an IPA. The Company has little experience in managing capitated-risk
arrangements and has no experience in forming or managing an IPA. With respect
to the assignment of capitated revenues to the Company, the Company will be
dependent on the physician group practices and networks entering into such
agreements, the terms and conditions of which are determined by the physicians
in their sole discretion, and providing medical services thereunder. In
addition, the Company is dependent upon the continued alliance of the physicians
with the group practice and network clients of the Company. The Company has not
earned, recognized or recorded any managed care or capitated revenue through
June 30, 1997, although the Company expects to do so beginning prior to the year
ending December 31, 1997. Revenues under any managed care or capitated
arrangements entered into directly by the Company 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,
in which event the Company would suffer a loss. The Company expects to enter
into floating rate reimbursement arrangements with network physicians and
reinsurance agreements with third-party insurers in respect of such risk. See
"Risk Factors - Risks Associated with Capitated Fee Arrangements" and "- Risks
Associated with Direct Capitation."
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, one of which has been allowed and is expected to issue by
the end of 1997. In addition, foreign patent applications having subject matter
common with both U.S. applications have been filed. 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, if issued, will provide the Company with adequate
protection. Nor can any assurance be given that patent, trade secrets,
copyright or other intellectual property rights can be successfully asserted in
any court action. The Company also has 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.
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.
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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 formal state or federal regulatory 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.
Reimbursement. Management estimates that approximately 35% of the revenues
of the Company's affiliated physician group practices are derived from payments
made by government-sponsored health care programs (principally Medicare,
Medicaid and state reimbursement programs). Consequently, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The federal Medicare
program has implemented a system of reimbursement of physician services, RBRVS.
The Company expects that future changes in the RBRVS fee schedule, as required
by law, and in Medicare reimbursement generally, 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 any
such reductions would have a material adverse effect on the Company, the RBRVS
fee schedule may be adopted by other payors, which could have a material
adverse effect on the Company. See "Risk Factors - Cost Containment and
Reimbursement Trends."
Billing. There are state and federal civil and criminal statutes, which
impose substantial penalties, including civil and criminal fines and
imprisonment, on health care providers who 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. 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 in their interpretations of such regulations
and, in such event, the Company might have to modify its relationship with
physician organizations. Noncompliance with such regulations could have a
material adverse effect on the business, financial conditions and results of
operations of the Company and subject it and affiliated physician groups to
penalties and additional costs.
Corporate Practice of Medicine and Fee Splitting. The laws of many states
prohibit business corporations such as the Company from practicing medicine and
employing physicians to practice medicine. These laws forbid both direct
control over medical decisions and indirect interference, such as splitting
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medical fees with physicians or controlling budgetary allotments for patient
care. Laws regarding the corporate practice of medicine vary from state to
state and are enforced by the courts and by regulatory authorities. All of the
management service agreements ("MSAs") between the Company's majority-owned
MSOs and the physician groups and networks they serve address this issue by
providing that the physician organization retains complete control over medical
decisionmaking, and that the MSO may neither interfere with the professional
judgment of medical personnel nor control, direct or supervise the provision of
medical services. Furthermore, the MSAs provide that the MSO may not perform
any services or activities which constitute the practice of medicine. For
instance, the MSO has no responsibility to make decisions regarding level of
patient care, credentialing or quality monitoring. Administrative policies,
budgets and fee schedules affecting the delivery of medical services are
developed by a Joint Management Advisory Board, which is at all times
controlled by medical group physicians. Each MSO controlled by the Company is a
management organization whose role is to perform administrative and business
functions. Although the Company believes it is in material compliance with
regulations regarding the corporate practice of medicine, no assurance can be
given that its operations will not be challenged by regulatory authorities.
A recent letter by the general counsel of the New York State Department of
Health has called into question commonplace practices with regard to management
services fees charged to physician practices by corporations such as the
Company. Specifically, this letter took the position that per visit fees and
billing fees based on a percentage of collections violated New York's
prohibition on fee-splitting by licensed professionals. The Company has
included such percentage of collection fees in substantially all of the MSAs
with physicians in New York. No assurance can be given that such agreements
will be enforceable. Furthermore, 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's business,
financial condition and results of operations and on the price of the Common
Stock. In addition, a determination in any state that the Company is engaged in
the corporate practice of medicine or fee splitting could render any management
services agreement or IPA provider agreement between the Company and a practice
in such state unenforceable or subject to modification in a manner materially
adverse to the Company.
Fraud and Abuse Statutes. 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 which is intended
to induce business for which payment may be made under a federal health care
program. A federal health care program is any plan or program that provides
health benefits, whether directly, through insurance or otherwise, which is
funded directly, in whole or in part, by the United States government (e.g.,
Medicare, Medicaid and CHAMPUS). Excluded from the definition of federal health
care program is the Federal Employee Health Benefits Program. The type of
remuneration covered by the Anti-kickback Statute is very broad. It includes
not only kickbacks, bribes and rebates, but also proscribes any such
remuneration, whether made directly or indirectly, overtly or covertly, in cash
or in kind. Moreover, prohibited conduct includes not only remuneration
intended to induce referrals, but also remuneration intended to induce the
purchasing, leasing, arranging or ordering of any goods, facilities, services
or items paid for by a federal health care program. The Anti-kickback Statute
has been broadly interpreted by courts in many jurisdictions. Read literally,
the statute places at risk many business arrangements potentially subjecting
such arrangements to lengthy expensive investigations and prosecutions
initiated by federal and state government officials. Many states, including
some of 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 MSAs 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. Moreover, the Company 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 MSAs 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
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<PAGE>
felony, punishable by criminal fines up to $25,000 per violation and
imprisonment for up to five years; a civil monetary penalty of $50,000; and/or
civil damages of not more than three times the amount of remuneration offered,
paid, solicited or received without regard to whether any portion of such
remuneration was for a lawful purpose. In addition, the U.S. Department of
Health and Human Services ("HHS") 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 provided 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 proposed 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.
As a component of the recently enacted Health Insurance Portability and
Accountability Act of 1996, Congress directed the Secretary of HHS to issue
advisory opinions regarding compliance with the Anti-kickback Statute. Advisory
opinions are available concerning what constitutes prohibited remuneration
within the meaning of the Anti-kickback Statute, whether an arrangement
satisfies the statutory exceptions to the Anti-kickback Statute, whether an
arrangement meets a safe harbor, what constitutes an illegal inducement to
reduce or limit services to individuals entitled to benefits covered by the
Anti-kickback Statute and whether an activity constitutes grounds for the
imposition of civil or criminal penalties under the applicable exclusion.
Advisory opinions, however, will not assess fair market value for any goods,
services or property or determine whether an individual is a bona fide employee
within the meaning of the Internal Revenue Code. The statutory language makes
clear that advisory opinions are available for both proposed and existing
arrangements. The failure of a party to seek an advisory opinion, however, may
not be introduced into evidence to prove that the party intended to violate the
Anti-kickback Statute. The Company has not sought, and has no present intention
of seeking, an advisory opinion regarding any aspect of its current operations
or arrangements with physicians.
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 or her 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 group
practice. The designated health services include radiology and other diagnostic
services, radiation therapy services, physical and occupational therapy
services and providing 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, interpretative regulations clarifying the provisions of
Stark II have not been issued and, therefore, there can be no assurance that
the Company's operations will not be challenged by regulatory authorities.
Stark II also governs a physician's ability to refer patients for
designated health services within the practices and networks that the Company
manages in light of the physician's ongoing compensation arrangements with such
practices and networks. An exception for in-office ancillary services requires
that the practices and networks meet certain structural and operational
requirements on an ongoing basis in order to bill for in-office ancillary
designated health services rendered by employed or contracted physicians. A key
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feature of the in-office ancillary services exception is the Stark law's
definition of "group practice." The Health Care Financing Administration
("HCFA") has announced its intention to publish proposed regulations in the
near future, which, among other things, are expected to focus on the definition
of "group practice." Any adverse changes to the group practice definition may
have a material adverse effect on the Company by severely limiting the ability
of the practices and networks that the Company manages to bill the Medicare and
Medicaid Programs for certain ancillary services furnished by those practices
and networks.
In the recently enacted Balanced Budget Act of 1997, Congress directed the
Secretary of HHS to issue advisory opinions as to whether a referral relating
to designated health services (other than clinical laboratory services) is
prohibited under the Stark law. The advisory opinion mechanism is authorized to
begin on or about November 3, 1997. An advisory opinion issued by the Secretary
will be binding as to the Secretary and the party or parties requesting the
opinion. The Company has no present intention to seek an advisory opinion
regarding its current operations, arrangements with physicians or the referral
activities of physicians in the practices and networks it manages.
A number of states have enacted self-referral laws that are similar in
purpose to Stark II but which impose different restrictions on referrals from
Stark II. These various state self-referral laws have different requirements.
Some states, for example, only prohibit referrals when the physician's
financial relationship with a health care provider is based upon an investment
interest. Other state laws apply only to a limited number of designated health
services or, alternatively, to all health care services furnished by a
provider. Some states do not prohibit referrals at all, but require only that a
patient be informed of the financial relationship before the referral is made.
Most of the states in which the Company conducts business have adopted some
form of self-referral law. Many states, including Pennsylvania, have
self-referral laws that are particularly applicable to workers' compensation
patients. The Company believes that its current operations and the structure of
the practices and networks it manages are in material compliance with the
self-referral laws of the states in which such practices and networks are
located.
Under numerous federal laws, including the Federal False Claims Act (the
"False Claims Act"), the federal government is authorized to impose criminal,
civil and administrative penalties on any health care provider that files a
false claim for reimbursement from a federally funded health program (such as
Medicare or Medicaid). Recently enacted federal legislation also imposes
federal criminal penalties on persons who file false or fraudulent claims with
private insurers. While the criminal statutes are generally reserved for
instances of fraud, the civil and administrative penalty statutes are being
applied by the government in an increasingly broad range of circumstances.
Civil sanctions may be imposed if the claimant knew or should have known that
billing was improper. The government also has taken the position that claiming
reimbursement for services that are substandard is a violation of these false
claims statutes if the claimant knew or should have known that the care was
substandard or rendered under improper circumstances. Private persons may bring
civil actions to enforce the False Claims Act. Under certain lower court
decisions, claims derived from the Anti-kickback Statute or the Stark law have
been deemed to be, or may under certain circumstances be construed to be, false
claims.
While the Company believes that it and the MSOs are in compliance with the
foregoing federal and state laws, future regulations could require the Company
to modify the form of its relationships with physician organizations. Moreover,
the violation of any such state or federal law by the Company, the MSOs or the
physician organizations managed by the Company could have a material adverse
effect on the Company.
PIP Regulations. 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 that contract to arrange for
services to Medicare and Medicaid beneficiaries ("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 that the group does not directly
provide (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
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<PAGE>
or limit covered or medically necessary services are prohibited ("Prohibited
Payments"). 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 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 conduct enrollee surveys and 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 a
model for the industry as a whole. Although the Company currently has no
contracts that require compliance with the PIP regulations, the new
regulations, by limiting the amount of risk that may be imposed upon physicians
in certain arrangements, could have an effect 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.
Anti-Trust. Because the physician organizations managed by the Company
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 divisions of markets. In particular, the
antitrust laws have been interpreted by the Federal Trade Commission and the
United States Department of Justice to prohibit joint negotiations by
competitors of price terms in the absence of financial risk that is shared among
the competitors, other financial integration or substantial clinical integration
among the competitors. The Company intends to comply with such state and federal
laws as may affect its development of, and contracting for, integrated health
care delivery networks, but there can be no assurance that 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.
Insurance Regulations. Laws in all states regulate the business of
insurance and the operation of HMOs. On August 10, 1995, the NAIC issued a
report opining that certain risk-transferring arrangements may entail the
business of insurance, to which state licensure laws apply, but that licensure
laws would not apply where an unlicensed entity contracts to assume "downstream
risk" from a duly licensed health insurer or HMO for health care provided to
that carrier's enrollees. In addition, in December 1996, the NAIC issued a
report entitled "Regulation of Health Risk Bearing Entities," which sets forth
issues to be considered by state insurance regulators when considering new
regulations, and encourages that a uniform body of regulation be adopted by the
states. Certain states have enacted statutes or adopted regulations affecting
risk assumption in the health care industry. In some states, including some of
those in which the Company does business, these statutes and regulations
subject any physician or physician network engaged in risk-based contracting,
even if through HMOs and insurance companies, to applicable insurance laws and
regulations, or other laws and regulations, which may include, among other
things, providing for minimum capital requirements and other safety and
soundness requirements. Although the NAIC's conclusions are not binding on the
states, the Company believes that additional regulation at the state level will
be forthcoming in response to the NAIC initiatives. The Company will enter into
capitated contracts only with licensed insurance companies and HMOs, and only
if allowed by state law. 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.
Health Care Reform. 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 and may continue to 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 to the Company.
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Confidentiality of Patient Records. 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. Although
the Company does not currently collect aggregate clinical data for utilization
review and quality assurance purposes, it plans to develop such databases. Data
entries to these databases would delete any patient identifiers, including name,
address, hospital and physician. With respect to its electronic clinical
information systems, the Company uses a state-of-the-art security system,
including user passwords, 128-bit key encryption technology and a triple-DES
encryption algorithm, to safeguard the privacy of clinical data accessed or
transmitted on both private and public networks, including the Internet, and
will continue to employ such security measures in the future. The Company
believes that its procedures comply with the laws and regulations regarding the
collection of patient data in substantially all jurisdictions, but regulations
governing patient confidentiality rights are evolving rapidly and are often
difficult to apply. Additional legislation governing the dissemination of
medical record information has been proposed at both the state and federal
level. Furthermore, the Health Insurance Portability and Accountability Act of
1996 requires the Secretary of HHS to recommend legislation or promulgate
regulations governing privacy standards for individually identifiable health
information and creates a federal criminal offense for knowing disclosure or
misuse of such information. These statutes and regulations 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.
Licensure, Certificate of Need and Prescription Laws. Certain of the
ancillary services that the Company anticipates providing on behalf of the
practices and networks it manages are now, or may in the future be, subject to
licensure or certificate of need laws in various states. There can be no
assurance that the Company, or the practices or networks it manages, will be
able to obtain such licenses or certificate of need approval to the extent
required for the particular ancillary service. Each state establishes rules
related to the practice of medicine, including the method of prescribing drugs.
In addition, the federal drug enforcement administration (the "DEA") regulates
the issuance and content of prescriptions for controlled substances. The
application of these federal and state rules to the use of the Smart Scripts and
E-Rx prescription writing and management systems (the "Prescription Systems")
varies. Certain states in which the Company does business, such as New York,
Delaware and Tennessee, prohibit the use of the Prescription Systems while the
other states in which the Company does business, Connecticut, Georgia, New
Jersey and Pennsylvania, limit the use of the Prescription Systems and the DEA
neither specifically permits nor specifically prohibits electronic transmission
of prescription orders. The DEA is investigating the possibility of adopting a
policy regarding electronic transmission of prescription orders, such as that
used by the Prescription Systems, for controlled substances. The Company will
advise users of the Prescription Systems of the existence of these restrictions
and limitations and believes its use of the Prescription Systems will be in
compliance with applicable state and federal laws. Modification or further
clarification of federal and state rules regarding use of the Prescription
Systems in a manner that reduces their utility may have a material adverse
effect on the Company.
FDA Regulation. 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 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
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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
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 several years, however, the FDA has stated that it
intends to issue a new policy concerning computer products and has been
increasing its efforts to develop this policy in recent months. Under this new
policy, exemptions from regulatory controls, if any, may be based upon a
product specific "risk factor" analysis. For purposes of this analysis, the FDA
may consider, among other things, the following: (i) seriousness of the disease
to be diagnosed or treated, (ii) the time frame for use of the information,
(iii) whether the data output is provided or manipulated in a novel or
non-traditional manner, (iv) whether the software provides individualized
patient care recommendations, (v) whether the mechanism by which the software
arrives at a decision is hidden or transparent and (vi) whether the product
provides new capabilities for the user. 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's clinical information systems are intended to assist health
care providers in analyzing economic and quality data related to patient care
and expected outcomes in order to maximize the cost-effectiveness of general
treatment plans and practice protocols. These products are not intended to
provide specific diagnostic data or results or affect the use of specific
therapeutic interventions for individual patients. As such, 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 might be
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."
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 government
involvement in health care, lower reimbursement rates and otherwise change the
operating environment for the Company's customers. Health
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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.
LEGAL PROCEEDINGS
On May 22, 1997, an action captioned Benenson & Associates, Inc. and
Michael J. Benenson v. Advanced Health Corporation, Advanced Health Management
Corp. f/k/a Advanced Clinical Networks Corp., Jonathan Edelson, M.D., Steven I.
Hochberg and Alan B. Masarek was filed in the United States District Court for
the Southern District of New York. The action relates to: (i) an Employment
Agreement dated April 1, 1996 between the Company and Michael J. Benenson and
(ii) an Asset Purchase Agreement dated April 1, 1996, among the Company,
Benenson & Associates, Inc. and Mr. Benenson. Plaintiffs have asserted claims
against all defendants for alleged violations of the Exchange Act, common law
fraud and fraudulent inducement, and against the Company for breach of contract.
Plaintiffs' complaint seeks both damages and equitable relief. The Company
believes that each of the plaintiffs' claims is without merit, and it intends to
defend against the action vigorously.
On September 23, 1997, the Company commenced an action against Synetic,
Inc. ("Synetic") entitled Advanced Health Med-E-Systems Corporation v. Synetic,
Inc. in the Supreme Court of the State of New York to collect $1 million owing
by Synetic to the Company pursuant to a software license agreement dated as of
March 31, 1997, as amended (the "License Agreement"), between Synetic and the
Company. The Company believes that Synetic's stated ground for its refusal to
make this payment (alleged failure to timely deliver software and documentation
as required by the License Agreement) is without merit. Synetic has not yet
filed an answer or other response to this lawsuit.
From time to time, the Company is involved in litigation. Although the
actual amount of any liability that could arise with respect to any such
litigation cannot be accurately predicted, in the opinion of management, the
resolution of these matters is not expected to have material adverse effect on
the Company's business, results of operations or financial condition.
EMPLOYEES
As of September 1, 1997, the Company had a total of approximately 580
employees, approximately 400 of whom were employed by the MSOs and
approximately 40 of whom were employed by 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 26,302 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 for the Tarrytown office has an annual rental cost of
approximately $500,000 and expires in March 2002. The lease for the Marietta
office expires in January 2001 and has an annual rental cost of approximately
$50,000. The lease for the Wayne office expires in October 1997 and has an
annual rental cost of approximately $20,000. The lease for the Chicago office
expires in March 2001 and has an annual rental cost of $184,000 for the current
year. The Company believes that these facilities are adequate for the
foreseeable future.
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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. ...... 37 Chairman of the Board and Chief Executive
Officer
Steven Hochberg ............ 35 Vice Chairman and Director
Alan B. Masarek ............ 36 President, Chief Operating Officer and Acting
Chief Financial Officer
Robert Alger ............... 42 Vice President and Chief Information Officer
James T. Carney(2) ......... 53 Director
Barry Kurokawa(1)(2) ......... 41 Director
Jonathan Lieber(1) ......... 31 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, from August 1993 to
December 1994. 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 Vice Chairman of the Company since September 15,
1997 and has been a director of the Company since its inception. Mr. Hochberg
served as President of the Company from inception until September 15, 1997. 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. Mr. Hochberg, a CPA, holds an MBA from Harvard Business School.
Alan B. Masarek has been President, Chief Operating Officer and Acting
Chief Financial Officer of the Company since September 15, 1997 and served as
the Chief Operating Officer and Chief Financial Officer of the Company from
November 1995 until September 15, 1997. 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. 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.
42
<PAGE>
James T. Carney has been a director of the Company since September 1996.
Mr. Carney has served as General Manager of Benefits Administration for USX
Corporation and Vice President of Administration for United States Steel and
Carnegie Pension Fund since 1989. Mr. Carney was named General
Attorney-Employee Benefits of USX Corporation in 1978, Senior General
Attorney-Employee Benefits and Workers' Compensation in 1985 and Senior General
Attorney-Commercial and Employee Relations for the U.S. Diversified Group in
1986.
Barry Kurokawa has been a director of the Company since March 1996. Since
February 1996, Mr. Kurokawa has served as a managing member of ProMed Asset
Management, L.L.C. and has served as President of Blackriver Capital Management,
Ltd., a managing member of ProMed Management, L.L.C. ProMed Asset Management,
L.L.C is a private health care investment management company and ProMed
Management, L.L.C is a private health care service 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, and has served since June
1996 as a member of Wheatley Partners, LLC, the general partner of Wheatley
Partners, L.P. an equity investment partnership. 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.
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 1998 (comprised of Messrs. Carney and Kurokawa), 1999
(comprised of Dr. Edelson and Mr. Hochberg) and 2000 (comprised of Mr. Lieber).
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.
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 comprised of Messrs. Carney and Kurokawa, 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 1995 Stock Option Plan. 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
43
<PAGE>
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 carries directors' and officers' liability insurance ("D&O
Insurance"). 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 (collectively, the "Named Executive Officers") for services rendered in
all capacities to the Company during the Company's fiscal years ended December
31, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LONG-TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS
--------------------- -----------------------
SECURITIES UNDERLYING
OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) (#)
- --------------------------------------------- ------ --------------------- -----------------------
Jonathan Edelson, M.D. ..................... 1996 $220,224 -
Chief Executive Officer 1995 187,115 101,286
Steven Hochberg(1) ........................ 1996 220,184 -
President 1995 187,115 101,286
Alan B. Masarek(2) ........................ 1996 200,198 -
Chief Operating Officer 1995 25,942 86,307
and Chief Financial Officer
Robert Alger .............................. 1996 154,854 -
Vice President and Chief Information Officer 1995 123,937 41,706
</TABLE>
- ----------
(1) Effective September 15, 1997, Mr. Hochberg became Vice Chairman of the
Company.
(2) Effective September 15, 1997, Mr. Masarek became President, Chief Operating
Officer and Acting Chief Financial Officer of the Company.
44
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
During the fiscal year ended December 31, 1996, the Company made no option
grants to the Named Executive Officers and no Named Executive Officer exercised
any options. The following table sets forth certain information regarding
options held at December 31, 1996 by each of the Named Executive Officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR-END
YEAR-END (#) ($)(1)
---------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C>
Jonathan Edelson, M.D. ...... 33,762 67,524 $321,052 $642,115
Steven Hochberg ............ 33,762 67,524 321,052 642,115
Alan B. Masarek ............ 33,407 52,630 299,992 472,620
Robert Alger ............... 13,902 27,804 136,756 273,512
</TABLE>
- ----------
(1) Value of unexercised in-the-money options is based on a value of $12.50 per
share of the Company's Common Stock, the fair market value of the
Company's Common Stock on December 31, 1996. Amounts reflected are based
on the assumed value minus the exercise price multiplied by the number of
shares subject to the option.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with each of the Named Executive Officers (each, an "Employee").
The Employment Agreements provide that the minimum annual base salary of each
of the Employees is: Dr. Edelson, $220,000; Mr. Hochberg, $220,000; Mr.
Masarek, $200,000; and Mr. Alger, $174,000. 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 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.
2,100,000 shares of Common Stock have been reserved for issuance under the
1995 Plan and, subject to stockholder approval, an additional 650,000 shares of
Common Stock have been reserved for issuance under the 1995 Plan. The number of
shares reserved for issuance under the 1995 Plan is subject
45
<PAGE>
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) 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 2,397,187 outstanding
options had been granted at a weighted average exercise price of $12.42 per
share and an aggregate of 352,813 shares were available for future option
grants. Of such outstanding options, 549,651 were granted to Dr. Edelson,
199,651 to Mr. Hochberg, 387,629 to Mr. Masarek, 132,876 to Mr. Alger, 10,000
to Mr. Carney, 22,506 to Mr. Kurokawa and 22,506 to Mr. Lieber.
Employee Stock Purchase Plan. The Company has adopted, but not yet
implemented, 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
46
<PAGE>
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.
47
<PAGE>
CERTAIN TRANSACTIONS
In May 1995, Jonathan Edelson, M.D., the Chairman of the Board and Chief
Executive Officer of the Company, 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 March 1995, Steven Hochberg, the Vice Chairman and a director of the
Company, 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 January 1995, the Company issued 200,000 shares of Series C Convertible
Preferred Stock to affiliates of INVESCO Trust Company, a principal stockholder
of the 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 Convertible Preferred Stock (collectively, the "Preferred Stock")
converted into approximately 1.1 shares of Common Stock upon the consummation
of the Initial Public 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. Such loans were repaid in full upon the consummation of the Initial
Public Offering.
In 1996 and 1997, in accordance with the Company's Senior Executive Loan
Policy, which is administered by the Compensation Committee of the Board of
Directors, the Company made loans of $220,000, $275,000, $103,000 and $60,000
to Dr. Edelson, Mr. Hochberg, Mr. Masarek and Mr. Alger, respectively. These
loans are due three years from the date of grant, with interest payable monthly
at a rate of 6% per annum.
In June 1997, the Company purchased approximately $500,000 of Series A
Preferred Stock issued by Caresoft, a corporation that, among other things,
develops chronic disease and patient compliance software. In addition, certain
of the Company's stockholders and other investors, including Wheatley Partners,
L.P., of which Jonathan Lieber, a director of the Company, serves as a member of
the general partner, certain funds advised by INVESCO Funds Group, Inc., Steven
Hochberg, the Company's Vice Chairman, and certain entities affiliated with
ProMed Management, L.L.C., of which Barry Kurokawa, a director of the Company,
is the general partner, purchased the following amounts of Caresoft's Series A
Preferred Stock: $2.0 million, $1.0 million, $125,000 and $500,000,
respectively. Messrs. Hochberg and Kurokawa serve on the Board of Directors of
Caresoft. See "Principal and Selling Stockholders."
Through November 1, 1996, the Company subleased approximately 4,500 square
feet of office space in Tarrytown, New York from Physicians' Online, a Delaware
corporation of which Dr. Edelson and Mr. Hochberg own capital stock and were
previously directors. Physicians' Online was founded in January 1992 by Mr.
Hochberg. The yearly base rental on the Physicians' Online sublease equaled
$77,707, plus escalations. During the years ended December 31, 1994 and 1995
and the three months ended March 31, 1996, Physicians' Online incurred
administrative expenses totalling $135,825, $180,631 and $25,500, respectively,
on behalf of the Company for which the Company reimbursed Physicians' Online.
During 1994, Physicians' Online loaned the Company $300,000, which loan bore
interest at the prime rate. At December 31, 1994, $304,262 was outstanding,
which included accrued interest of $4,262. Such loan was repaid in full in
1995, and the accrued interest was forgiven. 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. In January 1997, the
Company and Physicians' Online announced an agreement to jointly market,
distribute and operate E-Rx. See Note 4 of Notes to Consolidated Financial
Statements.
48
<PAGE>
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.
49
<PAGE>
PRINCIPAL AND SELLING 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
September 1, 1997 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,
(iv) all directors and officers as a group and (v) each Selling Stockholder.
Unless otherwise indicated, the address for each stockholder is c/o the
Company, 555 White Plains Road, Tarrytown, New York 10591.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)(2)
----------------------- --------------------
SHARES BEING
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- ----------------------------------------- ----------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
INVESCO Trust Company(3) ............... 1,165,086 15.6% 300,000 865,086 9.1%
7800 E. Union Avenue
Denver, CO 80237
21st Century Partnerships(4) ............ 852,394 10.8% 200,000 652,394 6.6%
767 Fifth Avenue
New York, NY 10153
Jonathan Edelson, M.D.(2)(5) ............ 528,224 7.0% - 528,224 5.5%
Steven Hochberg(2)(6) .................. 390,918 5.2% - 390,918 4.1%
Alan B. Masarek(7) ..................... 22,350 * - 22,350 *
Robert Alger(8) ........................ 5,002 * - 5,002 *
James T. Carney(9) ..................... 3,334 * - 3,334 *
Barry Kurokawa(10) ..................... 4,502 * - 4,502 *
Jonathan Lieber(10)(11) ................. 2,502 * - 2,502 *
All directors and executive officers as a
group (7 persons)(12) .................. 956,832 12.6% - 956,832 10.0%
</TABLE>
- ----------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities and includes options exercisable within 60 days of September
1, 1997. 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 7,455,647 shares of Common Stock outstanding as of September 1,
and 9,455,647 shares of Common Stock outstanding upon the consummation of
this offering (9,705,647 shares if the Underwriters' overallotment option
is exercised in full).
(2) Assumes no exercise of the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, the number of shares being
offered, the number of shares beneficially owned after this offering and
the percentage of shares beneficially owned after this offering for each
of the Selling Stockholders would be as follows: 300,000, 865,086 and 8.9%
for INVESCO Trust Company; 250,000, 602,394 and 5.9% for the 21st Century
Partnerships; 10,000, 518,224 and 5.3% for Jonathan Edelson, M.D.; and
65,000, 325,918 and 3.4% for Steven Hochberg.
(3) Includes 613,537 shares of Common Stock owned of record by INVESCO
Strategic Portfolios, Inc. - Health Sciences Portfolio ("ISP - HSP") and
551,549 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.
(4) Includes warrants to purchase 446,858 shares of Common Stock that are
exercisable within 60 days of the date of this Prospectus and shares of
Common Stock owned by 21st Century Communications Partners, L.P., 21st
Century Communications T-E Partners, L.P. and 21st Century Foreign
Partners, L.P.
(5) Includes options to purchase 100,000 shares of Common Stock that are
exercisable within 60 days of the date of this Prospectus.
(6) Includes no options to purchase shares of Common Stock that are exercisable
within 60 days of the date of this Prospectus.
(7) Includes options to purchase 22,343 shares of Common Stock that are
exercisable within 60 days of the date of this Prospectus.
(8) Includes options to purchase 5,002 shares of Common Stock that are
exercisable within 60 days of the date of this Prospectus.
(9) Includes options to purchase 3,334 shares of Common Stock that are
exercisable within 60 days of the date of this Prospectus.
(10) Includes options to purchase 2,502 shares of Common Stock that are
exercisable within 60 days of the date of this Prospectus.
(11) Includes 2,000 shares of Common Stock that are owned jointly by Mr.
Kurokawa and his spouse.
(12) See notes (5) (6), (7), (8), (9) and (10).
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists 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 September 1, 1997, there were 7,455,647 shares of Common Stock
outstanding that were held of record by approximately 80 stockholders. 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-outstanding 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 945,681 shares of the Company's Common Stock outstanding
after this offering 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. Other than with respect to the shares of Common Stock offered by the
Selling Stockholders hereby, 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 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 in October 1999. 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, which is expected to occur in
October 1997, and will expire in October 1999. 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.
51
<PAGE>
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.
Pursuant to an agreement between the Company and INVESCO Trust Company,
INVESCO Trust Company has a right to purchase its proportionate percentage of
shares of Common Stock offered for sale by the Company. INVESCO Trust Company
has waived such rights with respect to shares being sold pursuant to this
offering.
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, (ii) 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 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.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market price from time to time 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
9,455,647 shares of Common Stock. Approximately 7,690,817 shares of Common
Stock, including the 2,500,000 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 1,764,830 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 Rule 144, such
shares will be available for sale in the public market upon the expiration of
the lock-up agreements 90 days after the Effective Date, subject, in certain
cases, to the volume, manner of sale and reporting requirements of Rule 144.
The Company has registered Common Shares reserved for issuance under its
stock option plans and employee stock purchase plan. See "Management - Stock
Plans." 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.
Upon completion of this offering, the holders of 945,681 shares of Common
Stock (including 50,000 shares of Common Stock subject to the Underwriters
over-allotment option), 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 90 days after the Effective Date, without the prior written consent
of Cowen & Company, subject to certain limited exceptions. Additionally, all
directors, executive officers and principal stockholders of the Company,
holding in the aggregate approximately 1,764,830 shares of Common Stock
outstanding after this offering (1,639,830 if the Underwriters' over-allotment
option is exercised in full), have agreed with the Underwriters not to sell or
otherwise dispose of any shares of Common Stock for a period of 90 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, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, 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 two 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.
53
<PAGE>
Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Exchange Act, pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Exchange Act, in reliance upon Rule 144 but
without compliance with certain restrictions, including the holding period
requirements, contained in Rule 144. In addition, the Commission has indicated
that Rule 701 will apply to typical stock options granted by an issuer before
it becomes subject to the reporting requirements of the Exchange Act, along
with the shares acquired upon exercise of such options (including exercises
after the date of this Prospectus). Securities issued in reliance on Rule 701
are restricted securities and, subject to the contractual restrictions
described above, 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 one-year minimum holding period requirements.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company, Hambrecht & Quist LLC, SBC Warburg Dillon Read Inc. and Volpe
Brown Whelan & Company, LLC, have severally agreed to purchase from the Company
and the Selling Stockholders the following respective number of shares at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- -------------------------------------------- -------------
<S> <C>
Cowen & Company ........................
Hambrecht & Quist LLC ..................
SBC Warburg Dillon Read Inc. ............
Volpe Brown Whelan & Company, LLC ......
-----
Total .............................. 2,500,000
=========
</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 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
public offering of the shares, the offering price and other selling terms may
from time to time be varied by the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable no later than 30 days after the date of this Prospectus,
to purchase up to 375,000 additional shares (250,000 from the Company and
125,000 from the Selling Stockholders) of Common Stock at the 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 stockholders of the
Company holding in the aggregate approximately 1,764,830 shares of Common Stock
and approximately 133,181 shares of Common Stock subject to options exercisable
within 90 days of the effective date have agreed that they 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
55
<PAGE>
warrants to acquire shares of Common Stock, or securities exchangeable for or
convertible into shares of Common Stock owned by them during the 90-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 90-day period except in certain limited circumstances.
The Company and the Selling Stockholders have 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.
In order to facilitate this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot in connection with
this offering, creating a short position in the Common Stock for their own
account. In addition, to cover over-allotments or to stabilize the price of the
Common Stock, the Underwriters may bid for, and purchase, shares of the Common
Stock in the open market. The Underwriters may also reclaim selling concessions
allowed to an underwriter or a dealer for distributing the Common Stock in this
offering, if the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short positions, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase shares of the
Common Stock in market making transactions. These activities may stabilize or
maintain the market price of the Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market marker generally may not exceed 30% of its average daily trading volume
in the Common Stock during a specified two-month prior period or 200 shares,
whichever is greater. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the Common
Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
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 of the Company as of December 31, 1996 and 1995
and for the three years ended December 31, 1996 included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
56
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants ........................... F-2
Consolidated Balance Sheets:
As of December 31, 1995 and 1996 .................................
As of June 30, 1997 (unaudited) ................................. F-3
Consolidated Statements of Operations:
For the years ended December 31, 1994, 1995 and 1996 ............
For the six months ended June 30, 1996 and 1997 (unaudited) ...... F-4
Consolidated Statement of Shareholders' Equity:
For the years ended December 31, 1994, 1995 and 1996 ............
For the six months ended June 30, 1997 (unaudited) ............... F-5
Consolidated Statements of Cash Flows:
For the years ended December 31, 1994, 1995 and 1996 ............
For the six months ended June 30, 1996 and 1997 (unaudited) ...... F-6
Notes to Consolidated Financial Statements. ..................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Health Corporation:
We have audited the accompanying consolidated balance sheets of Advanced
Health Corporation (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the three years ended December 31,
1996. 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
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the three years ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 28, 1997 (except for the matters
discussed in the last paragraph
of Note 4, as to which the
date is April 15, 1997)
F-2
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- ------------
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 1,464 $ 12,086 $ 4,840
Investments in marketable securities (Note 5) .................. - 7,390 7,336
Accounts receivable, net ....................................... 1,021 8,637 7,870
Note receivable ................................................ 125 - 60
Prepaid expenses ................................................ 278 182 124
Advances to physician practices (Note 4) ........................ - 647 3,372
Deferred income taxes, net (Note 11) ........................... - 977 977
-------- --------- --------
Total current assets .......................................... 2,888 29,919 24,579
PROPERTY AND EQUIPMENT, net (Note 6) ........................... 1,539 2,053 2,644
INTANGIBLE ASSETS, net (Note 7) ................................. 1,876 1,858 5,259
OTHER ASSETS (Notes 2 and 4) .................................... 159 1,570 4,517
-------- --------- --------
Total assets ................................................ $ 6,462 $ 35,400 $ 36,999
======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................ $ 1,313 $ 1,968 $ 1,942
Accrued expenses (Note 8) ....................................... 407 913 739
Deferred revenue ................................................ 1,500 200 200
Loan payable related to acquisition (Note 3) .................. 150 23 -
Current portion of capital lease obligations (Note 12) ......... 260 131 53
-------- --------- --------
Total current liabilities .................................... 3,630 3,235 2,934
DEFERRED REVENUE ................................................ - 200 100
CAPITAL LEASE OBLIGATIONS (Note 12) .............................. 157 81 -
-------- --------- --------
Total liabilities ............................................. 3,787 3,516 3,034
-------- --------- --------
COMMITMENTS (Note 13)
SHAREHOLDERS' EQUITY:
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;
4,491,270, 7,166,941 and 7,201,600 (unaudited) shares issued
and outstanding, respectively ................................. 45 72 72
Additional paid-in capital .................................... 11,481 42,069 42,339
Accumulated deficit ............................................. (8,776) (10,242) (8,431)
Unrealized gain on marketable securities, net of deferred in-
come taxes - 60 60
Less: Treasury stock, at cost; 8,937 shares, respectively ...... (75) (75) (75)
-------- --------- --------
Total shareholders' equity .................................... 2,675 31,884 33,965
-------- --------- --------
Total liabilities and shareholders' equity .................. $ 6,462 $ 35,400 $ 36,999
======== ========= ========
</TABLE>
The accompanying notes are an integral
part of these consolidated balance sheets.
F-3
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
------------ --------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES .............................. $ 204 $ 1,054 $ 19,136 $ 7,617 $ 23,028
REVENUES FROM RELATED
PARTY ................................. 175 - - - -
---------- ----------- ---------- ---------- ----------
Total revenues ........................ 379 1,054 19,136 7,617 23,028
COST OF REVENUES ........................ 12 340 9,707 5,580 17,309
---------- ----------- ---------- ---------- ----------
Gross profit ........................... 367 714 9,429 2,037 5,719
OPERATING EXPENSES ..................... 2,901 6,412 11,886 3,840 4,185
---------- ----------- ---------- ---------- ----------
Operating income (loss) ............... (2,534) (5,698) (2,457) (1,803) 1,534
INTEREST EXPENSE ........................ (15) (9) (164) (53) -
INTEREST INCOME ........................ - - 179 - 343
---------- ----------- ---------- ---------- ----------
Net income (loss) before income taxes. (2,549) (5,707) (2,442) (1,856) 1,877
BENEFIT (PROVISION) FOR IN-
COME TAXES (Note 11) - - 977 0 (66)
---------- ----------- ---------- ---------- ----------
Net income (loss) ..................... $ (2,549) $ (5,707) $ (1,465) $ (1,856) $ 1,811
========== =========== ========== ========== ==========
PER SHARE INFORMATION
(Note 2):
Net income (loss) per share ............ $ (1.29) $ (1.68) $ (0.29) $ (0.41) $ 0.22
========== =========== ========== ========== ==========
Weighted average common shares
and common share equivalents out-
standing 1,977,736 3,388,767 5,130,421 4,488,766 8,189,732
========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
SUBSCRIPTIONS
COMMON STOCK ADDITIONAL RECEIVABLE
----------------------- PAID-IN -------------------------
SHARES PAR VALUE CAPITAL SHARES AMOUNT
----------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 .................. 1,773,389 $ 18 $ 91 185,893 $ (3)
Sale and issuance of common stock (Note
10a) ....................................... 25,319 - 639 - -
Issuance of Series B Convertible Preferred
Stock (Note 10) ........................... 252,831 2 1,998 - -
Net loss ................................. - - - - -
---------- ----- -------- --------- ------
BALANCE, December 31, 1994 .................. 2,051,539 20 2,728 185,893 (3)
Issuance of common stock (Note 10a) ...... 50,641 1 (1) - -
Issuance of Series C Convertible Preferred
Stock (Note 10) ........................... 178,743 2 1,498 - -
Issuance of common stock in private
placement (Note 10c) ..................... 79,780 1 624 - -
Redemption of common stock subscrip-
tions - - - (185,893) 3
Exercise of stock options .................. 885,279 9 11 - -
Common stock issued for acquisitions ...... 649,753 7 1,629 - -
Issuance of Series D Convertible Preferred
Stock (Note 10) ........................... 595,535 6 4,992 - -
Repurchase of treasury stock ............... - - - - -
Net loss ................................. - - - - -
---------- ----- -------- --------- ------
BALANCE, December 31, 1995 .................. 4,491,270 46 11,481 - -
Common stock issued for acquisition ...... 8,937 - 45 - -
Exercise of stock options (Note 10) ...... 21,734 - 86 - -
Issuance of common stock in public offer-
ing, net of expenses of $3,922 (Note 10c). 2,645,000 26 30,457 - -
Unrealized gain on marketable securities,
net of deferred income taxes of $40......... - - - - -
Net loss ................................. - - - - -
---------- ----- -------- --------- ------
BALANCE, December 31, 1996 .................. 7,166,941 72 42,069 - -
Exercise of stock options .................. 34,659 - 270 - -
Net income ................................. - - - - -
---------- ----- -------- --------- ------
BALANCE, June 30, 1997 (unaudited) ......... 7,201,600 $ 72 $42,339 - $ -
========== ===== ======== ========= ======
<CAPTION>
UNREALIZED
GAIN ON TREASURY STOCK
ACCUMULATED MARKETABLE -----------------
DEFICIT SECURITIES SHARES AMOUNT TOTAL
------------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 .................. $ (521) $ - - $ - $ (415)
Sale and issuance of common stock (Note
10a) ....................................... - - - - 639
Issuance of Series B Convertible Preferred
Stock (Note 10) ........................... - - - - 2,000
Net loss ................................. (2,549) - - - (2,549)
---------- ---- ------ ----- ---------
BALANCE, December 31, 1994 .................. (3,070) - - - (325)
Issuance of Common Stock (Note 10a) ...... - - - - -
Issuance of Series C convertible Preferred
Stock (Note 10) ........................... - - - - 1,500
Issuance of common stock in private
placement (Note 10c) ..................... - - - - 625
Redemption of common stock subscrip-
tions - - - - 3
Exercise of stock options .................. - - - - 20
Common stock issued for acquisitions ...... - - - -- 1,636
Issuance of Series D Convertible Preferred
Stock (Note 10) ........................... - - - - 4,998
Repurchase of treasury stock ............... - - 8,937 (75) (75)
Net loss ................................. (5,707) - - - (5,707)
---------- ---- ------ ----- ---------
BALANCE, December 31, 1995 .................. (8,777) - 8,937 (75) 2,675
Common stock issued for acquisition ...... - - - - 45
Exercise of stock options (Note 10) ...... - - - - 86
Issuance of common stock in public offer-
ing, net of expenses of $3,922 (Note 10c). - - - - 30,483
Unrealized gain on marketable securities,
net of deferred income taxes of $40......... - 60 - - 60
Net loss ................................. (1,465) - - - (1,465)
---------- ---- ------ ----- ---------
BALANCE, December 31, 1996 .................. (10,242) 60 8,937 (75) 31,884
Exercise of stock options .................. - - - - 270
Net income ................................. 1,811 - - - 1,811
---------- ---- ------ ----- ---------
BALANCE, June 30, 1997 (unaudited) ......... $ (8,431) $60 8,937 $ (75) $ 33,965
========== ==== ====== ===== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (UNAUDITED)
----------------------------------------- ---------------------
1994 1995 1996 1996 1997
--------------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (2,549) $ (5,707) $ (1,465) $(1,856) $ 1,811
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization .......................... 147 457 890 423 483
Deferred income taxes ................................. - - (977) - -
Allowance for doubtful accounts ........................ - - 210 - -
Changes in operating assets and liabilities-
Accounts receivable ................................. - (1,021) (7,826) (2,282) 767
Note receivable ....................................... - (125) 125 110 (60)
Prepaid expenses .................................... (7) (271) 96 (58) 58
Advances to physician practices ..................... - - (647) 50 (125)
Other assets .......................................... (126) (33) (1,440) (15) (2,085)
Accounts payable .................................... 201 994 656 (341) (26)
Accrued expenses .................................... 83 280 506 445 (174)
Due to related party ................................. 271 (376) - - -
Deferred revenue .................................... (175) 1,500 (1,100) (550) (100)
---------- --------- --------- -------- --------
Net cash provided by (used in) operating activities... (2,155) (4,302) (10,972) (4,074) 549
---------- --------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of note receivable from related party ......... - (500) - - -
Proceeds from repayment of note receivable from re-
lated party - 500 - - -
Investments in marketable securities .................. - - (7,290) - -
Cash paid for acquisitions ........................... - (150) - - -
Purchases of property and equipment, net ............... (506) (882) (1,296) (249) (1,020)
Advances to physician practices ........................ - - - - (2,600)
Investment in physician practices ..................... - - - - (3,763)
Minority investment in software development company. - - - - (500)
---------- --------- --------- -------- --------
Net cash used in investing activities ............... (506) (1,032) (8,586) (249) (7,883)
---------- --------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from loan payable related to
acquisition .......................................... 50 (50) (94) (95) (23)
Net proceeds from sale and issuance of common stock . 639 628 30,483 - -
Net proceeds from exercise of stock options ............ - 20 86 - 270
Net proceeds from promissory notes ..................... - - 5,000 4,000 -
Repayment of promissory notes ........................ - - (5,000) - -
Purchase of treasury stock ........................... - (75) - - -
Net proceeds from issuance of Series B Convertible
Preferred Stock (Note 10) ........................... 2,000 - - - -
Net proceeds from issuance of Series C Convertible
Preferred Stock (Note 10) ........................... - 1,500 - - -
Net proceeds from issuance of Series D Convertible
Preferred Stock (Note 10) ........................... - 4,998 - - -
Repayment of capital lease obligations ............... (28) (230) (295) (209) (159)
---------- --------- --------- -------- --------
Net cash provided by financing activities ............ 2,661 6,791 30,180 3,696 88
---------- --------- --------- -------- --------
Net change in cash and cash equivalents ............... - 1,457 10,622 (627) (7,246)
CASH AND CASH EQUIVALENTS, beginning of period. 7 7 1,464 1,464 12,086
---------- --------- --------- -------- --------
CASH AND CASH EQUIVALENTS, end of period ................ $ 7 $ 1,464 $ 12,086 $ 837 $ 4,840
========== ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest ............................................. $ 3 $ 21 $ 160 $ 46 $ 7
========== ========= ========= ======== ========
Income taxes .......................................... $ 3 $ 15 $ 36 $ - $ 66
========== ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH IN-
VESTING ACTIVITIES:
Capital lease obligations incurred ..................... $ 394 $ 281 $ 58 $ 196 $ -
========== ========= ========= ======== ========
Fair market value of common stock issued for acquisi-
tions $ - $ 1,636 $ 45 $ 45 $ -
---------- --------- --------- -------- --------
Unrealized gain on marketable securities ............... $ - $ - $ 100 $ - $ -
========== ========= ========= ======== ========
Loan payable issued for acquisition .................. $ - $ 150 $ 23 $ - $ -
========== ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND BUSINESS:
THE COMPANY
Advanced Health Corporation ("AHC") and subsidiaries (collectively, the
"Company") provides physician groups and networks with professional 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, 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.
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.
FORMATION OF MANAGEMENT SERVICE ORGANIZATIONS
The Company has established Management Service Organizations ("MSOs") to
facilitate the provision of management services to physician practice and
network clients.
In November 1995, the Company obtained a 51% interest in Uptown Physician
Management, Inc. ("Uptown"), a newly formed MSO. The Company acquired this
interest as part of the formation of Uptown and concurrent with the signing of
a long-term management services agreement between Uptown and Madison Medical -
The Private Practice Group of New York, L.L.P. ("Madison"), which is a
multi-specialist group practice based in the State of New York.
In June 1996, the Company obtained a 51% interest in Specialist Physicians
Management, Inc. ("Specialist"), a newly formed MSO. The Company acquired this
interest as part of the formation of Specialist and concurrent with the signing
of a long-term management services agreement between Specialist and Cardiology
First of New Jersey, P.A., which is a network of cardiologists based in the
State of New Jersey.
In June 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 August 1996, the Company obtained a 51% interest in Millennium
Physician Management, Inc. ("Millennium"), a newly formed MSO. The Company
acquired this interest as part of the formation of Millennium and concurrent
with the signing of a long-term management services agreement between
Millennium and Millennium Medical Associates, P.C., which is a multi-specialist
group practice based in the State of New Jersey.
F-7
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 1996, the Company obtained a 51% interest in Prime Health
Physician Management, Inc. ("Prime"), a newly formed MSO. The Company acquired
this interest as part of the formation of Prime and concurrent with the signing
of a long-term management services agreement between Prime and Primary Care
Associates, which is a multi-specialist group practice based in the State of
Pennsylvania.
In November 1996, the Company obtained a 51% interest in Mid-Atlantic
Physicians Management, Inc. ("Mid-Atlantic"), a newly formed MSO. The Company
acquired this interest as part of the formation of Mid-Atlantic and concurrent
with the signing of a long-term management services agreement between
Mid-Atlantic and Mid-Atlantic Cardiology, P.A., which is a cardiologist group
practice based in the State of New Jersey.
In forming these MSOs, the Company conveyed 49% interests (Note 3) to the
physician practice or network in exchange for the execution of the long-term
management services agreements described above. The Company records the fair
value of these arrangements, which is, in the opinion of management, more
readily determinable than the 49% MSO interest conveyed. These intangible
assets, which are not material, will be amortized over the life of the related
contracts.
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) and Med-E-Systems
Corporation ("MES"), and the MSOs discussed in Note 1. The consolidated
financial statements for 1994 and 1995 include the results of operations of the
Company, including other entities formed or acquired from their formation or
acquisition during those years, through December 31, 1995. The structure of the
Company's wholly or majority-owned MSOs presently provides for the Company to
receive activity-based fee income from the MSOs for management services
provided, and reimbursement from the MSOs for certain expenses incurred, with
the result being that there are no profits in the MSO entity for which a
minority interest is required to be calculated. Accordingly, the consolidated
financial statements do not reflect any minority interest in the operations of
the MSOs. In the event that profits remain in MSO entities in the future,
minority interests will be reflected in the Company's consolidated financial
statements. Intercompany accounts and transactions have been eliminated in
consolidation.
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.
REVENUE RECOGNITION
Operating revenues are generated form three principal sources:
(a) Physician Practice Revenues: A physician group practice is a single
legal entity comprised of multiple physicians. Through its majority or
wholly-owned consolidated MSOs, the Company enters into management services
agreements with physician group practices, whereby such physician practices
outsource their non-medical and administrative functions to the MSO.
Activity-based fees are generated by the MSO through the provision of these
outsourced services as well as certain additional manage-
F-8
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ment, marketing and information services. Fees for such services are either
fixed or based on the level of services provided, as negotiated in the
Company's various agreements for the provision of services, and are recognized
monthly or as these services are rendered, respectively, based on the terms of
the related agreements. The Company's contracts with its physician group
practices also include pre-determined incentives which are earned and
recognized as revenue in the event that the Company is successful in reducing a
physician group practice's administrative expenses.
(b) Physician Network Revenues: A physician network is an aggregation of
individual physicians and physician groups formed for the purpose of entering
into contracts with third-party payors. A physician network enters into a
contract with a third-party payor pursuant to which the physicians comprising
the network agree to provide medical services to network enrollees in return
for a fixed per enrollee fee. Such contracts are known as "capitated
contracts." The physician network then enters into a management services
agreement with the Company's majority-owned, consolidated MSO, pursuant to
which the aggregate capitated payments are assigned to the MSO. From these
capitated payments, the MSO pays a fixed percentage of the capitated premium to
fund all administrative and management services required under the contract.
After payment of such administrative and management expenses, the MSO pays the
network physicians in return for the physicians' provision of medical services
to medical enrollees. Such payments are typically based on a pre-determined fee
schedule based on actuarial predictions of required medical utilization by the
networks' enrollees. In the event that total capitated premiums exceed the sum
of the costs of (i) administrative and management services provided and (ii)
the physicians' provision of medical services to the network enrollees, such
savings are shared between the MSO and the network physicians in differing
pre-determined amounts. In the event that total capitated premiums are less
than the sum of the abovementioned costs, such costs are accrued and are borne
proportionally by the MSO. The Company has not earned, recognized or recorded
any such capitated revenues in the three years ended December 31, 1996 or in
the six month period ended June 30, 1997 (unaudited).
In the event that contracts between MSOs and physician practices and
network are terminated, the terms of the related contracts do not require the
Company, through the MSOs, to return any previously-earned revenues.
(c) Information Systems and Services Revenue: The Company's current
business strategy for providing integrated physician practice and network
management services includes selling its information systems and services as a
means of ultimately providing a full range of services. In order to generate
operating funds and demonstrate the uses of its systems and development
capabilities, the Company has licensed, and may continue licensing, certain
components of its software to third parties.
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
the SOP.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased.
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 rendered.
F-9
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INVESTMENTS IN MARKETABLE SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with this
pronouncement, the debt securities held by the Company and included in the
accompanying consolidated balance sheets that may be sold in response to
changes in interest rates, prepayments, and other factors have been classified
as available-for-sale. Such securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of shareholders' equity (on an after-tax basis). Gains and losses on
the disposition of securities are recognized on the specific identification
method in the period in which they occur.
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
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, covenants not-to-compete and management
contracts are included in intangible assets and are presently being amortized
over periods of 4 to 20 years on a straight-line basis. These amortization
periods are evaluated by management on a continuing basis, and will be adjusted
if the lives of the related intangible assets are impaired.
ACCOUNTING FOR LONG-LIVED ASSETS
During March 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 121, "Accounting for the Impairment of 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, and was adopted by the Company in 1996. The effect of
the adoption was not material.
COMPUTER SOFTWARE COSTS
The Company develops computer software which is marketed to third parties.
The Company capitalizes such costs in accordance with SFAS No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Amortization of such costs is provided using the straight-line method over the
estimated economic life of the products, which is generally five years.
The Company has $101 and $1,130 of unamortized capitalized computer
software costs included in other assets in the accompanying consolidated
balance sheets as of December 31, 1995 and 1996, respectively. Such costs
capitalized in 1996 were incurred primarily in the latter part of that year.
Computer software amortization expense aggregated $0, $25 and $28,
respectively, for the three years ended December 31, 1996.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the Company.
Research and development expense aggregated $1,582, $3,157 and $2,843,
respectively, for the three years ended December 31, 1996 and $1,875 and $0,
respectively, for the six months ended June 30, 1996 and 1997 (unaudited).
F-10
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under SFAS 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) net
operating loss 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 INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share was computed by dividing net income
(loss) by the weighted average number of common shares and common share
equivalents outstanding during the respective periods, which includes, for all
periods, (i) the effect of the conversion of Class A, B, C and D Convertible
Preferred Stock to common stock, and (ii) the retroactive effect of the reverse
stock split, both described in Note 10, which occurred concurrent with the
consummation of the Company's initial public offering. Fully diluted net loss
per common share has not been presented in periods through December 31, 1996
since the inclusion of the impact of stock options and warrants outstanding
(Notes 3, 9 and 10) would be antidilutive. For the six month period ended June
30, 1997 (unaudited), the weighted average impact of 988,132 outstanding
options and warrants has been included in the computation of net income per
share.
STOCK-BASED COMPENSATION
During October 1995, the FASB 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 costs under pre-existing accounting pronouncements. If the fair
value-based method of accounting is not adopted, SFAS No. 123 requires pro
forma disclosures of net income (loss) and earnings (loss) per share in the
notes to the 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 adopted this standard in 1996, and has elected to
continue the accounting set forth in Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and to provide the
necessary pro-forma disclosures (Note 10).
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any
potential dilution. Diluted EPS reflects potential dilution from the exercise
or conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently-required fully diluted EPS. SFAS
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
F-11
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
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., who were not previously affiliated with the
Company, for an aggregate purchase price of $1,368. 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 sheets,
as will any contingent consideration which arises due to the option described
above, based on a twenty-year contract with an MSO, which was contributed to
Majean, Inc. by its shareholders upon its formation immediately 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. 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
in cash, a note for $150 due in two installments within one year of the
acquisition and 30,193 shares of common stock, for an aggregate purchase price
of $376. Furthermore, the Health Connections purchase agreement calls for the
issuance of an additional 56,611 common shares, as contingent consideration,
based on the achievement of targeted operating performance by this entity.
The Company will record the effect of the contingent consideration, if
any, related to these acquisitions based upon the provisions of Emerging Issues
Task Force Issue 95-8, "Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Company in a Purchase Business Combination", which
sets forth the criteria for determining the allocation of contingent
consideration as either additional purchase price or compensation expense.
These criteria provide for the recognition of contingent consideration, as
opposed to compensation expense, upon the exercisability, if any, of such
options and warrants where relevant facts and circumstances, such as continued
employment of the sellers, components of the selling shareholder group, reasons
for contingent payments and other agreements and issues, indicate that such
accounting is warranted. Management of the Company believes that the terms of
the acquisitions described above meet the criteria for recognition of
contingent consideration.
F-12
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
These acquisitions described above were valued based on management's
estimate of the fair value of common stock at the date of acquisition, which
was determined by the Company's management by comparisons to (i) arms-length
transactions with unrelated third-parties for the same or similar securities
and (ii) an independent third-party appraisal. Costs in excess of net assets
acquired were recorded as intangible assets as follows:
<TABLE>
<CAPTION>
PELTZ U.S. HEALTH
MAJEAN, INC. VENTIMIGLIA, INC. CONNECTIONS, INC.
-------------- ------------------- ------------------
<S> <C> <C> <C>
Accounts receivable ......... $ - $ 42 $ 41
Management contracts ......... 1,368 - -
Goodwill ..................... - 173 355
Covenant not-to-compete ...... - 10 10
Current liabilities ......... - (34) (30)
-------- ----- -----
Total purchase price ...... $ 1,368 $ 191 $ 376
======== ===== =====
</TABLE>
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.
This pro forma information does not give effect to any operations of Majean,
Inc., which had no operations prior to the merger transaction with the Company.
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 $ 1,620
Net loss ............... (2,467) (5,743)
Net loss per share ...... $ (1.25) $ (1.70)
</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.
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, to be paid in two installments of $22 on
the closing date and on the first anniversary thereof, for an aggregate
purchase price of approximately $90, all of which is included in goodwill in
the accompanying consolidated balance sheets. 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.
The stockholders agreements for these MSOs and those MSOs which were
formed as described in Note 1, 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 targets if
the Company has not called its right to acquire those interests within that
period. The agreements provide that these call transactions will be paid in the
Company's common stock, and put transactions will be paid in cash, and that
either transaction, if effected, would be based on an agreed-upon amount at the
time of the transaction. The Company will, in the event that these transactions
take place, account for such transactions as purchases at the agreed-upon fair
market value of the MSO interest being purchased.
F-13
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH PHYSICIAN PRACTICES:
SHARED SERVICES
The Company previously shared office space and administrative services
with Physicians' Online, Inc. ("POL"), a privately held healthcare information
services company which is partly owned by several of the Company's
shareholders, including certain officers and directors.
During the three years ended December 31, 1996, POL also incurred expenses
totaling $136, $181 and $95, respectively, on behalf of the Company for which
the Company has reimbursed POL. The Company also repaid a loan from POL in the
amount of $300 during the year ended December 31, 1995. In addition, during
1995, POL borrowed $500 from the Company. POL repaid this amount in full prior
to December 31, 1995.
TRANSACTIONS WITH OFFICERS
In accordance with the Company's Senior Executive Loan Policy, which is
administered by the Compensation Committee of the Board of Directors, the
Company has made loans to certain senior executives of the Company aggregating
$430, which are included in other assets in the accompanying consolidated
balance sheet as of December 31, 1996. These loans are due three years from the
loan date with interest payable monthly at a rate of 6% per annum. There were
such no loans outstanding at December 31, 1995.
Management of the Company believes that these related party transactions
were effected on terms which approximate fair market value.
TRANSACTIONS WITH MSOS
In December 1996, one of the MSOs purchased accounts receivable from a
physician practice, under the terms of its management services agreement, for
an aggregate amount of $4,501, which is included in accounts receivable in the
accompanying consolidated balance sheet as of December 31, 1996. In accordance
with the agreement, all purchased accounts receivable outstanding after ninety
days from the purchase date are to be sold back to the physician practice at
face value. In the event that the physician practice is unable to repurchase
the receivables, the aggregate outstanding amount is converted to a loan which
is collateralized by outstanding shares of the Company held by the shareholders
of the physician practice.
During 1996, a separate MSO made advances aggregating $600, in the
ordinary course of business, to a physician practice with which the MSO has a
long-term management services agreement. These advances were satisfied
subsequent to December 31, 1996, as the physician practice simultaneously
assigned certain accounts receivable to the MSO to satisfy the advances and
sold additional accounts receivable to the MSO. This amount is included in
advances to affiliates in the accompanying consolidated balance sheet.
Revenues generated by MSOs from physician practices, which are owned by
physicians, certain of whom own or may, in the future, own shares of the
Company's common stock, do not, in the opinion of the Company's management,
meet the criteria for related party transactions because their operations are
independent of the Company in all material respects and the physician ownership
of the Company is not significant.
F-14
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. INVESTMENTS IN MARKETABLE SECURITIES:
The amortized cost, gross unrealized gains and losses and fair value of
the available-for-sale securities as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Commercial paper ...... $ 7,290 $ 100 $ - $ 7,390
======== ====== ==== ========
</TABLE>
All available-for-sale securities are due within one year. There were no
sales of available-for-sale securities for the year ended December 31, 1996.
The Company had no marketable securities prior to 1996.
6. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software ..................... $ 1,152 $ 2,276 $3,189
Equipment under capital leases ........................ 682 471 471
Furniture and fixtures .............................. 189 272 379
Leasehold improvements .............................. 60 43 43
-------- -------- -------
2,083 3,062 4,082
Less: Accumulated depreciation and amortization ...... 544 1,009 1,438
-------- -------- -------
Property and equipment, net ........................... $ 1,539 $ 2,053 $2,644
======== ======== =======
</TABLE>
Depreciation and amortization aggregated $147, $397 and $782,
respectively, for the three years ended December 31, 1996 and $369 and $429,
respectively, for the six months ended June 30, 1996 and 1997 (unaudited).
7. INTANGIBLE ASSETS:
Intangible assets arising from acquisitions (Note 3) consist of the
following:
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
--------- --------- ------------
(UNAUDITED)
Management contracts ............... $ 1,368 $ 1,368 $ 4,823
Goodwill ........................... 529 619 619
Covenant not-to-compete ............ 20 20 20
-------- -------- --------
1,917 2,007 5,462
Less: Accumulated amortization ...... 41 149 203
-------- -------- --------
Intangible assets, net ............... $ 1,876 $ 1,858 $ 5,259
======== ======== ========
Amortization aggregated $42 and $108, respectively, for the years ended
December 31, 1995 and 1996 and $54 and $54, respectively, for the six months
ended June 30, 1996 and 1997 (unaudited). There were no intangible assets prior
to 1995.
F-15
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Reimbursable physician practice expense ...... $ 326 $400
Public stock offering expenses ............... 245 -
Professional fees .............................. - 168
Other ....................................... 342 171
------ -----
Total accrued expenses ..................... $ 913 $739
====== =====
</TABLE>
The Company had no individual accrued expenses in excess of 5% of current
liabilities as of December 31, 1995.
9. BRIDGE FINANCING:
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. The
Company issued one promissory note and received $1,500 upon the closing, issued
a second promissory note and received $750 at the second closing date, April
26, 1996, and issued a third promissory note and received the remaining $750 on
the third closing date, June 28, 1996. Each note was due on the earlier of the
initial public offering of the Company's securities or one year from the
respective closing dates. Interest was 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 were to be
exercisable during the period from January 1, 1997 through June 28, 2001 if
payment had not been made on the notes by the agreed-upon payment dates
described above or if an initial public offering was not consummated prior to
January 1, 1997; however, when payments on the notes were made by the specified
dates, these contingent warrants were canceled.
The Company also entered into an agreement with the owners of the
Company's Series D Convertible Preferred Stock and related warrants (Note 10)
for additional bridge financing in the amount of approximately $2,000. This
financing was unsecured, bore interest at 9% and expired on the earlier of the
consummation of an initial public offering or July 31, 1997. On June 19, 1996,
the Company issued three promissory notes in the aggregate principal amount of
$1,000 and on August 13, 1996, the Company issued three additional promissory
notes in the aggregate principal amount of $1,000 under this agreement.
The Company used a portion of the proceeds of the initial public offering
to repay this bridge financing. The supplementary net loss per share for the
year ended December 31, 1996, which follows, gives supplementary effect to the
issuance of 384,615 shares of common stock for the entire period during which
the related bridge financing was outstanding, which is the number of shares
issued in the initial public offering, the proceeds of which were used to repay
the bridge financing, as well as to the effect of the reduction of related
interest expense, net of tax, in the period during which that debt was
outstanding. These shares are presumed outstanding for supplementary purposes
only, and were neither issued nor outstanding for any purpose during the year
ended December 31, 1996.
F-16
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
-------------------
<S> <C>
Supplementary net loss per share ......... $ (.26)
-------
Supplementary weighted average common shares
outstanding .............................. 5,426
=======
</TABLE>
10. SHAREHOLDERS' EQUITY:
COMMON STOCK
(a) In November 1994, the Company sold 75,960 common shares pursuant to a
private placement agreement dated August 22, 1994 for an aggregate of
$639. 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.
(b) In 1995, the Company sold 79,780 common shares pursuant to a private
placement agreement dated April 21, 1995 for an aggregate of $625. 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.
(c) In October 1996, the Company completed an initial public offering of
its securities. The offering included the sale of 2,300,000 shares of
common stock (on a basis which reflected the reverse split described
below) at $13.00 per share plus an underwriters' overallotment of
345,000 shares. Total net proceeds from this offering were $30,483.
PREFERRED STOCK
Prior to the initial public offering, the Company had 2,000,000 shares of
authorized Preferred Stock with a par value of $.01 per share, of which 971,800
shares had been designated Series A Convertible Preferred Stock. On August 31,
1993, the Company sold 971,800 shares of Series A Convertible Preferred Stock
for $97. In March 1994, the Company authorized and sold 282,900 shares of
Series B Convertible Preferred Stock for $2,000 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 pursuant to a Private Placement
Agreement. In August 1995, the Company authorized and sold 666,360 shares of
Series D Convertible Preferred Stock for $4,998 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 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.
Subject to certain provisions, registration rights, as defined in the
agreement, were 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 had voting rights. Furthermore, holders of Series D Convertible Preferred
Stock had the right to purchase 446,858 shares of Class D Convertible Preferred
Stock at $8.39 per share.
F-17
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK SPLITS AND CONVERSION OF PREFERRED STOCK
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. In April 1996, the Company authorized a 1.5 for 1 stock split on
its common stock in the form of a stock dividend.
Pursuant to the terms of the Series A, B, C and D Convertible Preferred
Stock, these securities were converted, on a 1.5 to 1 share basis, to common
stock immediately prior to the effective date of the initial public offering.
In connection with the initial public offering, the Company effected a
recapitalization whereby the presently outstanding common stock (including
converted Series A, B, C and D Convertible Preferred Stock) was converted to
shares of common stock on a .59581 to 1 share basis.
All information in the accompanying consolidated financial statements and
footnotes has been retroactively restated to give effect to these transactions.
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 adopted the 1995 Stock Option Plan (the "1995
Plan") for the purpose of granting incentive stock options to 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. Options granted under the 1995 Plan typically vest
annually over a three-year period and expire ten years from the date of grant.
The Company reserved 1,500,000 shares of common stock for issuance under the
1995 Plan.
The Company also adopted the Advanced Health Corporation Employee Stock
Purchase Plan (the "Employee Plan") during 1996 in order to allow the employees
of the Company to acquire a proprietary interest in the Company through the
purchase of the Company's common stock. Under the Employee Plan, eligible
employees will be granted options to purchase shares of common stock through
regular payroll deductions. The total number of shares of common stock that are
authorized for issuance under the Employee Plan is 1,200,000. No shares have
been issued under the Employee Plan.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net loss and net loss per share would have been changed
to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <C> <C> <C>
Net loss: ............... As Reported $ (5,707) $ (1,465)
Pro Forma (5,898) (1,850)
Net loss per share: ...... As Reported $ (1.68) $ (0.29)
Pro Forma (1.71) (0.36)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-18
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
A summary of the status of the 1995 Plan at December 31, 1995 and 1996,
and changes during the years then ended, is presented in the table and
narrative below:
<TABLE>
<CAPTION>
1995 1996
---------------------------- -------------------------
WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Outstanding at beg. of year ..................... 841,264 $ 0.27 888,916 $ 0.17
Grant .......................................... 980,968 2.73 154,733 6.77
Exercised ....................................... (885,279) 0.01 (21,734) 3.71
Forfeited ....................................... (48,037) 2.52 (217,471) 4.17
---------- ----------
Outstanding at end of year ..................... 888,916 0.17 804,444 1.31
========== ==========
Exercisable at end of year ..................... 22,479 n/a 306,511 n/a
========== ==========
Weighted average fair value of options granted . $ 1.43 n/a $ 3.54 n/a
========== ==========
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1995 and 1996, respectively:
risk-free interest rates of 6.2%; expected dividend yields of 0%; expected
lives of 3 years; expected stock price volatility of 74%.
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:
Income tax benefit consists of the following:
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
Federal:
Current ........................ $ - $ - $ -
Deferred ........................ - - 757
State and Local:
Current ........................... - - -
Deferred ........................ - - 220
---- ---- ------
Total income tax benefit ...... $ - $ - $ 977
==== ==== ======
A reconciliation of difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1995 1996
---------- ---------- -----
<S> <C> <C> <C>
U.S. Federal statutory income tax rate ............... 34% 34% 34%
State income taxes, net of federal tax benefit ...... 6% 6% 6%
Net operating loss without tax benefit ............... (40%) (40%) -
------- ------- ---
- - 40%
======= ======= ===
</TABLE>
F-19
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The tax effects of temporary differences, that give rise to a significant
portion of the deferred income tax asset, net, are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1995 1996
----------- ----------
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforward ...... $ - $ 977
-------- --------
Current deferred tax asset ......... - 977
-------- --------
Noncurrent deferred income tax asset, net:
Net operating loss carryforwards ...... 2,565 3,511
Amortization ........................... 523 380
Deferred revenue ..................... 240 160
Allowance for doubtful accounts ...... - 84
Other ................................. 179 (11)
-------- --------
3,507 4,124
-------- --------
Less: Valuation allowance ............ (3,507) (4,124)
-------- --------
Total deferred income taxes, net ...... $ - $ 977
======== ========
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") available to offset future book and taxable income of approximately
$10,200 and $8,700, respectively, which expire in varying amounts through 2011.
Certain of these carryforwards are limited as to their utilization due to
cumulative changes in ownership of the Company through 1996 (Note 10). Future
changes in ownership, as defined by Section 382 of the Internal Revenue Code,
as amended could limit the amount of net operating loss carryforwards in any
one year. In 1996, management of the Company determined that it has become more
likely than not that the current year deferred income tax assets will be
realized and has, accordingly, recorded the current year deferred income tax
asset of $976, which is included in the income tax benefit in the accompanying
consolidated statement of operations for 1996. The determination that the net
deferred income tax asset of $976, which includes the deferred income tax
benefit for the current year, is realizable is based on the Company's
profitability in the latter part of 1996.
12. CAPITAL LEASE OBLIGATIONS:
The Company is the lessee of certain equipment under capital leases
expiring through 2001. 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 as of
December 31, 1996:
Year ending December 31,
1997 ............................................. $ 145
1998 ............................................. 78
1999 ............................................. 8
2000 ............................................. 11
2001 ............................................. 4
------
Total minimum lease payments ..................... 246
Less: Amount representing interest ............... 34
------
Present value of net minimum lease payments ...... 212
Less: Current portion ........................... 131
------
$ 81
======
F-20
<PAGE>
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
Future minimum payments for operating leases at December 31, 1996 are as
follows:
Year ending December 31,
1997 ..................... $ 631
1998 ..................... 719
1999 ..................... 784
2000 ..................... 814
2001 and thereafter ...... 792
Rent expense was $70, $126 and $630, respectively, for the three years
ended December 31, 1996 and $181 and $451, respectively for the six months
ended June 30, 1996 and 1997 (unaudited).
14. SUBSEQUENT EVENT:
Subsequent to December 31, 1996, the Company loaned $2,000 to Madison at
the prime rate plus 2%, not to exceed 10%, with interest payable monthly and
the outstanding principal payable in twelve monthly installments beginning in
January 1998. In conjunction with this loan, the Company has guaranteed a
letter of credit of Madison, in the amount $1,727, by depositing and
restricting cash in the same amount with the same financial institution
providing that letter of credit. These obligations are secured by the 49%
ownership interest in Uptown held by Madison.
15. UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The unaudited consolidated financial information included herein for the
six months ended June 30, 1996 and 1997 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.
16. EVENTS (UNAUDITED) OCCURRING SUBSEQUENT TO THE DATE OF REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
In June 1997, in connection with an amendment to the management services
agreement with Madison, the Company exchanged approximately $3,600 of accounts
receivable from Madison for an increase in the fees payable by Madison, an
increase in the term from 20 to 30 years and the elimination of Madison's right
to terminate the agreement, without cause, prior to the end of the tenth year of
the term. This consideration has been added to intangible assets and will be
amortized over the remaining life of the related contract, as amended.
As discussed under "Business--Legal Proceedings," the Company commenced an
action in September 1997 against a customer to collect $1,000 owed by the
customer to the Company pursuant to a software licensing agreement dated as of
March 31, 1997, as amended (the "License Agreement"), between the customer and
the Company. The Company believes that the customer's stated grounds for its
refusal to make this payment (alleged failure to timely deliver software and
documentation) is without merit. The Company recorded the subject payment as
revenue in the fiscal quarter ended June 30, 1997, and the dispute between the
parties arose thereafter. The Company believes that the ultimate resolution of
this action will not have a material effect on the Company's financial position
as of June 30, 1997 or the results of operations for the three and six months
then ended.
F-21
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT 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 SOLICITATION OF AN OFFER TO BUY ANY 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 CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Available Information ........................ 2
Prospectus Summary ........................... 3
Risk Factors ................................. 5
The Company ................................. 17
Use of Proceeds .............................. 17
Price Range of Common Stock and Dividend
Policy .................................... 17
Capitalization .............................. 18
Dilution .................................... 19
Selected Consolidated Financial Data ......... 20
Management's Discussion and Analysis of Fi-
nancial Condition and Results of Operations 21
Business .................................... 25
Management ................................. 42
Certain Transactions ........................ 48
Principal and Selling Stockholders ......... 50
Description of Capital Stock ............... 51
Shares Eligible for Future Sale ............ 53
Underwriting ................................. 55
Legal Matters .............................. 56
Experts .................................... 56
Index to Financial Statements ............... F-1
</TABLE>
================================================================================
<PAGE>
================================================================================
2,500,000 SHARES
[LOGO]
ADVANCED HEALTH
CORPORATION
COMMON STOCK
--------------------------------
PROSPECTUS
--------------------------------
COWEN & COMPANY
HAMBRECHT & QUIST
SBC WARBURG DILLON READ INC.
VOLPE BROWN WHELAN & COMPANY
, 1997
================================================================================
<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 ..................... $ 21,127
NASD filing fee ........................ 7,472
Nasdaq National Market listing fee ...... 17,500
Blue sky fees and expenses ............... 25,000
Printing and engraving expenses ......... 200,000
Legal fees and expenses .................. 250,000
Accounting fees and expenses ............ 250,000
Transfer agent and registrar fees ...... 25,000
Miscellaneous ........................... 203,901
----------
Total ................................. $1,000,000
==========
</TABLE>
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 10.7 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 unregistered securities
during the past three years:
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.
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
II-1
<PAGE>
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 was converted into
1.1189249 shares of Common Stock upon the consummation of the Company's Initial
Public 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 then President, a former 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, a former 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.
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
- -------------- -------------------------------------------------------------------------------------
<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
**3.2 By-laws of the Registrant
*5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm)
**10.1 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
**10.2 Investors' Rights Agreement dated as of August 23, 1995, among the Registrant, 21st
Century Communications Partners, L.P., 21st Century Communications T-E Partners,
L.P. and 21st Century Communications Foreign Partners, L.P.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------------------- ---------------------------------------------------------------------------------------
<S> <C>
**10.3 Registration Rights Agreement dated February 28, 1996, among the Registrant, Park
Avenue Capital, L.P. and Access Industries, LLC
***10.4 Tarrytown, New York Office Lease Agreement dated November 20, 1995, between
Tarrytown Corporate Center IV, L.P. and the Registrant
***10.5 First Amendment to Lease Agreement between Reckson Operating Partnership, LP, as
Owner, and the Registrant, as Tenant
**10.6 Chicago Office Lease Agreement dated December 8, 1995, between Adams Family,
L.L.C. and the Registrant
**10.7 Form of Director Indemnification Agreement
**10.8 Employment Agreement between the Registrant and Jonathan Edelson, M.D.
**10.9 Employment Agreement between the Registrant and Steven Hochberg
**10.10 Employment Agreement between the Registrant and Alan B. Masarek
****10.11 Employment Agreement between the Registrant and Robert Alger
*10.12 Amended and Restated Advanced Health Corporation 1995 Stock Option Plan
**10.13 Employee Stock Purchase Plan
*21 List of Subsidiaries
*23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its opinion filed
as Exhibit 5 hereto)
*23.2 Consent of Arthur Andersen LLP
****24 Powers of Attorney
****27 Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
** Filed as an exhibit to the Registrant's Registration Statement on Form
S-1, as amended (Registration No. 333-06283), and incorporated herein by
reference.
*** Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996, and incorporated herein by reference.
**** Previously filed
(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.
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
II-3
<PAGE>
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the 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 30th day of September, 1997.
ADVANCED HEALTH CORPORATION
By: /s/ Alan B. Masarek
------------------------------------
President, Chief Operating Officer
and Acting Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendement
No. 2 to the Registration Statement has been signed on the 30th day of
September, 1997, 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 Officer)
Jonathan Edelson, M.D.
* President and Director
-----------------------------
Steven Hochberg
President, Chief Operating Officer and
* Acting Chief Financial Officer (Principal
----------------------------- Financial and Accounting Officer)
Alan B. Masarek
* Director
-----------------------------
James T. Carney
* Director
-----------------------------
Barry Kurokawa
* Director
-----------------------------
Jonathan Lieber
</TABLE>
*By: /s/ Alan B. Masarek
---------------------------
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------
<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
**3.2 By-laws of the Registrant
*5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent
of such firm)
**10.1 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
**10.2 Investors' Rights Agreement dated as of August 23, 1995, among the
Registrant, 21st Century Communications Partners, L.P., 21st
Century Communications T-E Partners, L.P. and 21st Century
Communications Foreign Partners, L.P.
**10.3 Registration Rights Agreement dated February 28, 1996, among the
Registrant, Park Avenue Capital, L.P. and Access Industries, LLC
***10.4 Tarrytown, New York Office Lease Agreement dated November 20,
1995, between Tarrytown Corporate Center IV, L.P. and the
Registrant
***10.5 First Amendment to Lease Agreement between Reckson Operating
Partnership, LP, as Owner, and the Registrant, as Tenant
**10.6 Chicago Office Lease Agreement dated December 8, 1995, between
Adams Family, L.L.C. and the Registrant
**10.7 Form of Director Indemnification Agreement
**10.8 Employment Agreement between the Registrant and Jonathan Edelson,
M.D.
**10.9 Employment Agreement between the Registrant and Steven Hochberg
**10.10 Employment Agreement between the Registrant and Alan B. Masarek
****10.11 Employment Agreement between the Registrant and Robert Alger
*10.12 Amended and Restated Advanced Health Corporation 1995 Stock Option
Plan
**10.13 Employee Stock Purchase Plan
*21 List of Subsidiaries
*23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as
part of its opinion filed as Exhibit 5 hereto)
<PAGE>
*23.2 Consent of Arthur Andersen LLP
****24 Powers of Attorney (included on page II-5)
****27 Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
** Filed as an exhibit to the Registrant's Registration Statement on Form
S-1, as amended (Registration No. 333-06283), and incorporated herein by
reference.
*** Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996, and incorporated herein by reference.
**** Previously filed.
2,500,000 Shares
ADVANCED HEALTH CORPORATION
Common Stock
UNDERWRITING AGREEMENT
October __, 1997
COWEN & COMPANY
HAMBRECHT & QUIST LLC
SBC WARBURG DILLON READ INC.
VOLPE BROWN WHELAN & COMPANY, LLC
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Ladies and Gentlemen:
1. Introductory. Advanced Health Corporation, a Delaware corporation (the
"Company"), and certain of the selling stockholders named in Schedule B hereto
(the "Firm Selling Stockholders") propose to sell, pursuant to the terms of this
Agreement, to the several underwriters named in Schedule A hereto (the
"Underwriters" or, each, an "Underwriter"), an aggregate of 2,500,000 shares of
Common Stock, par value $.01 per share (the "Common Stock") of the Company. The
aggregate of 2,500,000 shares so proposed to be sold is hereinafter referred to
as the "Firm Stock". The Company, certain of the Firm Selling Stockholders named
in Schedule B hereto and certain selling stockholders of the Company designated
as management selling stockholders in Schedule B hereto (the "Management Selling
Stockholders" and, together with the Firm Selling Stockholders, the "Selling
Stockholders") may also sell to the Underwriters, upon the terms and conditions
set forth in Section 3 hereof, up to an additional 375,000 shares of Common
Stock (the "Optional Stock"). The Firm Stock and the Optional Stock are
hereinafter collectively referred to as the "Stock". Cowen & Company ("Cowen"),
Hambrecht & Quist LLC, SBC Warburg Dillon Read Inc. and Volpe Brown Whelan &
Company, LLC are acting as
<PAGE>
2
representatives of the several Underwriters and in such capacity are hereinafter
referred to as the "Representatives".
2. (a) Representations and Warranties of the Company and the Management
Selling Stockholders. The Company and the Management Selling Stockholders
represent and warrant to, and agree with, the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-35115), as
amended, in the form in which it became or becomes effective and also in
such form as it may be when any post-effective amendment thereto shall
become effective with respect to the Stock, including preeffective
prospectuses included as part of the registration statement as originally
filed or as part of any amendment or supplement thereto, or filed pursuant
to Rule 424 under the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, copies of
which have heretofore been delivered to you, has been carefully prepared by
the Company in conformity with the requirements of the Securities Act and
has been filed with the Commission under the Securities Act; and one or
more amendments to such registration statement, including in each case an
amended preeffective prospectus, copies of which amendments have heretofore
been delivered to you, have been so prepared and filed (as so amended, the
"Registration Statement"). If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the Registration
Statement will be filed and must be declared effective before the offering
of the Stock may commence, the term "Registration Statement" as used in
this Agreement means the Registration Statement as amended by said
post-effective amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement relating to the
Stock that is filed and declared effective pursuant to Rule 462(b) under
the Securities Act. The term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement, or, (A)
if the prospectus included in the Registration Statement omits information
in reliance on Rule 430A under the Securities Act and such information is
included in a prospectus filed with the Commission pursuant to Rule 424(b)
under the Securities Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule 424(b) and (B) if
prospectuses that meet the requirements of Section 10(a) of the Securities
Act are delivered pursuant to Rule 434 under the Securities Act, then (i)
the term "Prospectus" as used in this Agreement means the "prospectus
subject to completion" (as such term is defined in Rule 434(g) under the
Securities Act) as supplemented by (a) the addition of Rule 430A
information or other information contained in the form of prospectus
delivered pursuant to Rule 434(b)(2) under the Securities Act or (b) the
information contained in the term sheets described
<PAGE>
3
in Rule 434(b)(3) under the Securities Act, and (ii) the date of such
prospectuses shall be deemed to be the date of the term sheets. The term
"Preeffective Prospectus" as used in this Agreement means the prospectus
subject to completion in the form included in the Registration Statement at
the time of the initial filing of the Registration Statement with the
Commission, and as such prospectus shall have been amended from time to
time prior to the date of the Prospectus.
(ii) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Preeffective Prospectus, and, at
its date of issue, each Preeffective Prospectus conformed in all material
respects with the requirements of the Securities Act and did not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; and, when the Registration Statement becomes effective and at
all times subsequent thereto up to and including the Closing Dates (as
hereinafter defined), the Registration Statement and the Prospectus and any
amendments or supplements thereto contained and will contain all material
statements and information required to be included therein by the
Securities Act and conformed and will conform in all material respects to
the requirements of the Securities Act and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto,
included or will include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to information
contained in or omitted from any Preeffective Prospectus or the
Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity with, written
information regarding any Underwriter furnished to the Company by or on
behalf of any Underwriter, directly or through you, specifically for use in
the preparation thereof; there is no lease, franchise, contract, agreement
or document required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which
is not described or filed therein as required; and all descriptions of any
such leases, franchises, contracts, agreements or documents contained in
the Registration Statement are accurate and complete descriptions of such
documents in all material respects.
(iii) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set forth
or contemplated in the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations, direct
or contingent, nor entered into any transactions not in the ordinary course
of business, and there has not been any material adverse change in the
condition (financial or otherwise), properties, business,
<PAGE>
4
management, prospects, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the capital
stock, short-term or long-term debt of the Company and its subsidiaries
considered as a whole.
(iv) The financial statements, together with the related notes and
schedules, set forth in the Prospectus and elsewhere in the Registration
Statement fairly present, on the basis stated in the Registration
Statement, the financial position and the results of operations and changes
in financial position of the entities purported to be shown thereby at the
respective dates or for the respective periods therein specified and have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis except as may be set forth in the Prospectus.
The pro forma financial statements set forth in the Registration Statement
fairly presents, on the basis stated in the Registration Statement, the
information set forth therein, has been prepared in accordance with the
Rules and Regulations and the guidelines of the Commission with respect to
pro forma financial statements, has been properly compiled on the pro forma
bases set forth therein and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein. The
selected financial data set forth in the Prospectus under the caption
"Selected Consolidated Financial Data" fairly present, on the basis stated
in the Registration Statement, the information set forth therein.
(v) Arthur Andersen, LLP, who have expressed their opinions on the
audited financial statements and related schedules included in the
Registration Statement and the Prospectus, are independent public
accountants as required by the Securities Act and the Rules and
Regulations.
(vi) The Company has and each of its subsidiaries have been duly
organized and are validly existing and in good standing as corporations
under the laws of their respective jurisdictions of organization, with
power and authority (corporate and other) to own or lease their properties
and to conduct their businesses as described in the Prospectus; the Company
is and each of its subsidiaries are in possession of and operating in
compliance with all grants, authorizations, licenses, permits, consents,
certificates and orders required for the conduct of their respective
businesses, all of which are valid and in full force and effect; and the
Company is and each of such subsidiaries are duly qualified to do business
and in good standing as foreign corporations in all other jurisdictions
where their ownership or leasing of properties or the conduct of their
businesses requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the condition
(financial or otherwise), properties, business, management, prospects, net
worth or results of operations of the Company and its subsidiaries
considered as a whole. The Company has and each of its subsidiaries have
all requisite power and authority, and all
<PAGE>
5
necessary grants, authorizations, licenses, permits, consents,
certificates, orders, approvals, registrations and qualifications of and
from all public regulatory or governmental agencies and bodies to own,
lease and operate their respective properties and conduct their respective
businesses as now being conducted and as described in the Registration
Statement and the Prospectus, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. The Company's only significant subsidiaries
(as defined in Rule 1-02(w) of Regulation S-X under the Securities Act) are
those set forth in Exhibit 21 to the Registration Statement.
(vii) The Company's authorized and outstanding capital stock is on the
date hereof, and will be on the Closing Dates (as hereinafter defined), as
set forth under the heading "Capitalization" in the Prospectus; the
outstanding shares of Common Stock of the Company conform to the
description thereof in the Prospectus and have been duly authorized and
validly issued and are fully paid and nonassessable; and have been issued
in compliance with all federal and state securities laws and were not
issued in violation of or subject to any preemptive rights or similar
rights to subscribe for or purchase securities. Except as disclosed in and
or contemplated by the Prospectus and the financial statements of the
Company and related notes thereto included in the Prospectus, the Company
does not have outstanding any options or warrants to purchase, or any
preemptive rights or other rights to subscribe for or to purchase any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations, except for options granted
subsequent to the date of information provided in the Prospectus pursuant
to the Company's stock option plans disclosed in the Prospectus. The
description of the Company's stock option and other stock plans or
arrangements, and the options or other rights granted or exercised
thereunder, as set forth in the Prospectus, accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights. Except as set forth in the Prospectus,
all outstanding shares of capital stock of each subsidiary have been duly
authorized and validly issued, and are fully paid and nonassessable and
(except for directors' qualifying shares) are owned directly by the Company
or by another wholly owned subsidiary of the Company free and clear of any
liens, encumbrances, equities or claims.
(viii) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued, fully paid and nonassessable and free of any
preemptive or similar rights and will conform to the description thereof in
the Prospectus.
<PAGE>
6
(ix) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries or affiliates is a party or of which any property of the
Company or any subsidiary or affiliate is subject, which, if determined
adversely to the Company or any such subsidiary or affiliate, might
individually or in the aggregate (i) prevent or adversely affect the
transactions contemplated by this Agreement, (ii) suspend the effectiveness
of the Registration Statement, (iii) prevent or suspend the use of the
Prospectus in any jurisdiction or (iv) result in a material adverse change
in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and its subsidiaries considered as a whole; and to the best of the
Company's knowledge no such proceedings are threatened or contemplated
against the Company or any subsidiary or affiliate by governmental
authorities or others. The Company is not a party to nor subject to the
provisions of any material injunction, judgment, decree or order of any
court, regulatory body or other governmental agency or body. The
description of the Company's litigation under the heading "Legal
Proceedings" in the Prospectus is true and correct and complies with the
Rules and Regulations.
(x) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
breach or violation of any of the terms or provisions of or constitute a
default under any indenture, mortgage, deed of trust, note agreement or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its properties is or may
be bound, the Certificate of Incorporation, By-laws or other organizational
documents of the Company or any of its subsidiaries, or any law, order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties or result in the creation of a lien.
(xi) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company
of the transactions contemplated by this Agreement, except such as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or under the Securities Act or the securities or "Blue Sky" laws of
any jurisdiction in connection with the purchase and distribution of the
Stock by the Underwriters.
(xii) The statements set forth under the captions "Risk Factors
Government Regulation," "Risk Factors - FDA Regulation" and "Business
Government Regulation" in the Prospectus are accurate and fairly represent
the information disclosed therein.
<PAGE>
7
(xiii) The Company has the full corporate power and authority to enter
into this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Stock), and this Agreement has been duly and
validly authorized, executed and delivered by the Company and is a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except to the extent that rights to indemnity
and contribution hereunder may be limited by federal or state securities
laws or the public policy underlying such laws.
(xiv) The Company and its subsidiaries are in all material respects in
compliance with, and conduct their businesses in conformity with, all
applicable federal, state, local and foreign laws, rules and regulations of
any court or governmental agency or body; to the knowledge of the Company,
otherwise than as set forth in the Registration Statement and the
Prospectus, no prospective change in any of such federal or state laws,
rules or regulations has been adopted which, when made effective, would
have a material adverse effect on the operations of the Company and its
subsidiaries.
(xv) The Company's conduct of its business complies in all material
respects with the statutes relating to the corporate practice of medicine
in each jurisdiction in which the Company does business, including in New
York, New Jersey, Connecticut, Pennsylvania, Delaware, Georgia and
Tennessee.
(xvi) To the extent that the Company enters into risk-sharing or
capitation arrangements in the manner described in the Prospectus, the
Company is or will be exempt from regulation under any and all local, state
and federal laws, rules and regulations pertaining to the regulation of
insurance companies.
(xvii) The Company and its subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and other tax
returns and have paid all taxes shown as due thereon or with respect to any
of their properties, and there is no tax deficiency that has been, or to
the knowledge of the Company is likely to be, asserted against the Company
or any of its subsidiaries or any of their respective properties or assets
that would adversely affect the financial position, business or operations
of the Company and its subsidiaries.
(xviii) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement, except for persons
and entities who have expressly waived such right in connection with the
Registration Statement or who have been given proper notice and have failed
to exercise such right within the time or times required under the terms
and conditions of such right.
<PAGE>
8
(xix) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action
designed or intended to stabilize or manipulate the price of any security
of the Company, or which caused or resulted in, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company.
(xx) The Company has provided you with all financial statements since
August 27, 1993 to the date hereof that are available to the officers of
the Company, including financial statements for the months of [July and
August] of 1997.
(xxi) The Company and its subsidiaries own or possess all trademarks,
trademark registrations, service marks, service mark registrations,
tradenames, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or
necessary for the conduct of their respective businesses, and the Company
is not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and its subsidiaries with respect to
the foregoing. The Company's business as now conducted and as proposed to
be conducted does not and will not infringe or conflict with in any
material respect patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses or other intellectual property or
franchise right of any person. No claim has been made against the Company
alleging the infringement by the Company of any patent, trademark, service
mark, tradename, copyright, trade secret, license in or other intellectual
property right or franchise right of any person.
(xxii) The Company and its subsidiaries have performed all material
obligations required to be performed by them under all contracts required
by Item 601(b)(10) of Regulation S-K under the Securities Act to be filed
as exhibits to the Registration Statement, and neither the Company nor any
of its subsidiaries nor any other party to such contract is in default
under or in breach of any such obligations. Neither the Company nor any of
its subsidiaries has received any notice of such default or breach.
(xxiii) The Company is not aware that (A) any executive, key employee
or significant group of employees of the Company or any subsidiary plans to
terminate employment with the Company or any such subsidiary or (B) any
such executive or key employee is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreement that would be
violated by the present or proposed business activities of the Company and
its subsidiaries. Neither the Company nor any subsidiary has or expects to
have any liability for any prohibited transaction or funding deficiency or
any complete or partial withdrawal liability with respect to any pension,
profit sharing or other plan which is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to which the
<PAGE>
9
Company or any subsidiary makes or ever has made a contribution and in
which any employee of the Company or any subsidiary is or has ever been a
participant. With respect to such plans, the Company and each subsidiary
are in compliance in all material respects with all applicable provisions
of ERISA.
(xxiv) The Company has obtained the written agreement described in
Section 8(o) of this Agreement from each of its officers, directors and
holders of Common Stock listed on Schedule C hereto.
(xxv) The Company and its subsidiaries have, and the Company and its
subsidiaries as of the Closing Dates will have, good and marketable title
to all personal property owned or proposed to be owned by them which is
material to the business of the Company or of its subsidiaries, in each
case free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as would not have a material
adverse effect on the Company and its subsidiaries considered as a whole;
and any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases (assuming the lessors under such leases have full right, power and
authority to perform their obligations under such leases) with such
exceptions as would not have a material adverse effect on the Company and
its subsidiaries considered as a whole, in each case except as described in
the Prospectus.
(xxvi) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they are engaged;
and neither the Company nor any subsidiary of the Company has any reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires, to obtain similar coverage from similar
insurers as may be necessary to continue their business or to obtain any
reinsurance in connection with risk-sharing or capitation arrangements
which the Company may enter into as described in the Prospectus at a cost
that would not materially and adversely affect the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered as a
whole, except as described in the Prospectus.
(xxvii) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the Company
any brokerage or finder's fee or other fee or commission as a result of any
of the transactions contemplated by this Agreement.
(xxviii) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i)
<PAGE>
10
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxix) To the Company's knowledge, neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any of its
subsidiaries has made any payment of funds of the Company or any of its
subsidiaries or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(xxx) Neither the Company nor any of its subsidiaries is an
"investment company" or an entity "controlled" by an "investment company"
as such terms are defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), and the rules and regulations thereunder, and the Company
and its subsidiaries intend in the future to conduct their affairs in such
a manner as to ensure that they will not become an "investment company" or
a company "controlled" by an "investment company" within the meaning of the
1940 Act and such rules and regulations.
(xxxi) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of medical wastes or
hazardous substances by the Company or any of its subsidiaries (or, to the
knowledge of the Company, any of its predecessors in interest) at, upon or
from any of the property now or previously owned or leased by the Company
or any of its subsidiaries in violation of any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial
action which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and remedial
actions, a material adverse effect on the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered as a
whole; there has been no material spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such property or of
any medical wastes or hazardous substances due to or caused by the Company
or any of its subsidiaries or with respect to which the Company or any of
its subsidiaries had knowledge, except for any such spill, discharge, leak,
emission, injection, escapes, dumpings and releases which would not have or
would not be reasonably likely to have, singularly or in the aggregate with
all such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, such a material adverse effect; and the
<PAGE>
11
terms "hazardous substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
(xxxii) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company as to the matters
covered thereby.
(b) Representations and Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters that:
(i) Such Selling Stockholder now has, and on the Closing Dates will
have, valid and marketable title to the Stock to be sold by such Selling
Stockholder, free and clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any restriction on transfer,
and has full right, power and authority to enter into this Agreement, the
Power of Attorney and the Custody Agreement (each as hereinafter defined),
and, to the extent such Selling Stockholder is not a natural person, has
been duly organized and is validly existing and in good standing in its
corporate or other capacity under the laws of its jurisdiction of
organization.
(ii) Such Selling Stockholder now has, and on the Closing Dates will
have, upon delivery of and payment for each share of Stock hereunder, full
right, power and authority, and any approval required by law to sell,
transfer, assign and deliver the Stock being sold by such Selling
Stockholder hereunder, and each of the several Underwriters will acquire
valid and marketable title to all of the Stock being sold to the
Underwriters by such Selling Stockholder, free and clear of any liens,
encumbrances, equities claims, restrictions on transfer or other defects
whatsoever.
(iii) Such Selling Stockholder has duly executed and delivered a power
of attorney, in substantially the form heretofore delivered by the
Representatives (each, a "Power of Attorney"), appointing [Jonathan
Edelson, M.D.], [Steven Hochberg] and [Alan B. Masarek], or any of them, as
attorney-in-fact (the "Attorneys-in-fact") with authority to execute and
deliver this Agreement on behalf of such Selling Stockholder, to authorize
the delivery of the shares of Stock to be sold by such Selling Stockholder
hereunder and otherwise to act on behalf of such Selling Stockholder in
connection with the transactions contemplated by this Agreement.
(iv) Such Selling Stockholder has duly executed and delivered a
custody agreement, in substantially the form heretofore delivered by the
Representatives (each, a "Custody Agreement"), with [The Bank of New York]
as custodian (each, a "Custodian"), pursuant to which certificates in
negotiable form for the shares of Stock
<PAGE>
12
to be sold by such Selling Stockholder hereunder have been placed in
custody for delivery under this Agreement.
(v) Such Selling Stockholder has, by execution and delivery of each of
this Agreement, the Power of Attorney and the Custody Agreement, created
valid and binding obligations of such Selling Stockholder, enforceable
against such Selling Stockholder in accordance with its terms, except to
the extent that rights to indemnity hereunder may be limited by federal or
state securities laws or the public policy underlying such laws.
(vi) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably
be expected to, cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Stock pursuant to the distribution contemplated by this Agreement, and
other than as permitted by the Securities Act, has not distributed and will
not distribute any prospectus or other offering material in connection with
the offering and sale of the Stock.
(vii) The performance of this Agreement, the Custody Agreement and the
Power of Attorney, and the consummation of the transactions contemplated
hereby and thereby will not require any consent, approval, authorization or
other order of any court, regulatory body, administrative agency or other
governmental body (except as such may be required under the Securities Act,
state securities laws or Blue Sky laws) and will not result in a breach or
violation by such Selling Stockholder of any of the terms or provisions of,
or constitute a default by such Selling Stockholder under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan agreement,
lease, franchise, license, or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder or any
of its properties, or to such Selling Stockholder's knowledge, any statute,
decree, order, rule or regulation of any court or governmental agency or
body applicable to such Selling Stockholder or any of its properties.
(viii) Such parts of the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relate to such
Selling Stockholder do not, and will not on the Closing Dates, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(ix) At any time during the period described in paragraph 4(c) hereof,
if there is any change in the information referred to in paragraph 2(b)(ix)
above, the Selling Stockholders will immediately notify you of such change.
<PAGE>
13
Each Selling Stockholder agrees that the shares of Stock represented by the
certificates held in custody under its respective Custody Agreement are for the
benefit of and coupled with and subject to the interests of the Underwriters,
the other Selling Stockholders and the Company hereunder, and that the
arrangement for such custody and the appointment of the Attorneys-in-fact are
irrevocable; that the obligations of such Selling Stockholder hereunder shall
not be terminated by operation of law, whether by death or incapacity,
liquidation or distribution of such Selling Stockholder, or any other event; and
that if such Selling Stockholder should die or become incapacitated or is
liquidated or dissolved or any other event occurs, before the delivery of the
Stock hereunder, certificates for the Stock to be sold by such Selling
Stockholder in accordance with the terms and conditions of this Agreement and
its applicable Custody Agreement, and action taken by the Attorneys-in-fact or
any of them under the Power of Attorney shall be valid as if such death,
incapacity, liquidation or dissolution or other event had not occurred, whether
or not the applicable Custodian, the Attorneys-in-fact or any of them shall have
notice of such death, incapacity, liquidation or dissolution or other event.
3. Purchase by, and Sale and Delivery to, Underwriters--Closing Dates. The
Company and the Firm Selling Stockholders agree, severally and not jointly, to
sell to the Underwriters the Firm Stock, with the number of shares to be sold by
the Company being 2,000,000 shares, and the number of shares to be sold by each
Firm Selling Stockholder being that number set opposite its name in Schedule B;
and on the basis of the representations, warranties, covenants and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase the Firm Stock from
the Company and the Firm Selling Stockholders the number of shares of Firm Stock
to be purchased by each Underwriter being set opposite its name in Schedule A,
subject to adjustment in accordance with Section 12 hereof. The number of shares
of Stock to be purchased by each Underwriter from each Firm Selling Stockholder
hereunder shall bear the same proportion to the total number of shares of Stock
to be purchased by such Underwriter hereunder as the number of shares of Stock
being sold by each Firm Selling Stockholder bears to the total number of shares
of Stock being sold by both Firm Selling Stockholders, subject to adjustment by
the Representatives to eliminate fractions.
The purchase price per share, net of commissions, to be paid by the
Underwriters to the Company and the Firm Selling Stockholders will be $__.__ per
share (the "Purchase Price").
The Company and the Firm Selling Stockholders will deliver the Firm Stock
to the Representatives for the respective accounts of the several Underwriters
in the form of definitive certificates, issued in such names and in such
denominations as the Representatives may direct by notice in writing to the
Company and the Firm Selling Stockholders given at or prior to 12:00 Noon, New
York Time, on the second full business day preceding the First
<PAGE>
14
Closing Date (as defined below) or, if no such direction is received, in the
names of the respective Underwriters or in such other names as Cowen may
designate (solely for the purpose of administrative convenience) and in such
denominations as Cowen may determine, against payment of the aggregate Purchase
Price therefor by wire transfer of immediately available funds, payable to the
order of the Company and [The Bank of New York] as Custodian for the Firm
Selling Stockholders, all at the offices of Shearman & Sterling, 599 Lexington
Avenue, New York, New York 10022. The time and date of the delivery and closing
shall be at 10:00 A.M., New York Time, on October __, 1997, in accordance with
Rule 15c6-1 of the Exchange Act. The time and date of such payment and delivery
are herein referred to as the "Firm Closing Date". The Firm Closing Date and the
location of delivery of, and the form of payment for, the Firm Stock may be
varied by agreement between the Company, the Firm Selling Stockholders and
Cowen. The Firm Closing Date may be postponed pursuant to the provisions of
Section 12.
The Company and the Firm Selling Stockholders shall make the certificates
for the Stock available to the Representatives for examination on behalf of the
Underwriters not later than 10:00 A.M., New York Time, on the business day
preceding the Firm Closing Date at the offices of Cowen & Company, Financial
Square, New York, New York 10005.
It is understood that Cowen, individually and not as Representative of the
several Underwriters, may (but shall not be obligated to) make payment to the
Company or the Firm Selling Stockholders on behalf of any Underwriter or
Underwriters, for the Stock to be purchased by such Underwriter or Underwriters.
Any such payment by Cowen shall not relieve such Underwriter or Underwriters
from any of its or their other obligations hereunder.
The several Underwriters agree to make a public offering of the Firm Stock
at the public offering price as soon after the effectiveness of the Registration
Statement as in their judgment is advisable. The Representatives shall promptly
advise the Company and the Firm Selling Stockholders of the making of the public
offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company and certain of the Selling Stockholders hereby grant to the Underwriters
an option to purchase, severally and not jointly, up to the aggregate number of
shares of Optional Stock set forth opposite the Company's and each such Selling
Stockholder's respective name on Schedule B hereto, for an aggregate of up to
375,000 shares. The price per share to be paid for the Optional Stock shall be
the Purchase Price. The option granted hereby may be exercised as to all or any
part of the Optional Stock at any time, and from time to time, not more than
thirty (30) days subsequent to the effective date of this Agreement. No Optional
Stock shall be sold and delivered unless the Firm Stock previously has been, or
simultaneously is, sold and delivered. The right to purchase the Optional Stock
or any portion thereof may be
<PAGE>
15
surrendered and terminated at any time upon notice by the Underwriters to the
Company and the Attorneys-in-fact, on behalf of the Selling Stockholders.
The option granted hereby may be exercised by the Underwriters by giving
written notice from Cowen to the Company and the Attorneys-in-fact, on behalf of
the Selling Stockholders, setting forth the number of shares of the Optional
Stock to be purchased by them and the date and time for delivery of and payment
for the Optional Stock. Each date and time for delivery of and payment for the
Optional Stock (which may be the Firm Closing Date, but not earlier) is herein
called the "Option Closing Date" and shall in no event be earlier than two (2)
business days nor later than ten (10) business days after written notice is
given. The Option Closing Date and the Firm Closing Date are herein called the
"Closing Dates". All purchases of Optional Stock from the Company and the
Selling Stockholders shall be made on a pro rata basis. Optional Stock shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Stock set forth opposite such Underwriter's name in
Schedule A hereto bears to the total number of shares of Firm Stock (subject to
adjustment by the Underwriters to eliminate odd lots). Upon exercise of the
option by the Underwriters, the Company and the Selling Stockholders agree to
sell to the Underwriters the number of shares of Optional Stock set forth in the
written notice of exercise and the Underwriters agree, severally and not jointly
and subject to the terms and conditions herein set forth, to purchase the number
of such shares determined as aforesaid.
The Company and the Selling Stockholders will deliver the Optional Stock to
the Underwriters (in the form of definitive certificates, issued in such names
and in such denominations as the Representatives may direct by notice in writing
to the Company and the Attorneys-in-fact, on behalf of the Selling Stockholders
given at or prior to 12:00 Noon, New York Time, on the second full business day
preceding the Option Closing Date or, if no such direction is received, in the
names of the respective Underwriters or in such other names as Cowen may
designate (solely for the purpose of administrative convenience) and in such
denominations as Cowen may determine), against payment of the aggregate Purchase
Price therefor by wire transfer of immediately available funds, payable to the
order of the Company and to [The Bank of New York] as Custodian for the Selling
Stockholders or payable as directed by such Custodian all at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022. The Company
and the Selling Stockholders shall make the certificates for the Optional Stock
available to the Underwriters for examination not later than 10:00 A.M., New
York Time, on the business day preceding the Option Closing Date at the offices
of Cowen & Company, Financial Square, New York, New York 10005. The Option
Closing Date and the location of delivery of, and the form of payment for, the
Option Stock may be varied by agreement between the Company, the Selling
Stockholders and Cowen. The Option Closing Date may be postponed pursuant to the
provisions of Section 12.
<PAGE>
16
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A, use its best efforts to
cause the Registration Statement to become effective, (ii) if the Company
and the Representatives have determined to proceed pursuant to Rule 430A,
use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and Rule 424 of
the Rules and Regulations and (iii) if the Company and the Representatives
have determined to deliver Prospectuses pursuant to Rule 434 of the Rules
and Regulations, to use its best efforts to comply with all the applicable
provisions thereof. The Company will advise the Representatives promptly as
to the time at which the Registration Statement becomes effective, will
advise the Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or of the institution of any proceedings for that purpose, and will use its
best efforts to prevent the issuance of any such stop order and to obtain
as soon as possible the lifting thereof, if issued. The Company will advise
the Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to the
Registration Statement or supplement to the Prospectus which shall not
previously have been submitted to the Representatives a reasonable time
prior to the proposed filing thereof or to which the Representatives shall
reasonably object in writing or which is not in compliance with the
Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or supplements to
the Registration Statement or the Prospectus which in the reasonable
opinion of the Representatives may be necessary to enable the several
Underwriters to continue the distribution of the Stock and will use its
best efforts to cause the same to become effective as promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be
delivered under the Securities Act any event relating to or affecting the
Company or any of its subsidiaries occurs as a result of which the
Prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Securities Act, the Company
will promptly notify the Representatives thereof and will prepare an
amended or
<PAGE>
17
supplemented prospectus which will correct such statement or omission; and
in case any Underwriter is required to deliver a prospectus relating to the
Stock nine (9) months or more after the effective date of the Registration
Statement, the Company upon the request of the Representatives and at the
expense of such Underwriter will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to the Representatives, at or before the
Closing Dates, conformed copies of the Registration Statement, as
originally filed with the Commission, and all amendments thereto including
all financial statements and exhibits thereto, and will deliver to the
Representatives such number of copies of the Registration Statement,
including such financial statements but without exhibits, and all
amendments thereto, as the Representatives may reasonably request. The
Company will deliver or mail to or upon the order of the Representatives,
from time to time until the effective date of the Registration Statement,
as many copies of the Preeffective Prospectus as the Representatives may
reasonably request. The Company will deliver or mail to or upon the order
of the Representatives on the date of the initial public offering, and
thereafter from time to time during the period when delivery of a
prospectus relating to the Stock is required under the Securities Act, as
many copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided,
however, that the expense of the preparation and delivery of any prospectus
required for use nine (9) months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to
deliver such prospectus.
(e) The Company will make generally available to its stockholders as
soon as practicable, but not later than fifteen (15) months after the
effective date of the Registration Statement, an earnings statement which
will be in reasonable detail (but which need not be audited) and which will
comply with Section 11(a) of the Securities Act, covering a period of at
least twelve (12) months beginning after the "effective date" (as defined
in Rule 158 under the Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable the
Stock to be registered or qualified for offering and sale by the
Underwriters and by dealers under the securities laws of such jurisdictions
as the Representatives may designate and at the request of the
Representatives will make such applications and furnish such consents to
service of process or other documents as may be required of it as the
issuer of the Stock for that purpose; provided, however, that the Company
shall not be required to qualify to do business or to file a general
consent (other than that arising out of the offering or sale of the Stock)
to service of process in any such jurisdiction where it is not now so
subject. The Company will, from time to time, prepare and file such
statements and reports as are or may be required of it as the
<PAGE>
18
issuer of the Stock to continue such qualifications in effect for so long a
period as the Representatives may reasonably request for the distribution
of the Stock. The Company will advise the Representatives promptly after
the Company becomes aware of the suspension of the qualifications or
registration of (or any such exception relating to) the Common Stock of the
Company for offering, sale or trading in any jurisdiction or of any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any orders suspending such qualifications,
registration or exception, the Company will, with the cooperation of the
Representatives, use its best efforts to obtain the withdrawal thereof.
(g) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public accountants
and with quarterly summary financial information in reasonable detail which
may be unaudited. During the period of five (5) years from the date hereof,
the Company will deliver to the Representatives and, upon request, to each
of the other Underwriters, (i) as soon as is practicable after the end of
each fiscal year, copies of each Annual Report of the Company filed on Form
10-K containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows
for the year then ended and the opinion thereon of the Company's
independent public accountants, (ii) as soon as they are available, copies
of any other reports or communications of the Company (financial or other)
which the Company shall publish or otherwise make available to any of its
stockholders as such, (iii) as soon as practicable after the filing
thereof, copies of each proxy statement, Quarterly Report on Form 10-Q,
Report on Form 8-K or any report filed by the Company with the Commission,
the NASD or any national securities exchange and (iv) from time to time
such other information concerning the Company as the Representatives may
reasonably request. So long as the Company has active subsidiaries, such
financial statements will be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in reports
furnished to its stockholders generally. Separate financial statements
shall be furnished for all subsidiaries whose accounts are not consolidated
but which at the time are significant subsidiaries as defined in the Rules
and Regulations.
(h) The Company will use its best efforts to maintain the inclusion of
the Stock on the Nasdaq National Market (or on a national securities
exchange) for a period of five (5) years after the effective date of the
Registration Statement.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
<PAGE>
19
(j) Prior to filing its quarterly statements on Form 10-Q, the Company
will have its independent auditors perform a limited quarterly review of
its quarterly numbers.
(k) Without the prior written consent of Cowen, the Company will not
offer, sell, assign, transfer, encumber, 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 the 90
days commencing on the date hereof, other than the Company's sale of Common
Stock hereunder and the Company's issuance of Common Stock upon the
exercise of warrants and stock options which are presently outstanding and
described in the Prospectus, the Company's issuance of options under the
Company's presently authorized stock option and purchase plans described in
the Prospectus and the Company's issuance of Common Stock upon the exercise
of any such options.
(l) The Company will apply the net proceeds from the sale of the Stock
as set forth in the description under "Use of Proceeds" in the Prospectus,
which description complies in all respects with the requirements of Item
504 of Regulation S-K.
(m) The Company will supply the Representatives with copies of all
correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the offer and sale of the
Stock under the Securities Act.
(n) Prior to each of the Firm Closing Date and the Option Closing
Date, the Company will furnish to the Representatives, as soon as they have
been prepared, copies of any unaudited interim consolidated financial
statements of the Company and its subsidiaries for any periods subsequent
to the periods covered by the financial statements appearing in the
Registration Statement and the Prospectus.
(o) Prior to the Firm Closing Date, the Company will issue no press
release or other communications directly or indirectly and hold no press
conference with respect to the Company or any of its subsidiaries, the
financial condition, results of operation, business, prospects, assets or
liabilities of any of them, or the offering of the Stock, without the prior
written consent of the Representatives. For a period of twelve (12) months
following the Firm Closing Date, the Company will use its best efforts to
provide to the Representatives copies of each press release or other public
communications with respect to the financial condition, results of
operations, business, prospects, assets or liabilities of the Company
contemporaneously with the public issuance thereof.
<PAGE>
20
(p) The Company will use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to each of the Firm Closing Date and the Option Closing Date
and to satisfy all conditions precedent to the delivery of the Stock
pursuant to this Agreement.
5. Payment of Expenses. (a) The Company will pay (directly or by
reimbursement) all costs, fees and expenses incurred in connection with expenses
incident to the performance of the obligations of the Company and the Selling
Stockholders under this Agreement and in connection with the transactions
contemplated hereby, including but not limited to (i) all expenses and taxes
incident to the issuance and delivery of the Stock to the Representatives; (ii)
all expenses incident to the registration of the Stock under the Securities Act;
(iii) the costs of preparing stock certificates (including printing and
engraving costs) ; (iv) all fees and expenses of the registrar and transfer
agent of the Stock; (v) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Stock to the Underwriters; (vi)
fees and expenses of the Company's counsel and the Company's independent
accountants; (vii) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement, each Preeffective Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, the Selling Stockholders' Powers of Attorney, the Custody Agreement,
the Agreement Among Underwriters between the Representatives and the
Underwriters, the Master Selected Dealers' Agreement, the Underwriters'
Questionnaire and the Blue Sky memoranda and this Agreement; (viii) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with exemptions from the qualifying or registering (or obtaining
qualification or registration of) all or any part of the Stock for offer and
sale and determination of its eligibility for investment under the Blue Sky or
other securities laws of such jurisdictions as the Representatives may
designate; (ix) all fees and expenses paid or incurred in connection with
filings made with the NASD; and (x) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section.
(b) Each Selling Stockholder will pay (directly or by reimbursement) all
fees and expenses incident to the performance of such Selling Stockholder's
obligations under this Agreement which are not otherwise specifically provided
for herein, including but not limited to any fees and expenses of counsel for
such Selling Stockholder, such Selling Stockholder's pro rata share of fees and
expenses of the Attorneys-in-fact and the Custodian and all expenses and taxes
incident to the sale and delivery of the Stock to be sold by such Selling
Stockholder to the Underwriters hereunder.
(c) In addition to its other obligations under Section 6(a) hereof, the
Company and each Selling Stockholder jointly and severally agrees that, as an
interim
<PAGE>
21
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon (i) any statement or omission or
any alleged statement or omission or (ii) any breach or inaccuracy in its
representations and warranties, they will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
and each Selling Stockholder's obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company and each Selling Stockholder, as the
case may be, together with interest, compounded daily, determined on the basis
of the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) announced from time to time by The Chase Manhattan Bank, New
York, New York (the "Prime Rate"). Any such interim reimbursement payments which
are not made to an Underwriter in a timely manner as provided below shall bear
interest at the Prime Rate from the due date for such reimbursement. This
expense reimbursement agreement will be in addition to any other liability which
the Company or any Selling Stockholder may otherwise have. The request for
reimbursement will be sent to the Company with a copy to each Selling
Stockholder.
(d) In addition to its other obligations under Section 6(b) hereof, each
Underwriter severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 6(b) hereof which relates to written information regarding
any Underwriter furnished to the Company by or on behalf of any Underwriter,
directly or through you, specifically for use in the Registration Statement, it
will reimburse the Company (and, to the extent applicable, each officer,
director, or controlling person) or Selling Stockholder on a quarterly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company (and, to
the extent applicable, each officer, director, or controlling person) or Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company (and, to the extent applicable, each officer, director, or
controlling person) or Selling Stockholder shall promptly return it to the
Underwriters together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made to
the Company within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
<PAGE>
22
(e) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in paragraphs (c) and/or (d) of
this Section 5, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Such an arbitration
would be limited to the operation of the interim reimbursement provisions
contained in paragraphs (c) and/or (d) of this Section 5 and would not resolve
the ultimate propriety or enforceability of the obligation to reimburse expenses
which is created by the provisions of this Section 5.
6. Indemnification and Contribution. (a) The Company and the Management
Selling Stockholders, jointly and severally, agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls such Underwriter
within the meaning of the Securities Act and the respective officers, directors,
partners, employees, representatives and agents of each such Underwriter
(collectively, the "Underwriter Indemnified Parties" and, each, an "Underwriter
Indemnified Party"), against any losses, claims, damages, liabilities or
expenses (including the reasonable cost of investigating and defending against
any claims therefor and counsel fees incurred in connection therewith), joint or
several, which may be based upon the Securities Act, or any other statute or at
common law, on the ground or alleged ground that any Preeffective Prospectus,
the Registration Statement or the Prospectus (or any Preeffective Prospectus,
the Registration Statement or the Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, unless such statement
or omission was made in reliance upon, and in conformity with, written
information regarding any Underwriter furnished to the Company by any
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof. The Company and the Management Selling Stockholders
will be entitled to participate at their own expense in the defense or, if they
so elect, to assume the defense of any suit brought to enforce any such
liability, but if the Company and the Management Selling Stockholders elect to
assume the defense, such defense shall be conducted by counsel chosen by them.
In the event the Company and the Management Selling Stockholders elect to assume
the defense of any such suit and retain such counsel, any Underwriter
Indemnified Parties, defendant or defendants in the suit, may retain additional
counsel but shall bear the fees and expenses of such counsel unless (i) the
Company and the Management Selling Stockholders shall have specifically
authorized the retaining of such counsel or (ii) the parties to such suit
include any such Underwriter Indemnified Parties, and the Company and the
Management Selling Stockholders and such Underwriter Indemnified Parties have
been advised by counsel to the Underwriters
<PAGE>
23
that one or more legal defenses may be available to it or them which may not be
available to the Company and the Management Selling Stockholders, in which case
neither the Company nor either of the Management Selling Stockholders shall be
entitled to assume the defense of such suit notwithstanding their obligation to
bear the fees and expenses of such counsel. This indemnity agreement is not
exclusive and will be in addition to any liability which the Company and the
Management Selling Stockholders might otherwise have and shall not limit any
rights or remedies which may otherwise be available at law or in equity to each
Underwriter Indemnified Party.
In making a claim for indemnification under this Section 6(a), the
Underwriter Indemnified Parties may proceed against either (i) both the Company
and the Management Selling Stockholders jointly or (ii) the Company only, but
may not proceed solely against the Management Selling Stockholders. In the event
that the Underwriter Indemnified Parties are entitled to seek indemnity or
contribution hereunder against any loss, liability, claim, damage and expense
incurred with respect to a final judgment from a trial court, then, as a
precondition to any Underwriter Indemnified Party obtaining indemnification or
contribution from either of the Management Selling Stockholders, the Underwriter
Indemnified Parties shall first obtain a final judgment from a trial court that
such Underwriter Indemnified Parties are entitled to indemnity or contribution
under this Agreement with respect to such loss, liability, claim, damage or
expense (the "Final Judgment") from the Company and the Management Selling
Stockholders and shall seek to satisfy such Final Judgment in full from the
Company by making a written demand upon the Company for such satisfaction. Only
in the event such Final Judgment shall remain unsatisfied in whole or in part 45
days following the date of receipt by the Company of such demand shall any
indemnified party have the right to take action to satisfy such Final Judgment
by making demand directly on the Management Selling Stockholders (but only if
and to the extent the Company has not already satisfied such Final Judgment,
whether by settlement, release or otherwise). The Underwriter Indemnified
Parties may exercise this right to first seek to obtain payment from the Company
and thereafter obtain payment from the Management Selling Stockholders without
regard to the pursuit by any party of its rights to the appeal of such Final
Judgment. The Underwriter Indemnified Parties shall, however, be relieved of
their obligation to first obtain a Final Judgment, seek to obtain payment from
the Company with respect to such Final Judgment or, having sought such payment,
to wait such 45 days after failure by the Company to immediately satisfy any
such Final Judgment if (i) the Company files a petition for relief under the
United States Bankruptcy Code (the "Bankruptcy Code"), (ii) an order for relief
is entered against the Company in an involuntary case under the Bankruptcy Code,
(iii) the Company makes an assignment for the benefit of its creditors, or (iv)
any court orders or approves the appointment of a receiver or custodian for the
Company or a substantial portion of its assets. The foregoing provisions of this
paragraph are not intended to require any Underwriter Indemnified Party to
obtain a Final Judgment against the Company or the Selling Stockholders before
obtaining reimbursement of expenses (including the reasonable cost of
investigating and defending against any claims and counsel fees
<PAGE>
24
incurred in connection therewith) pursuant to paragraph (a) of this Section 6.
However, the Underwriter Indemnified Parties shall first seek to obtain such
reimbursement in full from the Company by making a written demand upon the
Company for such reimbursement. Only in the event such expenses shall remain
unreimbursed in whole or in part 45 days following the date of receipt by the
Company of such demand shall any Underwriter Indemnified Party have the right to
receive reimbursement of such expenses from the Management Selling Stockholders
by making written demand directly on the Management Selling Stockholders (but
only if and to the extent the Company has not already satisfied the demand for
reimbursement, whether by settlement, release or otherwise). The Underwriter
Indemnified Parties shall, however, be relieved of their obligation to first
seek to obtain such reimbursement in full from the Company or, having made
written demand therefor, to wait such 45 days after failure by the Company to
immediately reimburse such expenses if (i) the Company files a petition for
relief under the Bankruptcy Code, (ii) an order for relief is entered against
the Company in an involuntary case under the Bankruptcy Code, (iii) the Company
makes an assignment for the benefit of its creditors, or (iv) any court orders
or approves the appointment of a receiver or custodian for the Company or a
substantial portion of its assets.
(b) Each Firm Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter Indemnified Party against any
losses, claims, damages, liabilities or expenses (including, unless such Firm
Selling Stockholder elects to assume the defense, the reasonable cost of
investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, which may be based upon the
Securities Act, or any other statute or at common law, on the ground or alleged
ground that such parts of any Preeffective Prospectus, the Registration
Statement or the Prospectus (or any Preeffective Prospectus, the Registration
Statement or the Prospectus as from time to time amended or supplemented) under
the caption "Principal and Selling Stockholders" that specifically relate to
such Firm Selling Stockholder includes or allegedly includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, unless such
statement or omission was made in reliance upon, and in conformity with, written
information regarding any Underwriter furnished to the Company by any
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof. Such Firm Selling Stockholder will be entitled to
participate at its own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if such Firm
Selling Stockholder elects to assume the defense, such defense shall be
conducted by counsel chosen by such Firm Selling Stockholder. In the event that
any Firm Selling Stockholder elects to assume the defense of any such suit and
retain such counsel, any Underwriter Indemnified Parties, defendant or
defendants in the suit, may retain additional counsel but shall bear the fees
and expenses of such counsel unless (i) such Firm Selling Stockholder shall have
specifically authorized the retaining of such counsel or (ii) the parties to
such suit
<PAGE>
25
include any such Underwriter Indemnified Parties, and such Firm Selling
Stockholder and such Underwriter Indemnified Parties have been advised by
counsel to the Underwriters that one or more legal defenses may be available to
it or them which may not be available to such Firm Selling Stockholder, in which
case such Firm Selling Stockholder shall not be entitled to assume the defense
of such suit notwithstanding its obligation to bear the fees and expenses of
such counsel. This indemnity agreement is not exclusive and will be in addition
to any liability which such Firm Selling Stockholder might otherwise have and
shall not limit any rights or remedies which may otherwise be available at law
or in equity to each Underwriter Indemnified Party. The Company, the Management
Selling Stockholders and the Firm Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to their respective amounts of such liability for which they each
shall be responsible. Notwithstanding any other provision of this Section 6, the
aggregate liability of any Firm Selling Stockholder pursuant to the provisions
of this Section 6(b) shall be limited to an amount equal to the aggregate
purchase price received by such Firm Selling Stockholder from the sale of such
Firm Selling Stockholder's Stock hereunder.
(c) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act (collectively, the "Company Indemnified
Parties") and each Selling Stockholder and each person, if any, who controls a
Selling Stockholder within the meaning of the Securities Act (collectively, the
"Stockholder Indemnified Parties") against any losses, claims, damages,
liabilities or expenses (including, unless the Underwriter or Underwriters elect
to assume the defense, the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred in connection therewith),
joint or several, which arise out of or are based in whole or in part upon the
Securities Act, the Exchange Act or any other federal, state, local or foreign
statute or regulation, or at common law, on the ground or alleged ground that
any Preeffective Prospectus, the Registration Statement or the Prospectus (or
any Preeffective Prospectus, the Registration Statement or the Prospectus, as
from time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, but only insofar as
any such statement or omission was made in reliance upon, and in conformity
with, written information regarding any Underwriter furnished to the Company by
such Underwriter, directly or through the Representatives, specifically for use
in the preparation thereof; provided, however, that in no case is such
Underwriter to be liable with respect to any claims made against any Company
Indemnified Party or Stockholder Indemnified Party against whom the action is
brought unless such Company Indemnified Party or Stockholder Indemnified Party
shall have notified such Underwriter in writing within a reasonable time after
the summons or other first legal process giving information of the nature of the
claim shall have been served upon the Company Indemnified
<PAGE>
26
Party or Stockholder Indemnified Party, but failure to notify such Underwriter
of such claim shall not relieve it from any liability which it may have to any
Company Indemnified Party or Stockholder Indemnified Party otherwise than on
account of its indemnity agreement contained in this paragraph. Such Underwriter
shall be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such liability,
but, if such Underwriter elects to assume the defense, such defense shall be
conducted by counsel chosen by it. In the event that any Underwriter elects to
assume the defense of any such suit and retain such counsel, the Company
Indemnified Parties or Stockholder Indemnified Parties and any other Underwriter
or Underwriters or controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional counsel retained by
them, respectively. The Underwriter against whom indemnity may be sought shall
not be liable to indemnify any person for any settlement of any such claim
effected without such Underwriter's consent. This indemnity agreement is not
exclusive and will be in addition to any liability which such Underwriter might
otherwise have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to any Company Indemnified Party or Stockholder
Indemnified Party.
(d) If the indemnification provided for in this Section 6 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above in respect of any losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to herein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other from the offering of the Stock. If, however,
the allocation provided by the immediately preceding sentence is not permitted
by applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or
<PAGE>
27
prevent such statement or omission. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contribution
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to above shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating, defending, settling or
compromising any such claim. Notwithstanding the provisions of this subsection
(d), no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the shares of the Stock underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. The Underwriters' obligations to contribute are several in proportion
to their respective underwriting obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
7. Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by them respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, the Selling
Stockholders, the Company or any of its officers or directors or any controlling
person, and shall survive delivery of and payment for the Stock.
8. Conditions of Underwriters' Obligations. The respective obligations of
the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of each
of the Firm Closing Date and the Option Closing Date, of the representations and
warranties made herein by the Company and the Selling Stockholders, to
compliance at and as of such Closing Date by the Company and the Selling
Stockholders with their covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to such Closing Date, and to the
following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company or the Representatives, shall be threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction
of the Representatives. Any filings of the Prospectus, or
<PAGE>
28
any supplement thereto, required pursuant to Rule 424(b) or Rule 434 of the
Rules and Regulations, shall have been made in the manner and within the
time period required by Rule 424(b) and Rule 434 of the Rules and
Regulations, as the case may be.
(b) The Representatives shall have been satisfied that there shall not
have occurred any change, on a consolidated basis, prior to such Closing
Date in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the capital
stock, short-term or long-term debt of the Company and its subsidiaries
considered as a whole, such that (i) the Registration Statement or the
Prospectus, or any amendment or supplement thereto, contains an untrue
statement of fact which, in the opinion of the Representatives, is
material, or omits to state a fact which, in the opinion of the
Representatives, is required to be stated therein or is necessary to make
the statements therein not misleading, or (ii) it is unpracticable in the
reasonable judgment of the Representatives to proceed with the public
offering or purchase the Stock as contemplated hereby.
(c) The Representatives shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company which is
material and adverse to the Company or which affects or may affect the
Company's or any Selling Stockholder's ability to perform its respective
obligations under this Agreement shall have been instituted or threatened
and there shall have occurred no material adverse development in any
existing such action, suit or proceeding.
(d) At the time of execution of this Agreement, the Representatives
shall have received from Arthur Andersen LLP, independent certified public
accountants, a letter, dated the date hereof, in form and substance
satisfactory to the Underwriters.
(e) The Representatives shall have received from Arthur Andersen, LLP,
independent certified public accountants, a letter, dated such Closing
Date, to the effect that such accountants reaffirm, as of such Closing
Date, and as though made on such Closing Date, the statements made in the
letter furnished by such accountants pursuant to paragraph (d) of this
Section 8.
(f) The Representatives shall have received from O'Sullivan Graev &
Karabell, LLP, counsel for the Company, an opinion, dated such Closing
Date, to the effect set forth in Exhibit I hereto.
(g) The Representatives shall have received from O'Sullivan Graev &
Karabell, LLP, special counsel for the Selling Stockholders, an opinion,
dated such Closing Date, to the effect set forth in Exhibit II hereto.
<PAGE>
29
(h) The Representatives shall have received from Proskauer Rose Goetz
& Mendelsohn LLP, special regulatory counsel for the Company, an opinion,
dated such Closing Date, to the effect set forth in Exhibit III(a) hereto
and a side letter, dated such Closing Date, to the effect set forth in
Exhibit III(b) hereto.
(i) The Representatives shall have received from King & Spalding,
special regulatory counsel for the Company, an opinion, dated such Closing
Date, to the effect set forth in Exhibit IV hereto.
(j) The Representatives shall have received from Handal & Morofsky,
patent counsel for the Company, an opinion, dated such Closing Date, to the
effect set forth in Exhibit V hereto.
(k) The Representatives shall have received from Shearman & Sterling,
counsel for the Underwriters, their opinion or opinions dated such Closing
Date with respect to the incorporation of the Company, the validity of the
Stock, the Registration Statement and the Prospectus and such other related
matters as it may reasonably request, and the Company shall have furnished
to such counsel such documents as they may request for the purpose of
enabling them to pass upon such matters.
(l) The Representatives shall have received a certificate, dated such
Closing Date, of the chief executive officer and the chief financial or
accounting officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act.
(ii) Neither any Preeffective Prospectus, as of its date, nor the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(iii) The representations and warranties of the Company in this
Agreement are true and correct at and as of such Closing Date, and the
Company has complied with all the agreements and performed or
satisfied all
<PAGE>
30
the conditions on its part to be performed or satisfied at or prior to
such Closing Date.
(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as
disclosed in or contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company and its subsidiaries considered as a whole; (ii) the
business and operations conducted by the Company and its subsidiaries
have not sustained a loss by strike, fire, flood, accident or other
calamity (whether or not insured) of such a character as to interfere
materially with the conduct of the business and operations of the
Company and its subsidiaries considered as a whole; (iii) no legal or
governmental action, suit or proceeding is pending or threatened
against the Company or its subsidiaries which is material to the
Company or its subsidiaries, whether or not arising from transactions
in the ordinary course of business, or which may materially and
adversely affect the transactions contemplated by this Agreement; (iv)
since such dates and except as so disclosed, the Company and its
subsidiaries have not incurred any material liability or obligation,
direct, contingent or indirect, made any change in their capital stock
(except pursuant to their stock plans), made any material change in
their short-term or funded debt or repurchased or otherwise acquired
any of the Company's or its subsidiaries capital stock; and (v) the
Company and its subsidiaries have not declared or paid any dividend,
or made any other distribution, upon their outstanding capital stock
payable to stockholders of record on a date prior to such Closing
Date.
(m) The Representatives shall have received a certificate or
certificates, dated such Closing Date, of each Attorney-in-fact, on behalf
of the Selling Stockholders, to the effect that as of such Closing Date its
representations and warranties in this Agreement are true and correct as if
made on and as of such Closing Date, and that it has performed all its
obligations and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(n) The Company and each of the Selling Stockholders shall have
furnished to the Representatives such additional certificates as the
Representatives may have reasonably requested as to the accuracy, at and as
of such Closing Date, of the representations and warranties made herein by
them and as to compliance at and as of such Closing Date by them with their
covenants and agreements herein contained and other provisions hereof to be
satisfied at or prior to such Closing Date, and as to satisfactions of the
other conditions to the obligations of the Underwriters hereunder.
<PAGE>
31
(o) Cowen shall have received the written agreements of the officers,
directors and holders of Common Stock or holders of options or warrants in
respect of Common Stock listed in Schedule C that each will not offer,
sell, assign, transfer, encumber, 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 (including,
without limitation, Common Stock of the Company which may be deemed to be
beneficially owned by the Company in accordance with the Rules and
Regulations) during the 90 days commencing on the Effective Date and such
written agreements remain in full force and effect as of the date hereof.
(p) The Stock shall have been approved for quotation on the Nasdaq
National Market.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in form
and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section shall not have been
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing or by telegram at or prior to each of the Closing Dates, but Cowen
shall be entitled to waive any of such conditions.
9. Effective Date. This Agreement shall become effective immediately as to
Sections 5, 6, 7, 9, 10, 11, 14, 15, 16, 17 and 18 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business day
following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Stock
for sale to the public. For the purposes of this Section 9, the Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by you of
telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
10. Termination. This Agreement (except for the provisions of Section 5)
may be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be terminated
by the Representatives at any time before it becomes effective in accordance
with Section 9 by notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement, there shall be no
liability of any party to this Agreement to any
<PAGE>
32
other party, other than as provided in Sections 5, 6 and 11 and other than as
provided in Section 12 as to the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the Firm Closing
Date or the Option Closing Date trading in securities on any of the New York
Stock Exchange, American Stock Exchange or Nasdaq National Market System shall
have been suspended or minimum or maximum prices shall have been established on
any such exchange or market, or a banking moratorium shall have been declared by
New York or United States authorities; (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market; (iii) if at or prior to the Firm Closing Date or the Option Closing Date
there shall have been (A) an outbreak or escalation of hostilities between the
United States and any foreign power or of any other insurrection or armed
conflict involving the United States or (B) any change in financial markets or
any calamity or crisis which, in the judgment of the Representatives, makes it
impractical or inadvisable to offer or sell the Firm Stock or Optional Stock, as
applicable, on the terms contemplated by the Prospectus; (iv) if there shall
have been any development or prospective development involving particularly the
business or properties or securities of the Company or any of its subsidiaries
or the transactions contemplated by this Agreement, which, in the judgment of
the Representatives, makes it impracticable or inadvisable to offer or deliver
the Firm Stock or the Optional Stock, as applicable, on the terms contemplated
by the Prospectus; (v) if there shall be any litigation or proceeding, pending
or threatened, which, in the judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Firm Stock or Optional
Stock, as applicable, on the terms contemplated by the Prospectus; or (vi) if
there shall have occurred any of the events specified in the immediately
preceding clauses (i) - (v) together with any other such event that makes it, in
the judgment of the Representatives, impractical or inadvisable to offer or
deliver the Firm Stock or Optional Stock, as applicable, on the terms
contemplated by the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any other provisions
hereof, if this Agreement shall not become effective by reason of any election
of the Company or the Selling Stockholders pursuant to the first paragraph of
Section 10 or shall be terminated by the Representatives under Section 8 or
Section 10, the Company will bear and pay the expenses specified in Section 5
hereof and, in addition to their obligations pursuant to Section 6 hereof, the
Company will reimburse the reasonable out-of-pocket expenses of the several
Underwriters (including reasonable fees and disbursements of counsel for the
Underwriters) incurred in connection with this Agreement and the proposed
purchase of the Stock, and promptly upon demand the Company will pay such
amounts to the Representatives.
12. Substitution of Underwriters. If any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Stock hereunder and
the aggregate
<PAGE>
33
number of shares which such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed ten percent (10%) of the total number of
shares underwritten, the other Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the shares
which such defaulting Underwriter or Underwriters agreed but failed to purchase.
If any Underwriter or Underwriters shall so default and the aggregate number of
shares with respect to which such default or defaults occur is more than ten
percent (10%) of the total number of shares underwritten and arrangements
satisfactory to the Representatives and the Company for the purchase of such
shares by other persons are not made within forty-eight (48) hours after such
default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company and
the Selling Stockholders shall have the right to postpone the Closing Dates for
a period of not more than five (5) full business days in order that the Company
and the Selling Stockholders may effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective numbers of shares to be
purchased by the remaining Underwriters or substituted Underwriters shall be
taken as the basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting Underwriter of
its liability to the Company, the Selling Stockholders or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter, the Selling Stockholders or the Company, except
for expenses to be paid or reimbursed pursuant to Section 5 and except for the
provisions of Section 6.
13. Covenants and Agreements of the Selling Stockholders. Each Selling
Stockholder covenants and agrees with the several Underwriters and the Company
that:
(a) For a period of 90 days after the date of this Agreement, without
the consent of Cowen, such Selling Stockholder will not offer to sell,
sell, contract to sell or otherwise dispose of any Stock or securities
convertible into or exchangeable for Stock, including without limitation,
Stock which may be deemed to be beneficially owned by such Selling
Stockholder in accordance with the Rules and Regulations, except for the
Stock being sold hereunder.
(b) Each Selling Stockholder will pay or cause to be paid all transfer
taxes with respect to the Stock to be sold by such Selling Stockholder.
<PAGE>
34
(c) Each Selling Stockholder will take all reasonable actions in
cooperation with the Company and the several Underwriters to do and perform
all things to be done and performed under this Agreement prior to each of
the Firm Closing Date and the Option Closing Date and to satisfy all
conditions precedent to the delivery of the Stock pursuant to this
Agreement.
14. Notices. All communications hereunder shall be in writing and, if sent
to the Underwriters shall be mailed, delivered or telegraphed and confirmed to
you, as their Representatives, c/o Cowen & Company at Financial Square, New
York, New York 10005 except that notices given to an Underwriter pursuant to
Section 6 hereof shall be sent to such Underwriter at the address furnished by
the Representatives or, if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed to Advanced Health Corporation, 555 White Plains Road,
Tarrytown, New York 10591, or if sent to the Selling Stockholders, shall be
mailed, delivered or telegraphed and confirmed to the [Jonathan Edelson, M.D.],
[Steven Hochberg] and [Alan B. Masarek], c/o [Advanced Health Corporation, 555
White Plains Road, Tarrytown, New York 10591].
15. Successors. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters, the Company, and the Selling Stockholders and
their respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
other than the persons mentioned in the preceding sentence any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Company and the Selling
Stockholders contained in this Agreement shall also be for the benefit of the
person or persons, if any, who control any Underwriter or Underwriters within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, and the indemnities of the several Underwriters shall also be for the
benefit of each director of the Company, each of its officers who has signed the
Registration Statement and the person or persons, if any, who control the
Company or any Selling Stockholder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
16. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the state of New York.
17. Authority of the Representatives. In connection with this Agreement,
Cowen will act for and on behalf of the several Underwriters, and any action
taken under this Agreement by Cowen, as Representative will be binding on all
the Underwriters.
<PAGE>
35
18. Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
19. General. This Agreement constitutes the entire agreement of the parties
to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Representatives.
20. Counterparts. This Agreement may be signed in two (2) or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
<PAGE>
36
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
ADVANCED HEALTH CORPORATION
By:_____________________________________
Title:
SELLING STOCKHOLDERS LISTED
IN SCHEDULE B
By:_____________________________________
Attorney-in-fact
Acting [on his own behalf
and] on behalf of the Selling
Stockholders listed in Schedule B.
Accepted and delivered in
New York, New York as of
the date first above written.
COWEN & COMPANY
HAMBRECHT & QUIST LLC
SBC WARBURG DILLON READ INC.
VOLPE BROWN WHELAN & COMPANY, LLC
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: Cowen & Company
By: __________________________
Title: Managing Director
<PAGE>
SCHEDULE A
Number Number of
of Firm Optional
Shares Shares
to be to be
Name Purchased Purchased
Cowen & Company....................................
Hambrecht & Quist LLC..............................
SBC Warburg Dillon Read Inc........................
Volpe Brown Whelan & Company, LLC..................
Total.......................................... 2,500,000 375,000
========= =======
<PAGE>
SCHEDULE B
Number Number of
of Firm Optional
Shares Shares
to be Sold to be Sold
Name
Advanced Health Corporation.......................... 2,000,000 250,000
Firm Selling Stockholders
INVESCO Trust Company................................ 300,000 0
21st Century Partnerships............................ 200,000 50,000
Management Selling Stockholders
Jonathan Edelson, M.D................................ 0 10,000
Steven Hochberg. .................................... 0 65,000
Total............................................ 2,500,000 375,000
========= =======
<PAGE>
SCHEDULE C
Number of
Shares Subject to
Stockholders "Lock-Up" Letters
<PAGE>
EXHIBIT I
[Letterhead of O'Sullivan Graev & Karabell, LLP]
Cowen & Company
Hambrecht & Quist LLC
SBC Warburg Dillon Read Inc.
Volpe Brown Whelan & Company, LLC
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
Ladies and Gentlemen:
We have acted as counsel to Advanced Health Corporation, a Delaware
corporation (the "Company"), in connection with the issuance and sale by the
Company of an aggregate of 2,000,000 shares of the Company's Common Stock, par
value $.01 per share (the "Shares"), to the Underwriters named in Schedule A of
the Underwriting Agreement dated October __, 1997 (the "Underwriting Agreement")
among the Company, the Selling Stockholders named in Schedule B to the
Underwriting Agreement and Cowen & Company, Hambrecht & Quist LLC, SBC Warburg
Dillon Read Inc. and Volpe Brown Whelan & Company, LLC, as representatives of
the several Underwriters. This opinion is being delivered to you pursuant to
Section 8(f) of the Underwriting Agreement. Capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Underwriting
Agreement.
In this capacity, we have examined signed copies of the registration
statement on Form S-1 (Registration No. 333-35115) (the "Registration
Statement") filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"), with the Securities and Exchange Commission (the
"Commission") on September 8, 1997, Amendment No. 1 to the Registration
Statement filed with the Commission on September 10, 1997 and Amendment No. 2 to
the Registration Statement filed with the Commission on __________ __, 1997. The
Registration Statement, as amended at the time it became effective, including
the information deemed to be a part thereof at the time of effectiveness
pursuant to Rule 430A under the Securities Act, the exhibits and the schedules
thereto, is hereinafter referred to as the "Registration Statement," and the
final prospectus dated October __, 1997, in the form filed by the Company
pursuant to Rule 424(b)(4) under the Securities Act, is hereinafter referred to
as the "Prospectus."
<PAGE>
We have also examined the Underwriting Agreement and the originals, or
copies identified to our satisfaction, of such corporate records of the Company,
certificates of public officials, officers of the Company and other persons, and
such other documents, agreements and instruments as we have deemed necessary as
a basis for the opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity with the originals of all
documents submitted to us as copies. In rendering the opinions expressed below,
we have relied as to certain factual matters, to the extent we deem proper, upon
the representations and warranties contained in or made pursuant to the
Underwriting Agreement and upon certificates of officers of the Company and
certificates of public officials.
With respect to our opinion set forth in Paragraph (ii) below, we have
relied upon and assumed the accuracy of telephonic confirmation from the Staff
of the Division of Corporation Finance of the Commission that the Registration
Statement has become and remains effective under the Securities Act.
As used in the opinions contained herein, the expressions "known to us,"
"to our knowledge" and "to the best of our knowledge" with reference to matters
of fact mean that after an examination of documents in our files and considering
the actual knowledge of those attorneys in our firm who have given substantive
attention to this matter, but not including any constructive or imputed notice
of any information, we have no reason to believe that the opinions expressed
herein are factually incorrect. Without limiting the generality of the
foregoing, with respect to our opinion in paragraph (xii) below, we have not
conducted any docket or similar search and have relied upon certificates of
officers of the Company. Beyond the foregoing, we have made no independent
factual investigation for the purpose of rendering the opinions set forth
herein.
Our opinions expressed below are limited to the law of the State of New
York, the General Corporation Law of the State of Delaware and the Federal
securities law of the United States, and we do not express any opinion herein
concerning any other law.
Based upon and subject to the foregoing, we are of the opinion that:
(i) Each of the Company and its subsidiaries has been duly organized
and is validly existing and in good standing as a corporation under the law
of its respective jurisdiction of organization, with full corporate power
and authority to own or lease its properties and to conduct its business as
described in the Prospectus;
(ii) The Registration Statement has been declared effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement
2
<PAGE>
has been issued, and to the best of our knowledge, no proceedings for that
purpose have been instituted or are pending or contemplated under the
Securities Act;
(iii) The description of all contracts and other documents referred to
in the Registration Statement and the Prospectus, and the summaries of, and
other disclosures regarding, such contracts and other documents included in
the Registration Statement and the Prospectus fairly present the
information required to be disclosed with respect thereto; and, to our
knowledge, there are no other contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement or
required to be described in the Registration Statement or the Prospectus
which are not filed or described as required;
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(v) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained
in the Prospectus;
(vi) The Shares have been duly authorized, and when delivered to and
paid for by the Underwriters in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and
non-assessable and the issuance of the Shares is not subject to any
preemptive or to our knowledge similar rights;
(vii) To our knowledge, all registration rights attached to any of the
Company's shares have been duly waived with respect to the offering
contemplated by the Prospectus;
(viii) The issue and sale of the Shares and the performance by the
Company of its obligations under the Underwriting Agreement will not result
in any violation of the certificate of incorporation or by-laws of the
Company or the provisions of the General Corporation Law of the State of
Delaware or any applicable New York or Federal securities law or statute or
any order known to us, rule or regulation of any New York or Federal court
or governmental agency or body having jurisdiction over the Company or any
of its properties (except that we render no opinion herein with respect to
the compliance of the indemnification or contribution provisions of the
Underwriting Agreement with the Federal securities laws);
(ix) To the best of our knowledge, the execution, delivery and
performance of the Underwriting Agreement and the consummation of the
transactions therein contemplated will not result in a breach or violation
of any of the terms or provisions of any material agreement or instrument
to which the Company or any of its subsidiaries is a
3
<PAGE>
party or by which it or any of its properties is bound or result in the
creation of a lien under any of such agreement;
(x) No consent, approval, authorization, order, registration or
qualification of or with any New York or Federal court or governmental
agency or body is required for the sale and issuance of the Shares or the
performance of the Company of its obligations under the Underwriting
Agreement, except such consents, approvals, authorizations, registrations
or qualifications as have been obtained under the Securities Act, as may be
required under state securities or Blue Sky laws or under the rules of the
National Association of Securities Dealers, Inc. in connection with the
purchase and distribution of the Shares by the Underwriters.
(xi) To our knowledge, based solely on an officer's certificate
(without independent verification), the Company and its subsidiaries have
performed all material obligations required to be performed by them under
all contracts filed as exhibits to the Registration Statement.
(xii) To the best of our knowledge, except as set forth in the
Prospectus, there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries or affiliates is a party or of which
any property of the Company or any subsidiary or affiliate is subject,
which, if determined adversely to the Company or any such subsidiary or
affiliate, might individually or in the aggregate (i) prevent or adversely
affect the transactions contemplated by the Underwriting Agreement, (ii)
suspend the effectiveness of the Registration Statement, (iii) prevent or
suspend the use of the Prospectus in any jurisdiction or (iv) result in a
material adverse change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of
operations of the Company and its subsidiaries considered as a whole; and
to the best of our knowledge, no such proceedings are threatened or
contemplated against the Company or any subsidiary or affiliate by
governmental authorities or others.
(xiii) Neither the Company nor its subsidiaries is an "investment
company" or an entity "controlled" by an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended;
(xiv) The statements in the Prospectus under the caption "Description
of Capital Stock" and "Shares Eligible for Future Sale", insofar as such
statements constitute a summary of documents referred to therein or matters
of law, are accurate summaries and fairly and correctly present, in all
material respects, the information called for with respect to such
documents and matters; and
(xv) The Registration Statement and the Prospectus (except for the
financial statements, notes thereto and other financial information and
schedules included therein or
4
<PAGE>
omitted therefrom as to which we have not been requested to express any
opinion) appear on their face to have been appropriately responsive in all
material respects to the requirements of the Securities Act.
We have not verified, and are not passing upon and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or Prospectus, other than those
mentioned in subparagraph (xiv) above. We have, however, generally reviewed and
discussed such statements with certain officers of the Company, its auditors and
with your representatives and their counsel. In the course of this review and
discussion, no facts have come to our attention that lead us to believe that (i)
the Registration Statement (except for the financial statements, notes thereto
and other financial information and schedules included therein or omitted
therefrom as to which we have not been requested to express any opinion or
statement of belief), at the time the Registration Statement became effective,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or (ii) the Prospectus (except for the financial statements,
notes thereto and other financial information and schedules included therein or
omitted therefrom as to which we have not been requested to express any opinion
or statement of belief), at the time the Prospectus was issued or on the date
hereof, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
5
<PAGE>
EXHIBIT II
[Letterhead of O'Sullivan Graev & Karabell, LLP]
Cowen & Company
Hambrecht & Quist LLC
SBC Warburg Dillon Read Inc.
Volpe Brown Whelan & Company, LLC
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
Ladies and Gentlemen:
We have acted as special counsel to the selling stockholders named in
Schedule B to the Underwriting Agreement (as defined herein) (the "Selling
Stockholders"), in connection with the issuance and sale by the Selling
Stockholders of an aggregate of 500,000 shares of the Company's Common Stock,
par value $.01 per share (the "Shares"), to the Underwriters named in Schedule A
of the Underwriting Agreement dated October __, 1997 (the "Underwriting
Agreement") among the Company, the Selling Stockholders and Cowen & Company,
Hambrecht & Quist LLC, SBC Warburg Dillon Read Inc. and Volpe Brown Whelan &
Company, LLC, as representatives of the several Underwriters. This opinion is
being delivered to you pursuant to Section 8(g) of the Underwriting Agreement.
Capitalized terms used but not defined herein shall have the meanings ascribed
thereto in the Underwriting Agreement.
In this capacity, we have examined signed copies of the registration
statement on Form S-1 (Registration No. 333-35115) (the "Registration
Statement") filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"), with the Securities and Exchange Commission (the
"Commission") on September 8, 1997, Amendment No. 1 to the Registration
Statement filed with the Commission on September 10, 1997 and Amendment No. 2 to
the Registration Statement filed with the Commission on __________ __, 1997. The
Registration Statement, as amended at the time it became effective, including
the information deemed to be a part thereof at the time of effectiveness
pursuant to Rule 430A under the Securities Act, the exhibits and the schedules
thereto, is hereinafter referred to as the "Registration Statement," and the
final prospectus dated October __, 1997, in the form filed by the Company
pursuant to Rule 424(b)(4) under the Securities Act, is hereinafter referred to
as the "Prospectus."
<PAGE>
We have also examined the Underwriting Agreement and the originals, or
copies identified to our satisfaction, of such corporate records of the Company,
certificates of public officials, officers of the Company and other persons, and
such other documents, agreements and instruments as we have deemed necessary as
a basis for the opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity with the originals of all
documents submitted to us as copies. In rendering the opinions expressed below,
we have relied as to certain factual matters, to the extent we deem proper, upon
the representations and warranties contained in or made pursuant to the
Underwriting Agreement and upon certificates of each Attorney-in-fact, on behalf
of the Selling Stockholders, and certificates of public officials.
As used in the opinions contained herein, the expressions "to our
knowledge" and "to the best of our knowledge" with reference to matters of fact
mean that after an examination of documents in our files and considering the
actual knowledge of those attorneys in our firm who have given substantive
attention to this matter, but not including any constructive or imputed notice
of any information, we have no reason to believe that the opinions expressed
herein are factually incorrect. Without limiting the generality of the
foregoing, with respect to our opinion in paragraph (iv) below, we have not
conducted any docket or similar search and have relied upon certificates each
Attorney-in-fact, on behalf of the Selling Stockholders. Beyond the foregoing,
we have made no independent factual investigation for the purpose of rendering
the opinions set forth herein.
Our opinions expressed below are limited to the law of the State of New
York, the General Corporation Law of the State of Delaware and the Federal
securities law of the United States, and we do not express any opinion herein
concerning any other law.
Based upon and subject to the foregoing, we are of the opinion that:
(i) Each Selling Stockholder, to the extent such Selling Stockholder
is not a natural person, has been duly organized and is validly existing
and in good standing in its corporate or other capacity under the laws of
its jurisdiction of organization;
(ii) The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Stockholders;
(iii) The Shares to be sold by the Selling Stockholders have been duly
authorized, and when delivered to and paid for by the Underwriters in
accordance with the terms of the Underwriting Agreement, will be validly
issued, fully paid and non-assessable;
2
<PAGE>
(iv) The execution and delivery by each Selling Stockholder of, and
the performance by such Selling Stockholder of its obligations under, the
Underwriting Agreement and the Custody Agreement and Power of Attorney of
such Selling Stockholder will not contravene any provision of applicable
law, or, to the best of our knowledge, any agreement or other instrument
binding upon such Selling Stockholder, or to the best of our knowledge, any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over such Selling Stockholder, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by such Selling Stockholder of its
obligations under the Underwriting Agreement, or the Custody Agreement or
Power of Attorney of such Selling Stockholder, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(v) The Custody Agreement of each Selling Stockholder has been duly
authorized, executed and delivered by each Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder enforceable in
accordance with its terms;
(vi) Each Selling Stockholder has full legal right, power and
authority, and any approval required by law (other than approval imposed by
the applicable state securities and Blue Sky laws) to sell, assign,
transfer and deliver the Shares to be sold by such Selling Stockholder in
the manner provided in the Underwriting Agreement and the Custody
Agreement;
(vii) To our knowledge after due inquiry, each Selling Stockholder has
good and clear title to the Shares to be sold by such Selling Stockholder
and upon delivery thereof, pursuant hereto and payment therefor, assuming
the Underwriters purchase in good faith without notice of adverse claim
under Section 8-302 of the Uniform Commercial Code, good and clear title
will pass to the Underwriters, severally, free of all restrictions on
transfer, liens, encumbrances, security interests and claims whatsoever;
and
(viii) The Power of Attorney signed by each Selling Stockholder
appointing [Jonathan Edelson, M.D.], [Steven Hochberg] and [Alan B.
Masarek], or any of them, as its Attorney-in-fact to the extent set forth
in the Underwriting Agreement with regard to the transactions contemplated
hereby and by the Registration Statement has been duly authorized, executed
and delivered by or on behalf of each Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder enforceable in
accordance with its terms, and, pursuant to such Powers of Attorney, each
of the Selling Stockholders has authorized [Jonathan Edelson, M.D.],
[Steven Hochberg] and [Alan B. Masarek], or any of them, to execute and
deliver on their
3
<PAGE>
behalf the Underwriting Agreement and any other document necessary or
desirable in connection with the transactions contemplated hereby and to
deliver the Shares to be sold by them pursuant to the Underwriting
Agreement.
We have not verified, and are not passing upon and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or Prospectus. We have, however,
generally reviewed and discussed such statements with certain officers of the
Company, its auditors and with your representatives and their counsel. In the
course of this review and discussion, no facts have come to our attention that
lead us to believe that (i) the Registration Statement (except for the financial
statements, notes thereto and other financial information and schedules included
therein or omitted therefrom as to which we have not been requested to express
any opinion or statement of belief), at the time the Registration Statement
became effective, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) the Prospectus (except for the
financial statements, notes thereto and other financial information and
schedules included therein or omitted therefrom as to which we have not been
requested to express any opinion or statement of belief), at the time the
Prospectus was issued or on the date hereof, contained any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4
<PAGE>
EXHIBIT III(a)
[Letterhead of Proskauer Rose Goetz & Mendelsohn LLP]
Cowen & Company
Hambrecht & Quist LLC
SBC Warburg Dillon Read Inc.
Volpe Brown Whelan & Company, LLC
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
Ladies and Gentlemen:
We have acted as special health care regulatory counsel to Advanced Health
Corporation, a Delaware corporation (the "Company"), in connection with the
issuance and sale by the Company of an aggregate of 2,000,000 shares of the
Company's Common Stock, par value $.01 per share (the "Shares"), to the
Underwriters named in Schedule A of the Underwriting Agreement dated October __,
1997 (the "Underwriting Agreement") among the Company, the Selling Stockholders
named in Schedule B of the Underwriting Agreement and Cowen & Company, Hambrecht
& Quist LLC, SBC Warburg Dillon Read Inc. and Volpe Brown Whelan & Company, LLC,
as representatives of the several Underwriters. This opinion is being delivered
to you pursuant to Section 8(h) of the Underwriting Agreement. Capitalized terms
used but not defined herein shall have the meanings ascribed thereto in the
Underwriting Agreement.
Our opinion expressed below is limited to the law of the State of New York
and the Federal Law of the United States, and we do not express any opinion
herein concerning any other law.
Based upon and subject to the foregoing, we are of the opinion that:
(i) The statements set forth under the captions "Risk Factors
Government Regulation" and "Business - Government Regulation" (other than
the statements under the caption "- FDA Regulation" in such section, as to
which we have not been requested to, and do not, express an opinion) in the
Prospectus insofar as such
<PAGE>
statements constitute a summary of documents referred to therein or matters
of law, are accurate summaries and fairly and correctly present, in all
material respects, the information called for with respect to such
documents and matters.
This opinion is given to you solely for your benefit and the benefit
of the Underwriters represented by you in connection with the issuance of
the Prospectus. This opinion may not be relied upon by you or such
Underwriters for any other purpose or furnished to, quoted or relied upon
by any other person, firm or corporation for any purpose without our
express written consent.
2
<PAGE>
EXHIBIT III(b)
[Letterhead of Proskauer Rose Goetz & Mendelsohn LLP]
Cowen & Company
Hambrecht & Quist LLC
SBC Warburg Dillon Read Inc.
Volpe Brown Whelan & Company, LLC
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
Ladies and Gentlemen:
We have served only as special health care regulatory counsel to Advanced
Health Corporation, a Delaware corporation (the "Company"), and have advised the
Company in that capacity in regard to health care regulatory requirements
related to certain of its New York State transactions in connection with the
issuance and sale by the Company of an aggregate of 2,000,000 shares of the
Company's Common Stock, par value $.01 per share (the "Shares"), to the
Underwriters named in Schedule A of the Underwriting Agreement dated October __,
1997 (the "Underwriting Agreement") among the Company, the Selling Stockholders
named in Schedule B of the Underwriting Agreement and Cowen & Company, Hambrecht
& Quist LLC, SBC Warburg Dillon Read Inc. and Volpe Brown Whelan & Company, LLC,
as representatives of the several Underwriters. This opinion is being delivered
to you pursuant to Section 8(h) of the Underwriting Agreement. Capitalized terms
used but not defined herein shall have the meanings ascribed thereto in the
Underwriting Agreement.
In our capacity as special health care regulatory counsel, we participated
in conferences with certain officers of the Company concerning the preparation
of those portions of the Registration Statement and the Prospectus referred to
in the next paragraph.
Although we have not independently verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus, and in
view of the limitations inherent in our limited engagement we cannot and do not
assume responsibility or pass on the accuracy of such statements except to the
extent set forth in our opinion letter to you dated October __, 1997, no facts
have come to our attention that lead us to believe that the statements set forth
in the Registration Statement under the captions "Risk Factors -
<PAGE>
Government Regulation" and "Business - Government Regulation" (excluding the
statements under the caption "FDA Regulation" which for the purposes of this
letter, are outside the scope of the statements contained herein), at the time
the Registration Statement was declared effective, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading, or that the Prospectus, with respect to the above-specified text
captions, at the time the Registration Statement was declared effective, or on
the date hereof, contained or contains any untrue statement of a material fact
or omitted or omits to state any fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
2
<PAGE>
EXHIBIT IV
[Letterhead of King & Spalding]
Cowen & Company
Hambrecht & Quist LLC
SBC Warburg Dillon Read Inc.
Volpe Brown Whelan & Company, LLC
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
Ladies and Gentlemen:
We have acted as special regulatory counsel to Advanced Health Corporation,
a Delaware corporation (the "Company"), in connection with the issuance and sale
by the Company of an aggregate of 2,000,000 shares of the Company's Common
Stock, par value $.01 per share (the "Shares"), to the Underwriters named in
Schedule A of the Underwriting Agreement dated October __, 1997 (the
"Underwriting Agreement") among the Company, the Selling Stockholders named in
Schedule B of the Underwriting Agreement and Cowen & Company, Hambrecht & Quist
LLC, SBC Warburg Dillon Read Inc. and Volpe Brown Whelan & Company, LLC, as
representatives of the several Underwriters. This opinion is being delivered to
you pursuant to Section 8(i) of the Underwriting Agreement. Capitalized terms
used but not defined herein shall have the meanings ascribed thereto in the
Underwriting Agreement.
Our opinion expressed below is limited to the Federal Law of the United
States, and we do not express any opinion herein concerning any other law.
Based upon and subject to the foregoing, we are of the opinion that:
(i) The statements set forth under the caption "Risk Factors - FDA
Regulation" and under the caption "Business - Government Regulation -- FDA
Regulation" in the Prospectus insofar as such statements constitute a
summary of documents referred to therein or matters of law, are accurate
summaries and fairly and
<PAGE>
correctly present, in all material respects, the information called for
with respect to such documents and matters.
Although we have not independently verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus, no
facts have come to our attention that lead us to believe that the above-listed
portions of the Registration Statement, at the time the Registration Statement
was declared effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, or that the Prospectus, at
the time the Registration Statement was declared effective, or on the date
hereof, contained or contains any untrue statement of a material fact or omitted
or omits to state any fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
2
<PAGE>
EXHIBIT V
[Letterhead of Handal & Morofsky ]
Cowen & Company
Hambrecht & Quist LLC
SBC Warburg Dillon Read Inc.
Volpe Brown Whelan & Company, LLC
As Representatives of the several
Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Advanced Health Corporation
Ladies and Gentlemen:
We have acted as special patent counsel to Advanced Health Corporation, a
Delaware corporation (the "Company"), in connection with the issuance and sale
by the Company of an aggregate of 2,000,000 shares of the Company's Common
Stock, par value $.01 per share (the "Shares"), to the Underwriters named in
Schedule A of the Underwriting Agreement dated October __, 1997 (the
"Underwriting Agreement") among the Company, the Selling Stockholders named in
Schedule B of the Underwriting Agreement and Cowen & Company, Hambrecht & Quist
LLC, SBC Warburg Dillon Read Inc. and Volpe Brown Whelan & Company, LLC, as
representatives of the several Underwriters. This opinion is being delivered to
you pursuant to Section 8(j) of the Underwriting Agreement. Capitalized terms
used but not defined herein shall have the meanings ascribed thereto in the
Underwriting Agreement.
Our opinions expressed below are limited to the law of the State of New
York, and the Federal Law of the United States, and we do not express any
opinion herein concerning any other law.
Based upon and subject to the foregoing, we are of the opinion that:
(i) We have no knowledge of any fact which would preclude the Company
from having clear title to any patent applications referenced in the
Prospectus;
<PAGE>
(ii) To the best of our knowledge, the Company does not lack and will
not be unable to obtain any rights or licenses to use any patent or
know-how necessary to conduct the business now conducted by the Company as
described in the Prospectus. However, no search has been made to ascertain
the existence of proprietary positions of others;
(iii) To the best of our knowledge, except as disclosed in the
Prospectus, the Company has not received any notice of infringement or of
conflict with rights or claims of others with respect to any patents,
trademarks, service marks, trade names, copyrights or know-how which could
result in any material adverse effect upon the Company.
(iv) We are not aware of any patents of others which are infringed by
specific products or processes referred to in the Prospectus in such manner
as to materially and adversely affect the Company; however, we note that no
search for such patents has been made;
(v) To the best of our knowledge, except for the application
procedures instituted by the Company to obtain patents and trademarks, and
except as disclosed in the Prospectus, there are no legal or governmental
proceedings pending relating to patent rights, trade secrets, trademarks,
service marks or other proprietary information or materials of the Company,
and to the best of our knowledge, no such proceedings are threatened or
contemplated by governmental authorities or others;
(vi) To the best of our knowledge, there are no material contracts or
other material documents relating to the Company's patents or proprietary
information; and
(vii) The statements under the captions "Risk Factors - Dependence on
Proprietary Assets" and "Business - Proprietary Rights" in the Prospectus,
insofar as such statements constitute a summary of documents referred to
therein or matters of law, are accurate summaries and fairly and correctly
present, in all material respects, the information called for with respect
to such documents and matters.
Although we have not independently verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus, no
facts have come to our attention that lead us to believe that the above-listed
portions of the Registration Statement, at the time the Registration Statement
was declared effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, or that the Prospectus, at
the time the Registration Statement was declared effective, or on the date
hereof, contained or contains any untrue statement of a material fact or omitted
or omits to state any fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
2
[O'SULLIVAN GRAEV & KARABELL, LLP LETTERHEAD]
September 30, 1997
Advanced Health Corporation
555 White Plains Road
Tarrytown, New York 10591
Advanced Health Corporation
2,875,000 Shares of Common Stock, $.01 Par Value
Dear Sirs:
We have acted as counsel for Advanced Health Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing of
the Registration Statement of the Company on Form S-1 (File No. 333-35115) (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to 2,875,000 shares of its Common Stock, $.01 par
value (the "Common Stock") (including 375,000 shares reserved for issuance
pursuant to the Underwriters' over-allotment option) (such shares of Common
Stock are referred to as the "Shares"), of the Company. Capitalized terms used
but not defined herein shall have the respective meanings ascribed to them in
the Registration Statement. You have requested that we furnish our opinion as to
the matters hereinafter set forth.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of rendering
the opinions set forth below. As to certain questions of fact material to the
opinions contained herein, we have relied upon certificates or statements of
officers of the Company and certificates of public officials. In such
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity to authentic
originals of all documents submitted to us as certified or photostatic copies.
Based upon the foregoing, we are of the opinion as follows:
1. The Company is a validly existing corporation under the laws of the
State of Delaware.
2. The Shares have been duly authorized and, when issued and sold as
contemplated by the Registration Statement and the Underwriting
Agreement to be entered into among the Company, the Selling
Stockholders (as defined therein) and Cowen & Company, Hambrecht &
Quist LLC, SBC Warburg Dillon Read Inc., Volpe Brown Whelan & Company,
LLC, as representative of the Underwriters, will be validly issued,
fully paid and nonassessable.
We are admitted to the Bar of the State of New York and we express no
opinion as to the laws of any other jurisdiction other than the Delaware General
Corporation Law.
We know that we are referred to under the heading "Legal Matters" in the
Prospectus forming a part of the Registration Statement, and we hereby consent
to such use of our name in said Registration Statement and to the use of this
opinion for filing with said Registration Statement as Exhibit 5 thereto.
Very truly yours,
ADVANCED HEALTH CORPORATION
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
1. PURPOSE.
The purpose of this amended and restated plan (the "Plan") is to secure for
ADVANCED HEALTH CORPORATION (the "Company") and its shareholders the benefits
arising from capital stock ownership by employees, officers and directors of,
and consultants or advisors to, the Company and its subsidiary corporations who
are expected to contribute to the Company's future growth and success. Except
where the context otherwise requires, the term "Company" shall include all
present and future subsidiaries of the Company as defined in Sections 424(e) and
424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to
time (the "Code"). Those provisions of the Plan which make express reference to
Section 422 shall apply only to Incentive Stock Options (as that term is defined
in the Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and may be either incentive stock options
("Incentive Stock Options") meeting the requirements of Section 422 of the Code
or non-statutory options which are not intended to meet the requirements of
Section 422 of the Code.
(b) Administrative. The Plan will be administered by the Board of Directors
of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The Board of Directors may
in its sole discretion grant options to purchase shares of the Company's Common
Stock, $.01 par value per share ("Common Stock") and issue shares upon exercise
of such options as provided in the Plan. The Board shall have authority, subject
to the express provisions of the Plan, to construe the respective option
agreements and the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, to determine the terms and provisions of the respective
option agreements, which need not be identical, and to make all other
determinations in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director or person acting pursuant to authority delegated by the
Board of Directors shall be liable for any action or determination under the
Plan made in good faith. The Board of Directors may, to the full extent
permitted by or consistent with applicable laws or regulations (including,
without limitation, applicable state law and Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule
("Rule 16b-3")), delegate any or all of its powers under the Plan to a committee
(the
<PAGE>
"Committee") appointed by the Board of Directors, and if the Committee is so
appointed all references to the Board of Directors in the Plan shall mean and
relate to such Committee with respect to the powers so delegated.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply to the Company only at such time as
the Company's Common Stock is registered under the Exchange Act, subject to the
last sentence of Section 3(b), and then only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. ELIGIBILITY.
(a) General. Options may be granted to persons who are, at the time of the
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). A person who has been granted an option may, if he or she
is otherwise eligible, be granted additional options if the Board of Directors
shall so determine.
(b) Grant of Options to Reporting Persons. From and after the registration
of the Common Stock of the Company under the Exchange Act, the selection of a
director or an officer who is a Reporting Person (as the terms "director" and
"officer" are defined for purposes of Rule 16b-3) as a recipient of an option,
the timing of the option grant, the exercise price of the option and the number
of shares subject to the option shall be determined either (i) by the Board of
Directors or (ii) by a committee consisting of two or more directors having full
authority to act in the matter, each of whom shall be a "non-employee director"
(as hereinafter defined). For the purposes of the Plan, a director shall be
deemed to be a "non-employee director" only if such person qualifies as a
"non-employee director" within the meaning of Rule 16b-3, as such term is
interpreted from time to time.
4. STOCK SUBJECT TO PLAN.
The stock subject to options granted under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. Subject to adjustment as
provided in Section 15 below, the maximum number of shares of Common Stock of
the Company which may be issued and sold under the Plan is 2,750,000 shares. If
an option granted under the Plan shall expire, terminate or be cancelled for any
reason without having been exercised in full, the unpurchased shares subject to
such option shall again be available for subsequent option grants under the
Plan.
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan
-2-
<PAGE>
as may be approved by the Board of Directors. Such option agreements may differ
among recipients.
6. PURCHASE PRICE.
(a) General. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors at the time
of grant of such option; provided, however, that in the case of an Incentive
Stock Option, the exercise price shall not be less than 100% of the Fair Market
Value (as hereinafter defined) of such stock, at the time of grant of such
option, or shall not be less than 110% of such Fair Market Value in the case of
options described in Section 11(b). "Fair Market Value" of a share of Common
Stock of the Company as of a specified date for the purposes of the Plan shall
mean the closing price of a share of the Common Stock on the principal
securities exchange or the Nasdaq National Market on which such shares are
traded on the day immediately preceding the date as of which Fair Market Value
is being determined, or on the next preceding date on which such shares are
traded if no shares were traded on such immediately preceding day, or if the
shares are not traded on a securities exchange or the Nasdaq National Market,
Fair Market Value shall be deemed to be the average of the high bid and low
asked prices of the shares in the over-the-counter market on the day immediately
preceding the date as of which Fair Market Value is being determined or on the
next preceding date on which such high bid and low asked prices were recorded.
If the shares are not publicly traded, Fair Market Value of a share of Common
Stock (including, in the case of any repurchase of shares, any distributions
which respect thereto which would be repurchased with the shares) shall be
determined in good faith by the Board of Directors.
(b) Payment of Purchase Price. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or, to the extent provided in the applicable option agreement, (i) by delivery
to the Company of shares of Common Stock of the Company having Fair Market Value
on the date of exercise equal in amount to the exercise price of the options
being exercised, (ii) by any other means which the Board of Directors determines
are consistent with the purpose of the Plan and with applicable laws and
regulations (including, without limitation, the provisions of Rule 16b-3 and
Regulation T promulgated by the Federal Reserve Board) or (iii) by any
combination of such methods of payment.
7. OPTION PERIOD.
Subject to earlier termination as provided in the Plan, each option and all
rights thereunder shall expire on such date as determined by the Board of
Directors and set forth in the applicable option agreement, provided, that such
date shall not be later than ten (10) years after the date on which the option
is granted.
-3-
<PAGE>
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the option agreement evidencing such option, subject to the provisions
of the Plan. Subject to the requirements in the immediately preceding sentence,
if an option is not at the time of grant immediately exercisable, the Board of
Directors may (i) in the agreement evidencing such option, provide for the
acceleration of the exercise date or dates of the subject option upon the
occurrence of specified events and/or (ii) at any time prior to the complete
termination of an option, accelerate the exercise date or dates of such option.
9. NONTRANSFERABILITY OF OPTIONS.
No option granted under this Plan shall be assignable or otherwise
transferable by the optionee except by will or by the laws of descent and
distribution or, other than in the case of Incentive Stock Options, 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. An option may
be exercised during the lifetime of the optionee only by the optionee. In the
event an optionee dies during his employment by the Company or any of its
subsidiaries, or during any exercise period following the date of termination of
such employment, his option shall thereafter be exercisable, during the period
specified in the option agreement, by his executors or administrators to the
full extent to which such option was exercisable by the optionee at the time of
his death during the periods set forth in Section 10 or 11(d).
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11(d) with respect to Incentive Stock
Options, and subject to the provisions of the option agreement, an optionee may
exercise an option at such times following the termination of the optionee's
employment or other relationship with the Company as shall be set forth in the
option agreement with such optionee, but, except in the case of the optionee's
death, in no event later than the expiration date of the Option. If the
termination of the optionee's employment is for cause or is otherwise
attributable to a breach by the optionee of an employment or confidentiality or
non-disclosure agreement, the option shall expire immediately upon such
termination. The Board of Directors shall have the power to determine what
constitutes a termination for cause or a breach of an employment or
confidentiality or non-disclosure agreement, whether an optionee has been
terminated for cause or has breached such an agreement, and the date upon which
such termination for cause or breach occurs. Any such determinations shall be
final and conclusive and binding upon the optionee.
-4-
<PAGE>
11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under the Plan
shall, at the time of grant, be specifically designated as such in the option
agreement covering such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the Fair Market Value
of one share of Common Stock at the time of grant; and
(ii) the option exercise period shall not exceed five years from the
date of grant.
(c) Dollar Limitation. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate Fair Market Value, as of the
respective date or dates of grant, of more than $100,000.
(d) Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), provided, that the agreement with respect to such option
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory
option under the Plan;
-5-
<PAGE>
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the
period of one year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provisions thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within
the period of one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder "employment" shall
be defined in accordance with the provisions of Section 1.42I-7(h) of the Income
Tax Regulations (or any successor regulations). Notwithstanding the foregoing
provisions, no Incentive Stock Option may be exercised after its expiration
date.
12. ADDITIONAL PROVISIONS.
(a) Additional Option Provisions. The Board of Directors may, in its sole
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, rights of first refusal, commitments to pay cash bonuses, to
make, arrange for or guaranty loans or to transfer other property to optionees
upon exercise of options, or such other provisions as shall be determined by the
Board of Directors; provided, that such additional provisions shall not be
inconsistent with any other term or condition of the Plan and such additional
provisions shall not cause any Incentive Stock Option granted under the Plan to
fail to qualify as an Incentive Stock Option within the meaning of Section 422
of the Code.
(b) Acceleration, Extension, Etc. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3 (if applicable).
13. GENERAL RESTRICTIONS.
(a) Investment Representations. The Company may require any person to whom
an option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account
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for investment and not with any present intention of selling or otherwise
distributing the same, and to such other effects as the Company deems necessary
or appropriate in order to comply with federal and applicable state securities
laws, or with covenants or representations made by the Company in connection
with any public offering of its Common Stock.
(b) Compliance with Securities Law. Each option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or that the disclosure of
non-public information or the satisfaction of any other condition is necessary
as a condition of, or in connection with the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
14. RIGHTS AS A SHAREHOLDER.
The holder of an option shall have no rights as a shareholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS, REORGANIZATIONS AND RELATED
TRANSACTIONS.
(a) Recapitalizations and Related Transactions. If, through or as a result
of any recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar transaction, (i) the outstanding shares of Common
Stock are increased, decreased or exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other non-cash assets are distributed with respect to such
shares of Common Stock or other securities, an appropriate and proportionate
adjustment shall be made in (x) the maximum number and kind of shares reserved
for issuance under the Plan, (y) the number and kind of shares or other
securities subject to any then outstanding options under the Plan, and (z) the
price for each share subject to any then outstanding options under the Plan,
without changing the aggregate purchase price as to which such options remain
exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant
to this Section 15 if such adjustment (i) would cause the Plan to fail to comply
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with Section 422 of the Code or with Rule 16b-3 or (ii) would be considered as
the adoption of a new plan requiring stockholder approval.
(b) Reorganization, Merger and Related Transactions. If the Company shall
be the surviving corporation in any reorganization, merger or consolidation of
the Company with one or more other corporations, any then outstanding option
granted pursuant to the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Common Stock subject to such options
would have been entitled immediately following such reorganization, merger, or
consolidation, with a corresponding proportionate adjustment of the purchase
price as to which such options may be exercised so that the aggregate purchase
price as to which such options may be exercised shall be the same as the
aggregate purchase price as to which such options may be exercised for the
shares remaining subject to the options immediately prior to such
reorganization, merger, or consolidation.
(c) Board Authority to Make Adjustments. Any adjustments under this Section
15 will be made by the Board of Directors, whose determination as to what
adjustments, in any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the Plan on account of
any such adjustments.
16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) General. 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 in the event of a liquidation of the Company (collectively, a
"Corporate Transaction"), the Board of Directors of the Company, 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 options substituted for Incentive
Stock Options shall meet the requirements of Section 424(a) of the Code, (ii)
upon written notice to the optionees, 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) and (B) the
aggregate exercise price of all such outstanding options in exchange for the
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termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.
(b) Substitute Options. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, except that if at any time the approval of the
shareholders of the Company is required under Section 422 of the Code or any
successor provision with respect to Incentive Stock Options, or under Rule
16b-3, the Board of Directors may not effect such modification or amendment
without such approval.
(b) The modification or amendment of the Plan shall not, without the
consent of an optionee, affect his or her rights under an option previously
granted to him or her. With the consent of the optionee affected, the Board of
Directors may amend outstanding option agreements in a manner not inconsistent
with the Plan. The Board of Directors shall have the right to amend or modify
(i) the terms and provisions of the Plan and of any outstanding Incentive Stock
Options granted under the Plan to the extent necessary to qualify any or all
such options for such favorable federal income tax treatment (including deferral
of taxation upon exercise) as may be afforded incentive
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stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and any outstanding option to the extent necessary to ensure the
qualification of the Plan and any options granted hereunder under Rule 16b-3.
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a Fair
Market Value equal to such withholding obligation as of the date that the amount
of tax to be withheld is to be determined. An optionee who has made an election
pursuant to this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to any repurchase,
forfeiture, unfulfilled vesting or other similar requirements.
(b) The acceptance of shares of Common Stock upon exercise of an Incentive
Stock Option shall constitute an agreement by the optionee (i) to notify the
Company if any or all of such shares are disposed of by the optionee within two
years from the date the option was granted or within one year from the date the
shares were issued to the optionee pursuant to the exercise of the option, and
(ii) if required by law, to remit to the Company, at the time of an in the case
of any such disposition, an amount sufficient to satisfy the Company's federal,
state and local withholding tax obligations with respect to such disposition,
whether or not, as to both (i) and (ii), the optionee is in the employ of the
Company at the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting Person whose
options have been granted in accordance with the provisions of Section 3(b)
herein, no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3.
21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the price per share of the cancelled
options or (ii) the amendment of the terms of any and all outstanding options
under the Plan to provide an option exercise price per share
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which is higher or lower than the then-current exercise price per share of such
outstanding options.
22. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) Effective Date. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring shareholder approval shall become effective when adopted by
the Board of Directors; amendments requiring shareholder approval (as provided
in Section 19) shall become effective when adopted by the Board of Directors,
but no Incentive Stock Option granted after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate upon the earlier of (i) the close of business on the
day next preceding the tenth anniversary of its adoption by the Board of
Directors, or (ii) the date on which all shares available for issuance under the
Plan shall have been issued pursuant to the exercise or cancellation of options
granted under the Plan. If the date of termination is determined under (i)
above, then options outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.
23. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
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24. GOVERNING LAW.
The provisions of this Plan shall be governed and construed in accordance
with the laws of the State of Delaware without regard to the principles of
conflicts of laws.
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Exhibit 21
Subsidiaries
Advanced Health Management Corporation, a Delaware corporation
Advanced Health Heart Practices, Inc., a Delaware corporation
Advanced Health Med-E-Systems Corporation, a Delaware corporation
Uptown Physician Management, Inc., a Delaware corporation
Physicians Capital Corporation, a Delaware corporation
Diamond Physician Management, Inc., a Delaware corporation
Specialist Physicians Management, Inc., a Delaware corporation
Millenium Physician Management, Inc., a Delaware coporation
PCC Leasing, Inc., a Delaware corporation
Advanced Health Bukstel & Halfpenny Corporation, a Delaware corporation
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 28, 1997 (except for the matters discussed in the last
paragraph of Note 4, as to which the date is April 15, 1997) and to all
references to our Firm included in or made a part of this registration
statement.
ARTHUR ANDERSEN LLP
New York, New York
September 29, 1997
