<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO. 333-49721
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
HEALTHDRIVE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 8741 04-3052905
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
------------------------
25 NEEDHAM STREET
NEWTON, MA 02161-1615
(617) 964-6681
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
STEVEN S. CHARLAP, M.D.
CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER AND PRESIDENT
HealthDrive Corporation
25 Needham Street
Newton, MA 02161-1615
(617) 964-6681
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
VICTOR J. PACI, ESQ. DAVID F. DIETZ, P.C.
JOHAN V. BRIGHAM, ESQ. LIZETTE M. PEREZ, ESQ.
Bingham Dana LLP Goodwin, Procter & Hoar LLP
150 Federal Street Exchange Place
Boston, MA 02110-1726 Boston, MA 02109-2881
(617) 951-8000 (617) 570-1000
</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 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
effective registration statement for the same
offering. / / ________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY (1) OFFERING PRICE (1) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share
("Common Stock") 1,840,000 $8.00 $14,720,000 $3,800(2)
Representative's Warrants 160,000 Warrants $.01 $1,600 $1(3)
Common Stock, issuable upon exercise of
Representative's Warrants 160,000 Shares $9.60 $1,536,000 $454(3)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(2) 1,840,000 shares of Common Stock, $.01 par value per share, were registered
upon the initial filing of this registration statement (the "Registration
Statement") and a filing fee of $3,799.60 was paid in connection therewith.
(3) The Representative's Warrants and the Common Stock underlying such warrants
were registered upon the filing of Pre-Effective Amendment No. 2 to the
Registration Statement and an aggregate incremental filing fee of $455 was
paid in connection therewith.
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>
SUBJECT TO COMPLETION, DATED , 1998
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>
PROSPECTUS
1,600,000 SHARES
[LOGO]
COMMON STOCK
All of the 1,600,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of HealthDrive Corporation (the "Company") offered hereby (the
"Offering") are being sold by the Company. Prior to this offering, there has
been no public market for the Common Stock. It is currently anticipated that the
initial public offering price will be between $7.00 and $8.00 a share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company has applied to have the Common Stock
included for quotation on the Nasdaq SmallCap Market under the symbol "HDMD."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND
SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
Per Share.............. $ $ $
<S> <C> <C> <C>
Total(3)............... $ $ $
</TABLE>
(1) Excludes a non-accountable expense allowance equal to three percent (3.0%)
of the total proceeds from the sale of the Common Stock payable to H.C.
Wainwright & Co., Inc., the representative of the Underwriters (the
"Representative"), and the value of warrants to be issued to the
Representative to purchase the number of shares of Common Stock equal to ten
percent (10%) of the number of shares being offered hereby at an exercise
price of 120% of the Price to Public (the "Representative's Warrants"). In
addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $854,000 ($909,600, if the Underwriter's over-allotment option is
exercised in full), including the Representative's non-accountable expense
allowance. See "Underwriting."
(3) Steven S. Charlap, M.D. and Alec H. Jaret, D.M.D., two of the Company's
largest shareholders (the "Selling Stockholders"), have granted to the
Underwriters a 30-day option to purchase up to 240,000 additional shares of
Common Stock, on the same terms as set forth above, solely to cover over-
allotments, if any. If the Underwriters exercise such option in full, the
total Price to Public, Underwriting Discount, Proceeds to Company and
proceeds to Selling Stockholders will be $ , $ , $
and $ , respectively. See "Selling Stockholders" and "Underwriting."
------------------------
The shares of Common Stock are being offered severally by the Underwriters
named herein, subject to prior sale, when, as and if issued to and accepted by
them, subject to the approval of certain legal matters by counsel for the
Underwriters and to certain other conditions. The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the shares of Common Stock will be made in
Boston, Massachusetts on or about , 1998.
H.C. WAINWRIGHT & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[Map indicating in which states the Company currently operates.]
[Chart indicating which of the four major services provided by the Company's
Medical and Dental Practices are provided in each states in which the Company
operates.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
------------------------
HealthDrive-TM-, CustomCare-TM- and the Company's logo are trademarks of the
Company. This Prospectus also includes trademarks of companies other than the
Company.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. POTENTIAL
PURCHASERS OF THE COMMON STOCK SHOULD READ CAREFULLY THIS PROSPECTUS IN ITS
ENTIRETY AND SHOULD CONSIDER CAREFULLY THE FACTORS IDENTIFIED UNDER "RISK
FACTORS." EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED HEREIN
ASSUMES THE CONVERSION OF 571,428 SHARES OF THE COMPANY'S CLASS A CONVERTIBLE
PREFERRED STOCK ("CLASS A PREFERRED STOCK") AND 181,818 SHARES OF THE COMPANY'S
CLASS B CONVERTIBLE PREFERRED STOCK ("CLASS B PREFERRED STOCK") HELD BY DCC
INTERNATIONAL HOLDINGS B.V. ("DCC HOLDINGS") INTO 753,246 SHARES OF COMMON STOCK
UPON THE CLOSING OF THE OFFERING.
THE COMPANY
HealthDrive Corporation (the "Company") is the sole sponsor of, and provider
of administrative services to, four professional corporations and one Michigan
taxable not-for-profit corporation (collectively, the "Medical and Dental
Practices" and each a "Practice"). The Company and its founders established the
Medical and Dental Practices to focus on the provision of on-site geriatric
health care services primarily to residents of nursing homes. The Company does
not own the capital stock of any of the professional corporations or the
Michigan taxable not-for-profit corporation. Each of the Medical and Dental
Practices is affiliated with the Company through an exclusive long-term
Operating Agreement (collectively, the "Operating Agreements") pursuant to which
the Company receives a fee in exchange for the services it provides, and an
Option Agreement pursuant to which the Company is entitled to cause the sole
stockholder of the Practice to sell all of the outstanding capital stock of the
Practice to a designee of the Company at any time for a nominal price. The
Company and the Medical and Dental Practices are completely interdependent and
function as a single integrated economic unit, with the Company being entirely
dependent on the success of the Medical and Dental Practices for its revenues
and the Medical and Dental Practices being entirely dependent on the Company for
capital and all services other than the provision of medical, dental and
ancillary health care services. The Company does not itself provide health care
services.
In addition to providing services to nursing home residents, the Medical and
Dental Practices also provide services to a growing number of residents of
assisted living facilities ("ALFs") and independent living senior housing
facilities ("ILFs" and, collectively with nursing homes and ALFs, "LTCFs") that
are affiliated with nursing homes under service agreements with one or more of
the Practices. Physicians, dentists and ancillary health care service providers
employed by the Medical and Dental Practices ("Providers") travel to LTCFs where
they provide a growing range of geriatric medical and dental services. Services
currently provided by the Medical and Dental Practices include dentistry,
optometry, podiatry, audiology, and primary care. As of May 15, 1998, the
Medical and Dental Practices employed 95 Providers who were rendering services
at 884 LTCFs located in 11 states, and the Company employed an additional 106
people. The Company, headquartered in Newton, Massachusetts, operates four
regional offices located in Massachusetts, Connecticut, Pennsylvania and
Wisconsin.
The Company has positioned itself to capitalize on important trends shaping
geriatric care in the United States including: (i) changing demographics; (ii)
evolving care protocols and disease management techniques; and (iii) changing
reimbursement methodologies driven by federal legislation. In 1996, there were
approximately 15,300 nursing homes serving approximately 1.7 million residents
nationwide. In addition, it was estimated that in 1996 there were approximately
14,500 ALFs and ILFs nationwide. According to the U.S. Census Bureau, the
portion of the U.S. population aged 75 to 85 is expected to increase by 27.0%,
from approximately 10.0 million in 1990 to approximately 12.7 million by the
year 2010, and the number of persons aged 85 and older is expected to increase
by 90.0%, from approximately 3.0 million in 1990 to approximately 5.7 million by
the year 2010. According to the United States General Accounting Office, the
number of Americans aged 65 years and older who need assistance with activities
of daily living is expected to double from approximately 7.0 million in 1997 to
approximately 14.0 million by 2020. Nursing home residents require frequent
medical care and often suffer from decreased mobility which makes it difficult
for them to visit off-site physicians. The Company considers itself to be an
innovator in promoting, sponsoring and administering the delivery by the Medical
and Dental Practices of a broad spectrum of on-site geriatric medical and dental
services to residents of LTCFs. In order to do so effectively, the Company has
developed proprietary systems, procedures and expertise that aid it in the
complex task of providing a range of geriatric medical and dental services to a
large number and variety of LTCF residents. The Company believes such systems,
procedures and expertise give it and the Medical and Dental Practices a
significant competitive advantage over other health care services providers.
1
<PAGE>
The Company was founded in 1989 by Steven S. Charlap, M.D. and Alec H.
Jaret, D.M.D. to respond to the growing demand for convenient on-site dental
care services at nursing homes. Dr. Charlap and Dr. Jaret also founded three of
the Medical and Dental Practices with funds borrowed from the Company, Steven S.
Charlap, M.D., P.C. (the "Audiology and Primary Care Practice"), Alec H. Jaret,
D.M.D., P.C. (the "Dental Practice"), and HealthDrive Michigan Corporation,
which provides dental, optometry and podiatry services to residents of LTCFs in
Michigan. The Company has also established an optometry practice (Jeffrey Morer,
O.D., P.C., the "Optometry Practice"), and a podiatry practice (Mary C. Manesis,
D.P.M., P.C., the "Podiatry Practice"), as it identified opportunities in such
areas among residents of LTCFs serviced by its other Practices. In each case,
the Company designated the individual Provider who would incorporate the
professional corporation, and loaned money to the Practice to cover formation
and initial operating costs. Each of the Medical and Dental Practices (other
than HealthDrive Michigan Corporation) is a Massachusetts professional
corporation of which the named physician or dentist is the sole stockholder.
HealthDrive Michigan Corporation is a Michigan not-for-profit taxable
corporation of which Dr. Charlap is the sole stockholder.
Nursing homes are required by the Omnibus Budget Reconciliation Act ("OBRA")
of 1987 to ensure that medical and dental services are made available to their
residents. In addition, while not required to do so, certain ALFs and ILFs in
the Company's markets have begun to make on-site medical and dental services
available to their residents. Historically, it has not been cost-effective for
LTCFs to use their own resources to satisfy their residents' medical and dental
service needs, and they have looked to single-specialty solo health care service
providers ("Solo Providers") to meet such needs. Providing the range of
geriatric medical and dental services required by LTCF residents through Solo
Providers imposes a number of increasingly complex burdens on LTCFs which
include: (i) identifying and contracting with multiple, competent Solo Providers
to provide on-site services; (ii) allocating LTCF staff to coordinate the
services of such Solo Providers; (iii) monitoring the appropriateness of
services provided and related billings; (iv) complying with related federal and
state health care regulations; and (v) when necessary, transporting residents
off-site to receive such services.
The Balanced Budget Act of 1997 requires the Health Care Finance
Administration ("HCFA") by July 1, 1998 to begin converting from a cost-plus
reimbursement methodology to the Prospective Payment System ("PPS") for nursing
homes, pursuant to which the federal government will pay a per diem rate to
nursing homes for post-hospitalization services provided to their Medicare
covered residents. The Company believes that as a result of the change to PPS,
nursing homes will need to increase their focus on the efficiency and quality of
all of their operations to maximize their profitability. PPS does not cover
physician-related services such as those provided by the Medical and Dental
Practices. However, the Company believes an increased focus on efficiency and
quality will make the use of integrated providers of multiple medical and dental
services, such as the Medical and Dental Practices, more attractive than the use
of multiple Solo Providers.
The Company and the Medical and Dental Practices offer an efficient
alternative to Solo Providers because the Medical and Dental Practices, with the
assistance of the Company, are able to provide coordinated, comprehensive,
cost-effective on-site geriatric medical and dental services. The rendering of
such services requires: (i) multi-specialty clinical expertise; (ii) a staff of
highly qualified health care service providers; (iii) the purchase and
maintenance of specialized equipment; (iv) the development of sophisticated
management information systems; and (v) reimbursement and regulatory knowledge.
The Company and the Medical and Dental Practices have extensive experience in
providing such services. In addition, the Company has developed proprietary
procedures, systems and software necessary to overcome the logistical
complexities involved in coordinating on-site care. Specifically, the Company
has developed CustomCare, a proprietary software program that enhances the
Company's customer service capabilities by effectively integrating all facets of
the Company's services, including scheduling, billing, tracking dentures and
eyeglasses, coordinating transportation, compiling Provider productivity and
patient utilization data, monitoring payor pre-approvals, and generating
customized reports.
Pursuant to the Operating Agreements, the Company provides certain services
relating to the administration of health care provided by the Medical and Dental
Practices, licenses the use of the service mark "HealthDrive" and, from time to
time, extends credit to the Medical and Dental Practices. The services provided
by the Company pursuant to the Operating Agreements include ordering and
purchasing of supplies, performance of bookkeeping and accounting functions, and
billing and collections. In exchange for these services, the license of the
service mark to the Practice and the extension of credit, each Practice
2
<PAGE>
pays the Company a monthly fee (the "Compensation Amount") equal to all revenue
generated by such Practice minus the expenses incurred by such Practice
(primarily compensation and benefits, bad debt expense, insurance costs and the
interest expense on loans from the Company to such Practice), adjusted to give
effect to certain tax-related items. Under the terms of the Operating Agreements
the Compensation Amount may not exceed the fair market value of the services
provided by the Company thereunder. Revenue is generated by the Medical and
Dental Practices pursuant to service agreements each of them enters into with
LTCFs to provide their respective services (the "Service Agreements") to
residents of such LTCFs. Each of the Medical and Dental Practices, other than
HealthDrive Michigan Corporation, practices one of the four major specialties.
LTCFs enter into a separate Service Agreement with each of the Medical and
Dental Practices from which they wish to obtain services for their residents,
and generally a LTCF may choose to contract with any number and any combination
of the Medical and Dental Practices. Under the respective Service Agreements, an
LTCF is responsible for notifying its residents that the Practice's services are
available to them, as medically necessary, and the Practice is responsible for
providing its services to those residents who need and request them. The Company
then bills the patient or his or her insurance company on behalf of the Medical
and Dental Practices for the services rendered, typically Medicare, Medicaid or
a commercial insurer, and in most instances does not receive payments from the
LTCFs.
In connection with the formation of the Medical and Dental Practices, and
from time to time thereafter, the Company has advanced money pursuant to the
Operating Agreements to the Medical and Dental Practices for working capital
purposes. The amount of these advances, to the extent not repaid during the
month in which they are made, are added on a monthly basis to intercompany
balances (the "Intercompany Balances") maintained by the Company with each
Medical and Dental Practice, the majority of which have been generated by the
calculation of the Compensation Amounts. The Medical and Dental Practices are
required to pay down the principal balance and accrued interest on the
Intercompany Balances from time to time to the extent possible, and the Company
is entitled to demand repayment of the entire amounts due on thirty days notice.
The Intercompany Balances bear interest at rates determined by the Company not
to exceed a designated prime rate plus five percent and payments are generally
made on the Intercompany Balances no less frequently than on a monthly basis.
The primary strategic objective of the Company and the Medical and Dental
Practices is for the Medical and Dental Practices to become, acting in
cooperation with the Company, dominant providers of on-site, integrated and
cost-effective geriatric medical and dental services to residents of LTCFs. The
Company and the Medical and Dental Practices have identified three opportunities
for growth: (i) obtaining Service Agreements for the Medical and Dental
Practices with additional LTCFs in existing and contiguous markets; (ii)
increasing the number of Service Agreements with LTCFs under existing contracts
with the Medical and Dental Practices; and (iii) increasing the number of
patients served by the Medical and Dental Practices within LTCFs under existing
contracts. The Company has determined four means of capitalizing on such
opportunities to achieve growth within both existing geographic markets and new
geographic markets. These include: (i) increasing its sales and marketing
initiatives; (ii) expanding its existing customer relationships; (iii)
leveraging its operational infrastructure and its existing and planned
management information systems; and (iv) the consummation of acquisitions of
other LTCF-focused medical, dental or ancillary health care services practices
or related companies. These acquisitions are likely to take the form of (i) the
purchase outright by the Company of another company engaged in the business of
the promotion, administration and coordination of the provision of health care
services to residents of LTCFs; (ii) the purchase by the Company of the assets
of a physician practice followed by the assignment of any purchased service
contracts to one or more of the Practices, or (iii) the payment by the Company
of a purchase price for the entrance by an unaffiliated physician practice (and
its shareholders) into Operating Agreements and Option Agreements in
substantially the form of the existing Operating Agreements and Option
Agreements among the Company, the Practices and the stockholders of the
Practices. Because the Company is entirely dependent on the activities of the
Medical and Dental Practices for its revenue, to the extent that any of these
initiatives may be successful in increasing the profitability of the Medical and
Dental Practices, the Company's profitability may be similarly affected. The
Company believes that most of the costs associated with these initiatives, such
as increased sales and marketing expenditures and recruitment and salary costs
for new employees of the Company, will be borne by the Company and not the
Medical and Dental Practices. In addition to the material expenses that will be
3
<PAGE>
required to increase the Company's marketing efforts, the Company expects that
enhancing its management information systems to provide additional services and
consummating potential acquisitions will require substantial expenditures by the
Company.
The Company was incorporated in Delaware in May 1989. Its corporate
headquarters are located at 25 Needham Street, Newton, Massachusetts 02161 and
its telephone number is (617) 964-6681.
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered by the Company..... 1,600,000 shares
Common Stock outstanding prior to the Offering
(1)......................................... 2,763,246 shares
Common Stock to be outstanding after the
Offering (2)(3)............................. 4,363,246 shares
Use of Proceeds............................... To expand sales and marketing initiatives,
enhance management information systems,
finance acquisitions by the Company, repay
the amount outstanding under an existing
credit facility, and for working capital to
be used in connection with the expansion of
the Company's business. See "Use of
Proceeds."
Proposed Nasdaq SmallCap Market symbol........ HDMD
</TABLE>
- ------------------------
(1) Adjusted to give effect to the automatic conversion upon the closing of the
Offering of all outstanding shares of the Company's Class A Preferred Stock
and Class B Preferred Stock into an aggregate of 753,246 shares of Common
Stock.
(2) Does not include: (i) 436,400 shares of Common Stock reserved for issuance
upon the exercise of outstanding options granted pursuant to the Company's
Second Amended and Restated 1992 Stock Option Plan (the "Stock Option
Plan"), and up to 302,475 additional shares reserved for issuance upon the
exercise of options that may be granted in the future under the Stock Option
Plan; and (ii) 160,000 shares of Common Stock reserved for issuance upon the
exercise of the Representative's Warrants. See "Use of Proceeds" and
"Underwriting."
(3) Assumes that the Underwriters' option to purchase up to 240,000 shares of
Common Stock from the Selling Stockholders, solely to cover over-allotments,
if any, made in connection with the sale of the Common Stock offered hereby,
is not exercised. See "Selling Stockholders."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient service revenue................ $ 4,272 $ 6,778 $ 8,575 $ 11,006 $ 12,930 $ 3,023 $ 3,487
Direct patient care costs.................. 2,914 4,136 5,362 7,020 8,213 1,962 2,159
Selling, general and administrative
expenses................................. 1,512 2,104 3,218 4,880 4,602 1,138 1,149
Income (loss) from operations.............. (154) 538 (5) (894) 115 (77) 179
Net income (loss).......................... (148) 314 -- (745) 55 (92) 119
Accretion of dividends on preferred
stock.................................... (60) (80) (90) (90) (90) (22) (23)
Net income (loss) available to common
stockholders............................. $ (208) $ 234 $ (90) $ (835) $ (35) $ (114) $ 96
Pro forma net income (loss) available to
common stockholders(1)................... $ 55 $ 119
Net income (loss) per common and potential
common share:
Basic.................................... $ (0.10) $ 0.12 $ (0.04) $ (0.42) $ (0.02) $ (0.06) $ 0.05
Diluted.................................. (0.10) 0.09 (0.04) (0.42) (0.02) (0.06) 0.03
Pro forma diluted (1).................... 0.02 0.04
Supplemental pro forma (4)............... 0.03 0.04
Weighted average common and potential
common shares outstanding:
Basic.................................... 2,000 2,000 2,000 2,001 2,010 2,010 2,010
Diluted.................................. 2,000 2,741 2,000 2,001 2,010 2,010 2,994
Pro forma diluted (1).................... 2,883 2,994
Supplemental pro forma (4)............... 2,969 3,080
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(2) ADJUSTED(2)(3)
--------- ----------- ----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 29 $ 29 $ 10,335
Working capital............................................................ 879 879 11,185
Total assets............................................................... 3,161 3,161 13,467
Capital lease obligations, net of current portion.......................... 35 35 35
Redeemable Preferred stock................................................. 1,973 -- --
Total stockholders' equity (deficit)....................................... (455) 1,517 11,823
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2(i) of Notes to Financial
Statements.
(2) Adjusted to give effect to the automatic conversion upon the closing of the
Offering of all outstanding shares of the Company's Class A Preferred Stock
and Class B Preferred Stock into an aggregate of 753,246 shares of Common
Stock. Each share of Class A Preferred Stock and Class B Preferred Stock
converts into Common Stock on a 1:1 basis.
(3) Adjusted to give effect to the sale of 1,600,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$7.50 per share, after deducting the underwriting discount and estimated
offering expenses.
(4) Computed on the basis described in Note 2(i) of Notes to Financial
Statements, adjusted for the increase in the number of shares of Common
Stock issued pursuant to the proposed offering sufficient to generate
proceeds for the payment of $600,000 of a Revolving Credit Facility at the
beginning of the year ended December 31, 1997 and the three months ended
March 31, 1998.
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING RISK FACTORS
SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
HISTORICAL LOSSES; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS; ACCUMULATED
DEFICIT
Although the Company and the Medical and Dental Practices generated net
income on a consolidated basis for the fiscal years ended December 31, 1997
("Fiscal 1997") and December 31, 1994, they experienced net losses of $745,000
for the fiscal year ended December 31, 1996, ("Fiscal 1996") and $148,000 for
the fiscal year ended December 31, 1993, and have experienced net losses on a
consolidated basis in other periods on a quarterly basis. During these same
periods, the Medical and Dental Practices generated net profits before the
payment of the fees due under their respective Operating Agreements. The Company
attributes the consolidated net loss for Fiscal 1996 primarily to increased
start-up expenses incurred by the Medical and Dental Practices and the Company
and the associated increase in administrative costs as the Company and the
Medical and Dental Practices expanded their respective operations into three new
geographic markets, which expenses and costs were not sufficiently offset by
increased revenue. The Company does not believe that increases in Provider
compensation were material factors in these losses. There can be no assurance
that the Company and the Medical and Dental Practices will achieve a specified
level of consolidated revenues or that they will remain profitable in future
periods. In addition, the consolidated operating results of the Company and the
Medical and Dental Practices have fluctuated in the past and may continue to
fluctuate significantly from quarter to quarter and from year to year. In
addition, as of March 31, 1998, the Company had an accumulated deficit of
$571,504. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON MEDICAL AND DENTAL PRACTICES AND OPERATING AGREEMENTS
Four of the Medical and Dental Practices are independent professional
corporations and one is an independent Michigan taxable not-for-profit
corporation. Although the Company has an option, pursuant to the Option
Agreements, to cause the sole stockholder of each of the Medical and Dental
Practices to sell all of the outstanding capital stock of their Practice to a
designee of the Company for a nominal price, the Company does not own the stock
of any of the Medical and Dental Practices and the Company's revenue is derived
entirely from the fees it receives under the Operating Agreements. Under the
terms of each of the Operating Agreements between the Company and each of the
Medical and Dental Practices, the Company receives a monthly fee equal to the
Compensation Amount. These fees are paid to the Company in consideration for the
services provided by the Company to the Medical and Dental Practices, including
ordering and purchasing of supplies, performance of bookkeeping and accounting
functions, billing and collections, as well as for the license of the
servicemark "HealthDrive" and the extension of credit. As of March 31, 1998, the
Company had Intercompany Balances outstanding to each of the Medical and Dental
Practices in amounts ranging from approximately $134,000 to approximately
$913,000 and aggregating approximately $2,823,000. As a result, any material
adverse change in the business, financial condition or results of operations of
a Practice which reduces its profitability and, accordingly, the Compensation
Amount, or weakens the ability of the Practice to repay its Intercompany
Balance, could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, the termination of
an Operating Agreement (which, with respect to the Medical and Dental Practices,
is permitted in the event of a material default by or bankruptcy of the Company)
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the event of a breach of an Operating
Agreement by a Practice, there can be no assurance that the legal remedies
available to the Company will be adequate to compensate the Company for its
damages resulting from such breach. In addition, although the circumstances
under which the Operating Agreements may be
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terminated are limited, in the event that an Operating Agreement is terminated
in accordance with its terms, there can be no assurance that the Company would
be able to enter into a new operating agreement with the terminating Practice,
or a new Practice, on satisfactory terms, if at all. The Operating Agreements
contain non-competition and non-solicitation provisions which prevent each
Practice during the term of the Operating Agreement and for two years thereafter
from competing with the Company or soliciting the Company's employees, customers
or suppliers. There can be no assurance that these provisions will be
enforceable in a given situation. A determination that these provisions are not
enforceable could have a material adverse effect on the Company's business,
financial condition and results of operations. Each Practice is likewise
dependent upon the Company for the services that the Company provides under each
Operating Agreement and for the capital that is loaned to each Practice by the
Company from time to time. See "--Loans to Medical and Dental Practices owned by
Affiliates of the Company" and "Business--Relationship between the Company and
the Practices; Operating Agreements with Medical and Dental Practices."
RISKS ASSOCIATED WITH OPERATIONS OF, AND RELATIONSHIPS BETWEEN, THE COMPANY AND
THE MEDICAL AND DENTAL PRACTICES
The Company has not received and, in connection with the Offering the
Underwriters will not be receiving, a legal opinion from counsel or any federal
or state judicial or regulatory authority that the operations of the Company and
the Medical and Dental Practices and the relationships among the Company, the
Medical and Dental Practices, the Providers and LTCFs do not violate federal and
state health care laws and regulations, including laws and regulations relating
to fraud and abuse, physician incentive plans, and corporate practice of
medicine and "fee-splitting." Failure by the Company, the Medical and Dental
Practices and the Providers to operate in compliance with such laws and
regulations could potentially result in, among other things, exclusion of the
Company, the Medical and Dental Practices and the Providers from Medicare and
Medicaid and significant civil and/or criminal penalties. Furthermore, if the
operations of the Company and the Medical and Dental Practices and the
relationships among the Company, the Medical and Dental Practices, the Providers
and LTCFs are determined not to be in compliance with such laws and regulations,
the Company and the Medical and Dental Practices may be unable to continue
operations under their current relationships in one or more states. Each of the
Operating Agreements contains provisions requiring the Company and the
applicable Medical and Dental Practice to use their best efforts to negotiate an
amendment to such Operating Agreement if the relationship it establishes creates
certain regulatory difficulties. However, there can be no assurance in such an
event that the Company will be able to modify its operations or establish new
relationships among itself, the Medical and Dental Practices, the Providers and
LTCFs in order comply with such laws and regulations, or that operating under
any such relationships will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, in the
event that such operations and relationships are significantly altered, the
Company may be required to make adjustments in the manner in which its financial
condition and results of operations are reported on a consolidated basis with
the Medical and Dental Practices. There can be no assurance that any such
adjustments will not have a material adverse effect on the price at which the
Common Stock is traded. See "--Government Regulation" and
"Business--Relationship between the Company and the Practices."
RISKS ASSOCIATED WITH POSSIBLE LOSS OF PROVIDERS AND COMPETITION WITH FORMER
PROVIDERS
Substantially all of the Company's direct revenue is derived from the fees
it receives under the Operating Agreements. The separate profitability of the
Practices, upon which the Compensation Amounts are determined, are entirely
dependent upon revenue generated by the medical and dental services provided by
physicians, dentists and ancillary health care service providers employed by the
Medical and Dental Practices. Such Providers have most of the day-to-day
interaction with the LTCFs and their residents. With the exception of a dentist
in Michigan who had a substantial LTCF-focused dental practice when he was
recruited, the Medical and Dental Practices have not entered into employment
agreements with the Providers. In the event that a significant number of
Providers terminate their
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employment with the Medical and Dental Practices or become unwilling or unable
to continue their roles, the business, financial condition and results of
operations of the Company and the Medical and Dental Practices could be
materially and adversely affected. In addition, the Medical and Dental Practices
have encountered difficulty recruiting certain types of Providers in certain
markets and the Medical and Dental Practices have had to offer increased
compensation to secure sufficient Providers in those markets. There can be no
assurance that the Medical and Dental Practices will be able to attract and
retain Providers in all specialties and in sufficient numbers to service the
LTCFs currently served and new LTCFs. Because the Company's profitability is
entirely dependent on the profitability of the Medical and Dental Practices, any
event having a material adverse impact on the Practices would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Under the Operating Agreements, the Medical and Dental Practices must
require each Provider to enter into a non-competition agreement (the
"Non-Compete Agreements") prohibiting such Provider from competing with the
Company and the Medical and Dental Practices. These covenants generally restrict
the Providers from competing for a period of eighteen months post-termination in
the coordination or provision of dental, medical and ancillary health care
services at corporate and institutional sites in any state in which the Medical
and Dental Practices provide services. They also restrict solicitation by the
Providers of employees and customers of the Company and the Medical and Dental
Practices for such period. There can be no assurance, however, that these
agreements will not be breached, or that, if breached, the Medical and Dental
Practices or the Company will have adequate remedies for such a breach. In
addition, in certain of the states in which the Medical and Dental Practices
operate, covenants not to compete with health care service providers are
prohibited or limited by statute, and it is uncertain whether a court will
enforce a covenant not to compete in those states in a given situation. In
addition, there is little judicial authority regarding whether the Company's
interests under the Operating Agreements will be viewed as the type of
protectable business interest that would permit it or one of the Medical and
Dental Practices to enforce such a covenant. Consequently, there can be no
assurance that a court in any particular state would enforce the covenants not
to compete contained in the Non-Compete Agreements. Since the value of each
Operating Agreement to the Company depends primarily on the ability of the
applicable Practice to preserve its business, which could be harmed if its
Providers enter into competition with it, a determination that such covenants
not to compete are unenforceable or are limited in scope and duration could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Health Care Service Providers and Company
Employees; Non-Competition Agreements."
RISKS ASSOCIATED WITH POST-PAYMENT AUDITS
The Medical and Dental Practices have, from time to time, been subject to
post-payment audits and inquiries by government sponsored health care
reimbursement programs. Although such audits have resulted in only one
significant post-payment adjustment to date, the Medical and Dental Practices
are the subject of eight such audits currently ongoing, six of which the Company
currently believes are not material, and believes that recent events indicate an
increase in such audit activities with respect to the Medical and Dental
Practices and in the home health care industry generally. Although the Company
believes, based on its extensive regulatory experience and expertise, that it is
in material compliance with all relevant laws and regulations regarding such
reimbursement, there can be no assurance that any additional audits conducted in
the future will not yield additional adjustment or that any such current or
future audits will not have a material adverse effect on the business, financial
condition and results of operations of the Medical and Dental Practices or the
Company. Third party payors may also deny reimbursement if they decide that a
particular treatment was not performed in accordance with the cost-effective
treatment methods specified by such payors or for other reasons.
On May 13, 1998, the Optometry Practice received notice from Wisconsin
Physician Service Medicare Part B ("WPS") that it had conducted a limited audit
(covering twenty-five patients) of certain ophthalmological services billed to
and paid by the Medicare program under a procedure code for new patient
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comprehensive medical examinations. The results of this audit alleged that over
70% of the claims paid by the Medicare program were inappropriately billed in
violation of published Medicare program guidelines, based on a lack of
sufficient clinical documentation demonstrating medical necessity. The actual
deemed overpayment for the sample audited was $1,009. Extrapolating the
percentage disallowance from the audit sample to the entire group of claims paid
by Medicare to the Optometry Practice in Wisconsin under the same procedure code
during the period covered by the audit, indicates a potential liability to the
Optometry Practice of approximately $109,000. The maximum possible liability to
the Optometry Practice assuming all claims made under this procedure code were
disallowed, is approximately $154,000. In connection with the audit, WPS has
also requested that the Company submit medical records indicating the medical
need or reason for all eye evaluation services billed at the time requests for
payment are made. If the documentation is not received or does not substantiate
medical necessity, the services will be disallowed. The Company has never
previously been requested to submit to a pre-payment review, and will have to
adopt certain new procedures if compliance with this pre-payment review is
required. Although the Company has not yet responded to this notice and is
currently evaluating the appropriate response, the Company and the Optometry
Practice intend to zealously contest the findings of this audit.
On March 4, 1998, the Dental Practice received notice from the Division of
Medical Assistance, Commonwealth of Massachusetts (the "Division") that it was
conducting a retrospective utilization review and peer review of the services
rendered by the Dental Practice to Medicaid recipients in Massachusetts during
the period between April 1, 1996 and September 30, 1997. On March 25, 1998 a
third-party reviewer contracted by the Division conducted an on-site review of
the Dental Practice's records for 46 of a randomly-selected sample of 50
patients. On April 3, 1998, the Company mailed to the reviewer the remaining
requested information. On July 13, 1998 the Company received the results of the
review which indicated a potential assessment against the Dental Practice of
approximately $85,000. The Company is currently evaluating the appropriate
response and intends to zealously contest the results of this review.
RISKS ASSOCIATED WITH RESTRICTIVE DEBT COVENANTS; BREACHES OF COVENANTS
Pursuant to the Company's Revolving Credit Facility, dated as of May 23,
1995, as amended (the "Credit Facility"), with State Street Bank and Trust
Company (the "Bank"), the Company is subject to a number of covenants that,
among other things, restrict the Company's ability to incur additional
indebtedness, pay dividends, dispose of certain assets and create liens. The
Credit Facility also requires (and any replacement indebtedness incurred to
provide for working capital or other needs likely will require) the Company to
comply with certain financial ratios and tests, under which the Company is
required to achieve certain financial and operating results. The ability of the
Company to comply with such provisions may be affected by events beyond its
control, including changes in prevailing economic conditions and in the
Company's competitive environment, which could impair the Company's operating
performance. A breach of any of these covenants could result in a default under
the Credit Facility, in which event the Bank could elect to declare all
outstanding amounts borrowed thereunder, together with accrued and unpaid
interest thereon, to be due and payable. Acceleration of such indebtedness could
have a material adverse effect on the Company.
As of the date of this Prospectus, the Company is not in default under any
of the foregoing covenants. However, (i) during the third and fourth quarters of
Fiscal 1996 and the first quarter of Fiscal 1997, the Company was in breach of a
covenant of the Credit Facility prohibiting the Company from incurring net
losses, (ii) during the last quarter of Fiscal 1996 and the first two quarters
of Fiscal 1997, the Company was in breach of a covenant prohibiting the Company
from exceeding a maximum ratio of total liabilities to tangible net worth, and
(iii) from the second quarter of Fiscal 1996 through the first quarter of Fiscal
1997, and during the first quarter of the Company's fiscal year ended December
31, 1995, the Company was in breach of the requirement that it maintain a
minimum interest expense coverage ratio. Each of these breaches has been waived
in writing by the Bank. The Company expects to use a portion of the net proceeds
of the Offering to repay the outstanding principal balance of its loan under the
Credit Facility; however, there can be no assurance that the Company's past
breaches of the financial covenants under the
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Credit Facility will not impair the Company's ability to secure additional
financing on favorable terms upon the scheduled expiration of the Credit
Facility in January 1999. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INTERCOMPANY BALANCES OWED BY MEDICAL AND DENTAL PRACTICES OWNED BY AFFILIATES
OF THE COMPANY
All of the Practices have accrued obligations to the Company pursuant to the
Operating Agreements in amounts ranging from approximately $134,000 to
approximately $913,000 on March 31, 1998, and aggregating approximately
$2,823,000 on such date. Each of these Intercompany Balances was generated
primarily through the assesssment of the Compensation Amounts under the
respective Operating Agreements, and in some cases, through advances of capital
to the Practices to be used for working capital purposes or in connection with
the formation of the Practices. The principal amounts of the various
Intercompany Balances have fluctuated from time to time along with the
calculation of the various Compensation Amounts due under the Operating
Agreements. The outstanding amounts of the Intercompany Balances as of March 31,
1997 ranged from approximately $15,000 to approximately $767,000 and aggregated
approximately $2,147,000. The Company attributes the increase in the aggregate
amount of the Intercompany Balances from March 31, 1997 to March 31, 1998 to the
Compensation Amounts under the respective Operating Agreements increasing at a
faster pace than the collection of the Practices' accounts receivable. Under the
terms of the Operating Agreements, the Company is entitled to require each of
the Practices to repay the amount of its Intercompany Balance upon thirty days
notice, and the Intercompany Balances bear interest at a rate determined by the
Company not to exceed the prime rate plus five percent. Under the terms of the
Operating Agreements, the Medical and Dental Practices are required to use their
best efforts to pay the outstanding principal balance of the Intercompany
Balances and accrued interest outstanding from time to time and payments on the
Intercompany Balances are generally made no less frequently than on a monthly
basis. Although the Company has not yet made a demand for repayment of the full
amount of any of the Intercompany Balances, the accrual of interest under the
Intercompany Balances has historically reduced the Compensation Amounts
calculated under the various Operating Agreements. The obligations of the
respective Practices under the Intercompany Balances are secured by an
unperfected lien on the Practice's accounts receivable that is subordinate to a
perfected lien on the same assets granted to the Bank under the Credit Facility.
Furthermore, the Operating Agreements prohibit each Practice from (i) paying any
of its Providers any amounts in excess of the fair market value of such services
(with the Company being the ultimate arbiter of such value); and (ii) paying any
dividends to its shareholders while there are any amounts outstanding under the
Practice's Intercompany Balance. Nevertheless, as of March 31, 1998, the
aggregate amount of the Intercompany Balances owed to the Company exceeded the
aggregate amount of the accounts receivable of the Practices, minus the amount
of bad debt expense recorded by the Practices as of such date and the amount of
the outstanding borrowings of the Company under the Credit Facility by
approximately $ . The fees received by the Medical and Dental Practices
from third parties for the provision of health care services are expected to be
the source of repayment of the Intercompany Balances. While the Company expects
that all of these balances will be repaid in the future, the failure of the
Medical and Dental Practices to repay the Intercompany Balances upon demand
could have a material adverse impact on the Company's business, financial
condition and results of operations. See "--Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Certain Transactions."
GOVERNMENT REGULATION
The operations of the Company and the Medical and Dental Practices and the
relationships among the Company, the Medical and Dental Practices, the Providers
and LTCFs are subject to complex, extensive and increasing regulation under
numerous laws administered by governmental entities at the federal, state and
local levels.
FRAUD AND ABUSE STATUTES. The "anti-kickback" provisions of the Social
Security Act prohibit the payment, offer, solicitation or receipt of any form of
remuneration (including any kickback, bribe or rebate), directly or indirectly,
in return for, or in order to induce, (i) the referral of an individual for an
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item or service, (ii) the furnishing of, or arranging for the furnishing of, an
item or service, or (iii) the purchase, lease or order, or the arrangement or
recommendation of a purchase, lease or order, of any item or service, which is
reimbursable under Medicare or Medicaid. Other fraud and abuse laws, known as
"Stark I" and "Stark II," prohibit a physician from referring Medicare or
Medicaid patients to an entity providing "designated health services" with which
any such physician or an immediate family member of any such physician has a
financial relationship or compensation arrangement or in which any such
physician or an immediate family member of any such physician has an ownership
or investment interest. Stark II also prohibits billing the Medicare and
Medicaid programs for services rendered following prohibited referrals.
Noncompliance with, or violation of, such fraud and abuse laws can result in
exclusion from the Medicare and Medicaid programs and civil and criminal
penalties. Massachusetts and Pennsylvania, where the Medical and Dental
Practices generated approximately 61.4% of their revenues for Fiscal 1997, have
enacted laws similar to the federal statutes which apply to referrals for items
or services reimbursable by Medicaid and any third party payor, respectively.
Such laws impose civil and criminal penalties on physicians, dentists and
ancillary health care service providers who fraudulently or wrongfully bill
third party payors or pay or receive remuneration for referrals for medical and
dental services. To comply with these regulations, the Medical and Dental
Practices do not refer patients to each other and the LTCFs receive no
remuneration from the Company, the Medical and Dental Practices or the Providers
and the only remuneration paid by the LTCFs to the Medical and Dental Practices
are fees for services provided to their residents. In addition, with respect to
Stark I and Stark II, the Company believes that the Medical and Dental Practices
do not provide "designated health services" and do not refer patients to
entities providing "designated health services" as to which the proscribed
relationships, arrangements or interests exist. There can be no assurance,
however, that such laws will not be hereafter interpreted or amended in a manner
that has a material adverse effect on the business, financial condition and
results of operations of the Medical and Dental Practices or the Company. The
Office of the Inspector General of the U.S. Department of Health and Human
Services (the "OIG") on April 15, 1998 issued Advisory Opinion 98-4 which
concluded that a management services contract between a medical practice
management company and a physician practice pursuant to which the physician
practice would pay the management company compensation that would include a
percentage of the physician practice's net revenues may constitute prohibited
renumeration under the anti-kickback provisions of the Social Security Act. The
OIG based its determination on: (i) the compensation to be paid to the
management company would be in part for marketing services, and the likelihood
of the financial incentive to the management company to increase referrals among
its affiliated physician practices; (ii) the absence of safeguards against
overutilization; and (iii) the financial incentive to the management company to
engage in upcoding and similar abusive billing practices. Although the Operating
Agreements provide that (i) neither party has an obligation to refer patients to
each other, or to any entity affiliated with either party; (ii) the Medical and
Dental Practices must maintain systems and procedures necessary to prevent
overutilization; and (iii) the Company must maintain systems and procedures
necessary to prevent billing practices that unlawfully maximize revenues,
Advisory Opinion 98-4 may not be relied upon by the Company to insulate the
Company from potential claims that the Company has violated the "anti-kickback"
provisions of the Social Security Act. A successful claim that the Company has
violated the "anti-kickback" provisions of the Social Security Act could have a
material adverse effect on the business, financial condition and results of
operations of the Medical and Dental Practices or the Company. See
"Business--Government Regulation: Federal Regulation."
FALSE CLAIMS/QUALITY OF CARE. Under the federal False Claims Act and
similar state laws enacted in Connecticut and Massachusetts, states in which the
Medical and Dental Practices generated 65.2% of their gross revenue for Fiscal
1997, criminal, civil and administrative penalties may be imposed on health care
providers who file or participate in the filing of false claims for
reimbursement for the delivery of health care services, including claims filed
under Medicare, Medicaid, and insurance programs. Penalties that previously were
sought primarily in instances of claims filed for services not actually
provided, in whole or in part, or provided by unauthorized providers, are now
being sought in an increasingly broader range of circumstances, including
claiming reimbursement for services that do not comply with quality and other
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applicable standards of care. The Medical and Dental Practices have procedures
in place to oversee quality of care and to assure maintenance of the required
level of quality and standards of care. However, there can be no assurance as to
the adequacy of such procedures or that such laws will not hereafter be
interpreted or amended in a manner that has a material adverse effect on the
business, financial condition and results of operations of the Medical and
Dental Practices or the Company. See "Business-- Government Regulation."
REGULATIONS GOVERNING INCENTIVE COMPENSATION ARRANGEMENTS. Federal
regulations promulgated in 1996 under OBRA of 1990 govern physician incentive
plans that subject individual physicians to substantial financial risk in
providing services to Medicare and Medicaid patients. When applicable, the
regulations impose certain disclosure, survey and stop-loss requirements. Such
regulations also prohibit physician incentive plans which induce the limitation
or reduction of covered or medically necessary services. Violations of such
regulations can lead to the imposition of Medicare or Medicaid new member
enrollment suspensions and civil monetary penalties. Although the Company
believes that neither the Company nor any of the Medical and Dental Practices
have entered into physician incentive plan contracts that require compliance
with such regulations, increasing efforts both under such regulations and
otherwise to regulate risk assumption in the delivery of health care could have
a material adverse effect on the business, financial condition and results of
operations of the Medical and Dental Practices or the Company. See "Business--
Government Regulation."
EFFECTS OF ANTITRUST ENFORCEMENT. Because each of the Medical and Dental
Practices is a separate legal entity, they may be considered to be competitors
subject to a range of antitrust laws prohibiting anti-competitive conduct
including price fixing, concerted refusals to deal and division of market. More
particularly, governmental authorities have interpreted the antitrust laws to
prohibit, among other things, joint negotiations by competitors. The Company and
the Medical and Dental Practices intend to comply with such state and federal
antitrust laws as may affect their business, but there can be no assurance that
a review of the operations of the Company and the Medical and Dental Practices
by courts or regulatory authorities would not result in a determination that
could have a material adverse effect on the business, financial condition and
results of operations of the Medical and Dental Practices or the Company. See
"Business--Government Regulation."
CORPORATE PRACTICE OF MEDICINE AND "FEE-SPLITTING." The laws of many
states, including Connecticut, Massachusetts and Pennsylvania, states in which
the Medical and Dental Practices generated 80.4% of their gross revenues for
Fiscal 1997, prohibit business corporations, such as the Company, from
practicing medicine or dentistry or performing ancillary services and employing
physicians, dentists or ancillary service providers to practice medicine or
dentistry or perform ancillary services, respectively. To comply with these
regulations, the Medical and Dental Practices retain exclusive control over the
delivery of health care services under the Operating Agreements. However, many
aspects of the Company's operations have not been subject to formal state or
federal regulatory interpretation. Furthermore, the laws and regulations
governing the corporate practice of medicine have been subject to limited
judicial and regulatory interpretation in Connecticut, Massachusetts and
Pennsylvania and are subject to change. Therefore, no assurances can be given
that a review of the Company's relationships with the Medical and Dental
Practices by courts or regulatory authorities would not result in a
determination that could adversely affect the business, financial condition and
results of operations of the Company (for example, by rendering the Company's
Operating Agreement with a Practice unenforceable) or that the health care
regulatory environment will not change so as to restrict the Company's existing
operations or expansion. Massachusetts and Pennsylvania also prohibit
"fee-splitting" arrangements between physicians, dentists or ancillary health
care service providers and any party other than physicians, dentists and such
ancillary service providers, respectively, within the same practice. See
"Business--Government Regulation: State Regulation."
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RISKS ARISING FROM THE CHANGING HEALTH CARE INDUSTRY
Federal and state governments currently are considering various types of
health care initiatives and comprehensive revisions to the health care system.
Some of the proposals under consideration, or others that may be introduced,
could, if adopted, have a material adverse effect on the business, financial
condition and results of operations of the Company or the Medical and Dental
Practices. It is uncertain what legislative programs, if any, will be adopted in
the future, or what actions Congress or state legislatures may take regarding
health care reform proposals or legislation. In addition, changes in the health
care industry, such as the growth of managed care organizations and provider
networks, and changes in reimbursement methodologies and practices, may result
in lower payments for services provided by the Medical and Dental Practices.
Because the Company's consolidated revenues and profitability are entirely
dependent on the revenues and profitability of the Medical and Dental Practices,
any reduction in the revenues received by the Medical and Dental Practices, to
the extent such reduction decreases their profitability and the respective
Compensation Amounts calculated under the Operating Agreements, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
REIMBURSEMENT AND COST CONTAINMENT
Management estimates that approximately 71.5% of the revenues of the Medical
and Dental Practices for Fiscal 1997 were derived from government sponsored
health care programs (Medicare and Medicaid) and non-government third party
payors. The health care industry is experiencing a trend toward cost containment
as government and non-government third party payors seek to impose lower
reimbursement and utilization rates and negotiate reduced payment schedules with
health care service providers. These trends have caused a reduction in
per-patient revenue for certain of the services provided by the Medical and
Dental Practices, which the Company believes will continue to decrease. Further
reductions in payments to the Medical and Dental Practices or other changes in
reimbursement for health care services could have a material adverse effect on
the Medical and Dental Practices' business, financial condition and results of
operations. Historically, state and federal sponsored reimbursement programs
have been able to deny reimbursement for procedures that are determined not to
have been delivered or inadequate in quality or otherwise. In addition, such
programs routinely conduct post-payment audits of parties such as the Medical
and Dental Practices that seek reimbursement for services rendered.
The revenues of the Medical and Dental Practices are also affected by
changes in reimbursement methodologies. For example, certain of the states in
which the Podiatry Practice operates have replaced a commonly-used reimbursement
procedure code with three different codes, each of which yields a lower
reimbursement amount. It is currently unclear whether one or more of these
procedure codes may be combined in a majority of instances. Accordingly, it is
currently impossible to assess the impact of these procedure code changes on the
business of the Podiatry Practice or the Company. This particular procedure code
adjustment, or other possible procedure code adjustments that may be adopted by
one or more states in the future, could reduce payments to the Medical and
Dental Practices for certain services, which could have the effect of reducing
the Company's revenues. There can be no assurance that changes in reimbursement
procedure codes will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The federal government has implemented, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for physician
services. 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 Medical and Dental Practices. RBRVS-type of payment systems have also been
adopted by certain non-government third party payors and may become a
predominant payment methodology. Increased implementation of such programs would
reduce payments by non-
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government third party payors to the Medical and Dental Practices, which could
have the effect of reducing the Company's revenues.
There can be no assurance that any or all of the factors that may lead to
reduced revenues and operating margins of the Medical and Dental Practices could
be offset through cost reductions, increased volume, introduction of new
procedures by the Medical and Dental Practices or otherwise. The failure to
offset reduced revenues and operating margins at either the Company or Practice
level could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Market Overview: Prospective
Payment, Consolidated Billing and Managed Care."
GROWTH OF MANAGED CARE
The number of individuals covered under managed care contracts or other
similar arrangements has grown over the past several years and may continue to
grow in the future. Entities providing managed care coverage have been
successful in reducing payments for health care services in numerous ways,
including entering into capitated payment arrangements, denying payment for
specified services, refusing payment for specified services unless prior
authorization has been obtained, and refusing to increase fees for specified
services. During the three months ended March 31, 1998, approximately one
percent of the revenues of the Medical and Dental Practices was derived from
capitated payment arrangements. Because the Compensation Amount payable to the
Company is contingent upon profitability of the Medical and Dental Practices,
expenses incurred by the Medical and Dental Practices in excess of the capitated
payment will reduce the Compensation Amount and, accordingly, the Company's
consolidated revenues. The continued growth of the managed care industry and its
continued success in reducing payments to health care service providers could
have a material adverse effect on the business, financial condition and results
of operation of the Medical and Dental Practices or the Company. See
"Business--Market Overview: Prospective Payment, Consolidated Billing and
Managed Care."
DEPENDENCE ON KEY PERSONNEL; LIMITED MANAGEMENT TEAM
The Company's success depends to a significant extent on Steven S. Charlap,
M.D., the Company's Chairman, Chief Executive Officer and President and sole
equity holder of the Audiology and Primary Care Practice and HealthDrive
Michigan Corporation, Michael R. Kaplan, the Company's Chief Financial Officer
and Vice President of Finance, and Alec H. Jaret D.M.D., the President and sole
equity holder of the Dental Practice. The loss of Dr. Charlap's, Mr. Kaplan's or
Dr. Jaret's services to the Company would have a material adverse effect on the
success of the Company. Although Dr. Charlap and Mr. Kaplan have entered into
employment agreements with the Company and Dr. Jaret has entered into an
employment agreement with the Dental Practice, it is not contemplated that Dr.
Jaret or any of the other Providers or any holders of the capital stock of the
Practices will have an employment agreement with the Company. The Company has
key person life insurance in the amount of $1.5 million on Dr. Charlap, and the
in amount of $500,000 on Dr. Jaret. Following completion of the Offering, the
Company anticipates recruiting additional officers. The Company's future success
will depend in part on the ability to attract and retain highly qualified
personnel to manage the future growth of the Company. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The failure to attract
and retain such individuals could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management."
CONFLICTS OF INTEREST
Steven S. Charlap, M.D., the Chairman of the Board of Directors, Chief
Executive Officer and President of the Company, is the owner of all of the
outstanding capital stock of the Audiology and Primary Care Practice and
HealthDrive Michigan Corporation. Alec H. Jaret, D.M.D., a director of the
Company, is the owner of all of the outstanding capital stock of the Dentistry
Practice. As a result of Dr. Charlap's and Dr. Jaret's ownership of three of the
Medical and Dental Practices, conflicts of interest may arise from time to time
in certain matters including, but not limited to, matters relating to the
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Operating Agreements. For example, to the extent that the Company seeks to
challenge the compensation being paid to either of Dr. Charlap or Dr. Jaret as
the President of one or more of the Practices, either of Dr. Charlap or Dr.
Jaret may be able to influence the Company's prosecution of such challenge to
the Company's detriment. Although the Company believes that the terms and
provisions of the Operating Agreements with the Dentistry Practice, the
Audiology and Primary Care Practice and HealthDrive Michigan Corporation are
fair and no less favorable than those that the Company could obtain from third
parties, and each of Dr. Charlap and Dr. Jaret have fiduciary duties to the
Company, there can be no assurance that the Company will not be materially
adversely affected by matters in which Dr. Charlap or Dr. Jaret have conflicts
of interest.
BROAD DISCRETION IN USE OF PROCEEDS
Following the Offering and the specific application of some of the net
proceeds of the Offering as described under "Use of Proceeds," the Company will
have approximately $8.2 million (or approximately 80%) of the net proceeds
available for working capital and general corporate purposes, which may include
acquisitions and other expansion of the Company's business. The Company's
management, subject to approval of the Board of Directors in certain
circumstances, will have broad discretion with respect to the application of
such proceeds. Unless a possible acquisition involves a merger of the Company
with or into another company, it is unlikely that the stockholders of the
Company will have an opportunity to vote whether or not to approve such a
transaction. See "Use of Proceeds."
POSSIBILITY OF EXPOSURE TO PROFESSIONAL LIABILITY
In recent years, health care providers have become subject to an increasing
number of lawsuits alleging malpractice and related legal theories. Some of
these lawsuits involve large claims and significant defense costs. Any suits
involving the Company, the Medical and Dental Practices or the Providers, if
successful, could result in substantial damage awards. Such an award may exceed
the limits of the Company's and/or the Medical and Dental Practices' insurance
coverage or any insurance the Providers may have individually. Although the
Company does not itself engage in the practice of medicine or dentistry or
provide ancillary health care services or have responsibility for compliance
with certain regulatory and other requirements directly applicable to
physicians, dentists, physician and dental groups and ancillary health care
service providers, there can be no assurance that the Company will not become
subject to litigation in the future as a result of the health care services
provided by the Medical and Dental Practices. The Company does not itself
maintain medical malpractice liability insurance and, because the Company's
revenue is entirely dependent upon the fees it receives under the Operating
Agreements, any substantial damage award against the Medical and Dental
Practices in excess of their insurance coverage would have a material adverse
effect on the Company's revenues and profitability. The Company maintains
general liability insurance for itself and the Operating Agreements provide that
the Medical and Dental Practices must maintain comprehensive professional
liability insurance. While the Company believes that it and the Medical and
Dental Practices have adequate liability insurance coverage, there can be no
assurance that the coverage will be adequate to cover losses or that coverage
will continue to be available upon terms satisfactory to the Company and the
Medical and Dental Practices. In addition, certain types of risks and
liabilities, including penalties and fines imposed by governmental agencies, are
not covered by insurance. Malpractice insurance, moreover, can be expensive and
varies from state to state. There can be no assurance that the cost of such
insurance to the Company or the Medical and Dental Practices in the future will
not have a material adverse effect on the Company's business, financial
condition or results of operations. Successful malpractice claims against the
Company or the Medical and Dental Practices could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Insurance."
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RISKS ASSOCIATED WITH GROWTH STRATEGY AND UNSPECIFIED ACQUISITIONS
The Company and the Medical and Dental Practices intend to grow by
selectively expanding into new markets and adding additional services either
through the establishment of new operations or the acquisition of existing
LTCF-focused practices by the Medical and Dental Practices. There can be no
assurance that the Company will be able to successfully identify geographic
markets suitable for expansion or establish new regional offices to serve such
additional markets, or that the Medical and Dental Practices will be able to
secure the relationships with additional Providers which will be necessary to
provide health care services in such markets. In addition, in pursuing a growth
strategy of expansion into additional geographic markets, the Company will be
required to develop expertise and comply with laws and regulations that may be
significantly different from those applicable to the Company's current
operations as well as face competitors with greater knowledge of such markets
than the Company. To the extent the Company and the Medical and Dental Practices
pursue their strategy of establishing new operations, the process of identifying
new geographic markets with potential, recruiting additional Providers,
purchasing necessary equipment and supplies and, where necessary, establishing a
new regional office can be lengthy and costly. Furthermore, because new
operations will have no previous patient bases, significant sales, advertising
and marketing expenditures may be required to secure Service Agreements with
LTCFs. There can be no assurance that the Company and the Medical and Dental
Practices will be able to successfully identify additional health care services
for the Medical and Dental Practices to provide, adapt the Medical and Dental
Practices' existing operations to provide such services, or, secure the
relationships with additional Providers which will be necessary to provide such
services. Furthermore, such an expansion strategy could cause management's time
and resources to be diverted from the Company's existing markets to new markets,
and may require the Company to use the proceeds of the Offering to finance its
expansion into new markets. See "Business--Strategy."
The Company and the Medical and Dental Practices also intend to pursue a
strategy of growth through the acquisition of existing LTCF-focused practices.
Any such acquisitions are likely to take the form of (i) the purchase by the
Company of another company engaged in the business of the promotion,
administration and coordination of the provision of health care services to
residents of LTCFs; (ii) the purchase by the Company of the assets of a
physician practice followed by the assignment of any purchased service contracts
to one or more of the Practices, or (iii) the payment by the Company of a
purchase price for the entrance by an unaffiliated physician practice (and its
shareholders) into operating agreements and option agreements in substantially
the form of the existing Operating Agreements and Option Agreements among the
Company, the Practices and the stockholders of the Practices. In any case, the
consideration to be paid to the seller could take the form of cash (whether
payable immediately or over time), debt or Common Stock, or some combination of
the same, with any such consideration to be paid by the Medical and Dental
Practices most likely requiring an advance from the Company. Any cash used in
such an acquisition could be derived from the net proceeds of the Offering,
borrowings by the Company under any credit facility the Company is party to in
the future, cash generated by operations or by additional capital financings, or
some combination of these. Although the Company is not restricted in the amount
of cash it may pay in connection with a possible acquisition, it will not loan
more than $1.5 million of the net proceeds of the Offering in the aggregate to
the Practices in connection with possible acquisitions or for other purposes.
Identifying appropriate acquisition candidates and negotiating and consummating
acquisitions can be a lengthy and costly process. There can be no assurance that
suitable acquisition candidates will be identified, that acquisitions will be
consummated on favorable terms, on a timely basis, or at all, or that acquired
practices will be successfully integrated with existing operations. In addition,
the Company may not obtain fairness opinions from third parties in connection
with some or all of such possible acquisitions. To the extent that the Company
and the Medical and Dental Practices are successful in pursuing a strategy of
acquisitions of existing LTCF-focused practices by the Medical and Dental
Practices, such acquisitions could involve a number of risks, including the
diversion of management's attention to the assimilation of acquired entities,
and have short-term adverse effects on the Company's operating results.
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In addition, the Company and the Medical and Dental Practices have no experience
in consummating acquisitions of existing LTCF-focused practices by the Medical
and Dental Practices.
RISKS ASSOCIATED WITH ENHANCEMENT OF MANAGEMENT INFORMATION SYSTEM AND YEAR 2000
COMPLIANCE
As part of the Company's growth strategy, the Company intends to capitalize
on its existing billing operations, reimbursement expertise, patient demographic
databases and management information systems by providing clinical data and
consolidated billing services to LTCFs and unaffiliated primary care physicians
who service LTCFs. The Company has never independently marketed a clinical data
and consolidated billing service. The Company believes that market acceptance of
this service depends upon the continued increase in the administrative
complexity of billing and reimbursement and continued increases in pressures on
LTCFs to be more efficient. No assurance can be given that the Company will be
successful in bringing its independent clinical data and consolidated billing
service to commercial acceptance. Failure to gain market acceptance may have a
material adverse effect on the Company's growth strategy.
To facilitate growth in its current operations and those of the Medical and
Dental Practices, the Company also intends to use approximately $1.0 million of
the net proceeds of the Offering to finance an enhancement of the Company's
current management information system. The development and implementation of
enhancements to the Company's management information system involves the risk of
unanticipated delays and expense, as well as possible interruptions of current
operations, and there can be no assurance that the Company will be successful in
implementing and integrating these enhancements. Any significant delay or
expense associated with such enhancements, or any interruption in operations
caused by the implementation of such enhancements, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Use of Proceeds."
The Company currently employs three systems susceptible to Year 2000 issues,
including a billing system, CustomCare and an accounting system and has reviewed
the Year 2000 issue with respect to each system. The vendor of the Company's
billing system has indicated that an upgrade to the system that addresses the
Year 2000 issue will be available by the third quarter of 1998, without
requiring a substantial additional license fee. The Company believes that
CustomCare's displays will require minor modifications to address Year 2000 and
that its employees will be able to complete such modifications without incurring
material expense by the end of 1999. The Company expects to replace its
accounting system without incurring a material expense. Upon upgrade of such
systems, management believes that the Company and the Medical and Dental
Practices will be Year 2000 compliant.
The Company is unable to assess the potential impact on the Company of
potential failures to address Year 2000 issues by the governmental and
non-governmental third party payors. Any disruption in the systems of such
payors could result in delays in reimbursment for the services provided by the
Medical and Dental Practices which could have a material adverse effect on the
Company's business, financial condition and results of operations.
HIGHLY COMPETITIVE INDUSTRY
The health care services industry is highly competitive. The industry is
also subject to continuing changes in how services are provided and how
providers are selected and paid. Many of the current and potential competitors
of the Company and the Medical and Dental Practices, including national LTCF
operators, are significantly larger, have a captive group of affiliated
potential customers and have greater financial and marketing resources than the
Company. In addition, to the extent that an LTCF operator which has contracted
with the Medical and Dental Practices determines to provide services similar to
those offered by the Company, the Company may lose the revenue currently
generated from services provided by the Medical and Dental Practices to such
LTCFs. In 1997, SunAlliance Healthcare Services, Inc. ("SunAlliance"), a
division of Sun Healthcare Group, Inc. ("Sun Healthcare Group"), adopted such a
strategy
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which the Company believes resulted in the cancellation of one or more Service
Agreements with 21 Sun Healthcare Group facilities. These contracts represented
approximately $482,000 of the revenue of certain of the Medical and Dental
Pratices in Fiscal 1996. The Company currently recognizes SunAlliance as its
principal competitor in certain of its markets. There can be no assurance that
the Company and the Medical and Dental Practices will be successful in competing
effectively in its existing markets or in markets it may enter in the future.
See "Business--Competition."
DEPENDENCE ON PROPRIETARY ASSETS; LIMITED PROTECTION OF PROPRIETARY ASSETS
The Company has made significant investments in the systems and procedures
it has developed in order to coordinate the provision of a range of on-site
geriatric medical and dental services, including CustomCare, the Company's
management information system which integrates all of the Company's services.
The Company depends on trade secret law and nondisclosure and other contractual
provisions to protect its systems and procedures and has not filed for copyright
protection for CustomCare. There can be no assurance that the precautions taken
by the Company will be adequate to prevent infringement or misappropriation of
the Company's proprietary assets. Infringement of the Company's proprietary
assets by a competitor may result in a loss of the Company's competitive
advantage and have a material adverse effect on the Company's business,
financial condition and results of operations.
Although the Company believes that CustomCare does 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 that could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has invested a considerable amount of time and marketing
resources generating the goodwill associated with the name "HealthDrive." The
Company has a pending service mark application for the name "HealthDrive."
Although the Company is aware of no other entity using the name "HealthDrive"
and believes it will be able to obtain the registration that its has applied
for, no assurance can be given that it will succeed. In the event of any
successful opposition, the Company may be required to change the service mark
used in connection with its operations and/or the name of the Company.
STATE SALES AND USE TAXES
Certain states in which the Company and the Medical and Dental Practices
operate impose sales and use taxes on the provision of certain services,
including management, management consulting and data processing services. While
the Company believes that the Company and the Medical and Dental Practices file
sales and use tax returns in each jurisdiction where they are required to do so,
the Company and the Medical and Dental Practices do not currently file sales or
use tax returns or pay sales or use taxes in certain jurisdictions with respect
to some of the services the Company provides to the Medical and Dental
Practices. There can be no assurance that any state or local revenue authority
will not initiate an audit of the sales and use tax returns filed by the Company
or the Medical and Dental Practices in such jurisdictions, or investigate
whether or not the Company or the Medical and Dental Practices should be paying
taxes with respect to the services provided by the Company to the Medical and
Dental Practices in such jurisdictions. Any such audit or investigation could
result in the Company being required to pay amounts in back taxes and, in some
cases, interest and penalties with respect to prior periods, as well as to pay
additional taxes in future periods. The Company has not historically established
reserves against any possible liabilities resulting from such possible audits or
investigations, and there can be no assurance that the results of any such audit
or investigation, including any imposition of penalties, will not have a
material adverse effect on the Company's business, financial position or results
of operations.
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CONTROL BY PRINCIPAL STOCKHOLDERS, DIRECTORS AND OFFICERS
After giving effect to the sale of the shares of Common Stock offered
hereby, executive officers of the Company, current members of the Company's
Board of Directors and certain holders of the Common Stock, including Steven S.
Charlap, M.D., the Company's Chairman of the Board, Chief Executive Officer and
President, and DCC Holdings, will beneficially own or control in the aggregate
approximately 67.6% of the outstanding Common Stock, assuming the Underwriters'
over-allotment option is not exercised. As a result, these persons will have the
ability to control or exert significant influence over, significant corporate
transactions requiring stockholder approval, including mergers and sales of
assets and the election of members of the Company's Board of Directors, and over
the Company's Board of Directors, and, therefore, the business policies and
affairs of the Company. Furthermore, such control could preclude any unsolicited
acquisition proposals for the Company and, consequently, adversely affect the
market price for the Common Stock. DCC Holdings is controlled by DCC plc, an
equity fund publicly-traded on the London and Dublin stock exchanges. See
"Principal and Selling Stockholders."
POSSIBILITY OF NASDAQ QUOTATION TERMINATION OR SUSPENSION AND DECREASE IN STOCK
PRICE; PENNY STOCK REGULATION
The trading of the Common Stock on the Nasdaq SmallCap Market is conditioned
upon meeting certain asset, capital and surplus, earnings and stock price tests.
To maintain eligibility on the Nasdaq SmallCap Market, the Company must, among
other things, maintain compliance with one of the following three tests: (i) net
tangible assets must be in excess of $2.0 million; (ii) market capitalization
must be in excess of $35.0 million; or (iii) net income must be in excess of
$500,000 in the latest fiscal year or in two of the last three fiscal years. If
the Company fails all of these tests or if the Company fails to maintain an
average bid price of at least $1.00 per share, the Common Stock may be suspended
or terminated from inclusion on the Nasdaq SmallCap Market. The effects of
suspension or termination include the limited release of the market prices of
the Common Stock and limited news coverage of the Company. Suspension or
termination may restrict investors' interest in the Common Stock and materially
adversely affect the trading market and prices for such securities and the
Company's ability to issue additional securities or to secure additional
financing.
In addition to the risk of volatility of stock prices and possible
suspension or termination, low price stocks are subject to additional risks of
additional federal and state regulatory requirements and the potential loss of
effective trading markets. In particular, if trading of the Common Stock on the
Nasdaq SmallCap Market was to be suspended or terminated and the trading price
of the Common Stock was less than $5.00 per share, such Common Stock could be
subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which, among other things, requires that broker/dealers satisfy
special sales practice requirements, including making individualized written
suitability determinations and receiving any purchaser's written consent prior
to any transaction. In such case, the Common Stock could also be deemed "penny
stock" under the Securities Enforcement and Penny Stock Reform Act of 1990 which
would require additional disclosure in connection with trades in the Common
Stock, including the delivery of a disclosure schedule explaining the nature and
risks of the penny stock market. Such requirements could severely limit the
liquidity of the Common Stock and the ability of purchasers in this Offering to
sell their Common Stock in the secondary market. There can be no assurance that
the Company will not be delisted from the Nasdaq SmallCap Market or that the
price of the Common Stock per share will remain above $5.00. See "--Absence of
Public Market: Negotiated Offering Price" and "-- Potential Adverse Impact on
Market Price of Shares Eligible for Future Sale and Registration Rights."
SUBSTANTIAL AND IMMEDIATE DILUTION; SIGNIFICANT BENEFIT TO CURRENT SHAREHOLDERS
Purchasers of the Common Stock offered hereby will incur immediate dilution
of net tangible book value of $4.79 per share (after deducting underwriting
discounts and commissions and offering expenses
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payable by the Company), or 63.9% of the anticipated offering price of the
Common Stock. Such purchasers will incur additional dilution upon the exercise
of outstanding stock options. See "Management--Second Amended and Restated 1992
Stock Option Plan." Shareholders of the Company who purchased their shares prior
to the Offering acquired, and option holders who exercise their stock options
after the Offering will acquire, their shares at a cost substantially below the
price offered hereby and, accordingly purchasers of shares of the Company
pursuant to this Offering will bear a disproportionate risk of investment in the
Common Stock. See "Dilution."
ABSENCE OF PUBLIC MARKET; NEGOTIATED OFFERING PRICE
Prior to this Offering there has been no market for the Common Stock.
Although the Company has applied to include the Common Stock for quotation on
the Nasdaq SmallCap Market, there can be no assurance that an active trading
market will develop for the Common Stock, or, if developed, that it will be
maintained. The price of the Common Stock offered hereby will be determined
through negotiation between the Company and the Underwriters and may not be
indicative of the market price for the Common Stock after the Offering. The
factors considered in determining the offering price will be the preliminary
demand for the Common Stock, prevailing market and economic conditions, the
Company's revenue and earnings, estimates of its business potential and
prospects, the present state of its business operations, an assessment of its
management, the consideration of these factors in relation to the market
valuation of comparable companies in related businesses and the current
condition of the markets in which it operates. See "Underwriting."
ADDITIONAL CAPITAL REQUIREMENTS
The Company believes that the estimated net proceeds from this Offering,
together with current cash and cash equivalent balances and internally generated
funds, will satisfy the Company's projected requirements for working capital and
commitments for a period of at least twelve months. If cash generated from
operations is insufficient to satisfy the Company's projected requirements, or
if the Company subsequently elects to use funds to finance acquisitions by the
Company or the Medical and Dental Practices or other matters, the Company may be
required to sell additional equity or debt securities or obtain additional bank
financing. There can be no assurance that the Company will be able to sell such
securities or obtain such credit facilities on acceptable terms in the future,
if at all. In the event that the Company is unable to secure such additional
financing, the Company may be forced to curtail projected expansion, delay or
discontinue planned capital expenditures, reduce the Company's workforce or
close less-profitable operations, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
This potential sale of additional equity or debt securities could result in
further dilution to the Company's shareholders and increased interest expense.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NO INTENTION TO DECLARE OR PAY DIVIDENDS
The Company does not currently intend to declare or pay any cash dividends
on the Common Stock in the foreseeable future and anticipates that earnings, if
any, will be used to finance the development and expansion of its business.
Furthermore, until the Credit Facility expires on January 1, 1999, it does not
permit the Company to declare dividends on its Common Stock. The Company
anticipates that it may in the future seek to obtain a loan, revolving credit
agreement or other financing arrangement, the terms of which, although not known
to the Company at this time, may similarly prohibit the declaration and payment
of dividends without prior lender approval. Any payment of future dividends and
the amounts thereof will be dependent upon the Company's earnings, financial
requirements and other factors deemed relevant by the Company's Board of
Directors, including the Company's contractual obligations. See "Dividend
Policy."
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ANTITAKEOVER MEASURES
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") and By-Laws (the "By-Laws") could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that investors might be willing to pay in
the future for the Common Stock. These provisions require that the Company have
a Board of Directors comprised of three classes of directors with staggered
terms of office, require super-majority approval to amend certain provisions in
the Restated Certificate of Incorporation and By-Laws or enter into certain
transactions with significant stockholders of the Company and impose various
procedural and other requirements that could make it more difficult for
stockholders to effect certain corporate actions. See "Description of Capital
Stock."
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE AND
REGISTRATION RIGHTS
Upon completion of the Offering, the Company will have outstanding
approximately 4,363,246 shares of Common Stock. Of these shares, the 1,600,000
shares of Common Stock sold in the Offering, and any shares purchased from the
Selling Stockholders in the event that the Underwriter's over-allotment option
to purchase up to 240,000 shares is exercised, will be freely tradable without
restriction or further limitation under the Securities Act, except for any
shares purchased by an "affiliate" of the Company, which will be subject to the
limitations imposed on "affiliates" of the Company under Rule 144 promulgated
under the Securities Act ("Rule 144"). The remaining 2,763,246 outstanding
shares of Common Stock (2,523,246 if the Underwriters' over-allotment option is
exercised in full) are "restricted securities" within the meaning of Rule 144
and may not be resold except pursuant to a registration statement effective
under the Securities Act or pursuant to an exemption therefrom, including the
exemption provided by Rule 144. An additional 429,625 shares issuable upon the
exercise of outstanding options as of May 15, 1998 granted to officers,
directors and employees of the Company and the Medical and Dental Practices
pursuant to the Stock Option Plan, once issued, shall be freely tradable subject
to certain limitations imposed by Rule 701 promulgated under the Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one-year holding period may, subject to certain
restrictions, sell within any three-month period a number of shares which does
not exceed the greater of: (i) 1% of the then outstanding shares of Common Stock
or (ii) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission as
required by Rule 144. Rule 144 also permits the sale of shares without any
volume limitation by a person who is not an affiliate of the Company and who has
satisfied a two-year holding period. The one-year holding period with respect to
2,753,246 outstanding shares of Common Stock has expired. The remaining 10,000
shares of outstanding Common Stock, which were issued to a director of the
Company in accordance with Rule 701 promulgated under the Securities Act, will
become eligible for sale subject to the other limitations of Rule 144 ninety
days after the effective date of the registration statement of which this
Prospectus is a part (the "Registration Statement"). See "Shares Eligible for
Future Sale."
Shareholders holding approximately 98.8% of the Company's outstanding Common
Stock and Common Stock issuable upon the exercise of outstanding stock options
have agreed not to offer, pledge, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any securities of
the Company they currently hold without the prior written consent of the
Representative for a period of 180 days after the effective date of the
Registration Statement. See "Underwriting."
DCC Holdings, who will hold 1,308,246 shares of Common Stock upon completion
of the Offering, and the Representative, who will hold warrants to purchase
160,000 shares of Common Stock, have registration rights for the Common Stock
they own or may acquire, which might allow them to require the Company, subject
to certain conditions, to register their shares under the Securities Act. The
sale of a substantial number of shares of Common Stock in the public market
following the Offering, or the
21
<PAGE>
perception that such sales could occur, could adversely affect the market price
for the Common Stock and impair the Company's ability to raise additional
capital in the future through the sale of equity securities should it desire to
do so. See "--Substantial and Immediate Dilution; Significant Benefit to Current
Shareholders" and "Underwriting."
LIMITATION OF LIABILITY
The Restated Certificate of Incorporation provides that directors of the
Company shall not be liable personally for monetary damages to the Company or
its stockholders for breach of fiduciary duty as a director, subject to certain
limitations. Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission, the
presence of these provisions in the Restated Certificate of Incorporation could
prevent the recovery of monetary damages against directors of the Company. See
"Description of Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE
From time to time after the Offering, there may be significant volatility in
the market price for the Common Stock. 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, the Medical and Dental Practices or their respective competitors
could cause the market price of the Common Stock to fluctuate substantially. The
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market price of many companies' securities
and have often been unrelated to the operating performance of these companies.
Concern about the potential effects of health care reform measures has
contributed to the volatility of stock prices of companies in health care and
related industries and may similarly affect the price of the Common Stock
following the Offering. Any such fluctuations that occur following the
completion of this Offering may adversely affect the market price of the Common
Stock.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements including: (i)
anticipated trends in the Company's financial condition and results of
operations, including expected changes in the Company's gross profit, sales and
marketing expense, general and administrative expense and professional expenses;
(ii) the Company's business strategy for future growth, including the Company's
plans to increase penetration in existing markets, expand into new geographic
markets, offer additional services and consummate acquisitions, (iii) the
Company's expectations regarding the cost of Year 2000 compliance, (iv) the
Company's expectations regarding its ability to finance its capital requirements
in the future and (v) the Company's expectations regarding its intention not to
loan any of the proceeds of the Offering to any of the Medical and Dental
Practices. When used in the Prospectus, the words "believes," "intends,"
"anticipates," "expects," and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are based largely
on the Company's current expectations and are subject to a number of risks and
uncertainties. In addition to the other risks described elsewhere in this "Risk
Factors" Section, important factors to consider in evaluating such
forward-looking statements include: (i) changes in external competitive market
factors which might impact trends in the Company's results of operations; (ii)
unanticipated working capital and other cash requirements; (iii) general changes
in health care and related industries; and (iv) various other competitive
factors that may prevent the Company from competing successfully in the
marketplace. In light of these risks and uncertainties, many of which are
described in greater detail elsewhere in this "Risk Factors" Section, actual
results could differ materially from the forward-looking statements contained in
this Prospectus.
22
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $7.50 per share, the net
proceeds to the Company from the sale of shares of Common Stock offered hereby
are estimated to be approximately $10.3 million after deducting the underwriting
discount and expense allowance and estimated offering expenses. The Company will
not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. The Company maintains broad discretion with respect to the
application of the proceeds of the Offering.
The Company expects to use approximately $600,000 of the net proceeds of the
Offering to repay amounts outstanding under the Credit Facility. The Credit
Facility matures on January 1, 1999, and borrowings thereunder bear interest at
a rate of 1% in excess of State Street Bank and Trust Company's prime rate
(yielding a combined rate of 9.5% as of March 31, 1998). The outstanding balance
under the Credit Facility as of March 31, 1998 was approximately $514,000, of
which approximately $4,000 represented accrued interest. The Company has
historically used borrowings under the Credit Facility for working capital and
other general corporate purposes, including payroll expenses, general operating
expenses and capital expenditures. Some of the net proceeds of the loans under
the Credit Facility were used to make loans to the Practices. Although the
Company has no current plans to make borrowings under the Credit Facility in the
near future, the Company does not intend to terminate the Credit Facility after
consummation of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company plans to use the balance of the net proceeds from the Offering
for recruiting and compensating additional Company personnel, including
marketing, sales and related personnel (approximately $500,000), enhancing the
Company's management information systems to increase billing capacity and
possibly develop new services to be offered by the Company (approximately $1.0
million), and general working capital (approximately $8.2 million). The Company
expects this approximately $8.2 million, together with any excess cash generated
by operations, to be available for use in acquisitions or for other general
corporate purposes and to be used in connection with the expansion of the
Company's business. The Company does not currently intend to loan any of the net
proceeds of the Offering to any of the Medical and Dental Practices. In the
event that in the future the Company determines to loan any of the net proceeds
of the Offering to one or more of the Practices in connection with potential
acquisitions by the Practices or for other purposes, such loans will not exceed
$1.5 million in the aggregate. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." While the Company engages in
discussions from time to time with LTCF-focused practice managers and managers
of complementary businesses with respect to possible acquisitions by the Company
or the Medical and Dental Practices, neither the Company nor any of the Medical
and Dental Practices is currently a party to any commitments or agreements with
respect to any possible acquisition. See "Strategy--Acquiring Single Specialty
LTCF-Focused Practices and Similar Entities."
The following table sets forth the currently anticipated uses of the net
proceeds of the Offering:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Net proceeds of Offering......................................................... $ 10.3
-----
-----
Management information systems enhancement....................................... $ 1.0
Personnel recruitment and compensation........................................... 0.5
Repayment of Credit Facility..................................................... 0.6
General working capital.......................................................... 8.2
-----
Total Uses..................................................................... $ 10.3
-----
-----
</TABLE>
Pending use of the net proceeds as described above, the Company intends to
invest the net proceeds of the Offering in short-term investment-grade,
interest-bearing instruments.
23
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
formation. The Company does not currently intend to declare or pay any cash
dividends on the Common Stock in the foreseeable future and anticipates that
earnings, if any, will be used to finance the development and expansion of its
business. In addition, until its expiration on January 1, 1999, the Credit
Facility does not permit the Company to declare dividends on its Common Stock.
Furthermore, the Company anticipates that it may in the future seek to obtain a
loan, revolving credit agreement or other financing arrangement, the terms of
which, although not known to the Company at this time, may prohibit the
declaration of dividends without prior lender approval. The declaration and
payment of dividends by the Company are subject to the discretion of its Board
of Directors and to compliance with applicable law. Any determination as to the
payment of dividends in the future will depend upon, among other things, general
business conditions, future earnings and capital requirements of the Company and
the Medical and Dental Practices.
24
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at March 31, 1998: (i) on an actual basis; (ii) on a pro forma basis
to give effect to the conversion of all outstanding shares of Class A Preferred
Stock and Class B Preferred Stock into Common Stock upon the consummation of
this Offering; and (iii) on an adjusted pro forma basis to reflect the
consummation of the sale by the Company of 1,600,000 shares of Common Stock
offered hereby at an assumed public offering price of $7.50 per share. This
information should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, appearing elsewhere in this
Prospectus. See "Use of Proceeds," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Capital lease obligations, net of current portion............................. $ 35 $ 35 $ 35
--------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Convertible Preferred Stock, $0.01 par value, 571,428 shares
authorized, issued and outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted (1)........................ 1,355 -- --
--------- ----------- -----------
Class B Convertible Preferred Stock, $0.01 par value, 181,818 shares
authorized, issued and outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted (1)........................ 617 -- --
--------- ----------- -----------
Common Stock, $0.01 par value 3,259,162 shares authorized, 2,010,000 shares
issued and outstanding, actual; 3,259,162 shares authorized, 2,763,246
shares issued and outstanding, pro forma; and 7,500,000 shares authorized,
4,363,246 shares issued and outstanding, pro forma as adjusted (2).......... 20 28 44
Additional paid in capital.................................................... 96 1,979 12,269
Retained earnings (accumulated deficit)....................................... (571) (490) (490)
--------- ----------- -----------
Total stockholders' equity.................................................... (455) 1,517 11,823
--------- ----------- -----------
Total capitalization.......................................................... $ 1,552 $ 1,552 $ 11,858
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Upon consummation of the Offering, 571,428 shares of Class A Preferred Stock
and 181,818 shares of Class B Preferred Stock held by DCC Holdings will
convert into 571,428 shares of Common Stock and 181,818 shares of Common
Stock, respectively.
(2) Does not include: (i) 436,400 shares of Common Stock reserved for issuance
upon the exercise of outstanding options granted pursuant to the Stock
Option Plan, and up to 302,475 additional shares reserved for issuance upon
the exercise of options that may be granted in the future under the Stock
Option Plan and (ii) 160,000 shares reserved for issuance upon the exercise
of the Representative's Warrants. See "Underwriting."
25
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998,
was $1,517,000 or $0.55 per share of Common Stock, after giving effect to the
conversion of all outstanding Class A Preferred Stock and Class B Preferred
Stock into Common Stock. Pro forma net tangible book value per share of Common
Stock represents the amount of total tangible assets less total liabilities
divided by the number of shares of Common Stock outstanding (assuming the
conversion of all outstanding shares of Convertible Preferred Stock into Common
Stock). After giving effect to the sale by the Company of the Common Stock
offered hereby at an assumed initial public offering price of $7.50 per share
and the application of the net proceeds received by the Company therefrom as
described under "Use of Proceeds," the pro forma as adjusted net tangible book
value of the Company at March 31, 1998, would have been approximately
$11,823,000, or $2.71 per share. This represents an immediate increase in pro
forma net tangible book value of $2.16 per share to existing shareholders, and
an immediate dilution in pro forma net tangible book value of $4.79, or 63.9%
per share to new investors purchasing shares of Common Stock in this Offering.
The following table illustrates the immediate per share dilution to new
investors:
<TABLE>
<S> <C> <C>
Initial public offering price (1)............................................ $ 7.50
Pro forma net tangible book value at December 31, 1997....................... $ 0.55
Increase per share attributable to new investors (2)......................... 2.16
---------
Pro forma as adjusted net tangible book value per share after the Offering... 2.71
---------
Dilution per share to new investors.......................................... $ 4.79
---------
---------
Percentage dilution per share to new investors............................... 63.9%
---------
---------
</TABLE>
- ------------------------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) After deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The following table summarizes, on a pro forma basis as of December 31,
1997, the differences between the number of shares purchased from the Company,
the total consideration paid to the Company and the average price per share paid
by the existing shareholders and by new investors (based upon an assumed initial
public offering price of $7.50 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders (2).......................... 2,763,246 63.3% $ 2,070,900 14.7% $ 0.75
New investors...................................... 1,600,000 36.7% 12,000,000 85.3 7.50
---------- ----- ------------- -----
Total.......................................... 4,363,246 100.0% $ 14,070,900 100.0% $ 3.22
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
(1) The calculation of net tangible book value and the other computations above
assume no exercise of outstanding options under the Stock Option Plan. As of
March 31, 1998, 436,400 shares of Common Stock were issuable upon exercise
of outstanding stock options at a weighted average exercise price of $2.37
per share, of which options to purchase 232,100 shares were then exercisable
at a weighted average exercise price of $1.60 per share. To the extent the
outstanding options are exercised and that any of the shares reserved for
issuance are issued with exercise prices below the initial public offering
price, there will be further dilution to new investors. See "Management --
Second Amended and Restated 1992 Stock Option Plan" and "Shares Eligible for
Future Sale." Includes 753,246 shares of Common Stock issuable upon the
closing of the Offering upon the conversion of 571,428 shares of Class A
Preferred Stock and 181,818 shares of Class B Preferred Stock. Each share of
Class A Preferred Stock and Class B Preferred Stock converts into Common
Stock on a 1:1 basis.
(2) The shares of Common Stock held by the existing shareholders were purchased
from the Company (on an as-converted basis, taking into account a previous
stock split of the Common Stock) at prices ranging from $.005 to $2.75.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to the consolidated
statement of operations of the Company and the Medical and Dental Practices for
each of the fiscal years ended December 31, 1995, 1996 and 1997 and the
consolidated balance sheet data as of December 31, 1996 and 1997 have been
derived from audited financial statements of the Company and the Medical and
Dental Practices included elsewhere in this Prospectus. The summary consolidated
financial data for the years ended December 31, 1993 and 1994 and the
consolidated balance sheet data as of December 31, 1993, 1994 and 1995 are
derived from audited financial statements of the Company and the Medical and
Dental Practices which are not included in this Prospectus. The consolidated
financial data presented as of March 31, 1998 and for the three months ended
March 31, 1997 and March 31, 1998 are derived from unaudited financial
statements of the Company and the Medial Dental Practices included elsewhere in
this Prospectus. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED SUMMARY CONSOLIDATED FINANCIAL DATA:
Net patient service revenue............................................ $ 4,272 $ 6,778 $ 8,575 $ 11,006 $ 12,930
Direct patient care costs.............................................. 2,914 4,136 5,362 7,020 8,213
--------- --------- --------- --------- ---------
Gross profit........................................................... 1,358 2,642 3,213 3,986 4,717
Selling, general, and administrative expenses.......................... 1,512 2,104 3,218 4,880 4,602
--------- --------- --------- --------- ---------
Income (loss) from operations.......................................... (154) 538 (5) (894) 115
Interest income (expense), net......................................... 3 4 4 (26) (65)
Other income........................................................... 3 5 1 15 5
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes.............. (148) 547 -- (905) 55
Provision (benefit) for income taxes................................... -- 233 -- (160) --
--------- --------- --------- --------- ---------
Net Income (loss)...................................................... (148) 314 -- (745) 55
Accretion of dividends on preferred stock.............................. (60) (80) (90) (90) (90)
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders..................... $ (208) $ 234 $ (90) $ (835) $ (35)
--------- --------- --------- --------- ---------
Pro forma net income (loss) available to common
stockholders (1)..................................................... $ 55
---------
Net income (loss) per common and potential common share:
Basic................................................................ $ (0.10) $ 0.12 $ (0.04) $ (0.42) $ (0.02)
Diluted.............................................................. (0.10) 0.09 (0.04) (0.42) (0.02)
Pro forma diluted (1)................................................ 0.02
Supplemental pro forma (3)........................................... 0.03
Weighted average common and potential common shares outstanding:
Basic................................................................ 2,000 2,000 2,000 2,001 2,010
Diluted.............................................................. 2,000 2,741 2,000 2,001 2,010
Pro forma diluted (1)................................................ 2,883
Supplemental pro forma (3)........................................... 2,969
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
SELECTED SUMMARY CONSOLIDATED FINANCIAL DATA:
Net patient service revenue............................................ $ 3,023 $ 3,487
Direct patient care costs.............................................. 1,962 2,159
--------- -----------
Gross profit........................................................... 1,061 1,328
Selling, general, and administrative expenses.......................... 1,138 1,149
--------- -----------
Income (loss) from operations.......................................... (77) 179
Interest income (expense), net......................................... (15) (12)
Other income........................................................... -- 11
--------- -----------
Income (loss) before provision (benefit) for income taxes.............. (92) 178
Provision (benefit) for income taxes................................... -- 59
--------- -----------
Net Income (loss)...................................................... (92) 119
Accretion of dividends on preferred stock.............................. (22) (23)
--------- -----------
Net income (loss) available to common stockholders..................... $ (114) $ 96
--------- -----------
Pro forma net income (loss) available to common
stockholders (1)..................................................... $ 119
-----------
Net income (loss) per common and potential common share:
Basic................................................................ $ (0.06) $ 0.05
Diluted.............................................................. (0.06) 0.03
Pro forma diluted (1)................................................ 0.04
Supplemental pro forma (3)........................................... 0.04
Weighted average common and potential common shares outstanding:
Basic................................................................ 2,010 2,010
Diluted.............................................................. 2,010 2,994
Pro forma diluted (1)................................................ 2,994
Supplemental pro forma (3)........................................... 3,080
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 414 $ 781 $ 362 $ 2 $ 15
Working capital...................................................... 944 1,629 1,454 502 712
Total assets......................................................... 1,750 2,897 2,859 2,739 2,713
Capital lease obligations, net of current portion.................... 72 94 44 82 56
Redeemable Preferred stock........................................... 1,160 1,680 1,770 1,860 1,950
Total stockholders' equity (deficit)................................. $ 167 $ 395 $ 305 $ (516) $ (551)
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL PRO FORMA (2)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 29 $ 29
Working capital...................................................... 879 879
Total assets......................................................... 3,161 3,161
Capital lease obligations, net of current portion.................... 35 35
Redeemable Preferred stock........................................... 1,973 --
Total stockholders' equity (deficit)................................. $ (455) $ 1,517
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2(i) of Notes to Financial
Statements.
(2) Adjusted to give effect to the automatic conversion upon the closing of the
Offering of all outstanding shares of Preferred Stock and Class B Preferred
Stock into an aggregate of 753,246 shares of Common Stock. Each share of
Class A Preferred Stock and Class B Preferred Stock converts into Common
Stock on a 1:1 basis.
(3) Computed on the basis described in Note 2(i) of Notes to Financial
Statements, adjusted for the increase in the number of shares of Common
Stock issued pursuant to the Offering sufficient to generate proceeds for
the payment of $600,000 of the Credit Facility at the beginning of the year
ended December 31, 1997 and the three months ended March 31, 1998.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED. SEE "RISK FACTORS."
OVERVIEW
The Company is the sole sponsor of, and provider of administrative services
to, four professional corporations and one Michigan taxable not-for-profit
corporation. The Company and its founders established the Medical and Dental
Practices to focus on the provision of on-site geriatric health care services
primarily to residents of nursing homes. The Company does not itself provide
health care services. The Company does not own the capital stock of any of the
professional corporations or the Michigan taxable not-for-profit corporation.
Each of the Medical and Dental Practices is affiliated with the Company through
an exclusive long-term Operating Agreement pursuant to which the Company
receives a fee in exchange for the services it provides, and an Option Agreement
pursuant to which the Company is entitled to cause the sole stockholder of the
Practice to sell all of the outstanding capital stock of the Practice to a
designee of the Company at any time for a nominal price. The Company and the
Medical and Dental Practices are completely interdependent and function as a
single integrated economic unit, with the Company being entirely dependent on
the success of the Medical and Dental Practices for its revenues and the Medical
and Dental Practices being entirely dependent on the Company for capital and all
services other than the direct provision of medical, dental and ancillary health
care services. However, the stockholders of the Company and the Company's
creditors do not have legal recourse to the businesses or assets of the
Practices.
In addition to providing services to nursing home residents, the Medical and
Dental Practices also provide services to a growing number of residents of ALFs
and ILFs. Providers employed by the Medical and Dental Practices travel to LTCFs
where they provide a growing range of geriatric medical and dental services.
Services currently provided by the Medical and Dental Practices include
dentistry, optometry, podiatry, audiology, and primary care. As of May 15, 1998,
the Medical and Dental Practices employed 95 Providers who were rendering
services at 884 LTCFs located in 11 states, and the Company employed an
additional 106 people. The Company, headquartered in Newton, Massachusetts,
operates four regional offices located in Massachusetts, Connecticut,
Pennsylvania and Wisconsin.
NATURE OF CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE MEDICAL
AND DENTAL PRACTICES. Although each Practice was established by the Company,
each of them remains a separate legal entity. The Company's relationships with
the Medical and Dental Practices and the holders of their capital stock are
governed by separate Operating Agreements between the Company and each Practice
and separate Option Agreements among the Company, each Practice and the holder
of its capital stock. The nature of the relationships dictated by the Option
Agreements, pursuant to which, among other things, the Company is able to effect
changes in the sole stockholders of the various Practices at nominal cost to
itself, require the Company and the Medical and Dental Practices to consolidate
their results of operations for financial reporting purposes. Under footnote 1
to EITF 97-2, a company engaged in the provision of certain services to
physician practices that has the ability to cause a change in the "nominal"
shareholder of such practices for no more than nominal cost to such company must
report its financial results on a consolidated basis with the medical practices
to which it provides services.
Under the principles of consolidation, all of the intercompany liabilities
and assets (including the Intercompany Balances) are eliminated from the
financial presentation, and all of the revenue generated by the consolidated
entity (other than from intercompany charges, such as the Compensation Amounts
generated by the Company under the respective Operating Agreements) is presented
together. Substantially all of the revenue actually received by the Company is
generated by the Compensation Amounts payable pursuant to the respective
Operating Agreements and substantially all of the revenue of the Medical and
Dental Practices is generated by the provision of health care services. Upon
consolidation, the Compensation Amounts are eliminated.
28
<PAGE>
The following table depicts the total assets and liabilities of HealthDrive
Corporation on a stand-alone basis as of December 31, 1997 and March 31, 1998,
and net patient revenues, direct patient care costs and selling, general and
administrative expenses of HealthDrive Corporation on a stand-alone basis for
the year ended December 31, 1997 and for the three months ended March 31, 1998,
all of which is incorporated within the consolidated financial statements of the
Company presented in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Total assets........................................... $2,927,151 $ -- $ 3,576,566 $ --
Total liabilities...................................... 1,035,132 -- 1,273,781 --
Net patient revenue.................................... -- -- -- --
Direct patient care costs.............................. -- 1,812,962 -- 484,130
Selling, general and administrative expenses........... -- 4,601,991 -- 1,123,859
</TABLE>
OPERATING AGREEMENTS WITH MEDICAL AND DENTAL PRACTICES Pursuant to the
Operating Agreements, the Company provides certain services, licenses the use of
the name "HealthDrive", and extends credit to the Medical and Dental Practices.
Specifically, the Medical and Dental Practices receive the following services
exclusively from the Company under the Operating Agreements: (i) ordering and
purchasing of inventory and supplies ordinarily required by the Medical and
Dental Practices; (ii) performance of bookkeeping, accounting and payroll
functions for the Medical and Dental Practices; (iii) administration of the
Medical and Dental Practices' benefit plans; and (iv) processing of claims and
collection of fees on behalf of the Medical and Dental Practices. In payment for
the provision of these services the Company receives the Compensation Amount.
Pursuant to the Operating Agreements, the Company has from time to time
advanced certain amounts to the Medical and Dental Practices for working capital
purposes when it has determined that such Practice will have a need for such
funds. These advances are made in the sole discretion of the Company's
management. These amounts, to the extent not repaid during a particular month,
are added to the principal amount of the Intercompany Balances maintained by the
Medical and Dental Practices with the Company. These Intercompany Balances have
been in the past generated for the most part in connection with the calculation
of the Compensation Amounts due under the respective Operating Agreements. In no
month included in the thirteen fiscal quarters of the Company for which
Financial Statements are included in this Prospectus did the Company advance
more capital to the Practices than it received in cash from the Practices at the
end of such month. The principal amount of the Intercompany Balances are also
increased on a monthly basis as the Compensation Amounts are earned under the
respective Operating Agreements. The Intercompany Balances are payable upon
demand after thirty days notice and bear interest at rates determined by the
Company and not to exceed a designated prime rate plus five percent. The Company
determines the rates of interest on the Intercompany Balances, in its sole
discretion, as a result of market conditions. The interest charged on the
Intercompany Balances, while it increases the principal amount of the
Intercompany Balance when charged, causes a corresponding decrease in the amount
of the Compensation Amount calculated each month. Under the terms of the
Operating Agreements, the Practices are required to pay down the principal
balance and accrued interest on the Intercompany Balances from time to time to
the extent possible, and payments are generally made under the Intercompany
Balances no less frequently than on a monthly basis. Because the accrual of
interest on the Intercompany Balances has the effect of decreasing the
Compensation Amounts payable under the Operating Agreements on a monthly basis
in the same amount, and payments under the Intercompany Balances are made
without regard to whether the balance at the time of payment is attributable to
accrued interest, earned Compensation Amounts or prior working capital advances,
the Company's financial condition and results of operations are not materially
affected by changes in the amounts of interest charged. In addition, the
interest expenses are eliminated in consolidation. As of March 31, 1998, the
aggregate amount of the Intercompany Balances owed to the Company exceeded the
aggregate amount of the accounts receivable of the Practices, minus the amount
of bad debt expense recorded by the Practices as of such date and the amount of
the outstanding borrowings of the Company
29
<PAGE>
under the Credit Facility by approximately $ . Nevertheless, the Company
does not believe that it incurs substantial credit risk with respect to the
Intercompany Balances because (i) the Intercompany Balances are secured by an
unperfected lien on the Practices' accounts receivable that is subordinate to
the lien on such assets granted to the Bank under the Credit Facility; (ii)
under the terms of the Operating Agreements, the Practices are prohibited from
paying any of its Providers any amounts in excess of the fair market value of
such services (with the Company being the ultimate arbiter of such value); (iii)
the Operating Agreements also prohibit the Practices from paying any dividends
to their shareholders while there are any amounts outstanding under their
respective Intercompany Balances, and (iv) during each of the Company's last
thirteen fiscal quarters the Practices have been profitable on an operating
basis (prior to the calculation of the respective Compensation Amounts). The
Company does not, when it considers making an advance of capital to a Practice,
limit such advances to the collateral available to secure the Intercompany
Balance of such Practice under the applicable Operating Agreement.
The cash flow of the Medical and Dental Practices used for operating
activities is directly related to the changes in the balances of the outstanding
Intercompany Balances. For the year ended December 31, 1997, the Medical and
Dental Practices had cash flow used in operating activities of $266,914, of
which $265,355 was used to fund the increase in gross accounts receivable. This
increase in gross accounts receivable reduced the amount of cash available to
the Practices to pay down the Intercompany Balances and, as a result, the
balance due to the Company under the Intercompany Balances increased. If the
accounts receivable balance of the Medical and Dental Practices continues to
increase as a result of revenue growth, then the balance of the Intercompany
Balances are expected to continue to increase. There was no cash flow from
investing activities of the Medical and Dental Practices for the year ended
December 31, 1997. Likewise for the three-month period ended March 31, 1998, the
Medical and Dental Practices had cash flow used in operating activities of
$756,232, of which $752,878 was used to fund the increase in the gross accounts
receivable balance. This increase in gross accounts receivable caused the
increase of the outstanding Intercompany Balance balance. There were no cash
flows from investing activities of the Medical and Dental Practices for the
quarter ended March 31, 1998. There are no legal restrictions on the cash
generated by the Medical and Dental Practices.
Under the Operating Agreements, the provision of medical, dental and
ancillary health care services is supervised, directed and controlled, and all
final determinations with respect thereto are made, exclusively by the Medical
and Dental Practices and the Providers, including: (i) employment of Providers;
(ii) supervision and direction of Providers, including assignment of patients
and peer review; (iii) determination of the hospital supplying Providers when
applicable; (iv) maintenance of patient records; (v) establishment of policies
and procedures with respect to patient acceptance; and (vi) establishment of
hours of operation, scope of services provided and fees for services. The
Company expressly disclaims any control, direct or indirect, over the delivery
of medical, dental or ancillary health care services.
The Operating Agreements have a 40-year term and may be terminated by either
party only in the event of a breach by the other party or bankruptcy of the
other party. The Company has the right to terminate each Operating Agreement if
the applicable Practice at any time does not qualify as a professional
corporation or otherwise loses its authority to render medical or dental
services or a Provider's license to practice medicine or dentistry is revoked or
threatened to be revoked.
In exchange for its services under an Operating Agreement, the license of
the service mark and the periodic advances of capital, the Company receives the
Compensation Amount. The Compensation Amount with respect to each Practice is
equal to all revenue generated by the Practice minus the expenses incurred by
the Practice (primarily compensation and benefits, bad debt expense, insurance
costs and interest expense on loans from the Company to such Practice), adjusted
to give effect to certain tax-related items. The actual Compensation Amounts
calculated for each period are not reflected in the consolidated financial
statements of the Company because such amounts are eliminated in consolidation.
Under the terms of the Operating Agreements, the Compensation Amount may not
exceed the fair market value of the services provided by the Company under the
Operating Agreement. The Medical and Dental Practice is entitled, under the
terms of the Operating Agreement, to challenge the calculation of any
Compensation
30
<PAGE>
Amount within the thirty-day period after the month for which it is calculated.
In the event of such a challenge, the final determination of the fair market
value of the services is delegated to a committee of three persons of which one
is nominated by the Company, one is nominated by the Medical and Dental Practice
that is challenging the calculation, and the final person in nominated by each
of the two other persons. The primary factors to be considered by this committee
include the value of all of the services provided by the Company to the Practice
taken as a whole during the period, the potential impact on the Practice of a
discontinuation of the services provided by the Company, and the fees charged by
other similarly situated companies to similarly situated medical or dental
practices in the Company's industry. In the event that the Practice does not
deliver a notice challenging the calculation of the Compensation Amount within
the specified 30-day period, the Compensation Amount is deemed for all purposes
of the Operating Agreement to have not exceeded the fair market value of the
services provided by the Company during such month.
In connection with the establishment of the Medical and Dental Practices,
the Company entered into separate management agreements with each Practice. On
June 19, 1998, each of the Medical and Dental Practices entered into an Amended
and Restated Operating Agreement with the Company which superseded its original
management agreement. The significant differences between the original
management agreements and the Operating Agreements include the following: (i)
the Operating Agreements clarified the specific responsibilities of the Company
and the Medical and Dental Practices thereunder in order to ensure delivery of
quality care and compliance with state and federal health care laws; (ii) the
Operating Agreements formalized the practice pursuant to which the Company
extends credit to the Medical and Dental Practices from time to time to fund
working capital requirements; (iii) the Operating Agreements limit the
Compensation Amount to the fair market value of the services provided by the
Company, and establish a procedure pursuant to which the Practices may challenge
the calculation of the Compensation Amounts; (iv) the Operating Agreements
include provisions necessary to protect the Company's confidential and
proprietary information and prevent the Medical and Dental Practices from
competing with the Company; (v) the Operating Agreements include provisions
expressly prohibiting certain practices by both the Company and the Medical and
Dental Practices in order to ensure compliance with federal and state health
care laws; (vi) the Operating Agreements significantly extend the term of the
relationship, from ten years to forty years; (vii) the Operating Agreements made
it clear that the Company would be the exclusive provider of the services
described in the Operating Agreement to the Practices; and (viii) the Operating
Agreements prohibit the Medical and Dental Practices from paying dividends to
their shareholders while there are any amounts outstanding under their
respective Intercompany Balances.
PAYMENT OF COMPENSATION AMOUNT AND REPAYMENT OF INTERCOMPANY BALANCES. The
Compensation Amount due under each Operating Agreement is calculated on a
monthly basis for the applicable Medical and Dental Practice as follows. An
amount equal to all expenses incurred by the Practice during the month is
subtracted from the gross revenues earned by the Practice for such month, with
each amount calculated in accordance with generally accepted accounting
principles ("GAAP"). The expenses calculated for the Practice include, but are
not limited to, all compensation and benefits for the Providers employed by the
Practice, bad debt expense recorded by the Practice for such month, insurance
cost incurred by the Practice, and interest expense relating to the Intercompany
Balance of such Practice. For the purposes of calculating the Compensation
Amount, the resulting GAAP basis net income of the Practice is then adjusted for
all items that are reported differently for tax reporting purposes.
Historically, the significant adjustments to each of the Practices' GAAP basis
net income have resulted from book (GAAP basis) versus tax differences related
to the deductibility of the provision for bad debts and other accrued expenses.
These adjustments are calculated by determining either the amount that is
deductible for book purposes but not deductible for tax or the amount that is
deductible for tax reporting but not deductible for book. As a result, the
Compensation Amount paid to the Company is approximately equal to the Practice's
taxable income before deducting the Compensation Amount.
31
<PAGE>
The following table depicts the revenue, expenses and profit (on a basis
consistent with GAAP) of each of the Medical and Dental Practices for each of
the periods included in the consolidated financial statements of the Company
presented in this Prospectus, as well as the total amount of the adjustments
made to such profit to determine the Compensation Amount due from such
Practices. The stockholders of the Company and the Company's creditors do not
have legal recourse against the businesses or assets of the Practices.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
---------------------------------------- --------------------------
DEC. 31, DEC. 31, DEC. 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
THE DENTISTRY PRACTICE
Revenues................................... $ 3,585,241 $ 4,096,167 $ 4,461,153 $ 1,081,059 $ 1,199,032
Expenses................................... 1,942,830 2,332,486 2,522,080 620,529 640,655
Adjustments................................ 30,232 15,204 (96,254) 26,670 72,144
Compensation Amount........................ 1,672,643 1,778,885 1,842,819 487,200 630,521
THE OPTOMETRY PRACTICE
Revenues................................... 3,070,942 4,006,235 3,922,178 971,847 1,040,788
Expenses................................... 1,431,330 2,021,707 1,998,480 499,050 520,488
Adjustments................................ (13,038) 125,683 (20,325) 62,893 80,020
Compensation Amount........................ 1,626,574 2,110,211 1,903,373 535,690 600,320
THE PODIATRY PRACTICE
Revenues................................... 1,780,295 2,366,747 3,322,176 777,659 895,057
Expenses................................... 868,309 1,144,836 1,477,293 351,477 404,296
Adjustments................................ (13,256) 30,623 94,475 71,974 52,864
Compensation Amount........................ 898,730 1,252,534 1,939,358 498,156 543,625
THE AUDIOLOGY AND PRIMARY CARE PRACTICE
Revenues................................... 138,710 491,457 799,596 181,785 266,871
Expenses................................... 63,412 169,161 449,198 98,251 123,105
Adjustments................................ 4,280 31,784 (13,371) 8,759 13,587
Compensation Amount........................ 79,578 354,080 337,027 92,293 157,353
HEALTHDRIVE MICHIGAN CORPORATION
Revenues................................... -0- 5,152 424,692 10,604 85,514
Expenses................................... -0- 6,364 177,112 8,668 45,055
Adjustments................................ -0- 2,212 19,418 1,064 6,465
Compensation Amount........................ -0- 1,000 266,998 3,000 46,924
</TABLE>
After the final determination of the Compensation Amount for a particular
month, the entire amount of the Compensation Amount is added to the balance of
the Intercompany Balance of such Practice. From time to time and no less
frequently than monthly, the Company withdraws the maximum amount it deems
advisable in the best interests of the Company from a joint account maintained
with the Practice and applies such amount to the outstanding balance of the
Intercompany Balance. From time to time during the course of a particular month,
the Company may make additional advances to the Practices when it deems such
advances to be advisable in the best interests of the Company. To the extent
that these amounts are not repaid during such month, they are added to the
Intercompany Balances of such Practices. In addition, to the extent that the
Company causes the Practice to repay an amount on its Intercompany Balance that
is less than the Compensation Amount calculated for such Practice for such
month, the aggregate principal amount of the Intercompany Balance is increased.
32
<PAGE>
The following table depicts the Compensation Amount earned by the Company
from each of the Medical and Dental Practices during each of the Periods
included in the consolidated financial statements of the Company presented in
this Prospectus, the interest calculated on the Intercompany Balances due from
each of the Practices during such time, the amount, if any, of any capital
advances made by the Company to the Practices during such period, and the
changes in the principal balances of the Intercompany Balances during such
periods. The stockholders of the Company and the Company's creditors do not have
legal recourse against the businesses or assets of the Practices.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ------------------------
------------------------------------------- MARCH 31, MARCH 31,
DEC. 31, 1995 DEC. 31, 1996 DEC. 31, 1997 1997 1998
------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
THE DENTISTRY PRACTICE
Beginning balance on loan................. $ 477,700 $ 515,232 $ 462,651 $ 462,651 $ 492,528
Increases to loan
Compensation Amount..................... 1,672,643 1,778,885 1,842,819 487,200 630,521
Interest accrued........................ 54,027 43,638 58,581 11,614 15,024
Misc. Advances (Payments)............... 29,862 114,041 109,477 22,424 36,965
Repayment to Company...................... (1,719,000) (1,989,145) (1,981,000) (472,000) (405,000)
Ending balance of loan.................... 515,232 462,651 492,528 511,889 770,038
THE OPTOMETRY PRACTICE
Beginning balance on loan................. 661,500 785,648 666,375 666,375 629,000
Increases to loan
Compensation Amount..................... 1,626,574 2,110,211 1,903,373 535,690 600,320
Interest accrued........................ 88,451 100,957 73,846 15,946 17,800
Misc. Advances (Payments)............... (3,877) 18,034 (2,594) (3,796) (5,414)
Repayment to Company...................... (1,587,000) (2,348,475) (2,012,000) (447,000) (329,000)
Ending balance of loan.................... 785,648 666,375 629,000 767,215 912,706
THE PODIATRY PRACTICE
Beginning balance on loan................. 458,967 334,001 407,732 407,732 612,108
Increases to loan
Compensation Amount..................... 898,730 1,252,534 1,939,358 498,156 543,625
Interest accrued........................ 60,290 58,938 60,602 12,255 16,319
Misc. Advances (Payments)............... (2,314) 23,809 18,416 7,214 3,932
Repayment to Company...................... (1,081,672) (1,261,550) (1,814,000) (325,000) (423,000)
Ending balance of loan.................... 334,001 407,732 612,108 600,357 752,984
THE AUDIOLOGY AND PRIMARY CARE PRACTICE
Beginning balance on loan................. 51,346 66,919 194,113 194,113 209,493
Increases to loan
Compensation Amount..................... 79,578 354,080 337,027 92,293 157,353
Interest accrued........................ 6,840 11,524 22,879 5,585 5,620
Misc. Advances (Payments)............... 1,450 22,240 12,474 1,975 2,349
Repayment to Company...................... (72,295) (260,650) (357,000) (41,500) (122,000)
Ending balance of loan.................... 66,919 194,113 209,493 252,466 252,815
HEALTHDRIVE MICHIGAN CORPORATION
Beginning balance on loan................. -0- -0- 2,640 2,640 143,521
Increases to loan
Compensation Amount..................... -0- 1,000 266,998 3,000 46,924
Interest accrued........................ -0- 12 8,526 88 3,509
Misc. Advances (Payments)............... -0- 1,628 15,357 12,953 (913)
Repayment to Company...................... -0- -0- (150,000) (4,000) (59,000)
Ending balance of loan.................... -0- 2,640 143,521 14,681 134,041
</TABLE>
OPTION AGREEMENTS. Pursuant to separate Option Agreements among the
Company, each Medical and Dental Practice and the holder of the capital stock of
such Practice, the holders of the capital stock of
33
<PAGE>
the Practices have granted an option to the Company to designate an individual
to purchase, at any time, all of the outstanding capital stock of such Practice
for for a purchase price of $50.00. Pursuant to each of the Option Agreements,
unless and until the Company exercises its option to cause the sole stockholder
of the Practice to transfer his shares in such Practice to a new owner, the sole
stockholder is prohibited from transferring or assigning such shares in any
manner. In addition, pursuant to each Option Agreement the holder of the capital
stock of the Practice may cause the Company to designate an individual to
purchase all of the capital stock of the Practice for an aggregate purchase
price of $50.00 upon two years advance written notice. The Option Agreements
each have a term of forty years.
SERVICE AGREEMENTS. The Medical and Dental Practices have entered into
Service Agreements with 884 LTCFs. Pursuant to the Service Agreements, each
Practice must provide all equipment and care required by the LTCF residents who
choose to use its services and bill the LTCF residents or their health insurance
for all services rendered. Payments for services are generally made by Medicare,
Medicaid and patients directly to the Medical and Dental Practices, and the
Medical and Dental Practices in most instances do not receive payments directly
from LTCFs. The fees generated by the services of the Medical and Dental
Practices range from approximately $10 to $1,000. The Service Agreements do not
obligate the LTCF to obtain the services of the Medical and Dental Practices for
any of its patients, and do not prohibit the LTCF from obtaining similar
services from other health care service providers. See "Business-- Operations."
OPERATIONS. The operations of the Company and the Medical and Dental
Practices are governed by the Operating Agreements. As a result of the
relationships established by the Operating Agreements and the Option Agreements,
the Company is required to report all of the revenue generated by the Company
and the Medical and Dental Practices on a consolidated basis (hereinafter
"Revenue"). Substantially all of the Revenue reported is generated by the
Medical and Dental Practices from care provided to residents of LTCFs by the
Practices primarily on a fee-for-service basis. The Company receives no revenue
directly from the fees generated by the provision of health care services by the
Medical and Dental Practices. Instead, the Company receives the Compensation
Amount under the respective Operating Agreements and bears certain expenses not
related to direct patient care and general overhead. See "Operating Expenses."
Under the principles of consolidation, all of the Compensation Amounts received
by the Company are eliminated and only the Revenue is reported. The Medical and
Dental Practices enter into Service Agreements with LTCFs whereby Providers
travel to LTCFs to provide on-site care to the residents of LTCFs. The nature of
the care provided is the sole responsibility of the Medical and Dental Practices
and the individual Providers. The Company then bills on behalf of each Practice
the third party payors or the resident/patient for the care provided. The
Company believes its relationships with the Providers and the sole stockholders
of the Medical and Dental Practices are good and does not expect this to change.
The Company also believes that, as a result of the relationships established by
the Operating Agreements and the Option Agreements, the Practices cannot operate
separately from the Company. Accordingly, the Company does not believe that a
deterioration in the Company's relationships with the Providers and the sole
stockholders of the Medical and Dental Practices would have a material adverse
effect on the Company's business, financial condition and results of operations.
Certain of the Medical and Dental Practices have entered into capitated payment
arrangements with certain LTCFs whereby they are paid a fixed amount per
resident to provide their services to the residents of the LTCF. In connection
with its primary care business, one of the Medical and Dental Practices has, in
some cases, entered into contractual arrangements whereby it provides medical
directorship services to certain facilities for a fixed monthly fee. The
capitated arrangements and the primary care services represent an immaterial
percentage of the total Revenue of the Medical and Dental Practices, and have
not had a measurable effect on the Company's consolidated results of operations.
REVENUE RECOGNITION. Revenue is recognized when medical and/or dental
services are rendered by the Providers. Revenue is reported at estimated
realizable value which represents the actual amounts the Medical and Dental
Practices are expected to receive (before accounting for bad debts) from third
party
34
<PAGE>
payors and patients. Generally, Medicare and Medicaid payments are based on
pre-determined published fee schedules while commercial insurance companies
reimburse based on the usual and customary charge for the services rendered.
MEDICARE AND MEDICAID. As participants in the Medicare program, the Medical
and Dental Practices may not bill any patient or such patient's insurer for an
amount in excess of the fee allowed by Medicare pursuant to its fee schedule for
the geographic area concerned. This restriction prohibits what is referred to as
"balance billing." After the patient has satisfied a $100 deductible (the
"Medicare Deductible"), Medicare generally pays the first 80.0% of any service
it approves (the "Medicare Approved Service"). The Medical and Dental Practices
must then bill the patient's secondary insurance or the patient, if he or she
has no secondary insurance, for the remaining 20.0% (the "Medicare Copayment").
The various state Medicaid programs pay for services specifically covered
under their respective statutes. Generally, for patients with Medicaid as their
only insurance (i.e., Medicaid is the primary insurance), Medicaid will pay
100.0% of the amount listed on its fee schedule for any service it approves (the
"Medicaid Approved Service"). Medicaid fee schedules are generally lower than
those prescribed by Medicare. No provider may bill any patient covered by
Medicaid any amount with respect to any service covered by Medicaid. Only
Medicaid may be billed for such services. Medicaid is always the payor of last
resort, meaning that all billings for a service must first be made to all other
insurers that cover a particular patient.
A substantial portion of the patients of the Medical and Dental Practices
have both Medicare and Medicaid coverage with Medicare being the primary
insurance and Medicaid being the secondary insurance or payor of last resort.
Medicaid programs differ in their policies regarding the amount they will pay
when they are the secondary insurer. In some states, if a claim is first
submitted to Medicare for a Medicare Approved Service, Medicaid will pay the
full 20.0% Medicare Copayment or the amount applied to the Medicare Deductible,
regardless of the amount of such Medicare Copayment or such amount applied to
the Medicare Deductible, which may or may not be greater than the fee prescribed
on the Medicaid fee schedule for the service billed. In other states, Medicaid
will not pay any amount as a secondary insurer if the provider has already
received payment by any primary insurer in an amount exceeding the amount
Medicaid would have paid pursuant to its fee schedule for the service performed
had Medicaid been the primary insurer. In this case, if the services were
approved by the primary insurer and the payment made by such primary insurer is
less than the fee for the services performed according to the Medicaid fee
schedule, then Medicaid would pay an amount equal to the amount under its fee
schedule less the amount the provider was paid by the primary insurer. In some
states, Medicaid takes a hybrid approach where it will pay up to the full amount
applied to the Medicare Deductible, but, with respect to payment of Medicare
Copayments, only an amount equal to the amount prescribed by the Medicaid fee
schedule less the amount that the provider was paid by the primary insurance.
The Medicare and Medicaid programs may, from time to time, conduct
post-payment reviews of providers of services reimbursed under such programs.
Although the Medical and Dental Practices have been subject to only one
significant post-payment adjustment to date, the Medical and Dental Practices
are the subject of eight such audits currently ongoing, six of which the Company
currently believes are not material, and believes that recent events indicate an
increase in such review activities in the home health care industry. In 1993,
two optometrists were selected for post-payment review with respect to services
performed principally in 1992. The Optometry Practice protested the results of
this review before agreeing in 1997 to a compromise settlement with HCFA in the
amount of $52,200. This amount is being paid in twenty-four equal, monthly
installments (including interest), with the first payment having been made in
September 1997. The settlement amount was accrued in the fourth quarter of
Fiscal 1996.
On May 13, 1998, the Optometry Practice received notice from Wisconsin
Physician Service Medicare Part B that it had conducted a limited audit
(covering twenty-five patients) of certain ophthalmological
35
<PAGE>
services billed to and paid by the Medicare program under a procedure code for
new patient comprehensive medical examinations. The results of this audit
indicated that over 70.0% of the claims paid by the Medicare program were
inappropriately paid in violation of published Medicare program guidelines,
based on a lack of sufficient clinical documentation demonstrating medical
necessity. The actual deemed overpayment for the sample audited was $1,009.
Extrapolating the percentage disallowance from the audit sample to the entire
group of claims paid by Medicare to the Optometry Practice in Wisconsin under
the same procedure code during the period covered by the audit, indicates a
potential liability to the Optometry Practice of approximately $109,000. The
maximum possible liability to the Optometry Practice assuming all claims made
under this procedure code were disallowed, is approximately $154,000. In
connection with the audit, WPS has also requested that the Company submit
medical records indicating the medical need or reason for all eye evaluation
services billed at the time requests for payment are made. If the documentation
is not received or does not substantiate medical necessity, the services will be
disallowed. The Company has never previously been requested to submit to a
pre-payment review, and will have to adopt certain new procedures if compliance
with this pre-payment review is required. Although the Company has not yet
responded to this notice and is currently evaluating the appropriate response,
the Company and the Optometry Practice intend to zealously contest the findings
of this audit.
On March 4, 1998, the Dental Practice received notice from the Division of
Medical Assistance, Commonwealth of Massachusetts (the "Division") that it was
conducting a retrospective utilization review and peer review of the services
rendered by the Dental Practice to Medicaid recipients in Massachusetts during
the period between April 1, 1996 and September 30, 1997. On March 25, 1998 a
third-party reviewer contracted by the Division conducted an on-site review of
the Dental Practice's records for 46 of a randomly-selected sample of 50
patients. On April 3, 1998, the Company mailed to the reviewer the remaining
requested information. On July 13, 1998 the Company received the results of the
review which indicated a potential assessment against the Dental Practice of
approximately $84,000. The Company is currently evaluating the appropriate
response and intends to zealously contest the results of this review. The
Company has not established a reserve with respect to this audit.
The following table outlines the mix of Revenue recognized for the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------------------- -----------------------
1995 % 1996 % 1997 % 1997 %
------------ --------- ------------- --------- ------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental.................. $ 3,585,241 41.8% $4,101,320 37.3% $4,715,573 36.5% $ 1,091,663 36.1%
Optometry............... 3,070,942 35.8% 4,006,235 36.4% 4,029,118 31.2% 971,847 32.1%
Podiatry................ 1,780,295 20.8% 2,407,994 21.9% 3,406,466 26.3% 785,035 26.0%
Audiology............... 138,710 1.6% 490,209 4.4% 690,624 5.3% 173,181 5.7%
Primary Care............ 0 0.0% 0 0.0% 88,014 0.7% 1,228 0.1%
------------ --------- ------------- --------- ------------- --------- ------------ ---------
$ 8,575,188 100.0% $11,005,758 100.0% $12,929,795 100.0% $ 3,022,954 100.0%
------------ --------- ------------- --------- ------------- --------- ------------ ---------
------------ --------- ------------- --------- ------------- --------- ------------ ---------
<CAPTION>
1998 %
------------ ---------
<S> <C> <C>
Dental.................. $ 1,261,718 36.2%
Optometry............... 1,045,896 30.0%
Podiatry................ 912,096 26.2%
Audiology............... 220,771 6.3%
Primary Care............ 46,781 1.3%
------------ ---------
$ 3,487,262 100.0%
------------ ---------
------------ ---------
</TABLE>
The Medical and Dental Practices currently receive payments from a variety
of sources including Medicare, various Medicaid programs, private insurance and
individual LTCF residents. The following table outlines the source of receipts
for the Medical and Dental Practices for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Medicare.................................................... 42.1% 44.5% 40.4% 32.7% 35.2%
Private Payors.............................................. 31.8 28.0 28.5 30.9 30.8
Medicaid.................................................... 23.6 23.9 25.6 31.3 26.2
Private Insurance........................................... 2.5 3.6 5.5 5.1 7.8
--------- --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
36
<PAGE>
OPERATING EXPENSES. On a consolidated basis, certain of the operating
expenses of the Company and the Medical and Dental Practices can be grouped into
two major categories: direct patient care costs ("DPCC") and selling, general
and administrative expenses ("SGA"). The major expenses included in DPCC are
compensation related costs and employee benefits for Providers, bad debt
expense, transportation expenses, clinical fees and supplies expenses, workers'
compensation and malpractice insurance expenses and the depreciation of medical
equipment. Of these expenses, compensation related costs and employee benefits
for Providers, bad debt expenses, workers' compensation for Providers and
malpractice insurance expenses are generally borne by the Practices, and the
remainder are borne by the Company. Those expenses borne by the Practices are
subtracted from the revenues generated by the Practice on a monthly basis in
calculating the Compensation Amount. The major expenses included in SGA are
compensation related costs and employee benefits for corporate and regional
staff, rent expense, telephone expense, postage expense, travel and lodging
expense, professional fees expense, recruitment costs and the depreciation of
office and computer equipment, all of which are borne by the Company. All of the
expenses borne by the Company and the Medical and Dental Practices are reflected
in the consolidated financial statements of the Company.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenue, certain
items in the Company's Consolidated Statements of Operations of the Company and
the Medical and Dental Practices for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net patient service revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Direct patient care costs................................... 62.5 63.8 63.5 64.9 61.9
--------- --------- --------- --------- ---------
Gross profit................................................ 37.5 36.2 36.5 35.1 38.1
Selling, general and administrative expenses................ 37.6 44.3 35.6 37.6 33.0
--------- --------- --------- --------- ---------
Income (loss) from operations............................... (0.1) (8.1) 0.9 (2.5) 5.1
Interest income (expense), net.............................. 0.1 (0.2) (0.5) (0.5) (0.3)
Other income................................................ 0.0 0.1 0.0 0.0 0.3
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes... 0.0 (8.2) 0.4 (3.0) 5.1
Provision (benefit) for income taxes........................ 0.0 (1.4) 0.0 0.0 1.7
--------- --------- --------- --------- ---------
Net income (loss) (1)....................................... 0.0% (6.8)% 0.4% (3.0)% 3.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Exclusive of accretion of preferred stock dividends.
THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
NET PATIENT SERVICE REVENUE. Net patient service revenue increased 15.4%,
to $3.5 million for the three months ended March 31, 1998 from $3.0 million for
the three months ended March 31, 1997. Net patient service revenue from
long-standing existing geographic markets increased 9.8% to $3.1 million for the
three months ended March 31, 1998 from $2.8 million for the three months ended
March 31, 1997. Net patient service revenue from the three geographic markets
entered into in 1996 increased 86.5% to $400,000 for the three months ended
March 31, 1998 from $200,000 for the three months ended March 31, 1997.
DIRECT PATIENT CARE COSTS. DPCC increased 10.1%, to $2.2 million for the
three months ended March 31, 1998 from $2.0 million for the three months ended
March 31, 1997. This increase was due
37
<PAGE>
primarily to increases in Provider and transportation compensation and payroll
tax expenses, resulting primarily from the increase in net patient service
revenue. As a percentage of net patient service revenue, DPCC decreased to 61.9%
for the three months ended March 31, 1998 from 64.9% for the three months ended
March 31, 1997. This decrease was due primarily to a decrease in Provider and
transportation compensation and payroll tax expenses as percentage of net
patient service revenue. This decrease resulted primarily from the
implementation of the self transport model and improved Provider productivity.
GROSS PROFIT. Gross profit increased 25.1%, to $1.3 million for the three
months ended March 31, 1998 from $1.1 million for the three months ended March
31, 1997. As a percentage of net patient service revenue, gross profit increased
to 38.1% for the three months ended March 31, 1998 from 35.1% for the three
months ended March 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SGA expenses remained
relatively constant, increasing 1.0%, to $1.15 million for the three months
ended March 31, 1998 from $1.14 million for the three months ended March 31,
1997. As a percentage of net patient service revenue, SGA expenses decreased to
33.0% for the three months ended March 31, 1998 from 37.6% for the three months
ended March 31, 1997. This decrease was due primarily to decreases in corporate
and regional staff compensation and payroll tax expenses to 22.6% for the three
months ended March 31, 1998 from 27.6% for the three months ended March 31,
1997, a decrease of 5.0%, as a percentage of net patient service revenue. This
decrease was due to the fact that net patient service revenue increased by 15.4%
while corporate and regional staff compensation and payroll tax expenses
decreased by 5.5%, for the three months ended March 31, 1998. This decrease
resulted primarily from tight company wide cost control of SGA compensation,
centralization of certain functions previously performed at regional offices and
certain open positions not being filled within the period ended March 31, 1998.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $256,000,
to $179,000 for the three months ended March 31, 1998 from a loss from
operations of $77,000 for the three months ended March 31, 1997. As a percentage
of net patient service revenue, income from operations increased to 5.1% for the
three months ended March 31, 1998 from a loss from operations of 2.5% for the
three months ended March 31, 1997.
INTEREST INCOME (EXPENSE), NET. Interest expense, net decreased 20.6%, to
$12,000 for the three months ended March 31, 1998 from $15,000 for the three
months ended March 31, 1997.
OTHER INCOME. Other income increased to $11,000 for the three months ended
March 31, 1998 from $0 for the three months ended March 31, 1997. This increase
was due to gains recognized by the Company on the sale of certain vehicles.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company recorded a provision for
income taxes of $59,000 for the three months ended March 31, 1998, resulting in
an effective tax rate of approximately 33%. Income taxes in 1998 have been
provided at the Company's respective federal and state statutory rates, reduced
primarily for the anticipated use of net operating loss carryforwards not
previously benefited.
NET INCOME (LOSS). Net income increased $211,000, to $119,000 for the three
months ended March 31, 1998 from a net loss of $92,000 for the three months
ended March 31, 1997. As a percentage of net patient service revenue, net income
increased to 3.4% for the three months ended March 31, 1998 from a net loss of
3.0% for the three months ended March 31, 1997.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET PATIENT SERVICE REVENUE. Net patient service revenue increased 17.5%,
to $12.9 million in 1997 from $11.0 million in 1996. Net patient service revenue
from existing geographic markets increased 5.2% to $11.4 million in 1997 from
$10.8 million in 1996. Net patient service revenue from three geographic markets
entered in 1996 increased to $1.5 million in 1997 from $200,000 in 1996,
primarily as a result of
38
<PAGE>
growth in market penetration and the recognition of a full year of revenue in
1997 from operations in these markets.
DIRECT PATIENT CARE COSTS. DPCC increased 17.0%, to $8.2 million in 1997
from $7.0 million in 1996. The increase of $1.2 million was due primarily to
increases in Provider and transportation compensation and payroll tax expenses,
resulting primarily from the increase in net patient service revenue. As a
percentage of net patient service revenue, DPCC remained relatively constant
decreasing to 63.5% in 1997 from 63.8% in 1996. This decrease was due primarily
to decreases in clinical supplies expense, bad debt expense and a Medicare audit
charge offsetting increases in Provider and transportation compensation and
payroll tax expenses as a percentage of net revenue.
GROSS PROFIT. Gross profit increased 18.3%, to $4.7 million in 1997 from
$4.0 million in 1996. As a percentage of net patient service revenue, gross
profit remained relatively constant, increasing to 36.5% in 1997 from 36.2% in
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SGA expenses decreased 5.7%,
to $4.6 million in 1997 from $4.9 million in 1996. This decrease was due
primarily to decreases in travel and lodging expense and recruitment expense
that were made possible by increased controls restricting recruitment costs and
travel costs. As a percentage of net patient service revenue, SGA expenses
decreased to 35.6% in 1997 from 44.3% in 1996. This decrease was due primarily
to decreases in (i) corporate and regional staff compensation and payroll tax
expenses to 26.0% in 1997 from 29.7% in 1996, a decrease of 3.7%, (ii)
recruitment expense to 0.3% in 1997 from 1.8% in 1996, a decrease of 1.5% and
(iii) travel and lodging expense to 0.5% from 1.6%, a decrease of 1.1%, as a
percentage of net patient service revenue. The decrease in corporate and
regional staff compensation and payroll tax expenses as a percentage of net
revenue was due to the fact that net patient service revenue increased by 17.5%
while corporate and regional staff compensation and payroll tax expenses
increased only 2.9% in 1997. This resulted from the leveraging of staff in newer
maturing markets where percentage revenue growth far outstripped compensation
related growth, tight company wide control of compensation related expenses in
more mature markets and the restructuring of the corporate staff which resulted
in a decrease in the amount spent on corporate staff compensation related
expenses in 1997 despite growth in company wide revenue. The decreases in
recruitment expense and travel and lodging expense as a percentage of net
patient service revenue resulted primarily from increased controls restricting
recruitment costs and travel costs resulting in significant reductions in the
amounts spent for recruiting and travel and lodging in 1997 despite growth in
company wide revenue.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $1.0
million, to $115,000 in 1997 from a loss from operations of $894,000 in 1996. As
a percentage of net patient service revenue, income from operations increased to
0.9% in 1997 from a loss from operations of 8.1% in 1996.
INTEREST INCOME (EXPENSE), NET. Interest expense, net increased 150.1%, to
$65,000 in 1997 from $26,000 in 1996. This increase was due to an increase in
the average outstanding balance of the Company's bank line of credit during
1997, which was used primarily to finance working capital needs.
OTHER INCOME. Other income decreased 65.1%, to $5,050 in 1997 from $14,500
in 1996.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company recorded a benefit for
income taxes of $160,000 in 1996 due to the refund generated by the carryback of
operating losses against prior profitable years.
NET INCOME (LOSS). Net income increased $800,390, to $55,193 in 1997 from a
net loss of $745,197 in 1996. As a percentage of net patient service revenue,
net income increased to 0.4% in 1997 from a net loss of 6.8% in 1996.
39
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET PATIENT SERVICE REVENUE. Net patient service revenue increased 28.3%,
to $11.0 million in 1996 from $8.6 million in 1995. Net patient service revenue
from existing geographic markets increased 16.2% to $9.7 million in 1996 from
$8.4 million in 1995. Net patient service revenue from one geographic market
entered in 1995 increased to $1.1 million in 1996 from $200,000 in 1995,
primarily as a result of growth in market penetration and the recognition of a
full year of revenue in 1996 from operations in this market. Net patient service
revenue from three new geographic markets entered in 1996 increased to $200,000
in 1996 from $0 in 1995, resulting from establishing operations in these markets
in 1996.
DIRECT PATIENT CARE COSTS. DPCC increased 30.9%, to $7.0 million in 1996
from $5.4 million in 1995. This increase was due primarily to increases in
Provider and transportation compensation and payroll tax expenses and bad debt
expense, resulting primarily from the increase in net patient service revenue.
As a percentage of net patient service revenue, DPCC increased to 63.8% in 1996
from 62.5% in 1995. This increase was due primarily to increases in travel and
lodging expense, hearing aids expense and a Medicare audit charge as a
percentage of net patient service revenue.
GROSS PROFIT. Gross profit increased 24.1%, to $4.0 million in 1996 from
$3.2 million in 1995. As a percentage of net revenue, gross profit decreased to
36.2% in 1996 from 37.5% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SGA expenses increased 51.7%,
to $4.9 million in 1996 from $3.2 million in 1995. This increase was due
primarily to increases in corporate and regional staff compensation and payroll
tax expenses, travel and lodging expense and recruitment expense related to the
Company's expanding operations and the additional corporate infrastructure
required to support such expansion. As a percentage of net patient service
revenue, SGA expenses increased to 44.3% in 1996 from 37.6% in 1995. This
increase was due primarily to increases in (i) corporate and regional staff
compensation and payroll tax expenses to 29.7% in 1996 from 27.5% in 1995, an
increase of 2.2%, (ii) travel and lodging expense to 1.6% in 1996 from 0.4% in
1995, an increase of 1.2% and (iii) recruitment expense to 1.8% in 1996 from
1.1% in 1995, an increase of 0.7%, in each case as a percentage of net patient
service revenue. The increase in corporate and regional staff compensation and
payroll tax expenses as a percentage of net revenue was due to the fact that net
patient service revenue increased by 28.3% while corporate and regional staff
compensation and payroll tax expenses increased by 38.7% in 1996. This resulted
from additional regional and corporate level compensation related costs incurred
in connection with expansion into three new markets in 1996 which generated
little revenue in 1996. The increases in travel and lodging expense and
recruitment expense as a percentage of net patient service revenue resulted
primarily from increased travel to new markets and one existing market in 1996
and increased recruitment advertising and recruitment fees incurred for
corporate staff and for the three new markets and one existing market.
INCOME (LOSS) FROM OPERATIONS. Loss from operations increased $889,000, to
$894,000 in 1996 from $5,000 in 1995. As a percentage of net patient service
revenue, loss from operations increased to 8.1% in 1996 from 0.1% in 1995.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net decreased
$30,200, to interest expense, net of $26,000 in 1996 from interest income, net
of $4,200 in 1995. This decrease resulted primarily from higher utilization of
the Company's available cash and bank line of credit during 1996 to finance
expansion and working capital needs.
OTHER INCOME. Other income increased to $14,500 in 1996 from $900 in 1995.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company recorded a benefit for
income taxes of $160,000 in 1996 due to the refund generated by the carryback of
operating loss against prior profitable years.
NET INCOME (LOSS). Net income decreased $745,366, to a net loss of $745,197
in 1996 from net income of $169 in 1995. As a percentage of net patient service
revenue, net income decreased to a net loss of 6.8% in 1996 from net income of
0% in 1995.
40
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited financial data for each of the nine
consecutive fiscal quarters ended March 31, 1998, including such data expressed
as a percentage of the Company's consolidated net revenue. When read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus, the Company believes that this
information includes all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of such quarterly information.
The operating results of any quarter are not necessarily indicative of the
results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEP. 30 DEC. 31 MARCH 31 JUNE 30 SEP. 30 DEC. 31
1996 1996 1996 1996 1997 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net patient service
revenue............... $ 2,612 $ 2,694 $ 2,704 $ 2,996 $ 3,023 $ 3,208 $ 3,322 $ 3,377
Direct patient care
costs................. 1,610 1,697 1,747 1,966 1,962 2,014 2,082 2,155
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 1,002 997 957 1,030 1,061 1,194 1,240 1,222
Selling, general and
administrative
expenses.............. 1,028 1,107 1,249 1,496 1,138 1,158 1,170 1,136
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............ (26) (110) (292) (466) (77) 36 70 86
Interest income
(expense), net........ (2) (15) (1) (8) (15) (21) (16) (13)
Other income........... 1 1 1 12 -- 4 -- 1
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
provision (benefit)
for income taxes...... (27) (124) (292) (462) (92) 19 54 74
Provision (benefit) for
income taxes.......... (5) (21) (52) (82) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
(1)................... $ (22) $ (103) $ (240) $ (380) $ (92) $ 19 $ 54 $ 74
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MARCH 31
1998
-----------
<S> <C>
Net patient service
revenue............... $ 3,487
Direct patient care
costs................. 2,159
-----------
Gross profit........... 1,328
Selling, general and
administrative
expenses.............. 1,149
-----------
Income (loss) from
operations............ 179
Interest income
(expense), net........ (12)
Other income........... 11
-----------
Income (loss) before
provision (benefit)
for income taxes...... 178
Provision (benefit) for
income taxes.......... 59
-----------
Net income (loss)
(1)................... $ 119
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUE
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEP. 30 DEC. 31 MARCH 31 JUNE 30 SEP. 30 DEC. 31
1996 1996 1996 1996 1997 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net patient service
revenue............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Direct patient care
costs................. 61.6 63.0 64.6 65.6 64.9 62.8 62.7 63.8
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 38.4 37.0 35.4 34.4 35.1 37.2 37.3 36.2
Selling, general and
administrative
expenses.............. 39.3 41.1 46.2 49.9 37.6 36.1 35.2 33.6
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............ (0.9) (4.1) (10.8) (15.5) (2.5) 1.1 2.1 2.6
Interest income
(expense), net........ (0.1) (0.5) -- (0.3) (0.5) (0.6) (0.5) (0.5)
Other income........... -- -- -- 0.4 -- 0.1 -- 0.1
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
provision (benefit)
for income taxes...... (1.0) (4.6) (10.8) (15.4) (3.0) 0.6 1.6 2.2
Provision (benefit) for
income taxes.......... (0.2) (0.8) (1.9) (2.7) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
(1)................... (0.8)% (3.8)% (8.9)% (12.7)% (3.0)% 0.6% 1.6% 2.2%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MARCH 31
1998
-----------
<S> <C>
Net patient service
revenue............... 100.0%
Direct patient care
costs................. 61.9
-----------
Gross profit........... 38.1
Selling, general and
administrative
expenses.............. 33.0
-----------
Income (loss) from
operations............ 5.1
Interest income
(expense), net........ (0.3)
Other income........... 0.3
-----------
Income (loss) before
provision (benefit)
for income taxes...... 5.1
Provision (benefit) for
income taxes.......... 1.7
-----------
Net income (loss)
(1)................... 3.4%
-----------
-----------
</TABLE>
- ------------------------
(1) Exclusive of accretion of preferred stock dividends.
The Company's results of operations have been, and may in the future be,
subject to quarterly fluctuations due to a variety of factors, including the
availability of Providers, compensation fluctuations, expansion into new
markets, changes in reimbursement, nonrecurring income, postpayment reviews by
third-party payors, differing numbers of business days in various quarters,
fluctuations in demand for the Company's services, utilization of Provider
incentive plans and fluctuations in SGA expenses. These uncertainties make the
estimation of revenue and the results of operations on a quarterly basis
difficult
41
<PAGE>
and increase the potential margin for error in performance forecasts derived
from such estimates. As a result, the Company believes that the period-to-period
comparison of its results of operations is not necessarily meaningful and should
not be relied upon as any indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its working capital, capital expenditure
and expansion needs primarily through private equity financings, institutional
borrowings, capital lease financing and cash provided by operations. Net cash
used in operations was $147,797 for the three months ended March 31, 1998 on net
income of $118,500, offset principally by changes in operating assets and
liabilities. Net cash provided by operations was $231,355 in 1997 on net income
of $55,193, increased principally by changes in operating assets and
liabilities. Net cash used in operations was $223,076 in 1996 on a net loss of
$745,197, offset principally by changes in operating assets and liabilities. Net
cash used in operations was $40,257 in 1995 on net income of $169, offset
principally by changes in operating assets and liabilities.
Net accounts receivable increased 30%, to $2,253,247 at March 31, 1998, from
$1,733,099 at December 31, 1997. This increase in net accounts receivable was
due to an increase in average daily revenue for the period ended March 31, 1998
and slower collection activity in the first quarter. The days sales in net
accounts receivable (calculated by dividing the ending net accounts receivable
by the average daily revenue for the period) increased nine days, to 58 days at
March 31, 1998, from 49 days at December 31, 1997. This increase in days sales
in net accounts receivable resulted from slower collection activity in the first
quarter. Net accounts receivable increased 21%, to $1,733,099 at December 31,
1997, from $1,435,812 at December 31, 1996. This increase in net accounts
receivable was due to increased average daily revenue for the period ended
December 31, 1997. The days sales in net accounts receivable remained relatively
consistent, increasing one day, to 49 days at December 31, 1997, from 48 days at
December 31, 1996. Net accounts receivable decreased 12%, to $1,435,812 at
December 31, 1996, from $1,623,933 at December 31, 1995. This decrease in net
accounts receivable was due to improved collection activity, which more than
offset the increase in average daily revenue. The days sales in net accounts
receivable decreased 21 days, to 48 days at December 31, 1996, from 69 days at
December 31, 1995, as a result of the improved collections.
Cash flow provided by investing activities for the three months ended March
31, 1998 was $4,000, resulting primarily from the sale of certain property and
equipment. Cash flow used in investing activities for 1997, 1996 and 1995 was
$60,000, $377,000 and $279,000, respectively. These investment expenditures were
primarily for computer, medical and office equipment related to the Company's
expanding business.
Net cash provided by financing activities was $158,000 for the three months
ended March 31, 1998, due primarily to borrowings under the Credit Facility
referred to below, offset by payments required under capital leases. Net cash
used in financing activities was $159,000 in 1997 due to the partial paydown of
a bank line of credit and payments required under capital leases. Net cash
provided by financing activities was $241,000 in 1996 due primarily to
borrowings under a bank line of credit offset by payments required under capital
leases. Net cash used in financing activities was $99,000 in 1995 attributable
to payments required under capital leases.
From time to time the Company has advanced capital to the Practices,
generally to fund start-up expenses. These advances, to the extent not repaid
during the month in which they are made, are added to the respective
Intercompany Balances at the end of such month. These cash advances aggregated
$ during Fiscal 1997 and $ during Fiscal 1996. Each of the
Practices has been profitable on an operating basis (prior to the assessment of
the respective Compensation Amounts) during each quarter during the Company's
last three completed fiscal years and the Company's fiscal quarter ended March
31, 1998. Accordingly, the Company does not believe that the Practices will need
any material advances of capital during the foreseeable future.
The Company's external sources of financing have been private equity
financings, a bank line of credit and capital lease financing. The Company has
raised three rounds of private equity financing from DCC Limited and DCC
International Holdings B.V. (collectively, "DCC"), its largest shareholder prior
to the
42
<PAGE>
Offering. In April 1994, the Company raised $500,000 by the issuance of Series B
Preferred Stock to DCC pursuant to a stock purchase agreement. In May 1992, the
Company raised $1.0 million by the issuance of Series A Preferred Stock to DCC
pursuant to a stock purchase agreement. In October 1989, the Company raised
$550,000 by the issuance of Common Stock to DCC pursuant to a stock purchase
agreement. Pursuant to an agreement between the Company and DCC, all of the
outstanding preferred stock will be converted to Common Stock concurrently with
the completion of this Offering and DCC will retain certain rights with respect
to registration of its shares of Common Stock under the Securities Act. All
other rights pertaining to its holdings of common or preferred stock prior to
the Offering (other than with respect to certain accrued fees that are not in
the aggregate material) will be waived concurrently with the completion of this
Offering.
In May 1995, the Company entered into the Credit Facility with State Street
Bank and Trust Company (the "Bank") originally in the amount of $750,000 and
subsequently increased to $1.25 million. As of March 31, 1998, the outstanding
balance of the Credit Facility was $510,000. Under the Credit Facility, the
Company may borrow amounts up to 70.0% of its third-party accounts receivable
less than 120 days old and 50% of its self-pay accounts receivable less than 120
days old. Borrowings under the Credit Facility are secured by all of the assets
of the Company and the Medical and Dental Practices and bear interest at the
prime rate plus one percent (1.0%). During 1995, 1996 and 1997, the Company
failed to meet certain of the financial covenants contained in the Credit
Facility and obtained waivers from the Bank for such failures. The Credit
Facility matures on January 1, 1999.
The Company has used capital lease financing as the primary means of
financing its acquisition of vans used to transport medical equipment and
records.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Cash has
been and the Company contemplates that it will continue to be invested in
interest-bearing, investment grade securities. For all of the periods presented
the Company has consistently provided for bad debt through charges to expenses
at a rate of six to seven percent of revenues. The Company believes that this
percentage is reasonable based on the inherent trends of the industry and the
Company's historical level of write-offs. See Note 2(g) of Notes to Consolidated
Financial Statements.
The leases for the Company's corporate headquarters and its Newton,
Massachusetts regional office expired on June 30, 1998 and the Company is
currently a hold-over tenant in each locaction. The Company is currently
negotiating a one-year extension of its lease for its corporate headquarters,
and a three-year extension of the lease of its Newton regional office.
The Company believes that the net proceeds from the sale of Common Stock
offered hereby, together with cash generated from operations and existing cash
balances and advances available under the Credit Facility will be adequate to
finance its capital requirements for at least the next twelve months. However,
the Company's capital requirements beyond such period will depend upon the pace
of its acquisition strategy and the profitability of its operations. To the
extent that such amounts are insufficient to finance the Company's capital
requirements, the Company will be required to raise additional funds through
equity or debt financing, which could include the sale of additional shares of
Common Stock or borrowings under the Credit Facility with the Bank, or any
replacement credit facility or line of credit that the Company obtains after
consummation of the Offering. No assurance can be given that such financing will
be available on terms acceptable to the Company, and, if available, such
financing may result in further dilution to the Company's stockholders and
higher interest expense. In the event that the Company is unable to secure such
additional financing, the Company may be forced to curtail projected expansion,
delay or discontinue planned capital expenditures, reduce the Company's
workforce or close less-profitable operations. The primary capital expenses that
the Company expects to incur for the foreseeable future include (i)
approximately $1.0 million for enhancements to the Company's management
information systems that the Company expects to incur within 12 months, after
the consummation of the Offering, and (ii) up to $500,000 annually for the next
several years for the purchase of medical equipment and related capital
equipment in connection with planned expansion of the business of the Company
and the Medical
43
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and Dental Practices. Some of the capital expenditures made by the Medical and
Dental Practices may be funded by advances from the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997.
In July 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No.
131 requires certain financial and supplementary information to be disclosed on
an annual and interim basis for each reportable segment of an enterprise. SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997. Unless
impracticable, companies would be required to restate prior information upon
adoption.
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards
Board (FASB) recently released Issue No. 97-2: Application of FASB Statement of
Financial Accounting Standards (SFAS) No. 94, CONSOLIDATION OF ALL
MAJORITY-OWNED SUBSIDIARIES, and Accounting Principals Board (APB) Opinion No.
16, BUSINESS COMBINATIONS, to Physician Practice Management (PPM) Entities and
Certain Other Entities with Contractual Management Arrangements. The EITF
addressed the issue of whether an entity can establish a controlling financial
interest, as contemplated by SFAS No. 94, in a physician practice through a
contractual management agreement without having ownership of a majority of the
outstanding voting equity instruments of the physician practice. The EITF
reached a consensus that an entity can establish a controlling financial
interest in a physician practice through contractual management arrangements
and, therefore, require the consolidation of the physician practice if certain
requirements are met. The Company has applied the guidance provided in EITF 97-2
to the Operating and Option Agreements with the Medical and Dental Practices.
There was no effect to the Company upon the implementation of EITF 97-2 as the
consolidation status of the Medical and Dental Practices did not change.
YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Company currently employs three systems susceptible to Year 2000
issues, including a billing system, Custom Care and an accounting system, and
has reviewed the Year 2000 issue with respect to each system. The vendor of the
Company's billing system has indicated that an upgrade to the system that
addresses the Year 2000 issue will be available by the third quarter of 1998,
without requiring a substantial additional license fee. The Company believes
that CustomCare's displays require minor modifications to address Year 2000 and
that its employees will be able to complete such modifications without incurring
material expense by the end of 1999. The Company expects to replace its
accounting system without incurring a material expense. Upon upgrade of such
systems, management believes that the Company and the Medical and Dental
Practices will be Year 2000 compliant. Additionally, the Company is assessing
the impact of the Year 2000 issue on its significant customers, suppliers and on
others. Management believes that the cost to complete its Year 2000 compliance
will not be material.
The Company is unable to assess the potential impact on the Company of
potential failures to address Year 2000 issues by the governmental and
non-governmental third party payors. Any disruption in the systems of such
payors could result in delays in reimbursment for the services provided by the
Medical and Dental Practices which could have a material adverse effect on the
Company's business, financial condition and results of operations.
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BUSINESS
The Company is the sole sponsor of, and provider of administrative services
to, four professional corporations and one Michigan taxable not-for-profit
corporation. The Company and its founders established the Medical and Dental
Practices to focus on the provision of on-site geriatric health care services
primarily to residents of nursing homes. The Company does not own the capital
stock of any of the professional corporations or the Michigan taxable
not-for-profit corporation. Each of the Medical and Dental Practices is
affiliated with the Company through an exclusive long-term Operating Agreement
pursuant to which the Company receives a fee in exchange for the services it
provides, and an Option Agreement pursuant to which the Company is entitled to
cause the sole stockholder of the Practice to sell all of the outstanding
capital stock of the Practice to a designee of the Company at any time for a
nominal price. The Company and the Medical and Dental Practices are completely
interdependent and function as a single integrated unit, with the Company being
entirely dependent on the success of the Medical and Dental Practices for its
revenues and the Medical and Dental Practices being entirely dependent on the
Company for capital and all services other than the direct provision of medical,
dental and ancillary health care services. The Company does not itself provide
health care services.
In addition to providing services to nursing home residents, the Medical and
Dental Practices also provide services to a growing number of residents of ALFs
and ILFs that are affiliated with nursing homes under Service Agreements with
one or more of the Practices. Providers travel to LTCFs where they provide a
growing range of geriatric medical and dental services. Services currently
provided by the Medical and Dental Practices include dentistry, optometry,
podiatry, audiology, and primary care. As of May 15, 1998, the Medical and
Dental Practices employed 95 Providers who were rendering services at 884 LTCFs
located in 11 states, and the Company employed an additional 106 people. The
Company, headquartered in Newton, Massachusetts, operates four regional offices
located in Massachusetts, Connecticut, Pennsylvania and Wisconsin.
The Company has positioned itself to capitalize on important trends shaping
geriatric care in the United States including: (i) changing demographics; (ii)
evolving care protocols and disease management techniques; and (iii) changing
reimbursement methodologies driven by federal legislation. In 1996, there were
approximately 15,300 nursing homes serving approximately 1.7 million residents
nationwide. In addition, it was estimated that in 1996 there were approximately
14,500 ALFs and ILFs nationwide. According to the U.S. Census Bureau, the
portion of the U.S. population aged 75 to 85 is expected to increase by 27.0%,
from approximately 10.0 million in 1990 to approximately 12.7 million by the
year 2010, and the number of persons aged 85 and older is expected to increase
by 90.0%, from approximately 3.0 million in 1990 to approximately 5.7 million by
the year 2010. According to the United States General Accounting Office, the
number of Americans aged 65 years and older who need assistance with activities
of daily living is expected to double from approximately 7.0 million in 1997 to
approximately 14.0 million by 2020. Nursing home residents require frequent
medical care and often suffer from decreased mobility which makes it difficult
for them to visit off-site physicians. The Company considers itself to be an
innovator in promoting, sponsoring and administering the delivery by the Medical
and Dental Practices of a broad spectrum of on-site geriatric medical and dental
services to residents of LTCFs. In order to do so effectively, the Company has
developed proprietary systems, procedures and expertise that aid it in the
complex task of providing a range of geriatric medical and dental services to a
large number and variety of LTCF residents. The Company believes such systems,
procedures and expertise give it and the Medical and Dental Practices a
significant competitive advantage over other health care services providers.
The Company was founded in 1989 by Steven S. Charlap, M.D. and Alec H.
Jaret, D.M.D. to respond to the growing demand for convenient on-site dental
care services at nursing homes. Dr. Charlap and Dr. Jaret also founded three of
the Medical and Dental Practices with funds borrowed from the Company, Steven S.
Charlap, M.D., P.C., Alec H. Jaret, D.M.D., P.C. and HealthDrive Michigan
Corporation, which provides dental, optometry and podiatry services to residents
of LTCFs in Michigan. The Company, as it identified opportunities in such areas
among the LTCFs serviced by its other Practices, has also established
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an optometry practice and a podiatry practice. In each case, the Company
designated the individual Provider who would incorporate the professional
corporation, and loaned money to the Practice to cover formation and initial
operating costs. Each of the Medical and Dental Practices (other than
HealthDrive Michigan Corporation) is a Massachusetts professional corporation of
which the named physician or dentist is the sole stockholder. HealthDrive
Michigan Corporation is a Michigan not-for-profit taxable corporation of which
Dr. Charlap is the sole stockholder.
Nursing homes are required by the Omnibus Budget Reconciliation Act of 1987
to ensure that medical and dental services are made available to their
residents. In addition, while not required to do so, certain ALFs and ILFs in
the Company's markets have begun to make on-site medical and dental services
available to their residents. Historically, it has not been cost-effective for
LTCFs to use their own resources to satisfy their residents' medical and dental
service needs, and they have looked to single-specialty solo health care service
providers to meet such needs. Providing the range of geriatric medical and
dental services required by LTCF residents through Solo Providers imposes a
number of increasingly complex burdens on LTCFs which include: (i) identifying
and contracting with multiple, competent Solo Providers to provide on-site
services; (ii) allocating LTCF staff to coordinate the services of such Solo
Providers; (iii) monitoring the appropriateness of services provided and related
billings; (iv) complying with related federal and state health care regulations;
and (v) when necessary, transporting residents off-site to receive such
services.
The Balanced Budget Act of 1997 requires the Health Care Finance
Administration by July 1, 1998 to begin converting from a cost-plus
reimbursement methodology to the Prospective Payment System for nursing homes,
pursuant to which the federal government will pay a per diem rate to nursing
homes for post-hospitalization services provided to their Medicare covered
residents. The Company believes that as a result of the change to PPS, nursing
homes will need to increase their focus on the efficiency and quality of all of
their operations to maximize their profitability. PPS does not cover
physician-related services such as those provided by the Medical and Dental
Practices. However, the Company believes an increased focus on efficiency and
quality will make the use of integrated providers of multiple medical and dental
services, such as the Medical and Dental Practices, more attractive than the use
of multiple Solo Providers.
The Company and the Medical and Dental Practices offer an efficient
alternative to Solo Providers because, the Medical and Dental Practices, with
the assistance of the Company, are able to provide coordinated, comprehensive,
cost-effective on-site geriatric medical and dental services. The rendering of
such services requires: (i) multi-specialty clinical expertise; (ii) a staff of
highly qualified health care service providers; (iii) the purchase and
maintenance of specialized equipment; (iv) the development of sophisticated
management information systems; and (v) reimbursement and regulatory knowledge.
The Company and the Medical and Dental Practices have extensive experience in
providing such services. In addition, the Company has developed proprietary
procedures, systems and software necessary to overcome the logistical
complexities involved in coordinating on-site care. Specifically, the Company
has developed CustomCare, a proprietary software program that enhances the
Company's customer service capabilities by effectively integrating all facets of
the Company's services, including scheduling, billing, tracking dentures and
eyeglasses, coordinating transportation, compiling Provider productivity and
patient utilization data, monitoring payor pre-approvals, and generating
customized reports.
Pursuant to the Operating Agreements, the Company provides certain services
relating to the administration of health care provided by the Medical and Dental
Practices, licenses the use of the service mark "HealthDrive," and, from time to
time, extends credit to the Medical and Dental Practices. The services provided
by the Company pursuant to the Operating Agreement include ordering and
purchasing of supplies, performance of bookkeeping and accounting functions, and
billing and collections. In exchange for these services, the license of the
service mark to the Practice and the extension of credit, each Practice pays the
Company a monthly fee equal to all revenue generated by such Practice minus the
expenses incurred by such Practice (primarily compensation and benefits, bad
debt expense, insurance costs and the interest expense on the loans from the
Company to such Practice), adjusted to give effect to certain tax-
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related items. Under the terms of the Operating Agreements, the Compensation
Amount may not exceed the fair market value of the services provided by the
Company thereunder. Revenue is generated by the Medical and Dental Practices
pursuant to Service Agreements each of them enters into with LTCFs to provide
their respective services to residents of such LTCFs. Each of the Medical and
Dental Practices, other than HealthDrive Michigan Corporation, practices one of
the four major specialties. LTCFs enter into a separate Service Agreement with
each of the Medical and Dental Practices from which they wish to obtain services
for their residents, and generally a LTCF may choose to contract with any number
and any combination of the Medical and Dental Practices. Under the respective
Service Agreements, the LTCF is responsible for notifying its residents that the
Practice's services are available to them, as medically necessary, and the
Practice is responsible for providing its services to those residents who need
and request them. The Company then bills the patient or his or her insurance
company for the services rendered, typically Medicare, Medicaid or a commercial
insurer, and in most instances does not receive payments from the LTCFs.
In connection with the formation of the Medical and Dental Practices, and
from time to time thereafter, the Company has advanced money pursuant to the
Operating Agreements to the Medical and Dental Practices for working capital
purposes. The amount of these advances are added on a monthly basis to
Intercompany Balances maintained by the Company with each Medical and Dental
Practice, the majority of which have been generated by the calculation of the
Compensation Amounts. The Medical and Dental Practices are required to pay down
the principal amount and accrued interest on the Intercompany Balances from time
to time to the extent possible, and the Company is entitled to demand repayment
of the entire amounts due on thirty days notice. The Intercompany Balances bear
interest at rates determined by the Company not to exceed a designated prime
rate plus five percent, and payments are generally made on the Intercompany
Balances no less frequently than on a monthly basis.
The primary strategic objective of the Company and the Medical and Dental
Practices is for the Medical and Dental Practices to become, acting in concert,
a dominant provider of on-site, integrated and cost-effective geriatric medical
and dental services to residents of LTCFs. The Company and the Medical and
Dental Practices have identified three opportunities for growth: (i) obtaining
Service Agreements for the Medical and Dental Practices with additional LTCFs in
existing and contiguous markets; (ii) increasing the number of Service
Agreements with LTCFs under existing contracts with the Medical and Dental
Practices; and (iii) increasing the number of patients served by the Medical and
Dental Practices within LTCFs under existing contracts. The Company has
determined four means of capitalizing on such opportunities to achieve growth
within both existing geographic markets and new geographic markets. These
include: (i) increasing its sales and marketing initiatives; (ii) expanding its
existing customer relationships; (iii) leveraging its operational infrastructure
and its existing and planned management information systems; and (iv) the
consummation of acquisitions of other LTCF-focused medical, dental or ancillary
health care services practices or related companies. These acquisitions are
likely to take the form of (i) the purchase by the Company of another company
engaged in the business of the promotion, administration and coordination of the
provision of health care services to residents of LTCFs; (ii) the purchase by
the Company of the assets of a physician practice followed by the assignment of
any purchased service contracts to one or more of the Practices, or (iii) the
payment by the Company of a purchase price for the entrance by an unaffiliated
physician practice (and its shareholders) into operating agreements and option
agreements in substantially the form of the existing Operating Agreements and
Option Agreements among the Company, the Practices and the stockholders of the
Practices. Because the Company is entirely dependent on the activities of the
Medical and Dental Practices for its revenue, to the extent that any of these
initiatives may be successful in increasing the profitability of the Medical and
Dental Practices, the Company's profitability may be similarly affected. The
Company believes that most of the costs associated with these initiatives, such
as increased sales and marketing expenditures and recruitment and salary costs
for new employees of the Company, will be borne by the Company and not the
Medical and Dental Practices. In addition to the material expenses that will be
required to increase the Company's marketing
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efforts, the Company expects that enhancing its management information systems
to provide additional services and consummating potential acquisitions will
require substantial expenditures by the Company.
MARKET OVERVIEW
LONG-TERM CARE INDUSTRY. The long-term care industry encompasses a variety
of health care services that are provided primarily to the elderly in varying
settings including nursing homes, ALFs and ILFs. Nursing homes typically care
for those who require 24-hour skilled medical supervision and are in need of
specialized support, and rehabilitative, nutritional, respiratory and other
skilled treatments. ALFs, which are the fastest growing segment of the long-term
care industry, serve the rapidly growing elderly population who may require
housing, assistance with personal care (e.g. dressing and bathing), support
services (e.g. housekeeping and laundry) and intermittent health care services
(e.g. assistance taking medications and health monitoring) but who do not
require the skilled medical care of a nursing home. ILFs are age-restricted
communities designed for residents who require little assistance. ILFs generally
provide at least one congregative service (e.g. meals, housekeeping,
transportation, or activities). Residents in ALFs and ILFs typically do not
require continuous medical or skilled nursing care, but choose not to live
independently. Accordingly, ALF and ILF residents generally have lower acuity
levels than residents of nursing homes.
Residents of nursing homes, currently the primary consumers of the services
provided by the Medical and Dental Practices, generally have complex medical
needs which are treatable outside of acute care hospitals. In most cases,
nursing homes have the capacity to provide skilled nursing care, routine
rehabilitation therapy and other support services. However, nursing homes are
required by state and federal laws and Joint Commission for the Accreditation of
Healthcare Organizations ("JCAHO") standards to provide access to primary
medical care and specialty health care services often beyond their in-house
resources, including, but not limited to, routine dental care, eye care, foot
care, and care for the hearing impaired. In order to provide such specialty
health care services, nursing homes usually contract with outside health care
service providers.
In 1996, there were approximately 15,300 nursing homes servicing
approximately 1.7 million residents in the United States. Although the Company
is not aware of any third party collection of data that accurately demonstrates
the size of the Company's target market, residents of Massachusetts nursing
homes treated by the Medical and Dental Practices were visited in 1996 by
Providers in the fields of dentistry, optometry, podiatry and audiology an
average of 1.65 times, 1.50 times, 2.75 times and 1.00 times, respectively. By
multiplying such data by the average annual revenue received by the Company from
such visits and the total number of residents of nursing homes in the United
States in 1996, the Company estimates the total market nationwide in nursing
homes alone for the four major specialty health care services provided by the
Medical and Dental Practices to be approximately $760 million. This market size
is calculated based on internal Company data collected only with respect to
nursing homes in Massachusetts, where the Medical and Dental Practices have
succeeded in capturing the largest share of their target market. In addition, it
was estimated that in 1996 there were approximately 14,500 ALFs and ILFs
nationwide.
The Company attributes the continuing growth of the U.S. market for
geriatric medical and dental care in LTCFs to three factors:
AGING POPULATION. The target market for the services provided by the
Medical and Dental Practices are persons generally aged 75 years and older, one
of the fastest growing segments of the U.S. population. According to the U.S.
Census Bureau, the portion of the U.S. population aged 75 to 85 years is
expected to increase by 27.0%, from approximately 10.0 million in 1990 to
approximately 12.7 million by the year 2010. During the same period, the portion
of the U.S. population aged 85 years and older is expected to increase by 90.0%,
from approximately 3.0 million to approximately 5.7 million.
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INCREASED LIFE EXPECTANCY AND MEDICAL ACUITY. Medical technology and other
factors have helped to reduce the mortality rate in the U.S. and increase
longevity. However, longer life is accompanied by a greater chance of chronic
illness and/or disability. Disabilities and chronic illnesses which develop at a
higher rate as a person ages increase the functional dependencies of the elderly
and their need for specialty health care services. According to the United
States General Accounting Office, there are approximately 7.0 million Americans
aged 65 years and older who currently need assistance with activities of daily
living, and this number is expected to double by the year 2020. At the same
time, cost containment initiatives by third party payors have increased the
pressure to discharge medically complex patients from expensive acute care
hospitals to less expensive settings such as LTCFs.
LONG-TERM CARE MEDICAL AND DENTAL PROVIDER MARKET. Unlike many hospitals,
most LTCFs do not have permanent, on-site medical and dental health care service
providers. Generally, LTCFs depend on outside Solo Providers who provide
services using their own equipment and supplies. Medical and dental health care
service providers who treat residents of LTCFs typically receive a substantial
portion of their revenue through reimbursement from the Medicare and Medicaid
programs ("Government Payors"), with the balance of payments being received from
individual LTCF residents ("Private Payors") and private insurers and LTCFs
("Third Party Payors").
As a result of the increasing acuity levels of residents and the changing
regulatory environment, the sophistication and breadth of services required by
residents of LTCFs, and the administrative burdens associated with such
services, have increased dramatically in recent years. Solo Providers serving
patients at a given LTCF must independently verify patient demographic data,
including the patient's primary payor source. In addition, they must
independently pre-schedule visits, respond to emergencies, process all
paperwork, ensure compliance with all related regulatory and reimbursement
requirements, purchase, stock and transport their own equipment and supplies,
and maintain and store their own patient records off-site. Generally, Solo
Providers do not have the resources to adequately respond to these increasingly
complex burdens placed upon LTCFs.
Furthermore, contracting with multiple Solo Providers is inefficient for
LTCFs. LTCF staff and patients and their responsible parties need to contract
with, and coordinate the efforts of, each Solo Provider. Multiple Solo Providers
must be contacted independently to discuss coordination of services, treatment
plans, payment issues and other concerns. LTCFs must provide, and patients or
their responsible parties must complete, individual authorizations for each Solo
Provider. The redundancy of efforts required when utilizing several separate
Solo Providers creates inefficiencies for LTCFs. The Company and the Medical and
Dental Practices address these inefficiencies by eliminating the need to
contract with, and coordinate the efforts of, several Solo Providers. By
retaining the Medical and Dental Practices, LTCFs need only coordinate with one
party. Although the Company and the Medical and Dental Practices generally do
not displace all Solo Providers when it contracts with a LTCF, its experience
has been that in most LTCFs the Medical and Dental Practices have become the
predominant provider of their four major specialty health care services.
PROSPECTIVE PAYMENT AND MANAGED CARE. The Balanced Budget Act of 1997
effected several changes to the manner in which nursing homes are to be
reimbursed for health care services that are provided to Medicare beneficiaries.
Effective July 1, 1998, HCFA will begin a three-year transition period to PPS.
Under PPS, covered nursing homes will no longer be able to operate under a
cost-plus reimbursement methodology but will instead be paid a single federal
per diem rate for all non-physician health care services provided to Medicare
beneficiaries. The federal per diem rate will be based on historical cost
reports provided by covered nursing homes and will be standardized to reflect
differences among nursing homes which are attributable to, among other things,
current expenses, geographic location, labor costs, and case-mix. The Company
believes that as a result of the change to PPS, nursing homes will need to
increase their focus on the efficiency of all of their operations to maximize
their profitability. PPS does not cover physician related services such as those
provided by the Medical and Dental Practices. However, the
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Company believes this increased focus on efficiency will make single-source
providers of coordinated care across a variety of specialties, such as the
Company, more attractive as a result of the efficiencies realized.
In response to the rising cost of health care services, Government Payors
and Third Party Payors have implemented managed care initiatives, such as
capitated payment agreements, aimed at reducing the cost of such services. Such
initiatives have focused on eliminating the traditional fee-for-service method
of paying for health care services in favor of risk-sharing payment devices that
encourage the health care service provider to manage the care of patients in the
most cost-effective manner. Under capitated payment agreements, physicians,
dentists and other health care service providers agree to provide all required
services within their specialty to a defined group for a fixed fee. The Company
estimates that approximately one percent of the revenues of the Medical and
Dental Practices for the three months ended March 31, 1998 were derived from
capitated arrangements. However, because the Compensation Amount payable to the
Company is contingent upon the profitability of the Medical and Dental
Practices, expenses incurred by the Medical and Dental Practices in excess of
the capitated payment will reduce the Compensation Amount and, accordingly, the
Company's consolidated revenues.
Risk-sharing payment arrangements reward large practices that have (i) the
resources to offer coordinated care across a variety of specialties, (ii) low
operating costs relative to revenue, (iii) bargaining power with vendors of
supplies and services and (iv) sophisticated management information systems
which maintain outcome management programs and patient care data. While the
Medical and Dental Practices have traditionally provided health care services on
a fee for service basis, it expects that managed care, including capitated
payment agreements, may grow in importance as a means of reimbursement for
health care services provided to residents of LTCFs in the future. The Company
believes that it will have a competitive advantage in such an environment as a
result of its management information system, CustomCare, and its ability to
coordinate a spectrum of health care services involving a number of different
specialties. The Company also believes that its size generates economies of
scale and provides it with bargaining power with vendors of supplies.
STRATEGY
The primary strategic objective of the Company and the Medical and Dental
Practices is for the Medical and Dental Practices to become, acting in
cooperation with the Company, dominant providers of on-site, integrated and
cost-effective geriatric medical and dental services to residents of LTCFs.
The Company estimates that the Medical and Dental Practices have entered
into contracts with approximately 17.8% of the nursing homes within their
existing markets. In addition, the Company estimates that the Medical and Dental
Practices service on average only 50.0% of the residents of each LTCF who
require the services offered by the Medical and Dental Practices. Furthermore,
as of May 15, 1998, the Company's Medical and Dental Practices had entered into
only 2,120 Service Agreements with the 884 LTCFs with which they had contracts
(an average of approximately 2.4 contracts per LTCF).
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The Company believes that these relatively low penetration rates indicate
significant opportunities for growth including: (i) obtaining Service Agreements
for the Medical and Dental Practices with additional LTCFs in existing and
contiguous markets; (ii) increasing the number of Service Agreements with LTCFs
under existing contracts with the Medical and Dental Practices; and (iii)
increasing the number of patients served by the Medical and Dental Practices
within LTCFs under existing Service Agreements. The Company has identified four
means of capitalizing on such opportunities to achieve growth within both
existing geographic markets and new geographic markets; these include (i)
increasing its sales and marketing initiatives; (ii) expanding its existing
customer relationships; (iii) leveraging its operational infrastructure and
existing and planned management information systems; and (iv) consummating, in
conjunction with one or more of the Medical and Dental Practices, acquisitions
of other LTCF-focused medical, dental or ancillary health care services
practices or related companies.
(I) INCREASE SALES AND MARKETING INITIATIVES
The Company plans on continuing to add to its sales staff to capitalize on
the growth opportunities stated above. The Company's sales personnel maintain
existing LTCF relationships on behalf of the Medical and Dental Practices,
expand these relationships by signing additional Service Agreements on behalf of
the Medical and Dental Practices, and enter into new relationships with other
LTCFs in their assigned markets. The Company's sales personnel work closely with
the Providers and their assigned LTCFs to increase the number of patients within
each LTCF who select the Providers as their caregivers. In addition, the Company
has commenced adding sales personnel whose sole responsibility is to focus on
expansion into new markets.
(II) EXPAND EXISTING CUSTOMER RELATIONSHIPS
The Medical and Dental Practices have secured Service Agreements with a
number of national LTCF operators to provide services to facilities managed by
such operators in certain markets. The Company plans to use these relationships
to obtain additional Service Agreements for the Medical and Dental Practices
with facilities that are managed by such LTCF operators in other markets. The
Medical and Dental Practices have developed and expect to continue to develop
quality clinical programs with consistent standards of care applicable across
many regions. As the LTCF industry continues to consolidate, the Company
believes that, acting in concert with the Medical and Dental Practices, it
offers a multi-regional program for LTCF operators who want to standardize their
operations across multiple regions by contracting with one integrated provider.
The Company has developed customized reports which provide LTCF operators with
utilization data that is useful for quality assurance purposes and possible
managed care contracting.
(III) LEVERAGE OPERATIONAL INFRASTRUCTURE AND MANAGEMENT INFORMATION
SYSTEMS.
The Company has developed operations in four regions of the country and has
demonstrated a capability to serve contiguous markets from its regional
operations. In the past, the Company has serviced the New Hampshire and Rhode
Island markets from its regional center in Massachusetts, the New York market
from its regional center in Connecticut, and the New Jersey market from its
regional center in Pennsylvania. The Company has also demonstrated its ability
to service non-contiguous states such as Florida, Michigan, and Ohio from a
centralized operations base in Massachusetts. The Company's existing regional
and central operations enable the Company and the Medical and Dental Practices
to service additional LTCFs in contiguous and non-contiguous markets with
minimal increases in operating expenses. In addition, the Company and the
Medical and Dental Practices can add new services which can be administered to
LTCFs under existing contracts and newly contracted LTCFs from existing regional
and central operations. The Company believes that its success in managing
operations from regional and central, rather than local, centers is a result of
CustomCare, its proprietary management information system. CustomCare provides
the Company with the concise and timely data it requires to effectively and
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efficiently manage multiple sites from its corporate headquarters. The Company
intends to further leverage CustomCare by offering fee-based administrative and
billing services to non-affiliated primary care physicians who treat patients at
the same LTCFs where the Medical and Dental Practices provide their services. By
compiling clinical and demographic patient information provided by the
non-affiliated providers with similar information from the Medical and Dental
Practices, CustomCare can integrate such information into one comprehensive
report available to both non-affiliated primary care physicians and the LTCF.
The Company believes that by also providing fee-based Consolidated Billing
services for LTCFs, it can create a single source, integrated database for all
non-nursing related services for each LTCF in which it operates.
The Balanced Budget Act of 1997 will require LTCFs to bill for certain
outside vendor services as of January 1, 1999. Though the services provided by
the Medical and Dental Practices are excluded from this requirement, the Company
believes it may use its existing and planned billing operations, reimbursement
expertise, management information systems, including CustomCare, and patient
demographic data bases to provide LTCFs under existing contracts with such
fee-based billing services.
(IV) ACQUIRING SINGLE SPECIALTY LTCF-FOCUSED PRACTICES AND SIMILAR ENTITIES
Although the Company has traditionally expanded through the recruitment by
the Medical and Dental Practices of health care service providers, the Company
and the Medical and Dental Practices intend to further increase their presence
in existing markets and enter into new markets through the acquisition of
LTCF-focused practices by the Company and the Medical and Dental Practices. The
Company believes that it can penetrate new markets through such acquisitions and
use the acquired practices' existing relationships with LTCFs as platforms to
market other services of the Medical and Dental Practices. In 1997, the Company
recruited a prominent dentist in Michigan with an existing LTCF practice.
Marketing the Medical and Dental Practices' other services to the dentist's
existing LTCF clients resulted in the execution of 83 new contracts for
services. The Company intends to attract prominent practices by capitalizing on
its professional reputation, growing network of LTCFs, management experience,
proprietary information systems, and logistical know-how. These acquisitions are
likely to take the form of (i) the purchase by the Company of another company
engaged in the business of the promotion, administration and coordination of the
provision of health care services to residents of LTCFs; (ii) the purchase by
the Company of the assets of a physician practice followed by the assignment of
any purchased service contracts to one or more of the Practices, or (iii) the
payment by the Company of a purchase price for the entrance by an unaffiliated
physician practice (and its shareholders) into operating agreements and option
agreements in substantially the form of the existing Operating Agreements and
Option Agreements among the Company, the Practices and the stockholders of the
Practices. The Company believes that completion of the Offering will enhance the
ability of the Company and the Medical and Dental Practices to complete
acquisitions. In addition to gaining access to those of the cash proceeds of the
Offering that will be available to consummate acquisitions, the Company believes
that its ability to issue publicly-traded capital stock in connection with an
acquisition, either to raise cash to pay a portion of the purchase price or to
be issued directly to the seller as consideration, will provide it with
increased resources to complete acquisitions.
Although the Company and the Medical and Dental Practices are not currently
parties to any agreements to acquire other LTCF-focused practices, and have not
completed any acquisitions other than the recruitment of a dentist in Michigan
as described above, the Company has engaged in discussions with a number of such
practices in the past, and believes that there are significant opportunities for
acquisitions. There can be no assurance that any such acquisitions can be
consummated by the Company or the Medical and Dental Practices. However, the
Company believes that acquisitions completed in existing markets could
significantly enhance the operations of the Company and the Medical and Dental
Practices in such markets by allowing them to leverage their existing operations
to provide services to new LTCFs, and that
52
<PAGE>
acquisitions completed in new geographic markets may facilitate their entrance
into such markets and accelerate the growth of operations therein.
OPERATIONS
The Company and the Medical and Dental Practices have considerable
experience in the design and implementation of comprehensive clinical programs
for residents of LTCFs in the fields of dentistry, optometry, podiatry and
audiology. In addition, the Company has developed systems and procedures to
efficiently overcome the logistical obstacles associated with transporting
equipment, files and Providers to different LTCFs on a daily basis.
OPERATING MODELS AND TRANSPORTATION SYSTEMS. The Company has two operating
models and two transportation systems which are employed by the Company and the
Medical and Dental Practices to different degrees under each operating model
based on the size of the regional operation.
(I) REGIONAL OFFICE MODEL.
In certain markets such as Massachusetts, Connecticut, Pennsylvania and
Wisconsin, where the Medical and Dental Practices have a high number and
concentration of LTCFs under contract, the Company's operations are
decentralized with each regional office performing all functions related to the
support of patient care. Specifically, each regional office is responsible for
scheduling patient visits, maintaining and transporting medical records,
equipment and supplies to LTCFs, customer service, sales, billing, and
collections. Scheduling experts at each regional office generate patient
schedules for each LTCF and for each Provider. Pursuant to such schedules,
Providers visit a different LTCF each day.
(II) CENTRAL OFFICE MODEL.
In other markets such as Florida, Michigan and Ohio, where the Medical and
Dental Practices have a lower number and concentration of LTCFs under contract
currently, the Company's operations are more centralized. Scheduling patient
visits, customer service, billing and collections are performed out of the
Company's central office. The Company maintains local field account management
as necessary to provide quality customer service.
(III) ASSISTED TRANSPORT SYSTEM.
Under the assisted transport system, drivers who are assigned to each
Provider are responsible for ensuring that the proper equipment, supplies and
medical records are waiting for the Provider at the LTCF when the Provider
arrives. At the end of each day, the driver returns to the LTCF to retrieve the
equipment, supplies, medical records and billing forms. The driver then returns
to the regional office to deliver the medical records and billing forms for that
day's patients, and pick-up the medical records and replenish clinical supplies
for the following day's patients. This cycle repeats itself daily.
(IV) SELF TRANSPORT SYSTEM.
Providers under the self transport system are responsible for their own
transportation of equipment, and have the increased flexibility to visit more
than one facility per day. Recent advances in the miniaturization and
portability of certain equipment and innovative equipment configurations allow
easy transport of equipment by the Providers. The Company and the Medical and
Dental Practices intend to convert their operations to the self transport system
wherever feasible. The Company believes that implementation of the self
transport system will enable the Medical and Dental Practices to provide
services to residents of facilities (including many ALFs and ILFs) that have
fewer residents than the nursing homes historically served by the Company.
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MANAGEMENT INFORMATION SYSTEMS. The Company has developed CustomCare, a
unique proprietary software program specifically geared towards multi-specialty
health care practice in LTCFs. CustomCare is the product of the Company's eight
years of operational experience working primarily with nursing homes. The
Company designed CustomCare to increase its efficiency in coordinating the
delivery of on-site care and to provide better customer service. The system
enables the Company's non-Provider staff in regional offices, at the Company's
headquarters and at LTCFs, to immediately access all relevant patient
information. CustomCare also effectively integrates all facets of the Company's
services, including scheduling, billing, tracking denture and eyeglass
fabrication, coordinating transportation, compiling Provider productivity and
patient utilization data and monitoring payor pre-approvals. Using CustomCare,
the Company's non-Provider staff can easily and quickly generate extensive
customized clinical reports for LTCFs and productivity and utilization data for
Company management. This management information system considerably increases
the Company's ability to respond to requests from LTCFs, physicians, responsible
parties, Government Payors and Third Party Payors. In addition to these
capabilities, in early 1998 the Company began using CustomCare to generate the
Quality Assurance Report. Such report comprehensively summarizes all clinical
activity at any particular LTCF, sorted by patient, date of service, diagnosis,
procedure performed, next recall date, recommended treatment, and specialty.
This report assists LTCFs in monitoring regulatory compliance and quality of
care. The Company maintains appropriate procedures, and is provided with
assurances from the Medical and Dental Practices, with respect to the
maintenance of patient privacy and confidentiality.
SERVICE AGREEMENTS. The Medical and Dental Practices have entered into
Service Agreements with 884 LTCFs. Each of the Medical and Dental Practices,
other than HealthDrive Michigan Corporation, practices one of the four major
specialties. LTCFs enter into a separate Service Agreement with each of the
Medical and Dental Practices from which they wish to obtain services, and
generally a LTCF may choose to contract with any number and any combination of
the Medical and Dental Practices. Pursuant to the Service Agreements, each
Practice must provide all equipment and care required by the LTCF residents who
choose to use its services and bill the LTCF residents or their health insurance
for all services rendered. Payments for services are generally made by Medicare,
Medicaid and patients directly to the Medical and Dental Practices, and the
Medical and Dental Practices in most instances do not receive payments directly
from LTCFs. The fees generated by the services of the Medical and Dental
Practices range from approximately $10 to $1,000. Consistent with applicable
laws and regulations, each LTCF must provide the Medical and Dental Practices
with access to pertinent medical histories and billing information of its
residents as well as adequate space, electrical and water supplies. The Service
Agreements generally have an initial term of one year and thereafter are
terminable upon 30 days written notice. Either party may terminate at any time
if the other party fails to perform its obligations and does not correct such
failure after receiving 15 days written notice of such failure. The Service
Agreements do not obligate the LTCF to obtain the services of the Medical and
Dental Practices for any of its patients, and do not prohibit the LTCF from
obtaining similar services from other health care service providers. Although
the Service Agreements define the relationship between the Medical and Dental
Practices and LTCFs, the Company considers the working relationships of the
Company and the Medical and Dental Practices with LTCFs to be of greater
significance. During Fiscal 1997, the Medical and Dental Practices retained over
90.0% of the Service Agreements that came up for renewal.
LTCFS SERVED AND POTENTIAL MARKET
As of May 15, 1998, the Medical and Dental Practices had one or more Service
Agreements with 884 nursing homes in Massachusetts, Connecticut, Pennsylvania,
Wisconsin, Florida, Michigan, Rhode Island, New Jersey, Ohio, New Hampshire and
New York. Generally, each of the nursing homes may contract to have its
residents receive one or more of the four major specialty services provided by
the Medical and Dental Practices. On average, nursing homes contract to have
their residents receive two to three of the four specialty services provided by
the Medical and Dental Practices.
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The following table indicates the number of nursing homes currently
receiving services from the Medical and Dental Practices and the estimated total
number of nursing homes in the Company's current markets. The Company does not
have reliable information available indicating the number of ALFs and ILFs in
each of the Company's current markets. Accordingly, such facilities are not
included in this table.
<TABLE>
<CAPTION>
ESTIMATED NUMBER
OF
NUMBER OF NURSING HOMES NURSING HOMES IN SERVICE
MARKET CURRENTLY SERVED STATE* PENETRATION
- ------------------------------------------------------------- ----------------------- ----------------- -------------
<S> <C> <C> <C>
Massachusetts................................................ 308 557 55.3%
Connecticut.................................................. 110 265 41.5
Pennsylvania................................................. 107 669 16.0
Wisconsin.................................................... 95 385 24.7
Florida...................................................... 69 626 11.0
Michigan..................................................... 59 421 14.0
Rhode Island................................................. 47 103 45.6
New Jersey................................................... 39 345 11.3
Ohio......................................................... 30 958 3.1
New Hampshire................................................ 19 73 26.0
New York..................................................... 1 572 **
--- ------ ---
Total........................................................ 884 4,974 17.8%
--- ------ ---
--- ------ ---
All 50 states................................................ 884 15,323 5.8%
--- ------ ---
--- ------ ---
</TABLE>
- ------------------------
* Reflects data available for 1996.
** Less than 1%.
Although the Company and the Medical and Dental Practices have focused to
date primarily on coordinating the provision of geriatric medical and dental
services to residents of nursing homes in certain states, they intend to further
expand into other types of LTCFs, including ALFs and ILFs, in states where they
are currently operating, and eventually into other states. The Medical and
Dental Practices currently provide medical and dental services to nine ALFs and
ILFs that are affiliated with nursing homes under current Service Agreements
with one or more of the Practices. The Company expects the number of ALFs and
ILFs in operation throughout the United States to grow considerably in the
future as a result of the growing number of elderly Americans. The Company
believes that the development of such facilities will add significantly to the
size of the potential market for the Company's Medical and Dental Practices'
services.
THE MEDICAL AND DENTAL PRACTICES
Each of the Medical and Dental Practices, other than Health Drive Michigan
Corporation, practices one of the four major specialty health care services
coordinated by the Company. Each of the Medical and Dental Practices was
established by the Company, either at the time of the Company's formation in
1989, or as the Company sought to expand the services it would be able to
promote and administer. In each case, the Company designated the individual
Provider who would incorporate the professional corporation, and loaned money to
the Practice to cover formation and initial operating costs. The Company does
not own any of the capital stock of any of the Medical and Dental Practices.
THE DENTAL PRACTICE
Alec H. Jaret, D.M.D., P.C., the Dental Practice, is a Massachusetts
professional corporation that was formed by the Company in 1989. The sole
stockholder of the Dental Practice is Alec H. Jaret, D.M.D., a director of the
Company and one of its founders. The Dental Practice is party to an Operating
Agreement
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<PAGE>
with the Company and the Company, the Dental Practice and Alec H. Jaret, D.M.D.
are parties to an Option Agreement pursuant to which the Company has the right
to cause the sole stockholder of the Dental Practice to sell all of the
outstanding capital stock of the Dental Practice to a designee of the Company at
any time for a nominal purchase price.
SERVICES PROVIDED BY THE DENTAL PRACTICE. Oral health is important to an
elderly person's quality of life. The ability to properly chew and extract
nutrients from food is often dependent on good oral health. Lack of mobility
often results in the failure to obtain appropriate preventive dentistry and
address dental problems at their inception when they are easily and
inexpensively treatable. The Dental Practice's dental program was designed to
emphasize quality and convenience. The Dental Practice delivers a fully-equipped
dental clinic to each LTCF served, alleviating the need to transport LTCF
residents off-site for routine or emergency care. The equipment includes a
dental delivery unit, x-ray unit, portable chairs, lead sheets and reline
equipment. The Dental Practice also provides equipment necessary to safeguard
patients from cross-contamination during treatment. Dentists and hygienists are
assigned to specific LTCFs, thereby providing the continuity of care for
patients associated with visiting a traditional dentist. The Dental Practice and
the Michigan Practice provide the following services on-site:
- Routine examinations and cleanings
- Examinations for oral cancer
- X-rays
- Extractions
- Fillings, crowns and bridges
- Denture relines, repair and engraving
- Coordination of denture fabrication
- Emergency care
As of May 15, 1998, the Dental Practice provided dental services to
residents of 688 LTCFs in Massachusetts, Connecticut, Pennsylvania, Wisconsin,
Florida, Rhode Island and New Jersey.
THE OPTOMETRY PRACTICE
Jeffrey Morer, O.D., P.C., the Optometry Practice, is a Massachusetts
professional corporation that was formed by the Company in 1990. The sole
stockholder of the Optometry Practice is Jeffrey L. Morer, O.D. The Optometry
Practice is party to an Operating Agreement with the Company and the Company,
the Optometry Practice and Jeffrey L. Morer, O.D., are parties to an Option
Agreement pursuant to which the Company has the right to cause the sole
stockholder of the Optometry Practice to sell all of the outstanding capital
stock of the Optometry Practice to a designee of the Company at any time for a
nominal purchase price.
SERVICES PROVIDED BY THE OPTOMETRY PRACTICE. Similar to dental problems,
ocular problems are commonly ignored by residents of LTCFs due to the
inconvenience and discomfort associated with visiting an ophthalmologist,
optometrist or optician. Cataracts, macular degeneration, diabetic retinopathy
and glaucoma are the most sight-threatening ocular disorders associated with
aging and, due to their gradual development, they can go unrecognized for some
time. The Optometry Practice strives to prevent the neglect of ocular
infirmities by providing a comprehensive eye examination clinic to residents of
LTCFs which have contracted with the Optometry Practice to receive eye care
services, including a portable microscope, an indirect opthalmoscope for viewing
the back of the eye, a trial lens set especially adapted for elderly patients, a
Tono-Pen-TM- for precision glaucoma testing and a wide selection of eyeglass
frames. With such equipment, Providers employed by the Optometry Practice have
the capacity to conduct comprehensive eye exams and determine the appropriate
prescriptions for the residents of LTCFs which
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<PAGE>
have contracted to receive optometry services. The Optometry Practice and
HealthDrive Michigan Corporation provide the following services on-site:
- Glaucoma and overall eye health testing
- Vision testing using trial lenses especially
adapted for elderly patients
- Coordination of eyeglass fabrication, repair and
engraving
- Provision of low-vision aids for
partially-sighted individuals
- Emergency care
As of May 15, 1998, the Optometry Practice provided optometry services to
residents of 678 LTCFs in Massachusetts, Connecticut, Pennsylvania, Wisconsin,
Florida, Rhode Island, New Jersey, Ohio, New Hampshire and New York.
THE PODIATRY PRACTICE
Mary C. Manesis, D.P.M., P.C., the Podiatry Practice, is a Massachusetts
professional corporation that was formed by the Company in 1992. The sole
stockholder of the Podiatry Practice is Mary C. Manesis, D.P.M. The Podiatry
Practice is party to an Operating Agreement with the Company and the Company,
the Podiatry Practice and Mary C. Manesis, D.P.M., are parties to an Option
Agreement pursuant to which the Company has the right to cause the sole
stockholder of the Podiatry Practice to sell all of the outstanding capital
stock of the Podiatry Practice to a designee of the Company at any time for a
nominal purchase price.
SERVICES PROVIDED BY THE PODIATRY PRACTICE. Timely attention to various
conditions common to the elderly, including hammer toes, ulcers, calluses and
improperly fitted shoes, can help prevent ambulatory residents of LTCFs from
becoming wheelchair bound or bedridden. Especially for diabetic residents and
frail elderly residents, podiatric treatment is essential to prevent limb and
life-threatening consequences of untreated skin irritations. The Podiatry
Practice and HealthDrive Michigan Corporation provide the following services
on-site:
- Comprehensive evaluations
- Nail trimming, reduction, and debridement
- Treatment of corns, calluses and ulcers
- Wound care management with close follow-up
- Emergency care
As of May 15, 1998, the Podiatry Practice provided podiatry services to
residents of 325 LTCFs in Massachusetts, Connecticut, Pennsylvania, Wisconsin,
Florida, Rhode Island, New Jersey and New Hampshire.
THE AUDIOLOGY AND PRIMARY CARE PRACTICE
Steven S. Charlap, M.D., P.C., the Audiology and Primary Care Practice, is a
Massachusetts professional corporation that was formed by the Company in 1989.
The sole stockholder of the Audiology and Primary Care Practice is Steven S.
Charlap, M.D., the Chairman of the Board of Directors, Chief Executive Officer
and President of the Company and one of its founders. The Audiology and Primary
Care Practice is party to an Operating Agreement with the Company and the
Company, the Audiology and Primary Care Practice and Steven S. Charlap M.D. are
parties to an Option Agreement pursuant to which the Company has the right to
cause the sole stockholder of the Audiology and Primary Care Practice to sell
57
<PAGE>
all of the outstanding capital stock of the Audiology and Primary Care Practice
to a designee of the Company at any time for a nominal purchase price.
SERVICES PROVIDED BY THE AUDIOLOGY AND PRIMARY CARE PRACTICE. As people
age, the incidence of presbycusis, a form of hearing loss due to wear and tear
or deterioration within the ear, naturally increases, but is often overlooked or
ignored. Misunderstandings resulting from hearing loss can lead to social
isolation, may even be mistaken for dementia, and can potentially lead to
dependence on others for daily activities. An important part of the early
recognition and treatment of otologic conditions is a hearing evaluation. The
Audiology and Primary Care Practice strives to minimize the effects of hearing
loss. The Providers employed by the Audiology and Primary Care Practice utilize
the form of speech evaluation known as pure tone and speech audiometry and give
special attention to their patients' ability to hear and understand normal
conversation speech. The Audiology and Primary Care Practice provides the
following services on-site:
- Comprehensive evaluations including Audiometry and
Tympanometry
- Otoscopy
- Cerumen management
- Hearing aid fitting and dispensing
As of May 15, 1998, the Audiology and Primary Care Practice provided
audiology services to residents of 333 LTCFs in Massachusetts, Connecticut,
Pennsylvania, Wisconsin, Rhode Island, New Jersey and New Hampshire.
In December 1996, the Audiology and Primary Care Practice hired a
geriatrician who has secured five medical directorships at LTCFs under Service
Agreements with one or more of the Medical and Dental Practices, has been
contracted to serve as acting director of the nursing home program for a local
hospital system, and is currently the primary care physician for patients in
seven LTCFs.
HEALTHDRIVE MICHIGAN CORPORATION
HealthDrive Michigan Corporation is a Michigan not-for-profit taxable
corporation that was formed by the Company in 1996. The sole stockholder of
HealthDrive Michigan Corporation is Steven S. Charlap, M.D., the Chairman of the
Board of Directors, Chief Executive Officer and President of the Company and one
of its founders. HealthDrive Michigan Corporation is a party to an Operating
Agreement with the Company and the Company, HealthDrive Michigan Corporation and
Steven S. Charlap, M.D. are parties to an Option Agreement pursuant to which the
Company has the right to cause the sole stockholder of HealthDrive Michigan
Corporation to sell all of the outstanding capital stock of HealthDrive Michigan
Corporation to a designee of the Company at any time for a nominal purchase
price.
HealthDrive Michigan Corporation practices three of the four specialty
health care services coordinated by the Company. As of May 15, 1998, HealthDrive
Michigan Corporation provided dentistry, optometry, and podiatry services to
residents of 59 LTCFs in Michigan.
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<PAGE>
HEALTH CARE SERVICE PROVIDERS AND COMPANY EMPLOYEES
As of May 15, 1998, the Medical and Dental Practices employed 95 Providers.
The following table sets forth the number of Providers by Practice and state or
region.
<TABLE>
<CAPTION>
PRACTICE(1) PROVIDERS MASSACHUSETTS(2) PENNSYLVANIA(3) CONNECTICUT(4) WISCONSIN
- ----------------------- -------------------- ------------------- ------------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Dentistry Practice Dentists............ 13 7 4 1
Dental Hygienists... 8 0 2 0
Optometry Practice Optometrists........ 9 4 4 2
Opticians........... 2 0 0 0
Podiatry Practice Podiatrists......... 8 3 4 4
Audiology/Primary Audiologists........ 6 2 1 0
Care Practice Primary Care........ 1 0 0 0
--- --- --- ---
Total.................. 47 16 15 7
--- --- --- ---
--- --- --- ---
<CAPTION>
PRACTICE(1) FLORIDA OHIO MICHIGAN TOTAL
- ----------------------- ----------- ----- ------------- -----
<S> <C> <C> <C> <C>
Dentistry Practice 1 0 1 27
0 0 0 10
Optometry Practice 2 1 2 24
0 0 0 2
Podiatry Practice 2 0 1 22
Audiology/Primary 0 0 0 9
Care Practice 0 0 0 1
--- --- --- ---
Total.................. 5 1 4 95
--- --- --- ---
--- --- --- ---
</TABLE>
- ------------------------
(1) HealthDrive Michigan Corporation employs providers specializing in three of
the Medical and Dental Practices' four major specialties -- optometry,
dentistry, and podiatry.
(2) Includes New Hampshire and Rhode Island.
(3) Includes New Jersey.
(4) Includes New York.
As of May 15, 1998, the Company employed an additional 106 employees, of
whom 5 may be characterized as executive staff, and 101 may be characterized as
non-executive administrative staff. None of the employees of the Company or the
Medical and Dental Practices are covered under a union collective bargaining
agreement. The Company considers the relationships with its employees and the
employees of the Medical and Dental Practices to be good.
NON-COMPETITION AGREEMENTS. As a condition of employment by the Company or
a Practice, all employees, including Providers, are required to enter into
Secrecy and Non-Compete Agreements (the "Non-Compete Agreements"). Generally,
the Secrecy and Non-Compete Agreements contain certain provisions with respect
to: (i) confidentiality; (ii) the assignment of inventions, discoveries, methods
or other developments made by the employee while employed by the Company or a
Practice; (iii) the ownership of customer lists and other proprietary
information; and (iv) non-competition. The covenant not to compete generally
restricts the employee's ability to compete during the term of his or her
employment and for a period of eighteen months thereafter, in the coordination
or provision of dental, medical or ancillary health care services at corporate
and institutional sites in any state in which the Medical and Dental Practices
provide services. It also restricts solicitation of employees and customers of
the Company and the Medical and Dental Practices during such period.
RELATIONSHIP BETWEEN THE COMPANY AND THE PRACTICES
OPERATING AGREEMENTS WITH THE MEDICAL AND DENTAL PRACTICES. The Company has
entered into separate long-term exclusive Operating Agreements with each of the
Medical and Dental Practices. Pursuant to the Operating Agreements, the Company
provides certain services related to the administration of the health care
services provided by the Medical and Dental Practices, licenses the use of the
service mark "HealthDrive," and extends credit to the Medical and Dental
Practices. In exchange for such services, the license of the service mark to the
Practice, and the extension of credit, the Medical and Dental Practices pay the
Company the Compensation Amount. The Compensation Amount with respect to each
Practice is equal to all revenue earned by each Practice minus the expenses
incurred by each Practice (primarily compensation and benefits, bad debt
expense, insurance costs and interest on the loans from the Company to such
Practice), adjusted to give effect to certain tax-related items. However, the
Compensation Amount may not exceed the fair market value of the services
provided by the Company under the Operating Agreement. The Medical and Dental
Practices are entitled, under the terms of the various Operating Agreements, to
challenge the calculation of any Compensation Amount within the thirty day
period after the month for which it is calculated. In the event of such a
challenge, the final determination of the fair
59
<PAGE>
market value of the services is delegated to a committee of three persons of
which one is nominated by the Company, one is nominated by the Medical and
Dental Practice that is challenging the calculation, and the final person is
nominated by each of the two other persons. The primary factors to be considered
by this committee include the value of all of the services provided by the
Company to the Practice taken as a whole during the period, the potential impact
on the Practice of a discontinuation of the services provided by the Company,
and the fees charged by other similarly situated companies to similarly situated
medical or dental practices in the Company's industry. In the event that the
Practice does not deliver a notice challenging the calculation of the
Compensation Amount within the specified 30-day period, the Compensation Amount
is deemed for all purposes of the Operating Agreement to have not exceeded the
fair market value of the services provided by the Company for such month.
The Medical and Dental Practices receive the following services exclusively
from the Company under the Operating Agreements: (i) ordering and purchasing of
inventory and supplies ordinarily required by the Medical and Dental Practices;
(ii) performance of bookkeeping, accounting and payroll functions for the
Medical and Dental Practices; (iii) administration of the Medical and Dental
Practices' benefit plans; and (iv) processing of claims and collection of fees
on behalf of the Medical and Dental Practices.
The Company also advanced funds to the Medical and Dental Practices, from
time to time, to fund working capital requirements, to the extent it has deemed
such loans commercially reasonable. These amounts, to the extent not repaid
during a particular month, are added to the principal amount of the certain
Intercompany Balances maintained by the Medical and Dental Practices with the
Company. These Intercompany Balances were generated for the most part in
connection with the Compensation Amounts due under the respective Operating
Agreements. These Intercompany Balances are payable upon thirty days written
notice, and bear interest at a rate determined by the Company not to exceed the
prime rate plus five percent. The Medical and Dental Practices are required to
use their best efforts to pay the outstanding principal balance of the
Intercompany Balances and accrued interest outstanding from time to time and
payments are generally made on the Intercompany Balances no less frequently than
on a monthly basis. Capital advances are made to a Practice by the Company when,
in the judgment of management of the Company, funds are required by the Practice
to fund operating expenses (including the payment of Provider compensation and
employee benefits) and make necessary capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions."
Under the Operating Agreements, the delivery of medical, dental or ancillary
health care services is supervised, directed and controlled, and all final
determinations with respect thereto are made, exclusively by the Medical and
Dental Practices and the Providers, including: (i) employment of Providers; (ii)
supervision and direction of Providers, including assignment of patients and
peer review; (iii) determination of the hospital supplying Providers when
applicable; (iv) maintenance of patient records; (v) establishment of policies
and procedures with respect to patient acceptance; and (vi) establishment of
hours of operation, scope of services provided and fees for services.
The Company expressly disclaims any control, direct or indirect, over the
delivery of medical, dental or ancillary health care services. Other obligations
of the Medical and Dental Practices under the Operating Agreements include
maintaining adequate professional liability insurance, complying with all
applicable rules and regulations and ensuring quality of care. The Medical and
Dental Practices have exclusive authority to enter into agreements relating to
the provision of medical, dental and ancillary health care services, subject to
the provision of thirty days' notice to the Company.
In order to ensure the quality of care provided by the Medical and Dental
Practices, the Operating Agreements permit the Medical and Dental Practices to
employ only fully licensed Providers and prohibit the Medical and Dental
Practices from entering into fixed term agreements with Providers without the
consent of the Company. In addition, in order to protect the economic viability
of each Practice, the Operating Agreements require each Practice to only employ
Providers who have entered into Non-
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Compete Agreements and to pay compensation and benefits to Providers not in
excess of the fair market value of their services. Finally, in order to ensure
compliance with state and federal regulations, the Operating Agreements provide
as follows: (i) the Medical and Dental Practices, their affiliated Providers,
and the Company have no obligation to refer patients to each other or to
affiliates of each other and none of the foregoing have an obligation to refer
participants to the LTCFs; (ii) the Medical and Dental Practices must maintain
systems and procedures necessary to prevent overutilization of services; (iii)
the Company must maintain systems and procedures necessary to prevent billing
practices that unlawfully promote maximization of revenue provided that the
Company is not liable for billing practices by the Medical and Dental Practices
and Providers that unlawfully maximize revenues to the Medical and Dental
Practices or the Providers; (iv) the Company must provide information required
under applicable law upon request from the U.S. Department of Health and Human
Services and the U.S. Comptroller General; and (v) the Medical and Dental
Practices are prohibited from, and must use their best efforts to prevent
Providers from, rendering "designated health services" (as defined under
applicable law), or referring patients for "designated health services" to any
entity with respect to which a relationship proscribed under applicable law
exists.
The Operating Agreements have a 40-year term and may be terminated by either
party only in the event of breach by the other party or bankruptcy of the other
party. The Company has the right to terminate each Operating Agreement if the
applicable Practice at any time does not qualify as a professional corporation
or otherwise loses its authority to render medical or dental services or a
Provider's license to practice medicine or dentistry is revoked or threatened to
be revoked.
Pursuant to the Operating Agreements, the Medical and Dental Practices must
indemnify the Company for damages resulting from negligent or intentional acts
by the Medical and Dental Practices or the Providers and any breach of the
Operating Agreements by the Medical and Dental Practices.
The Operating Agreements contain provisions protecting the Company's
confidential and proprietary information, including standardized business
systems, procedures and forms provided to the Medical and Dental Practices. They
also contain non-competition and non-solicitation provisions which prevent each
Practice from competing with the Company or soliciting the employees, suppliers
or customers of the Company or the other Medical and Dental Practices. In
addition, pursuant to the Operating Agreements, each Practice must require the
Providers employed by it to execute an agreement to comply with the non-
disclosure provisions contained in the Operating Agreements and a
non-competition and non-solicitation agreement acceptable to the Company.
The Compensation Amount is determined monthly based on the financial
statements for the Medical and Dental Practices for the preceding month. The
amount payable to the Company is added to outstanding principal balance of the
Intercompany Balance which the Medical and Dental Practices are required to use
their best efforts to pay from time to time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OPTION AGREEMENTS WITH THE STOCKHOLDER OF EACH PRACTICE. The Company is
party to an Option Agreement with each of the Medical and Dental Practices and
their respective sole individual stockholders that permits the Company to cause
such stockholders to sell all of the outstanding capital stock of the Medical
and Dental Practice of which they are stockholders to a designee of the Company
for a nominal price. The options granted by the Option Agreements (the
"Options") may be exercised by the Company at any time and the Option Agreements
provide that the Company may cause the applicable Medical and Dental Practice
(and any new stockholder of such Practice to whom the capital stock is
transferred) to enter into an identical Option Agreement after an exercise of
the Option. The exercise price for each Option is $50.00. Under the terms of the
Option Agreements, unless and until the Company exercises its option to cause
the sole stockholder of a particular Practice to transfer his shares in such
Practice to a new owner, the sole stockholder is prohibited from transferring or
assigning such shares in any manner. In addition, pursuant to each Option
Agreement the holder of the capital stock of the Practice may cause the
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Company to designate an individual to purchase all of the capital stock of the
Practice for an aggregate purchase price of $50.00 upon two years advance
written notice. The Option Agreements each have a term of forty years.
COMPETITION
No single entity or health care service provider competes with the Company
or the Medical and Dental Practices in all states and in all specialties.
However, Solo Providers and regional entities offering single-specialty health
care services or multiple specialty health care services compete with the
Company and the Medical and Dental Practices in specific states. SunAlliance, a
division of Sun Healthcare Group, a LTCF operator, has recently begun to provide
a number of health care services to LTCFs on-site in Connecticut and
Massachusetts. The Company believes that in connection with SunAlliance's
entrance into this market in 1997, 21 LTCFs operated by Sun Healthcare Group
failed to renew one or more Service Agreements that represented approximately
$482,000 of the Company's revenue during Fiscal 1996. The Company believes that
SunAlliance is the primary competitor of the Company and the Medical and Dental
Practices in Massachusetts, where 46.2% of the revenue of the Company and the
Medical and Dental Practices was generated during 1997.
GOVERNMENT REGULATION
The practice of medicine and dentistry and the delivery of ancillary health
care services are regulated at both the state and federal levels, and the
regulation of health care related companies is increasing in scope and
complexity. The Company and the Medical and Dental Practices have not received,
and the Underwriters will not be receiving in connection with the Offering, a
legal opinion from counsel or any federal or state judicial or regulatory
authority that the operations of the Company and the Medical and Dental
Practices and the relationships among the Company, the Medical and Dental
Practices, the Providers and LTCFs do not violate federal and state health care
laws and regulations. Furthermore, such laws are rapidly evolving and subject to
interpretation, and as the Company expands into new states, it will become
subject to additional laws and regulations. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
Medical and Dental Practices to operate in compliance with applicable health
care laws and regulations at the state and federal levels.
FEDERAL REGULATION
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Certain provisions of the Social Security Act,
commonly referred to as the "anti-kickback provisions," prohibit, subject to
certain safe harbors, the payment, offer, solicitation or receipt of any form of
remuneration (including any kickback, bribe or rebate), direct or indirect, in
return for, or in order to induce: (i) the referral of an individual for an item
or service; (ii) the furnishing or arranging to furnish items or services; or
(iii) the purchase, lease or order or the arrangement or recommendation of a
purchase, lease or order of any item or service which is reimbursable under
Medicare or Medicaid. To comply with the Anti-kickback Amendments, the Medical
and Dental Practices do not refer patients to each other and the LTCFs receive
no remuneration from the Company or the Medical and Dental Practices.
Significant prohibitions against physician self-referrals for services
covered by Medicare were enacted, subject to certain exceptions, by Congress
under OBRA of 1993. These prohibitions, commonly known as "Stark II," amended
prior physician self-referral legislation known as "Stark I" (which applied only
to clinical laboratory referrals) by dramatically enlarging the list of services
and investment interests to which the self-referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits a physician or a member of his or
her immediate family from referring Medicare or Medicaid patients to an entity
providing "designated health services" with which any such physician or an
immediate family member of any such physician has a financial relationship or
compensation arrangement or in which any such physician or an
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immediate family member of any such physician has an ownership or investment
interest. "Designated health services" include, among other things, clinical
laboratory services, radiology and diagnostic services, radiation therapy
services, durable medical equipment, physical and occupational therapy services,
parental and enteral nutrients, certain equipment and supplies, prosthetics,
orthotics, outpatient prescription drugs, home health services and inpatient and
outpatient hospital services. Stark II prohibitions apply to referrals within
the physician's own group practice (unless such practice satisfies the "group
practice" definition) and referrals in connection with the physician's
employment arrangements with a practice (unless the arrangement satisfies the
employment exception). Stark II also prohibits billing the Medicare or Medicaid
programs for services rendered following prohibited referrals. Noncompliance
with, or violation of Stark II can result in exclusion from the Medicare and
Medicaid programs and civil and criminal penalties. The Company does not believe
that the Medical and Dental Practices provide "designated health services."
Federal regulations promulgated in 1996 under OBRA of 1990 also govern
physician incentive plans associated with certain managed care organizations
that offer risk-based Medicare and Medicaid contracts. Under the federal False
Claims Act, criminal, civil and administrative penalties may be imposed on
health care providers who file or participate in the filing of false claims for
reimbursement for the delivery of health care services, including claims filed
under Medicare, Medicaid and insurance programs. Penalties that previously were
sought primarily in instances of claims filed for services not actually
provided, in whole or in part, or provided by unauthorized providers, are now
being sought in an increasingly broader range of circumstances, including
claiming reimbursement for services that do not comply with quality and other
applicable standards of care. The Medical and Dental Practices have procedures
in place to oversee quality of care, and to assure maintenance of the required
level of quality and standards of care.
The Company may also be subject to Medicare rules governing billing agents.
These rules prohibit a billing agent from receiving a fee based on a percentage
of Medicare collections and may require Medicare payments for the services of
physicians to be made directly to the physician providing the services or to a
lock box account opened in the name of the applicable practice. The Company fees
are not related to Medicare payments and Medicare and Medicaid payments are
currently deposited into a joint account in the name of the Company and the
applicable Medical and Dental Practice.
Revenues of the Medical and Dental Practices received from Government Payors
and Third Party Payors are subject to significant regulation. Some payors limit
the extent to which physicians, dentists and ancillary health care service
providers may assign their revenues from services rendered to beneficiaries.
Under these "reassignment" rules, the Company and the Medical and Dental
Practices may not be able to require physicians, dentists and ancillary health
care service providers to assign their Government Payor and Third Party Payor
revenues unless certain conditions are met, such as acceptance by physicians,
dentists or ancillary health care service providers of assignment of the payor
receivable from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by ancillary service providers to those
services which were provided "incident to" a physician's or dentist's services.
Under these "incident to" rules, the Company and the Medical and Dental
Practices may not be able to receive reimbursement for services rendered by
certain ancillary health care service providers unless certain conditions are
met, such as requirements that services must be of a type commonly furnished in
a physician's or dentist's office and must be rendered under the physician's or
dentist's direct supervision and that the ancillary service providers must be
employed by the applicable Medical and Dental Practice.
Because the Medical and Dental Practices are separate legal entities, they
may be considered to be competitors subject to federal antitrust laws which
generally prohibit anti-competitive conduct involving price fixing, concerted
refusals to deal and division of market. More particularly, federal antitrust
laws have been interpreted to prohibit, among other things, joint negotiations
by competitors of price terms in
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absence of financial risk that is shared among the competitors. The Company
intends to comply with federal antitrust laws.
STATE REGULATION
The laws of many states, including Connecticut, Massachusetts, and
Pennsylvania, states in which the Medical and Dental Practices generated 80.5%
of their gross revenue for Fiscal 1997, prohibit business corporations, such as
the Company, from practicing medicine or dentistry and employing physicians,
dentists or ancillary health care service providers to practice medicine,
dentistry or perform ancillary health care services, respectively. Under the
Operating Agreements, the Medical and Dental Practices and Providers retain
exclusive control over the delivery of health care services. However, many
aspects of the Company's operations have not been subject to formal state or
federal regulatory interpretation. Furthermore, the laws and regulations
governing the corporate practice of medicine have generally been subject to
limited judicial and regulatory interpretation in most states, including
Connecticut, Massachusetts, and Pennsylvania, and are subject to change.
In addition, Massachusetts and Pennsylvania, states in which the Medical and
Dental Practices generated 61.4% of their gross revenue for Fiscal 1997, have
enacted fraud and abuse laws, and Connecticut and Massachusetts have enacted
false claims/quality of care laws. Such laws are similar to the federal fraud
and abuse and false claims/quality of care laws, and in certain cases, apply to
referrals for items or services reimbursable by any Third Party Payor, not just
Government Payors. Such laws impose substantial penalties, including civil and
criminal fines and imprisonment, on physicians, dentists and ancillary health
care service providers who fraudulently or wrongfully bill Third Party Payors
and Government Payors or pay or receive remuneration for referrals for medical
and dental services. Many states have also enacted antitrust laws analogous to
federal antitrust laws.
Massachusetts, Connecticut and Pennsylvania, states in which the Medical and
Dental Practices generated 80.5% of their gross revenue for Fiscal 1997, also
prohibit "fee-splitting" arrangements between physicians, dentists or ancillary
health care service providers and any party except other physicians, dentists or
ancillary health care service providers, respectively, within the same
professional corporation or other practice entity. The Medical and Dental
Practices' do not refer patients to each other and the Service Agreements
between the Medical and Dental Practices and the LTCFs do not provide for the
payment of remuneration to the LTCFs.
Operation Restore Trust, initiated by the U.S. Department of Health and
Human Services in 1995 and using an interdisciplinary project team of federal
and state investigators, targets Medicare and Medicaid program fraud, abuse and
misuse by nursing home providers and other providers. Activities include
financial audits by the U.S. Office of the Inspector General and other
governmental authorities, civil and criminal investigations and prosecutions,
sanctions and recovery actions, issuance of Special Fraud Alerts (most recently
relating to hospice care and nursing homes), and encouragement of voluntary
disclosure of violations. Initially affecting five states, Operation Restore
Trust now affects many more including most recently Massachusetts and other
states in which the Company operates.
In order to enhance the efforts of the Company to avoid even inadvertent
violations of antifraud and abuse, anti-kickback, and false claims laws, the
Company is in the process of adopting a formal corporate compliance program
designed to prevent violations of such laws in connection with the business of
the Company. It is expected that a full-time compliance officer will be
appointed to implement, oversee and monitor the Company's compliance program.
INSURANCE
The Company maintains general liability insurance for itself and the
Operating Agreements provide that the Medical and Dental Practices must maintain
comprehensive professional liability insurance in the amount of $1.0 million per
claim and with aggregate policy limits that are not less than $3.0 million. The
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Medical and Dental Practices are responsible for all liabilities in excess of
the limits of such insurance policies. The Company also maintains key person
life insurance, under which it is the beneficiary, in the amounts of $1.5
million on Steven S. Charlap, M.D. and $500,000 on Alec H. Jaret, D.M.D.
FACILITIES
The Company's corporate headquarters are located in Newton, Massachusetts.
The leases for the Company's corporate headquarters and its Newton,
Massachusetts regional office expired on June 30, 1998 and the Company is
currently a hold-over tenant in each location. The Company is currently
negotiating a one-year extension of its lease for its corporate headquarters,
and a three-year extension of its lease for its Newton regional office.
The regional office located in Newton, Massachusetts services Massachusetts,
New Hampshire and Rhode Island; the regional office located in Meriden,
Connecticut services Connecticut and New York; the regional office located in
Upper Southampton Township, Pennsylvania services Pennsylvania and New Jersey;
and the regional office in Brookfield, Wisconsin services Wisconsin. A central
office located at the Company's corporate headquarters services Florida,
Michigan and Ohio.
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE EXPIRATION DATE MONTHLY RENT
- --------------------------------------------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
Corporate Headquarters......................................... 3,651 6/30/98(1) (1)
Newton, Massachusetts.......................................... 5,300 6/30/98(1)
Meriden, Connecticut........................................... 3,200 12/5/99(2) 2,400
Upper Southampton Township, Pennsylvania....................... 1,540 9/25/99(2) 1,681(3)
Brookfield, Wisconsin.......................................... 1,600 7/31/98(2) 1,355(4)
</TABLE>
- ------------------------------
The Company is currently negotiating an extension of this lease, the terms
of which have not yet been determined.
(4) Subject to increase in the event of increases in property taxes and special
assessments.
(2) Subject to Company's option to renew.
(3) Includes monthly "Base Operating Expense Charge" equal to $494.08.
LEGAL PROCEEDINGS
The Company knows of no material pending, or threatened, legal proceedings
to which it is a party or to which any of its property is the subject.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their ages and
positions as of May 15, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Steven S. Charlap, M.D. (1).............. 39 Chairman of the Board of Directors, Chief Executive Officer and
President (2)
Michael R. Kaplan........................ 39 Chief Financial Officer and Vice President of Finance
Alec H. Jaret, D.M.D..................... 42 Director (3)
Rory Kallfelz............................ 34 Vice President of Management Information Systems, Reimbursement
and Regulatory Affairs
Laura Sullivan........................... 32 Vice President of Operations, Mid-West/North-Atlantic Region
Robert J. Lucci.......................... 29 Vice President of Operations, Massachusetts and Connecticut
Susan S. Bailis (1)(4)................... 52 Director
Morgan Crowe (4)(5)...................... 54 Director
Robert G. Eccles, Ph.D................... 47 Director
L. Dennis Shapiro........................ 64 Director
Brian Fagan (1)(5)....................... 37 Director
James A. Pitts (1)(4)(6)................. 58 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee of the Board of Directors, effective upon
the consummation of the Offering.
(2) Dr. Charlap is also the President and sole equity holder of the Audiology
and Primary Care Practice, and the President and sole stockholder of
HealthDrive Michigan Corporation.
(3) Dr. Jaret is the President and sole equity holder of the Dental Practice.
(4) Member of Audit Committee of the Board of Directors, effective upon the
consummation of the Offering.
(5) Messrs. Crowe and Fagan are citizens of the Republic of Ireland, and not
citizens of the United States.
(6) Mr. Pitts has been nominated for election to the Board of Directors
effective upon consummation of the Offering.
Certain employees of the Medical and Dental Practices significant to the
Company's business and operations, their ages and positions as of May 15, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --------- ----------------------------------------------------------------
<S> <C> <C>
Gabriel H. Brandeis, M.D................. 44 Chief Medical Officer of Steven S. Charlap, M.D., P.C.,
the Audiology and Primary Care Practice
Jeffrey L. Morer, O.D.................... 38 President and sole Director of Jeffrey Morer, O.D., P.C.,
the Optometry Practice
</TABLE>
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STEVEN S. CHARLAP, M.D. is a founder of the Company and has served as its
Chairman of the Board of Directors, Chief Executive Officer and President since
its inception in 1989. Dr. Charlap has also served as President of the Audiology
and Primary Care Practice, since its inception. Prior to founding the Company,
Dr. Charlap was Director of Corporate Development at T Cell Sciences, a
biotechnology company. Dr. Charlap holds medical licenses in Indiana,
Massachusetts, Michigan, Ohio, and Wisconsin. Dr. Charlap received a M.D. from
New York University School of Medicine, completed two years of post-graduate
training in surgery at the Beth Israel Medical Center in New York City, and
received a B.A. from Yeshiva University and a M.B.A. from Harvard Business
School.
MICHAEL R. KAPLAN has served as Chief Financial Officer and Vice President
of Finance of the Company since June 1992, and was a director of the Company
from October 1989 to May 1992. From July 1989 through June 1992, Mr. Kaplan was
a Vice President of DCC Limited, a venture and development capital investment
firm based in Dublin, Ireland. Prior to joining DCC Limited, Mr. Kaplan spent
five years in public accounting, most recently with Arthur Andersen & Co., and
is a Certified Public Accountant. Mr. Kaplan received a B.S. from University of
Rhode Island and a M.B.A. from The Wharton School.
ALEC H. JARET, D.M.D. is a founder of the Company and has served as a
director of the Company since its inception. Dr. Jaret has also served as the
President of the Dental Practice, since its inception. Dr. Jaret currently holds
licenses to practice dentistry in Florida, Massachusetts, New Jersey, New York,
Ohio, Michigan, Pennsylvania and Wisconsin. Dr. Jaret received a B.A. from
Yeshiva University and a D.M.D. from Boston University Goldman School of
Dentistry.
RORY KALLFELZ was appointed the Vice President of Management Information
Systems, Reimbursement, and Regulatory Affairs of the Company in January 1998.
Since joining the Company in 1992, Mr. Kallfelz has served the Company in
various roles related to operations, management information systems,
reimbursement and regulatory affairs. Previously, from 1985 through January
1992, Mr. Kallfelz worked for Cardio Data Services, most recently as the
Operations Manager for the New England region. Mr. Kallfelz attended Boston
University.
LAURA SULLIVAN was appointed as the Mid-West/North-Atlantic Regional Vice
President of Operations of the Company in January 1998. Since joining the
Company in November 1996, Ms. Sullivan has served the Company in various roles
related to operations. From 1982 to 1996, Ms. Sullivan worked for Apria Home
Health Care, most recently as Regional Operations Manager. Ms. Sullivan received
a B.A. from the University of Connecticut.
ROBERT J. LUCCI was appointed the Northeast Regional Vice President of
Operations of the Company in January 1998. Since joining the Company in 1992,
Mr. Lucci has served as Expansion Manager for the Pennsylvania service centers
and the Michigan, Florida and Wisconsin operations and Customer Service Manager
for the Newton service center. Mr. Lucci holds a B.S. and a M.B.A. from Bentley
College.
SUSAN S. BAILIS has served as a director of the Company since January 1993.
Since November 1997, Ms. Bailis has served as President and Chief Executive
Officer of the A.D.S. Group, a subsidiary of Genesis Health Ventures, a company
engaged in the provision of elder care services. Previously, from December 1996
through October 1997, Ms. Bailis served as Senior Vice President of The
Multicare Companies, a company also engaged in the provision of elder care
services. Ms. Bailis received a B.A. from Brandeis University and a M.S. from
Simmons College.
MORGAN CROWE has served as a director of the Company since January 1993.
Since 1979, Mr. Crowe has served as Executive Director of DCC, plc, an equity
fund publicly traded in London and Dublin. In addition, since 1996, Mr. Crowe
has served as Managing Director of DCC Healthcare Ltd. Mr. Crowe received a
certificate from Blackrock College, received a degree in mechanical engineering
from Dublin Institute of Technology and received a M.B.A. from Trinity College,
Dublin University.
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ROBERT G. ECCLES, PH.D. has served as a director of the Company since March
1990. Since July 1993, Mr. Eccles has served as President of Advisory Capital
Partners, a business consulting firm. Previously, from July 1979 through June
1993, Dr. Eccles was a professor at Harvard Business School. Dr. Eccles received
a S.B. in Mathematics and a S.B. in Humanities/Social Science from Massachusetts
Institute of Technology, and an A.M. and Ph.D. in Sociology from Harvard
University.
L. DENNIS SHAPIRO has served as a director of the Company since May 1992.
Since 1978, Mr. Shapiro has served as Chairman of Lifeline Systems Inc., a
company engaged in the business of providing personal response services to the
elderly. From 1978 to 1988, Mr. Shapiro also served as President and Chief
Executive Officer of Lifeline Systems, Inc. Mr. Shapiro received a S.B. and a
S.M. from Massachusetts Institute of Technology.
BRIAN FAGAN has served as a director of the Company since August 1996. Since
March 1998, Mr. Fagan has served as Finance Director of Fannin Limited, and
since June 1996, Mr. Fagan has served as Executive Director and Secretary of DCC
Healthcare Ltd. Previously, from March 1992 through May 1996, Mr. Fagan served
as Finance Director of Emo Oil Ltd. Mr. Fagan is a fellow of the Institute of
Chartered Accountants. Mr. Fagan received a Bachelor of Commerce degree and a
diploma in professional accounting from the National University of Ireland.
JAMES A. PITTS, a nominee for Director, has served as Vice President,
Finance and Administration, of The Boston Foundation since 1996. The Boston
Foundation is one of the largest community foundations in the United States with
over $550 million under management. From 1992 to 1995, Mr. Pitts served as
Executive Vice President and Chief Financial Officer of Clean Harbors, Inc., a
publicly-traded environmental services firm. Mr. Pitts is a Certified Public
Accountant. Mr. Pitts received a B.B.A. from Niagara University and a M.B.A.
from the University of Connecticut.
GABRIEL H. BRANDEIS, M.D. has served as the Chief Medical Officer of the
Audiology and Primary Care Practice since December 1996. From 1993 to 1996, Dr.
Brandeis was the Associate Chief of Staff for Geriatrics and Extended Care at
the Bedford Veterans Administration Medical Center, and an Assistant Professor
at Boston University School of Medicine. Dr. Brandeis is also a Certified
Nursing Home Medical Director. Dr. Brandeis received a M.D. from the Mount Sinai
School of Medicine, and completed a residency in Internal Medicine at
SUNY/Health Science Center at Syracuse, New York, and a Fellowship in Geriatric
Medicine at Harvard Medical School.
JEFFREY L. MORER, O.D., has served as the President of the Optometry
Practice since its inception. Dr. Morer holds licenses to practice optometry in
Florida, Massachusetts, Michigan, New York, Ohio, and Wisconsin. Dr. Morer
received a B.A. from Boston University and an O.D. from the New England College
of Optometry.
BOARD OF DIRECTORS AND COMMITTEES
All directors hold their positions until the annual meeting of stockholders
at which their respective successors are elected and qualified. Executive
officers of the Company are elected annually by the Board of Directors and serve
at the discretion of the Board of Directors or until their successors are duly
elected and qualified.
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is presently composed of seven
directors, with an eighth director (James A. Pitts) having been nominated for
election to the Board of Directors effective upon consummation of the Offering.
Following the Offering, the eight members of the Board of Directors will be
divided into three classes. Messrs. Fagan, Shapiro and Dr. Eccles will be in
Class I and their terms will expire at the annual meeting of stockholders to be
held in 1999. Ms. Bailis and Dr. Jaret will be in Class II and their terms will
expire at the annual meeting of stockholders to be held in 2000. Dr. Charlap,
Mr. Pitts and Mr. Crowe will be in Class III and their terms will expire at the
annual meeting of stockholders to be held in 2001.
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From and after the closing of the Offering, the Company shall maintain at
least two independent directors (directors who are not otherwise affiliated with
the Company) on the Board of Directors. Each of Ms. Susan Bailis, Dr. Robert
Eccles and Mr. L. Dennis Shapiro is currently an independent director of the
Company, and Mr. Pitts will also be an independent director of the Company.
The Board of Directors has established an Audit Committee and a Compensation
Committee, and appointed the respective members thereof, each effective upon the
closing of the Offering. The Audit Committee shall review the scope and results
of the annual audit of the Company's financial statements conducted by the
Company's independent accountants, the scope of other services provided by the
Company's independent accountants, proposed changes in the Company's financial
and accounting standards and principles, and the Company's policies and
procedures with respect to its internal accounting, auditing and financial
controls, and makes recommendations to the Board of Directors on the engagement
of the independent accountants, as well as other matters which may come before
it or as directed by the Board of Directors. The Compensation Committee shall
administer the Company's compensation programs, including the Stock Option Plan,
and perform such other duties as may from time to time be determined by the
Board of Directors. Dr. Charlap, Messrs. Fagan and Pitts and Ms. Bailis will be
the initial members of the Compensation Committee. The initial members of the
Audit Committee will be Messrs. Crowe and Pitts, and Ms. Bailis.
DIRECTOR COMPENSATION
Susan S. Bailis and L. Dennis Shapiro, two Directors of the Company who were
not employees or officers of the Company during its fiscal year ended December
31, 1997, received options to purchase 10,000 shares each under the Stock Option
Plan during such year. These options have a ten-year term from the date of
grant, vest in equal installments on each of the first four anniversaries of the
grant date, and are exercisable at a price of $4.00 per share, the fair market
value of a share of Common Stock on the date of grant. No other directors of the
Company received compensation for their services in such capacity during Fiscal
1997.
Under the Stock Option Plan, each member of the Board of Directors of the
Company (including any directors nominated for election by the Underwriter), who
is not an officer or employee of the Company, will receive an annual grant of
options to purchase up to 5,000 shares of Common Stock at an exercise price
equal to the fair market value of a share of Common Stock on the date of grant,
provided that no individual may receive more than five such grants and no
director who failed to attend 75.0% or more of the scheduled meetings of the
Board of Directors during the previous year will be entitled to receive these
grants. Each of these grants will become exercisable in equal installments over
four years from the date of grant, provided the director remains on the Board of
Directors of the Company, on each anniversary of the grant date during such
period. See "Management--Second Amended and Restated Stock Option Plan."
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
Steven S. Charlap, M.D., the Chairman of the Board of Directors, Chief Executive
Officer and President of the Company, and each other executive officer of the
Company (including certain executive officers of one or more of the Medical and
Dental Practices) that were paid a total salary and bonus for Fiscal 1997 that
exceeded $100,000 (collectively with Dr. Charlap, the "Named Executive
Officers"), for such period:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS NUMBER OF
ANNUAL COMPENSATION ----------------- SECURITIES
--------------------- OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY(1) BONUS(2) COMPENSATION OPTIONS
- ------------------------------------------------------------ ---------- --------- ----------------- ---------------
<S> <C> <C> <C> <C>
Steven S. Charlap, M.D...................................... $ 221,310 $ 13,481 * --
Chairman of the Board of Directors,
Chief Executive Officer and President
Michael R. Kaplan........................................... 120,000 552 * 5,000
Chief Financial Officer and
Vice President of Finance
Gabriel H. Brandeis, M.D.................................... 147,701 -- * --
Chief Medical Officer of
the Audiology and Primary Care Practice
Alec H. Jaret, D.M.D........................................ 142,123 845 * --
President of the Dental Practice
</TABLE>
- ------------------------
* Amount insufficient to be reportable under applicable rules of the
Commission.
(1) Salary includes amounts, if any, deferred pursuant to the Company's 401(k)
Plan.
(2) Bonus amounts represent amounts that were accrued for Fiscal 1997, but in
certain cases were not paid until 1998. Does not include a bonus in the
amount of $11,006 that was paid to Dr. Charlap during Fiscal 1997 with
respect to the Company's fiscal year ended December 31, 1996.
The aggregate cash compensation received by the Named Executive Officers
during Fiscal 1997 was $646,012, of which $355,343 was received by officers of
the Company.
The following table sets forth certain information with respect to grants of
stock options under the Stock Option Plan to Michael R. Kaplan, the only one of
the Named Executive Officers granted stock options during Fiscal 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
STOCK
PRICE
APPRECIATION
FOR
NUMBER OF PERCENT OF TOTAL OPTION
SECURITIES OPTIONS GRANTED EXERCISE TERM(2)
UNDERLYING TO EMPLOYEES IN PRICE PER EXPIRATION ---------
NAME: OPTIONS(1) FISCAL YEAR SHARE ($) DATE 5%
- ------------------------------------------------ ------------- --------------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Michael R. Kaplan............................... 5,000 5% $ 3.00 1/1/07 $ 9,433
<CAPTION>
NAME: 10%
- ------------------------------------------------ ---------
<S> <C>
Michael R. Kaplan............................... $ 23,906
</TABLE>
- ------------------------
(1) The options reported become exercisable in four equal annual installments
beginning on the first anniversary of the grant date, and have a maximum
term of 10 years from the date of grant, subject to earlier termination in
the event of the optionee's cessation of service with the Company. The
option is exercisable during the holder's lifetime only by the holder; it is
exercisable by the holder only while the holder is an employee of the
Company and for certain limited periods of time thereafter in the event of
termination of employment.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed appreciation rates of five percent and ten percent in
the fair market value of shares of Common Stock from the fair market value
on the date of grant, which rates are set by the Securities and Exchange
Commission
70
<PAGE>
and compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of option exercise prices,
but do not include deductions for taxes or other expenses associated with
the exercises. Actual gains, if any, are dependent on the performance of the
Common Stock and the date on which the option is exercised. There can be no
assurance that the amounts reflected will be achieved or will otherwise be
indicative of the actual amounts received, if any.
The following table sets forth information with respect to (i) the number of
unexercised options held by Michael R. Kaplan and Gabriel H. Brandeis, M.D., the
only Named Executive Officers who held stock options as of December 31, 1997 and
(ii) the value of any such unexercised in-the-money options (options for which
the fair market value of the Common Stock exceeds the exercise price) as of
December 31, 1997.
OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS AT OPTIONS AT
ACQUIRED ON REALIZED DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------------- ----------------- ------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Michael R. Kaplan...................... -- -- 110,000/25,000(2) $ 651,000/$137,500
Gabriel H. Brandeis, M.D............... -- -- 5,000/15,000(3) 22,500/67,500
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated on the basis of the
mid-point of the range specified on the cover of this prospectus, initial
public offering price of $7.50 per share, less the applicable exercise
price.
(2) Mr. Kaplan's options have a ten-year term from the date of grant, vest in
equal installments on each of the first four anniversaries of their
respective grant dates and are exercisable at a prices ranging from $1.38 to
$3.00, the fair market value of a share of Common Stock on the date of each
respective grant.
(3) Mr. Brandeis' options have a ten-year term from the date of grant, vest in
equal installments on each of the first four anniversaries of their
respective grant dates and are exercisable at a price of $3.00, the fair
market value of a share of Common Stock on the date of each respective
grant.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, effective as of the
consummation of the Offering, with each of Steven S. Charlap, M.D., the Chairman
of the Board of Directors, Chief Executive Officer and President of the Company,
and Michael R. Kaplan, the Chief Financial Officer and Vice President of Finance
of the Company. The initial term of Dr. Charlap's employment agreement will
expire on July 1, 2003, but will be extended for an additional five-year term
unless either Dr. Charlap or the Company provides notice of his or its intention
not to renew the contract by July 1, 2002. Dr. Charlap's employment agreement
provides for an annual base salary of $250,000 for the first year of the
contract, with such salary to be increased by a minimum of 5.0% per year
thereafter, and a cash bonus to be determined based on objectives established by
the Compensation Committee at the beginning of the applicable year, but subject
to a minimum bonus equal to 15.0% of Dr. Charlap's annual base salary and a
maximum bonus equal to 50% of such salary. In the event of Dr. Charlap's
termination other than by the Company for "cause" or by Dr. Charlap's
resignation without "reason" (as "cause" and "reason" are defined in the
employment agreement), Dr. Charlap will be paid a one-time severance payment
equal to a minimum of two times the sum of his then-current annual base salary
and the maximum bonus established for Dr. Charlap for such year. In the event of
a change of control of the Company (as defined in the Employment Agreement) Dr.
Charlap shall be entitled to resign and receive a one-time severance payment
equal to the sum of his then-current annual base salary and maximum bonus
established for such year. Under the terms of his employment agreement, Dr.
Charlap may not be terminated by the Company other than for "cause" without the
affirmative vote of two-thirds of the members of the Company's Board of
Directors.
The initial term of Michael R. Kaplan's employment agreement shall extend
through July 1, 2001, but will be extended for additional three-year terms
unless either the Company or Mr. Kaplan provides notice of its or his intention
not to renew the term of the agreement at least one year prior to the scheduled
termination. Mr. Kaplan's employment agreement provides for an initial annual
base salary of $130,000,
71
<PAGE>
with such salary to be increased by a minimum of 5.0% per year thereafter, and
eligibility to receive cash bonuses based on objectives established by the
Compensation Committee at the beginning of the year. In the event of Mr.
Kaplan's termination other than by the Company for "cause" or by Mr. Kaplan's
resignation without "reason" (as "cause" and "reason" are defined in the
employment agreement), Mr. Kaplan will be paid a one-time severance payment
equal to the sum of his then-current annual base salary and the maximum bonus
established for Mr. Kaplan for such year.
SECOND AMENDED AND RESTATED 1992 STOCK OPTION PLAN
The Stock Option Plan provides for the grant of options to purchase shares
of Common Stock to officers, employees and directors of the Company and to
certain eligible employees of the Medical and Dental Practices. Upon
consummation of the Offering, the maximum number of shares of Common Stock that
will be issued pursuant to the Stock Option Plan will be 750,000, of which
447,525 had been issued as of March 31, 1998. The Stock Option Plan was adopted
by the Board of Directors and approved by the stockholders of the Company on May
6, 1992. On December 26, 1997, the Stock Option Plan was amended and restated in
order to increase the number of shares of Common Stock available for issuance
upon the exercise of options granted thereunder to 505,916 shares. This
amendment and restatement was approved by the stockholders of the Company as of
June 25, 1997. The Stock Option Plan will be further amended upon consummation
of the Offering to increase the number of shares of Common Stock available for
issuance upon the exercise of options granted thereunder to 750,000, and to
provide for the annual formula grant of options ("Formula Grants") to purchase
5,000 shares of Common Stock to each non-employee Director of the Company (an
"Outside Director"). For a period of one year following the closing date of the
Offering, the Company will not issue options to purchase Common Stock equal in
the aggregate to greater than 15% of the outstanding shares of Common Stock on
the date of grant. The Stock Option Plan will expire on May 6, 2002 and no stock
options may be granted after May 5, 2002.
Prior to the Offering, the Stock Option Plan was administered by the Board
of Directors. After the consummation of the Offering, the Stock Option Plan will
be administered by the Compensation Committee which will initially be comprised
of Dr. Charlap and Messrs. Fagan and Pitts and Ms. Bailis. The Compensation
Committee will select participants and, in a manner consistent with the terms of
the Stock Option Plan, determine the number, duration, exercise price and
vesting period of the options to be granted and the other terms and conditions
of the option agreements. The Compensation Committee has the right to modify,
revise or terminate the Stock Option Plan at any time, provided that the
approval of a majority of the shares of Common Stock outstanding shall be
required to: (i) materially increase the benefits accruing to holders of
outstanding options; (ii) change the aggregate number of shares of Common Stock
issuable under options granted pursuant to the Stock Option Plan; or (iii)
change the class of persons eligible to receive options.
The Stock Option Plan provides for grants of stock options intended to
qualify for preferential tax treatment (the "Incentive Stock Options") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
non-statutory stock options ("Non-Statutory Options") that do not qualify for
such treatment. All employees of the Company and certain employees of the
Medical and Dental Practices are eligible for stock options under the Plan in
amounts and at prices determined by the Compensation Committee, provided that
Incentive Stock Options may be granted only to employees of the Company, and the
exercise price of each Incentive Stock Option will not be less than the fair
market value of the Common Stock on the date of grant, or not less than 110.0%
of the fair market value of the Common Stock on the grant date if the optionee
owns, directly or indirectly, more than 10.0% of the total combined voting power
of all classes of the Company's capital stock. Non-Statutory Options will be
granted at no less than 85% of the fair market value of the Common Stock on the
date of grant. With respect to Incentive Stock Options, the fair market value of
the Common Stock underlying options held by any one holder which become
exercisable in one year cannot exceed $100,000. To the extent provided in the
option
72
<PAGE>
agreement, payment of the exercise price may be made in cash, shares of Common
Stock or by a promissory note.
Under the Stock Option Plan, the Compensation Committee may establish with
respect to each option granted such vesting provisions as it determines to be
appropriate or advisable. In general, options vest in four equal increments over
four years and have a ten-year term, provided that, if the holder owns, directly
or indirectly, more than 10.0% of the total combined voting power of all classes
of the Company's capital stock, such options have a five-year term. Other than
in the case of death or disability of the holder, or a three-month extension
contained in the option agreement, unexercised options terminate upon the
termination of a holder's relationship with the Company. Shares of Common Stock
covered by unexercised options which are no longer exercisable become available
for issuance under new options. Options granted under the Stock Option Plan are
not transferable and may be exercised only by the holder, his or her executors
or administrators, or any persons to whom his or her option may be transferred
by will or the laws of descent and distribution.
Commencing on February 15, 1999, each Outside Director in office on February
15 of such year will receive a Formula Grant of options to purchase 5,000 shares
of Common Stock at the fair market value of the Common Stock on the date of such
Formula Grant, provided that no individual may receive more than five such
grants, and no director who failed to attend 75.0% or more of the scheduled
meetings of the Board of Directors for the previous year will receive a Formula
Grant. Each such option shall vest in four equal annual installments on each of
the first four anniversaries of the grant date and shall expire on the tenth
anniversary of the date of grant. Options granted pursuant to Formula Grants to
Outside Directors who are not reelected or are removed from the Board of
Directors are exercisable thereafter only until the earlier of (i) the
expiration date for such options specified in the applicable option award
agreement, or (ii) ninety days after such director's term of service expires, in
the case of non-reelection, or is terminated, in the case of removal. Options
granted pursuant to Formula Grants are not intended to be Incentive Stock
Options.
The Stock Option Plan includes a provision adjusting the number of shares of
Common Stock available for grant, the number of shares of Common Stock subject
to outstanding awards thereunder and the per share exercise price thereof in the
event of any stock dividend, stock split, recapitalization or other similar
event. In the event of a merger, pursuant to which the Company is not the
surviving corporation, consolidation, liquidation or sale, holders of
outstanding options shall generally be entitled to receive, upon exercise of
outstanding options, the shares of stock or other securities to which they would
have been entitled had they exercised the option prior to such merger,
consolidation, liquidation or sale. Furthermore, the Compensation Committee may,
in its discretion, accelerate the exercisability of unexercisable options or
cancel such options upon the effective date of a merger, consolidation,
liquidation or sale.
As of May 15, 1998, subject to shareholder approval, an aggregate of 738,875
shares of Common Stock were reserved for issuance upon the exercise of stock
options that have been or may be granted under the Stock Option Plan, and
options to purchase an additional 309,250 shares were available for grant
thereunder. As of May 15, 1998, options to purchase 235,750 shares of Common
Stock granted under the Stock Option Plan were exercisable at prices ranging
from $1.00 to $3.00 per share.
CERTAIN TRANSACTIONS
The Company's Chairman of the Board, Chief Executive Officer and President,
Steven S. Charlap, M.D., is the sole equity holder of each of the Audiology and
Primary Care Practice and HealthDrive Michigan Corporation. Alec H. Jaret,
D.M.D., a Director of the Company, is the sole equity holder of the Dental
Practice. As a result of Dr. Charlap's and Dr. Jaret's ownership of these
Medical and Dental Practices conflicts of interest in certain matters including
but not limited to matters related to the Operating Agreements between the
Company and such entities, may arise from time to time. Nevertheless, the
Company believes that the terms and conditions of the Operating Agreements
between the Company
73
<PAGE>
and each of the Medical and Dental Practices are fair and no less favorable to
the Company than the Company could obtain from third parties unaffiliated with
the Company.
The following table sets forth the aggregate Compensation Amounts earned by
the Company for the services provided by the Company to each of the Practices
during Fiscal 1997, Fiscal 1996 and the Company's fiscal year ended December 31,
1995, respectively.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Dental Practice............................................... $ 1,672,643 $ 1,778,885 $ 1,842,819
Optometry Practice............................................ 1,626,574 2,110,211 1,903,373
Podiatry Practice............................................. 898,730 1,252,534 1,939,358
Audiology and Primary Care Practice........................... 79,578 354,080 337,027
HealthDrive Michigan Corporation.............................. 0 1,000 266,998
</TABLE>
The Company has adopted a policy whereby all transactions between the
Company and one or more of its affiliates, or entities controlled by one or more
of its affiliates, must be approved in advance by a majority of the Company's
disinterested directors, and will be on terms that are fair and no less
favorable to the Company than the Company could obtain from third parties
unaffiliated with the Company.
Pursuant to a Stock Purchase Agreement, dated as of October 3, 1989, the
Company issued and sold an aggregate of 555,000 shares of Common Stock to DCC
Limited for an aggregate consideration of $550,000. Pursuant to a Stock Purchase
Agreement, dated as of May 8, 1992, as amended (as amended, the "1992 Purchase
Agreement"), the Company sold an aggregate of 571,428 shares of its Class A
Preferred Stock to DCC Limited for an aggregate consideration of $1,000,000.
Pursuant to a Preferred Stock Purchase Agreement, dated as of April 28,
1994, as amended (the "1994 Purchase Agreement"), the Company sold an aggregate
of 181,818 shares of its Class B Preferred Stock to DCC Holdings for an
aggregate consideration of $500,000. In addition, in August 1995, DCC Limited
transferred all of its shares of Class A Preferred Stock and Common Stock, and
its rights under the 1992 Purchase Agreement, to DCC Holdings. The 1994 Purchase
Agreement grants certain registration rights to DCC Holdings with respect to its
shares of Class A Preferred Stock, Class B Preferred Stock and Common Stock.
Upon consummation of the Offering, the 571,428 shares of Class A Preferred Stock
and 181,818 shares of Class B Preferred Stock held by DCC Holdings will convert
into 571,428 shares of Common Stock and 181,818 shares of Common Stock,
respectively. See "Description of Capital Stock-- Registration Rights."
Pursuant to the 1992 Purchase Agreement the Company agreed to pay DCC
Limited an annual business development fee of $9,983, (subject to annual
increase based upon a CPI-index), and pay attendance fees to each of the members
of the Company's Boards of Directors nominated by DCC Limited and its
affiliates. In 1995, the annual business development fee was increased to
$16,638 (subject to annual increase based upon a CPI-index), and the board
attendance fees were eliminated. In 1995, the Company paid an aggregate of
$8,018 against business development fees and board attendance fees due to DCC
Holdings for the Company's fiscal years ended December 31, 1994 and December 31,
1995. The Company has not paid any amounts to DCC Holdings in respect of its
fiscal years ended December 31, 1996 and December 31, 1997. The business
development fee accrued during such periods was accrued evenly across each
fiscal year. The obligations of the Company to pay business development fees
pursuant to the 1992 Purchase Agreement (other than with respect to prior
periods) will terminate upon consummation of the Offering. The Company is
currently negotiating with DCC Holdings the amount of the business development
fee, if any, that will be due for 1998.
In connection with the original sale of the Class B Stock, DCC Limited, DCC
Holdings and the other holders of the outstanding Common Stock, including Steven
S. Charlap, M.D., the Chairman of the Board of Directors, Chief Executive
Officer and President of the Company, and Alec H. Jaret, D.M.D., a member
74
<PAGE>
of the Company's Board of Directors, entered into a Stockholders Agreement,
dated as of April 28, 1994, as amended (as amended, the "Stockholders
Agreement"), pursuant to which, among other things, the holders of the
outstanding Common Stock agreed to vote their shares of Common Stock to set the
number of members of the Company's Board of Directors at seven and elect two
members nominated by DCC Limited and DCC Holdings, and Dr. Charlap and Dr.
Jaret, in each case so long as such individual holds at least 10% of the
outstanding Common Stock (on a fully-diluted basis). The Stockholders Agreement
will terminate upon the consummation of the Offering.
Pursuant to an Amendment, Conversion and Waiver Agreement, dated as of March
30, 1998 (the "Waiver Agreement"), DCC Holdings, DCC Limited, Steven S. Charlap,
M.D., Alec H. Jaret, D.M.D. and Cheryl V. Reicin agreed, subject to the
consummation of the Offering, with respect to DCC Holdings and DCC Limited, to
(i) terminate each of the 1992 Purchase Agreement and the 1994 Purchase
Agreement, except with respect to certain registration rights granted
thereunder; (ii) waive any "Piggyback" registration rights previously granted to
DCC Holdings and DCC Limited; (iii) convert all of the Class A Preferred Stock
and Class B Preferred Stock held by DCC Holdings into Common Stock; and (iv)
waive all past instances of non-compliance by the Company, Drs. Charlap and
Jaret and Ms. Reicin with the covenants contained in the 1992 Purchase
Agreement, the 1994 Purchase Agreement and the Stockholders Agreement, and, with
respect to Drs. Charlap and Jaret and Ms. Reicin, to terminate the Stockholders
Agreement.
From time to time, the Company has advanced certain amounts to the Medical
and Dental Practices for working capital purposes. These amounts, to the extent
not repaid during a particular month, are added to the principal amount of the
certain Intercompany Balances maintained by the Medical and Dental Practices
with the Company. These Intercompany Balances were generated for the most part
by the Compensation Amounts due under the respective Operating Agreements. The
Intercompany Balances are payable upon thirty days written notice, and currently
bear interest at a rate of ten percent per annum. The Medical and Dental
Practices are required to use their best efforts to pay the outstanding
principal balance of the Intercompany Balances and accrued interest outstanding
from time to time and payments are made on the Intercompany Balances no less
frequently than on a monthly basis.
The following table sets forth the outstanding Intercompany Balances as of
December 31, 1997 and March 31, 1998, and the largest such balances outstanding
during Fiscal 1997:
<TABLE>
<CAPTION>
LARGEST BALANCE OF
INTERCOMPANY BALANCE A INTERCOMPANY BALANCE
--------------------------------- DURING
DECEMBER 31, 1997 MARCH 31, 1998 FISCAL 1997
----------------- -------------- --------------------
<S> <C> <C> <C>
The Dental Practice..................................... $492,528 $770,038 $739,872
The Optometry Practice.................................. 629,000 912,706 870,312
The Podiatry Practice................................... 612,108 752,984 683,636
The Audiology and Primary Care Practice................. 209,493 252,815 252,467
HealthDrive Michigan Corporation........................ 143,521 134,041 245,293
</TABLE>
75
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 15, 1998, by: (i) each person
known to the Company to be the beneficial owner of more than 5.0% of the shares
of Common Stock; (ii) each current director of the Company; (iii) each of the
Named Executive Officers; (iv) an individual who has been elected to the Board
of Directors of the Company effective upon the consummation of the Offering; and
(v) all current directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING(1) OFFERING(1)(2)
------------------------- ---------------------
NAMES AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- -------------------------------------------------------------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
DCC International Holdings B.V. (3)................................. 1,308,246(4) 47.3% 1,308,246 29.9%
Steven S. Charlap, M.D. (5)......................................... 940,000 34.0 940,000 21.5
Alec H. Jaret, D.M.D. (6)........................................... 480,000 17.4 480,000 11.0
Michael R. Kaplan................................................... 111,250(7) 3.9 111,250(7) 2.5
Gabriel Brandeis, M.D............................................... 5,000(7) * 5,000(7) *
Morgan Crowe........................................................ 1,308,246(8) 47.3 1,308,246(8) 29.9
Brian Fagan......................................................... 1,308,246(9) 47.3 1,308,246(9) 29.9
Susan Bailis........................................................ 12,500(7) * 12,500(7) *
Robert G. Eccles, Ph.D.............................................. 12,500(7) * 12,500(7) *
L. Dennis Shapiro................................................... 12,500(10) * 12,500 10) *
James A. Pitts...................................................... -- * -- *
All current directors and executive officers as a group (13
persons).......................................................... 2,948,996(11) 99.2% 2,948,996 11) 67.6%
</TABLE>
- ------------------------
* Less than 1.0%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Securities and Exchange Commission under the Exchange
Act. Shares of Common Stock issuable pursuant to options, warrants and
convertible securities, to the extent such securities are currently
exercisable or convertible within 60 days of May 15, 1998, are treated as
outstanding for computing the percentage of the person holding such
securities but are not treated as outstanding for computing the percentage
of any other person. Unless otherwise noted, each person or group identified
possesses sole voting and investment power with respect to shares, subject
to community property laws where applicable. Shares not outstanding but
deemed beneficially owned by virtue of the right of a person or group to
acquire them within 60 days are treated as outstanding only for purposes of
determining the number of and percent owned by such person or group.
(2) Assumes that the Underwriters' over-allotment option is not exercised.
(3) The address of DCC Holdings is c/o DCC plc, DCC House, Brewery Road,
Stillorgan, Blackrock Co., Dublin, Ireland.
(4) Includes 753,246 shares of Common Stock issuable upon the conversion of
571,428 outstanding shares of Series A Convertible Preferred Stock and
181,818 outstanding shares of Series B Convertible Preferred Stock into
Common Stock.
(5) The address of Dr. Charlap is 54 Clements Road, Newton, Massachusetts 02158.
(6) The address of Dr. Jaret is 182 Rawson Road, Brookline, Massachusetts 02146.
(7) Consists entirely of shares of Common Stock subject to issuance upon the
exercise of outstanding options.
(8) Consists of shares of Common Stock reported as being held by DCC Holdings.
Mr. Crowe is a director of DCC plc., of which DCC Holdings is a wholly-owned
subsidiary, and may be deemed to control the voting and disposition of such
stock and, accordingly, may be deemed to have shared voting and investment
power with respect to all of the shares held by DCC Holdings. However, Mr.
Crowe disclaims beneficial ownership of all of such shares of Common Stock.
Mr. Crowe's address is c/o DCC plc, DCC House, Brewery Road, Stillorgan,
Blackrock Co., Dublin, Ireland.
(9) Consists of shares of Common Stock reported as being held by DCC Holdings.
Mr. Fagan is a director of DCC plc., of which DCC Holdings is a wholly-owned
subsidiary, and may be deemed to control the voting and disposition of such
stock and, accordingly, may be deemed to have shared voting and investment
power with respect to all of the shares held by DCC Holdings. However, Mr.
Fagan disclaims beneficial ownership of all of such shares of Common Stock.
Mr. Fagan's address is c/o DCC plc, DCC House, Brewery Road, Stillorgan,
Blackrock Co., Dublin, Ireland.
(10) Includes 2,500 shares of Common Stock subject to issuance upon the exercise
of outstanding options.
(11) Includes 210,750 shares of Common Stock subject to issuance upon the
exercise of outstanding options.
76
<PAGE>
SELLING STOCKHOLDERS
The Selling Stockholders have granted to the Underwriters a thirty-day
option to purchase up to 240,000 additional shares of Common Stock, solely to
cover over-allotments, if any, made in connection with the sale of the Common
Stock offered hereby, on the same terms and conditions as the offering by the
Company, given to the Company. The following table sets forth the shares subject
to the over-allotment option, the number of shares owned after the consummation
of the Offering and after the over-allotment option is exercised and the
percentage of shares in the Company held after consummation of the Offering and
after the over-allotment option is exercised. Except as indicated in the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERING
AND EXERCISE OF
SHARES OVER-ALLOTMENT
SUBJECT OPTION (1)
TO OVER- ------------------------
ALLOTMENT NUMBER OF
NAMES AND ADDRESS OF BENEFICIAL OWNER OPTION SHARES PERCENTAGE
- ----------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Steven S. Charlap, M.D. (2).................................................. 160,000 780,000 17.9%
Alec H. Jaret, D.M.D. (3).................................................... 80,000 400,000 9.2
All Selling Stockholders as a group.......................................... 240,000 1,180,000 27.0%
</TABLE>
- ------------------------
(1) Assumes Underwriters' over-allotment option is exercised in full. Beneficial
ownership is determined in accordance with Rule 13d-3(d) promulgated by the
Securities and Exchange Commission under the Exchange Act. Shares of Common
Stock issuable pursuant to options, warrants and convertible securities, to
the extent such securities are currently exercisable or convertible within
60 days of March 15, 1998, are treated as outstanding for computing the
percentage of the person holding such securities but are not treated as
outstanding for computing the percentage of any other person. Unless
otherwise noted, each person or group identified possesses sole voting and
investment power with respect to shares, subject to community property laws
where applicable. Shares not outstanding but deemed beneficially owned by
virtue of the right of a person or group to acquire them within 60 days are
treated as outstanding only for purposes of determining the number of and
percent owned by such person or group.
(2) The address of Dr. Charlap is 54 Clements Road, Newton, Massachusetts 02158.
(3) The address of Dr. Jaret is 182 Rawson Road, Brookline, Massachusetts 02146.
77
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of 7,500,000 shares of Common Stock, $.01 par value per
share, of which approximately 4,363,246 shares will be issued and outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters voted upon by shareholders, including the election of
directors. The Restated Certificate of Incorporation does not provide for
cumulative voting and, accordingly, the holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of the
directors standing for election.
The holders of the Common Stock are entitled to such dividends as may be
declared at the discretion of the Board of Directors out of funds legally
available therefore. See "Dividend Policy." Holders of 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
senior stock 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 the Offering will be upon
payment therefore, fully paid and non-assessable.
REPRESENTATIVE'S WARRANTS
On the closing of the Offering, the Company will sell to the Representative,
individually and not as the Representative of the Underwriters, for nominal
consideration, the Representative's Warrants entitling the Representative to
purchase an aggregate of 160,000 shares of Common Stock at an initial exercise
price per share equal to 120.0% of the initial public offering price hereunder.
The Representative's Warrants will be exercisable for a period of four years
commencing on the first anniversary of the Offering and will contain certain
demand and incidental registration rights relating to the underlying Common
Stock, requiring the Company to file, at any time one year after the closing
date of the Offering upon written request by the Representative, a registration
statement with the Securities and Exchange Commission for the shares of Common
Stock represented by the Representative's Warrants, and granting "piggyback"
registration rights to the shares issuable upon exercise of the Representative's
Warrants for a period beginning one year from the closing date of the Offering
and ending seven years from such date. The Representative's Warrants cannot be
transferred, assigned or hypothecated, in whole or in part, for a period of
twelve months from the date of their issuance, except to any officer or partner
of the Representative. The Representative's Warrants will contain customary
weighted-average anti-dilution provisions providing for appropriate adjustment
of the exercise price and the number of shares issuable upon exercise thereof
upon the occurrence of certain events regarding the Common Stock as a whole.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms, effective upon consummation of the Offering. A
director may be removed only for cause and then only by the vote of a majority
of the shares entitled to vote for the election of directors. See
"Management--Board of Directors and Committees."
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<PAGE>
The Restated Certificate of Incorporation and the By-Laws of the Company
provide that any action required or permitted to be taken by the stockholders of
the Company may be taken only at duly called annual or special meetings of the
stockholders (and not by written consent in lieu thereof), and that special
meetings may be called only by the Chairman of the Board of Directors, the
President, a majority of the Board of Directors of the Company or holders of
20.0% or more of the then outstanding shares of voting stock of the Company.
These provisions could have the effect of delaying until the next annual
stockholders meeting stockholder actions which are favored by the holders of the
outstanding voting securities of the Company, including actions to remove
directors. These provisions may also discourage another person or entity from
making a tender offer for the Common Stock, because such person or entity, even
if it acquired all or a majority of the outstanding voting securities of the
Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The Company has elected not to be subject to the provisions of Section 203
of the DGCL.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless the corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Restated Certificate of Incorporation requires the affirmative vote of the
holders of at least 75.0% of the outstanding voting stock of the Company to
amend or repeal any of the foregoing provisions, or to reduce the number of
authorized shares of Common Stock. A 75.0% vote will also be required to amend
or repeal any of the provisions of the By-Laws. The By-Laws may also be amended
or repealed by a majority vote of the Board of Directors.
The By-Laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a stockholder before an annual meeting
of stockholders, the stockholder must first have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a stockholder's notice
generally must be delivered not later than 90 days in advance of the anniversary
date of the release of the Company's proxy statement to stockholders in
connection with the prior year's annual meeting of stockholders. The notice must
contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting. Business transacted at a special meeting is limited to the purposes for
which the meeting is called.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company.
The Company's Restated Certificate of Incorporation contains certain
provisions permitted under the DGCL relating to the liability of directors.
These provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as the breach of a director's duty of
loyalty or acts or omissions that involve intentional misconduct or a knowing
violation of law. These provisions do not limit or eliminate the rights of the
Company or any stockholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of a director's fiduciary duty. These
provisions will not alter a director's liability under federal securities laws.
The Company's Restated Certificate of Incorporation and By-Laws also contain
provisions indemnifying the directors and officers of the Company to the fullest
extent permitted by the DGCL. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.
REGISTRATION RIGHTS
DCC Holdings, who will hold 1,308,246 shares of Common Stock (the
"Registrable Shares") upon consummation of the Offering, has certain rights with
respect to the registration of such shares of Common Stock under the Securities
Act. In general, in the event that the Company proposes to register any shares
79
<PAGE>
of Common Stock under the Securities Act for its own account or the account of
other stockholders at any time or times, subject to certain exceptions, the
Company must, upon the written request of DCC Holdings and any other holders of
Registrable Shares, use its best efforts to cause to be registered under the
Securities Act all of the Registrable Shares requested to be registered,
provided, however, that the Company is not required to register Registrable
Securities in excess of the amount, if any, of Common Stock which the principal
underwriter of an underwritten offering shall reasonably agree to include in
such offering in addition to the shares to be sold by the Company.
Beginning 180 days after the Company's initial public offering, DCC Holdings
will also have the right, subject to certain limitations, to require the Company
to prepare and file from time to time a registration statement under the
Securities Act with respect to their Registrable Shares, provided that it may
not exercise such right within 90 days before the effectiveness of a Company
initiated registration, or in circumstances in which the Board determines that
such filing could have a material adverse effect on the Company. DCC Holdings
may not exercise these registration rights more than twice with respect to a
registration statement on a form other than Form S-3, or more than two times in
any calendar year with respect to a registration statement on Form S-3. Upon
receipt of any such request from such holders, the Company will be required to
use its best efforts to effect such registration, subject to certain conditions
and limitations. The Company will not be required to maintain such registration
statements in effect for periods in excess of nine months, in the case of
registrations on Form S-3, or 120 days, in the case of other registrations. The
rights of DCC Holdings described above may be transferred to certain affiliates
of DCC Holdings or any transferee of 49.0% or more of the Registrable Shares.
DCC Holdings has waived its rights to have any Registrable Shares included in
the Registration Statement.
The Representative's Warrants will contain certain demand and incidental
registration rights relating to the underlying Common Stock requiring the
Company to file at any time one year after the closing date of the Offering upon
written request by the Representative, a registration statement with the
Securities and Exchange Commission for the shares of Common Stock represented by
the Representative's Warrants, and granting "piggyback" registration rights to
the shares issuable upon exercise of the Representative's Warrants for a period
beginning one year from the Closing date of the Offering and ending seven years
from that date. See "Underwriting."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is expected
to be American Stock Transfer & Trust Company.
80
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
approximately 4,363,246 shares of Common Stock, assuming that the Underwriters
do not exercise their over-allotment option. After the Offering, the 1,600,000
shares of Common Stock sold in the Offering and any shares sold by the Selling
Stockholders in the event that the Underwriters' over-allotment option to
purchase up to 240,000 shares is exercised, will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company, which will be subject to the
limitations imposed on "affiliates" of the Company under Rule 144. The remaining
2,763,246 outstanding shares of Common Stock (2,523,246 if the Underwriters'
over-allotment option is exercised in full), are "restricted securities" within
the meaning of Rule 144 and may not be resold except pursuant to a registration
statement effective under the Securities Act or pursuant to an exemption
therefrom, including the exemption provided by Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one-year holding period may, subject to certain
restrictions, sell within any three-month period a number of shares which does
not exceed the greater of (i) 1.0% of the then outstanding shares of Common
Stock; or (ii) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission as
required by Rule 144. Rule 144 also permits the sale of shares without any
volume limitation by a person who is not an affiliate of the Company and who has
satisfied a two-year holding period. The one-year holding period with respect to
2,753,246 shares of Common Stock outstanding prior to the Offering has expired.
The remaining 10,000 shares of outstanding Common Stock, which were issued to a
director of the Company in accordance with Rule 701 promulgated under the
Securities Act, will become eligible for sale subject to the other limitations
of Rule 144 ninety days after the effective date of the Registration Statement.
Shareholders holding or having the right to acquire approximately 98.8% of
the Company's outstanding Common Stock and shares of Common Stock issuable upon
the exercise of outstanding options have agreed not to offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any securities of the Company they currently hold,
without the prior written consent of the Representative, for a period of 180
days following the effective date of the registration statement of which this
Prospectus is a part. See "Underwriting."
On the closing of the Offering, the Company will sell to the Representative,
individually and not as Representative of the Underwriters, for nominal
consideration, the Representative's Warrants entitling the Representative to
purchase an aggregate of 160,000 shares of Common Stock at an initial exercise
price per share equal to 120.0% of the initial public offering price hereunder.
The Representative's Warrants will be exercisable for a period of four years
commencing one year after the closing date of the Offering and will contain
certain demand and incidental registration rights relating to the underlying
Common Stock. The holders of the Representative's Warrants may sell shares of
Common Stock acquired by exercise of the Representative's Warrants one year from
the date of exercise thereof without registration subject to the limitations of
Rule 144. See "Underwriting."
Prior to the Offering, there has been no market for the Common Stock. No
predictions can be made as to the effect, if any, that sales of shares of Common
Stock under Rule 144 will have on the market price of the Common Stock; sales of
Common Stock under Rule 144 in the public market could adversely affect the
market price of the Common Stock or the ability of the Company to raise money
through a public offering of its equity securities. See "Risk Factors--Potential
Adverse Impact on Market Price of Shares Eligible for Future Sale and
Registration Rights."
81
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, for whom H.C. Wainwright & Co., Inc. is acting as
Representative, and each of the Underwriters has severally agreed to purchase
from the Company, the respective number of shares of Common Stock set forth
opposite its name below at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that, subject to the terms and conditions set
forth therein, the Underwriters are obligated to purchase all of the shares of
Common Stock being sold pursuant to the Underwriting Agreement if any of the
shares of Common Stock are purchased. Under certain circumstances, under the
Underwriting Agreement, the commitments of non-defaulting Underwriters may be
increased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
H.C. Wainwright & Co., Inc.......................................................
Total............................................................................
----------
----------
</TABLE>
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock 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 reallow, a discount not in excess of $
per share of Common Stock on sales to certain other dealers. After the initial
public offering, but not before, the public offering price, concession and
discount may be changed.
The Company and the Selling Stockholders have granted the Underwriters an
option to purchase up to an additional 240,000 shares of Common Stock at the
initial public offering price set forth on the cover page of this Prospectus,
less the underwriting discount. Such option, which will expire 30 days after the
date of this Prospectus, may be exercised solely to cover over-allotments, if
any, made in connection with the sale of Common Stock offered hereby. To the
extent that this option is exercised, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
initially by that Underwriter bears to the total number of shares of Common
Stock to be purchased initially by the Underwriters. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,600,000 shares of Common Stock are being offered hereby. See
"Principal and Selling Stockholders."
The Company has agreed to pay the Representative a non-accountable expense
allowance of three percent (3.0%) of the gross proceeds of the Offering, which
will include proceeds from the over-allotment option if exercised. The
Representative's expenses in excess of the non-accountable expense allowance,
including its legal expenses, will be borne by the Representative.
At the request of the Company, the Underwriters have reserved up to 5.0% of
the shares of Common Stock offered hereby for sale to certain directors,
officers, employees and certain other persons having business relationships with
the Company, who have expressed an interest in purchasing shares of Common Stock
in the Offering. The price for such reserved shares will be the public offering
price. The number of shares available to the general public will be reduced to
the extent such persons purchase the reserved shares. Any reserved shares that
are not so purchased by such persons at the initial closing of this Offering
will be sold by the Underwriters to the general public on the same terms as the
other shares of Common Stock offered hereby.
On the closing of the Offering, the Company will sell to the Representative,
individually and not as the Representative of the Underwriters, for nominal
consideration, the Representative's Warrants entitling the
82
<PAGE>
Representative to purchase an aggregate of 160,000 shares of Common Stock at an
initial exercise price per share equal to 120.0% of the initial public offering
price hereunder. The Representative's Warrants will be exercisable for a period
of four years commencing on the first anniversary of the Offering and will
contain certain demand and incidental registration rights relating to the
underlying Common Stock, requiring the Company to file, at any time one year
after the closing date of the Offering upon written request by the
Representative, a registration statement with the Securities and Exchange
Commission for the shares of Common Stock represented by the Representative's
Warrants, and granting "piggyback" registration rights to the shares issuable
upon exercise of the Representative's Warrants for a period beginning one year
from the closing date of the Offering and ending seven years from such date. The
Representative's Warrants cannot be transferred, assigned or hypothecated, in
whole or in part, for a period of twelve months from the date of their issuance,
except to any officer or partner of the Representative. The Representative's
Warrants will contain customary weighted-average anti-dilution provisions
providing for appropriate adjustment of the exercise price and the number of
shares issuable upon exercise thereof upon the occurrence of certain events
regarding the Common Stock as a whole.
For the life of the Representative's Warrants, their holders have, at
nominal cost, the opportunity to profit from a rise in the market price for the
Common Stock without assuming the risk of ownership, with a resulting dilution
in the interest of other security holders. As long as the Representative's
Warrants remain unexercised, the terms under which the Company could obtain
additional capital may be adversely affected. Moreover, the holders of the
Representative's Warrants might be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on terms more favorable than those provided by the
Representative's Warrants. Additionally, if the Representative should exercise
its registration rights to effect a distribution of the underlying shares of
Common Stock, the Representative, prior to and during such distribution, would
be unable to make a market in the Common Stock. If the Representative must cease
making a market, the market and market price for the Common Stock may be
adversely affected and holders of the Common Stock may be unable to sell the
Common Stock.
The Company has, subject to certain exceptions with respect to employee and
director stock options, agreed not to, directly or indirectly, sell, offer to
sell, grant any option to purchase, or otherwise dispose of, any Common Stock or
any security convertible or exchangeable into, or exercisable for, such Common
Stock or file any registration statement with respect to any of the foregoing,
for a period of 180 days after the effective date of the Registration Statement,
without the prior written consent of the Underwriters.
Shareholders holding or having the right to acquire approximately 98.8% of
the Company's outstanding Common Stock and shares of Common Stock issuable upon
the exercise of outstanding options have agreed not to offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any securities of the Company they currently hold,
without the prior written consent of the Underwriters for a period of 180 days
following the date of this Prospectus.
The Company has granted H.C. Wainwright & Co., Inc. the right to act as the
Company's financial advisor on an exclusive basis until January 27, 2001 with
respect to any sale or disposition of the Company or any of its assets or the
acquisition by the Company of any securities or assets of any other business
entity. In addition, until January 27, 2001, the Company has also granted H.C.
Wainwright & Co., Inc. the right to act as a lead underwriter with respect to
any sales of equity securities by the Company. In addition, the Company has
granted to H.C. Wainwright & Co., Inc. the right to nominate one director to the
Company's Board of Directors, effective upon the closing of the Offering.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock was determined by
negotiations among the Company and the Underwriters. Among the factors
considered in such negotiations, in addition to prevailing market
83
<PAGE>
conditions, were certain financial information of the Company, an assessment of
the Company's management, estimates of the business potential and earnings
prospects of the Company, the present state of the Company's development and
operations, the present state of the Company's industry in general and other
factors deemed relevant. The initial public offering price range set forth on
the cover page of this Prospectus should not, however, be considered an
indication of the actual value of the Common Stock. Such price is subject to
change as a result of market conditions and other factors. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the Offering
at or above the initial public offering price.
In connection with the Offering, the Underwriters and certain selling group
members may engage in stabilizing, syndicate short covering transactions or
other transactions that stabilize, maintain or otherwise affect the market price
of the Common Stock. Stabilizing transactions may consist of initiating bids or
effecting purchases on the Nasdaq SmallCap Market for the purpose of preventing
or retarding a decline in the market price of the Common Stock. Bids or
purchases effected by the Underwriters or selling group members for such
purposes may be instituted at prices no higher than the initial public offering
price or the most recent independent bid, whichever is less. Such transactions
may stabilize the market price of the Common Stock at a level above that which
might otherwise prevail and, if commenced, may be discontinued at any time.
The Company has applied to include its Common Stock for quotation on the
Nasdaq SmallCap Market under the symbol HDMD.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or
contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain legal
matters will be passed upon for the Company by Bingham Dana LLP, Boston,
Massachusetts. Certain legal matters will be passed upon for the Underwriters by
Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
EXPERTS
The audited consolidated financial statements of the Company as of December
31, 1996 and 1997 and for each of the three years in the period ended December
31, 1997 included herein, have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report with respect thereto and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement of which this Prospectus is a part under
the Securities Act, with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus as to
the content of any contract or other document are not necessarily complete, and
in each instance reference is made to a copy of such contract or other document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission, each such statement being qualified in all respects by such
reference. For further information, reference is hereby made to the Registration
Statement and to the schedules and exhibits thereto, which can be inspected and
copied at the public reference facilities of the Commission at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at the Commission's regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of each such
84
<PAGE>
document may be obtained at prescribed rates from the Public Reference Section
of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. In addition, such material can also be
obtained from the Commission's Web site at http://www.sec.gov.
------------------------
Following this Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act, as amended, and intends to furnish to
its shareholders annual reports containing audited financial statements and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
85
<PAGE>
HEALTHDRIVE 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, 1996 and 1997,
and March 31, 1998 (Unaudited and Pro Forma)............................................................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997,
and for the three months ended March 31, 1997 and 1998 (Unaudited)....................................... F-4
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995, 1996 and 1997, and for the three months ended March 31, 1998 (Unaudited)........ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996
and 1997, and for the three months ended March 31, 1997 and 1998 (Unaudited)............................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HealthDrive Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of HealthDrive
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, redeemable
preferred stock and stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthDrive
Corporation and Subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 8, 1998
F-2
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
NOTE 2
<CAPTION>
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents................................................. $ 2,484 $ 15,062 $ 28,894 $ 28,894
Accounts receivable, net of allowances of approximately $355,000, $349,000
and $574,000 in 1996, 1997 and 1998, respectively....................... 1,435,812 1,733,099 2,253,247 2,253,247
Refundable income taxes................................................... 160,000 -- -- --
Prepaid expenses and other current assets................................. 216,311 221,326 205,151 205,151
---------- ---------- --------- -----------
Total current assets.................................................. 1,814,607 1,969,487 2,487,292 2,487,292
---------- ---------- --------- -----------
Property and Equipment, at cost:
Medical equipment......................................................... 682,489 738,002 740,109 740,109
Furniture, fixtures and office equipment.................................. 639,659 643,503 648,921 648,921
Equipment under capital leases............................................ 568,595 670,236 625,955 625,955
---------- ---------- --------- -----------
1,890,743 2,051,741 2,014,985 2,014,985
Less--Accumulated depreciation............................................ 966,823 1,308,540 1,341,567 1,341,567
---------- ---------- --------- -----------
923,920 743,201 673,418 673,418
---------- ---------- --------- -----------
$2,738,527 $2,712,688 $3,160,710 $3,160,710
---------- ---------- --------- -----------
---------- ---------- --------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C>
Current Liabilities:
Revolving line of credit loans............................................ $ 361,000 $ 325,000 $ 510,000 $ 510,000
Current portion of capital lease obligations.............................. 100,976 105,325 99,265 99,265
Accounts payable.......................................................... 142,154 125,629 111,667 111,667
Accrued expenses.......................................................... 690,124 684,750 811,460 811,460
Accrued income taxes...................................................... 18,193 16,839 76,026 76,026
---------- ---------- --------- -----------
Total current liabilities............................................. 1,312,447 1,257,543 1,608,418 1,608,418
---------- ---------- --------- -----------
Capital Lease Obligations, net of current portion........................... 82,302 56,174 34,821 34,821
---------- ---------- --------- -----------
Commitments (Note 8)
Redeemable Preferred Stock:
Class A Convertible Preferred Stock, $.01 par value--..................... 1,280,000 1,340,000 -- --
Authorized, issued and outstanding--571,428 shares stated at liquidation
value, at December 31, 1996 and 1997, and March 31, 1998; none pro
forma
Class B Convertible Preferred Stock, $.01 par value--..................... 580,000 610,000 -- --
Authorized, issued and outstanding--181,818 shares stated at liquidation
value, at December 31, 1996 and 1997, and March 31, 1998; none pro
forma
Stockholders' Equity (Deficit):
Class A Convertible Preferred Stock, $.01 par value--..................... -- -- 1,355,000 --
Authorized, issued and outstanding--571,428 shares stated at liquidation
value, at December 31, 1996 and 1997, and March 31, 1998; none pro
forma
Class B Convertible Preferred Stock, $.01 par value--..................... -- -- 617,500 --
Authorized, issued and outstanding--181,818 shares stated at liquidation
value, at December 31, 1996 and 1997, and March 31, 1998; none pro
forma
Common stock, $.01 par value--
Authorized--3,259,162; issued and outstanding--2,010,000 shares at
December 31, 1996 and 1997, and March 31, 1998; 2,763,246 shares pro
forma................................................................. 20,100 20,100 20,100 27,632
Additional paid-in capital................................................ 208,875 118,875 96,375 1,979,571
Accumulated deficit....................................................... (745,197) (690,004) (571,504) (489,732)
---------- ---------- --------- -----------
Total common stockholders' equity (deficit)............................. (516,222) (551,029) (455,029) 1,517,471
---------- ---------- --------- -----------
$2,738,527 $2,712,688 $3,160,710 $3,160,710
---------- ---------- --------- -----------
---------- ---------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
------------ ------------- ------------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Patient Service Revenue.............. $ 8,575,188 $ 11,005,758 $ 12,929,795 $ 3,022,954 $ 3,487,262
Direct Patient Care Costs................ 5,362,392 7,019,595 8,212,689 1,961,886 2,159,457
------------ ------------- ------------- ------------ ------------
Gross profit......................... 3,212,796 3,986,163 4,717,106 1,061,068 1,327,805
Selling, General and Administrative
Expenses............................... 3,217,730 4,879,840 4,601,990 1,137,736 1,148,859
------------ ------------- ------------- ------------ ------------
Income (loss) from operations........ (4,934) (893,677) 115,116 (76,668) 178,946
Interest Income.......................... 23,950 5,807 48 32 355
Interest Expense......................... (19,739) (31,788) (65,021) (15,175) (12,378)
Other Income............................. 892 14,461 5,050 (54) 10,764
------------ ------------- ------------- ------------ ------------
Income (loss) before provision
(benefit) for income taxes......... 169 (905,197) 55,193 (91,865) 177,687
Provision (Benefit) for Income Taxes..... -- (160,000) -- -- 59,187
------------ ------------- ------------- ------------ ------------
Net income (loss).................... 169 (745,197) 55,193 (91,865) 118,500
Accretion of Dividends on Preferred
Stock.................................. (90,000) (90,000) (90,000) (22,500) (22,500)
------------ ------------- ------------- ------------ ------------
Net income (loss) available to common
stockholders....................... $ (89,831) $ (835,197) $ (34,807) $ (114,365) $ 96,000
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Net Income (Loss) per Common and
Potential Common Share:
Basic................................ $ (0.04) $ (0.42) $ (0.02) $ (0.06) $ 0.05
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Diluted.............................. $ (0.04) $ (0.42) $ (0.02) $ (0.06) $ 0.03
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Pro forma diluted.................... $ 0.02 $ 0.04
------------- ------------
------------- ------------
Weighted Average Common and Potential
Common Shares Outstanding:
Basic................................ 2,000,000 2,000,792 2,010,000 2,010,000 2,010,000
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Diluted.............................. 2,000,000 2,000,792 2,010,000 2,010,000 2,993,725
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Pro forma diluted.................... 2,882,773 2,993,725
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
--------------------------------------------------
CLASS A CLASS B CLASS A
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK STOCK
------------------------ ------------------------ ------------------------
NUMBER OF LIQUIDATION NUMBER OF LIQUIDATION NUMBER OF LIQUIDATION
SHARES VALUE SHARES VALUE SHARES VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994......................... 571,428 $1,160,000 181,818 $ 520,000 -- $ --
Accretion of dividends on Class A and B
convertible preferred stock.................... -- 60,000 -- 30,000 -- --
Net income....................................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995......................... 571,428 1,220,000 181,818 550,000 -- --
Exercise of stock options........................ -- -- -- -- -- --
Accretion of dividends on Class A and B
convertible preferred stock.................... -- 60,000 -- 30,000 -- --
Net loss......................................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996......................... 571,428 1,280,000 181,818 580,000 -- --
Accretion of dividends on Class A and B
convertible preferred stock.................... -- 60,000 -- 30,000 -- --
Net income....................................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997......................... 571,428 1,340,000 181,818 610,000 -- --
Expiration of Preferred Stockholder's right to
cause redemption (Unaudited)................... (571,428) (1,340,000) (181,818) (610,000) 571,428 1,340,000
Accretion of dividends on Class A and B
convertible preferred stock (Unaudited)........ -- -- -- -- -- 15,000
Net income (Unaudited)........................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1998 (Unaudited)................ -- $ -- -- $ -- 571,428 $1,355,000
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
CLASS B ---------------------------------------------------
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
------------------------ ------------------------ ADDITIONAL
NUMBER OF LIQUIDATION NUMBER OF $.01 PAR PAID-IN ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL DEFICIT
----------- ----------- ----------- ----------- ----------- ------------
<S> <C>
Balance, December 31, 1994......................... -- $ -- 2,000,000 $ 20,000 $ 373,403 $ 1,603
Accretion of dividends on Class A and B
convertible preferred stock.................... -- -- -- -- (88,228) (1,772)
Net income....................................... -- -- -- -- -- 169
----------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1995......................... -- -- 2,000,000 20,000 285,175 --
Exercise of stock options........................ -- -- 10,000 100 13,700 --
Accretion of dividends on Class A and B
convertible preferred stock.................... -- -- -- -- (90,000) --
Net loss......................................... -- -- -- -- -- (745,197)
----------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1996......................... -- -- 2,010,000 20,100 208,875 (745,197)
Accretion of dividends on Class A and B
convertible preferred stock.................... -- -- -- -- (90,000) --
Net income....................................... -- -- -- -- -- 55,193
----------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1997......................... -- -- 2,010,000 20,100 118,875 (690,004)
Expiration of Preferred Stockholder's right to
cause redemption (Unaudited)................... 181,818 610,000 -- -- -- --
Accretion of dividends on Class A and B
convertible preferred stock (Unaudited)........ -- 7,500 -- -- (22,500) --
Net income (Unaudited)........................... -- -- -- -- -- 118,500
----------- ----------- ----------- ----------- ----------- ------------
Balance, March 31, 1998 (Unaudited)................ 181,818 $ 617,500 2,010,000 $ 20,100 $ 96,375 $ (571,504)
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
TOTAL
COMMON
STOCKHOLDERS'
EQUITY
(DEFICIT)
--------------
Balance, December 31, 1994......................... $ 395,006
Accretion of dividends on Class A and B
convertible preferred stock.................... (90,000)
Net income....................................... 169
--------------
Balance, December 31, 1995......................... 305,175
Exercise of stock options........................ 13,800
Accretion of dividends on Class A and B
convertible preferred stock.................... (90,000)
Net loss......................................... (745,197)
--------------
Balance, December 31, 1996......................... (516,222)
Accretion of dividends on Class A and B
convertible preferred stock.................... (90,000)
Net income....................................... 55,193
--------------
Balance, December 31, 1997......................... (551,029)
Expiration of Preferred Stockholder's right to
cause redemption (Unaudited)................... --
Accretion of dividends on Class A and B
convertible preferred stock (Unaudited)........ (22,500)
Net income (Unaudited)........................... 118,500
--------------
Balance, March 31, 1998 (Unaudited)................ $ (455,029)
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)...................................... $ 169 $(745,197) $ 55,193 $ (91,865) $ 118,500
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation......................................... 230,093 280,911 341,717 85,720 75,215
Provision for bad debts.............................. 612,000 811,000 809,000 198,000 243,000
Gain on disposal of property and equipment........... -- -- -- -- (9,474)
Changes in assets and liabilities--
Accounts receivable................................ (804,730) (622,879) (1,106,287) (618,510) (763,148)
Refundable income taxes............................ -- (160,000) 160,000 160,000 --
Prepaid expenses and other current assets.......... (63,673) (9,055) (5,015) (181,407) 16,175
Accounts payable................................... 90,271 (106,054) (16,525) (79,684) (13,962)
Accrued expenses................................... (103,907) 337,073 (5,374) 38,295 126,710
Accrued income taxes............................... (480) (8,875) (1,354) 39,236 59,187
--------- --------- ---------- --------- ---------
Net cash provided by (used in) operating
activities..................................... (40,257) (223,076) 231,355 (450,215) (147,797)
--------- --------- ---------- --------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment.................... (279,178) (377,344) (60,198) (10,086) (7,525)
Proceeds from sale of property and equipment........... -- -- -- -- 11,567
--------- --------- ---------- --------- ---------
Net cash provided by (used in) investing
activities..................................... (279,178) (377,344) (60,198) (10,086) 4,042
--------- --------- ---------- --------- ---------
Cash Flows from Financing Activities:
Borrowings (payments) under revolving line of credit... -- 361,000 (36,000) 490,995 185,000
Exercise of stock options.............................. -- 13,800 -- -- --
Payments under capital lease obligations............... (99,387) (134,175) (122,579) (33,178) (27,413)
--------- --------- ---------- --------- ---------
Net cash provided by (used in) financing
activities..................................... (99,387) 240,625 (158,579) 457,817 157,587
--------- --------- ---------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents..... (418,822) (359,795) 12,578 (2,484) 13,832
Cash and Cash Equivalents, beginning of year............. 781,101 362,279 2,484 2,484 15,062
--------- --------- ---------- --------- ---------
Cash and Cash Equivalents, end of year................... $ 362,279 $ 2,484 $ 15,062 $ -- $ 28,894
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid for--
Interest............................................. $ 19,739 $ 31,790 $ 62,570 $ 15,175 $ 11,112
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Taxes................................................ $ 62,480 $ 6,886 $ 1,112 $ -- $ --
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Supplemental Disclosure of Noncash Investing and
Financing Transactions:
Purchase of property and equipment under capital
lease................................................ $ 75,359 $ 161,909 $ 100,800 $ 15,668 $ --
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Accretion of dividends on Class A and B Convertible
Preferred Stock...................................... $ 90,000 $ 90,000 $ 90,000 $ 22,500 $ 22,500
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(including data applicable to unaudited periods)
(1) OPERATIONS
HealthDrive Corporation (HealthDrive) and (collectively with its
subsidiaries, the Company) is the sole sponsor of, and provider of
administrative services to, four exclusively-affiliated professional
corporations and one exclusively-affiliated taxable not-for-profit corporation:
Alec H. Jaret, D.M.D., P.C., Jeffery Morer, O.D., P.C., Mary C. Manesis, D.P.M.,
P.C., Steven S. Charlap, M.D., P.C. and HealthDrive Michigan Corporation (the
Practices). The Practices provide dentistry, optometry, podiatry, audiology and
primary care services primarily to nursing home residents at patient sites.
The Company is subject to a number of risks common to companies in similar
stages of development, including dependence on key individuals, competition from
substitute service providers, the need for adequate financing to fund future
operations and the continued successful development and marketing of its
services. (See Risk Factors included elsewhere in this Prospectus)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described in this note and elsewhere in the notes
to consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards
Board (FASB) recently released Issue No. 97-2: Application of FASB Statement of
Financial Accounting Standards (SFAS) No. 94, CONSOLIDATION OF ALL
MAJORITY-OWNED SUBSIDIARIES, and Accounting Principles Board (APB) Opinion No.
16, BUSINESS COMBINATIONS, to Physician Practice Management (PPM) Entities and
Certain Other Entities with Contractual Management Arrangements. The EITF
addressed the issue of whether an entity can establish controlling financial
interest, as contemplated by SFAS No. 94, in a physician practice through a
contractual management agreement without having ownership of a majority of the
outstanding voting equity instruments of the physician practice. The EITF
reached a consensus that an entity can establish a controlling financial
interest in a physician practice through contractual management arrangements
and, therefore, require the consolidation of the physician practice if certain
requirements are met. For all arrangements that existed on November 20, 1997,
the guidance provided by EITF 97-2 is effective for financial statements for
fiscal years ending after December 15, 1998. For all transactions and
modifications of existing arrangements that occur after the consensus reached in
EITF 97-2, the guidance is effective immediately.
As of November 20, 1997, the Company had exclusive operating agreements with
each of the Practices. The operating agreements all had initial terms of ten
years, and they provided significant control by HealthDrive over the Practices,
along with financial interdependence on HealthDrive by the Practices. This
controlling financial interest, along with other factors provide the historical
basis for the consolidation of HealthDrive and the Practices for financial
reporting purposes.
During June 1998, HealthDrive entered into amended operating agreements with
each of the Practices. The amended operating agreements have forty year terms,
expiring in May 2038. The Practices may only terminate the operating agreements
upon a material breach of the operating agreement by the Company or bankruptcy
of the Company. Under the operating agreements, HealthDrive provides certain
administrative and other functions. HealthDrive has exclusive authority over
decision making relating to all major ongoing operations of the underlying
Practices with the exception of the professional aspects of the medical practice
as required by state law. The delivery of medical and dental services is
supervised, directed and controlled, and all final determinations with respect
thereto are made, exclusively by the
F-7
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Practices. HealthDrive is exclusively responsible for the operation of all other
aspects of the Practices. The operating agreements also grant to the Practices a
non-exclusive license for the use of the name "HealthDrive" and provides for the
extension of credit to the Practices. As consideration for the license,
extension of credit and services provided by HealthDrive, the Practices pay a
fee calculated as follows. An amount equal to all expenses incurred by the
Practices is subtracted from the gross revenues earned by the Practices, with
each amount calculated in accordance with generally accepted accounting
principles (GAAP). The expenses calculated for the Practices include, but are
not limited to, all compensation and benefits for the providers employed by the
Practices, bad debt expense recorded by the Practices, insurance cost incurred
by the Practices, and interest expense relating to the intercompany balances
from HealthDrive. For the purpose of calculating the Compensation Amount, the
resulting GAAP basis net income of the Practices is then adjusted for all items
that are reported differently for tax reporting purposes. Historically, the
significant adjustments to the Practices' GAAP basis net income have resulted
from book (GAAP basis) versus tax differences related to the deductibility of
the provision for bad debts and other accrued expenses. These adjustments are
calculated by determining either the amount that is deductible for book purposes
but not deductible for tax or the amount that is deductible for tax reporting
but not deductible for book. As a result, the fee paid to HealthDrive is equal
to the Practices' taxable income before deducting the fee. The fee paid by the
Practices to HealthDrive eliminates in consolidation. Under the terms of the
operating agreement, the fee paid to HealthDrive from the Practices may not
exceed the fair market value of the license, extension of credit and services
provided by HealthDrive. Management does not believe that the fair value
limitation will have an impact on the fee paid to HealthDrive.
As discussed above, the operating agreements provide for the extension of
credit to the Practices to fund working capital requirements, including without
limitation amounts due to HealthDrive pursuant to the operating agreements. Such
extension of credit are intercompany balances which are due and payable,
including the principal balance and all accrued interest, upon 30 days written
notice by HealthDrive. The operating agreements do not limit the amount of
intercompany balances to the Practices. Interest on the unpaid principal balance
is determined in good faith by HealthDrive, but in no event shall it exceed the
prime rate (8.5% at March 31, 1998), plus 5%. Interest expense on the
intercompany balances reduces the Company's fee. The intercompany balances are
secured by an unperfected lien on the Practices' accounts receivable that is
subordinate to a perfected lien on the same assets granted to a bank under the
revolving line of credit (see Note 3). The loans eliminate in consolidation.
Concurrent with the execution of the operating agreements, HealthDrive
entered into option agreements with the sole equity holder (the Nominee
Shareholder) of each of the Practices. The option agreements allow HealthDrive
at its sole discretion without cause to establish or change the Nominee
Shareholder of a Practice and HealthDrive can name anyone as a new Nominee
Shareholder. HealthDrive can at all times establish and effect a change in the
Nominee Shareholder and there is no limit to the number of times that the
Nominee Shareholder is changed. Under the option agreement, the Nominee
Shareholder selected by HealthDrive would purchase all the equity of the
Practice for $50.00. Pursuant to each of the Option Agreements, unless and until
the Company exercises its option to cause the sole stockholder of the Practice
to transfer his shares in such Practice to a new owner, the sole stockholder is
prohibited from transferring or assigning such shares in any manner. Therefore,
there is nominal cost to the Company to effect this change. Neither HealthDrive
nor the Practices is subject to any significant adverse impact upon a change in
the Nominee Shareholder. In addition, pursuant to each option agreement the
Nominee Shareholder of each of the Practices may cause the Company to purchase
all of the capital stock of the Practice for an aggregate purchase price of
$50.00 upon two years advance written notice. HealthDrive maintains non-compete
agreements with the Nominee Shareholder of each of the Practices. Through the
operating agreements and option agreements, HealthDrive has a significant long-
F-8
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
term financial interest in the Practices, the interests in which are
unilaterally salable and transferable by HealthDrive and fluctuate based on
actual performance of the operations of the Practices. There was no
consideration paid upon the execution of the amended operating agreements and
option agreements. The option agreements meet the requirements of the nominee
shareholder situation detailed in EITF 97-2; therefore, the Practices will
continue to be consolidated with HealthDrive.
(B) REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue is recognized when services are rendered. The Company's revenue is
derived from services rendered to patients. Accounts receivable and revenue are
presented net of contractual allowances which represent the difference between
the usual and customary fees and the fees allowed by third party payors. While
the Company is not able to track revenue by payor source, for the years ended
December 31, 1995, 1996 and 1997, and for the three months ended March 31, 1998,
the Company estimates that the percentage of revenue attributable to third party
payors was approximately 68%, 72%, 72% and 69%, respectively, based on cash
receipts. The Company is, from time to time, subject to reviews and audits by
various third party payors, which can result in potential material claims
against the Company. The Company believes that it has complied with all
appropriate rules and regulations and will vigorously defend against any
determination to the contrary. If in the judgment of management the Company
believes any of these claims may result in a liability, appropriate reserves
will be recorded.
On May 13, 1998, the Optometry Practice received notice from Wisconsin
Physician Service Medicare Part B that it had conducted a limited audit
(covering twenty-five patients) of certain ophthalmological services billed to
and paid by the Medicare program under a procedure code for new patient
comprehensive medical examinations. The results of this audit alleged that over
70% of the claims paid by the Medicare program were inappropriately billed in
violation of published Medicare program guidelines, based on a lack of
sufficient clinical documentation demonstrating medical necessity. The actual
deemed overpayment for the sample audited was $1,009. Extrapolating the
percentage disallowance from the audit sample to the entire group of claims paid
by Medicare to the Optometry Practice in Wisconsin under the same procedure code
during the period covered by the audit, indicates a potential liability to the
Optometry Practice of approximately $109,000. The maximum possible liability to
the Optometry Practice assuming all claims made under this procedure code were
disallowed, is approximately $154,000. Although the Company has not yet
responded to this notice and is currently evaluating the appropriate response,
the Company and the Optometry Practice intend to zealously contest the findings
of this audit.
On March 4, 1998, the Dental Practice received notice from the Division of
Medical Assistance, Commonwealth of Massachusetts (the "Division") that it was
conducting a retrospective utilization review and peer review of the services
rendered by the Dental Practice to Medicaid recipients in Massachusetts during
the period between April 1, 1996 and September 30, 1997. On March 25, 1998 a
third-party reviewer contracted by the Division conducted an on-site review of
the Dental Practice's records for 46 of a randomly-selected sample of 50
patients. On April 3, 1998, the Company mailed to the reviewer the remaining
requested information. On July 13, 1998 the Company received the results of the
review which indicated a potential assessment against the Dental Practice of
approximately $85,000. The Company is currently evaluating the appropriate
response and intends to zealously contest the results of this review.
To date, the Company has not recorded any material amounts for any
post-payment audits in progress. The Company does not believe that the results
of any pending or in-process audits will have a material impact on its financial
condition or results of operations.
F-9
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash and cash
equivalents consist primarily of cash and money market funds at December 31,
1996 and 1997, and March 31, 1998.
(D) DEPRECIATION
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated using the straight-line method over their estimated
useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------------------------------------------------------------------------------- -----------
<S> <C>
Medical equipment........................................................................... 5 years
Furniture, fixtures and office equipment.................................................... 5 years
Equipment under capital leases.............................................................. 3 years
</TABLE>
(E) 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(F) DERIVATIVE FINANCIAL INSTRUMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company does not have any derivative or other financial instruments as
defined by SFAS No. 119, DISCLOSURE ABOUT FINANCIAL INSTRUMENTS AND FAIR VALUE
OF FINANCIAL INSTRUMENTS.
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash and cash
equivalents, accounts receivable and a revolving line of credit. The estimated
fair value of these financial instruments approximates their carrying value at
December 31, 1996 and 1997, and March 31, 1998. The estimated fair values have
been determined through information obtained from market sources and management
estimates. As discussed in Note 2(a), intercompany loans to the Practices have
been eliminated in consolidation.
(G) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains its cash and cash
equivalents with established financial institutions. The Company does not
believe it has accounts receivable collection risk in excess of existing
reserves. Medicare accounted for approximately 63%, 64% and 55% of accounts
receivable at December 31, 1996 and 1997, and March 31, 1998, respectively, and
Medicaid accounted for approximately 16%, 16% and 20% of accounts receivable at
December 31, 1996 and 1997, and March 31, 1998.
F-10
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The following schedule summarizes the activity of the Company's accounts
receivable reserve for the three years ended December 31, 1997, and for the
three months ended March 31, 1998:
<TABLE>
<CAPTION>
DESCRIPTION
- ----------------------------------------------------- BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
ACCOUNTS RECEIVABLE RESERVE PERIOD EXPENSES WRITE-OFFS PERIOD
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1995.................................... $ 245,000 $ 612,000 $ 595,000 $ 262,000
December 31, 1996.................................... 262,000 811,000 718,000 355,000
December 31, 1997.................................... 355,000 809,000 815,000 349,000
March 31, 1998....................................... 349,000 243,000 18,000 574,000
</TABLE>
(H) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997, and March 31, 1998 consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Accrued payroll and benefits....................................... $ 211,143 $ 205,069 $ 227,288
Accrued insurance.................................................. 105,565 145,203 145,203
Accrued other...................................................... 373,416 334,478 438,969
---------- ---------- ----------
$ 690,124 $ 684,750 $ 811,460
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(I) NET INCOME (LOSS) PER SHARE
In March 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE,
effective December 15, 1997. SFAS No. 128 establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. The Company has applied the provisions
of SFAS No. 128 retroactively to all periods presented. In accordance with SEC
Staff Accounting Bulletin (SAB) No. 98, the Company has determined that there
were no nominal issuances of common stock or potential common stock in the
period prior to the Company's planned initial public offering (IPO). The
dilutive effect of potential common shares for the three months ended March 31,
1998, consisting of outstanding stock options and convertible preferred stock,
is determined using the treasury method and the if-converted method,
respectively, in accordance with SFAS No. 128. Diluted weighted average shares
outstanding for the years ended December 31, 1995, 1996 and 1997, and the three
months ended March 31, 1997, exclude the potential common shares from stock
options and convertible preferred stock outstanding because to do so would have
been antidilutive for the periods presented. The potential common shares
excluded for the years ended December 31, 1995, 1996 and 1997, and the three
months ended March 31, 1997, related to outstanding stock options were 71,560,
136,867, 119,527 and 108,252 shares, respectively. The potential common shares
excluded for the years ended December 31, 1995, 1996 and 1997, and the three
months ended March 31, 1997, related to convertible preferred stock were 753,246
shares for each period. Pro forma diluted net income (loss) per common and
potential common share assumes that all classes of convertible preferred stock
had been converted to common stock as of the original issuance dates. In
addition, pro forma diluted net income (loss) per common and potential common
shares has been calculated without consideration to the accretion of dividends
due to the forfeiture of such dividends upon the automatic conversion of all
classes of preferred stock to common stock.
F-11
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Calculations of basic, diluted and pro forma diluted net income (loss) per
common share and potential common share are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................ $ 169 $ (745,197) $ 55,193 $ (91,865) $ 118,500
Accretion of dividends on
preferred stock................ (90,000) (90,000) (90,000) (22,500) (22,500)
------------ ------------ ------------ ------------ ------------
Net income (loss) available to
common shareholders............ $ (89,831) $ (835,197) $ (34,807) $ (114,365) $ 96,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average common shares
outstanding.................... 2,000,000 2,000,792 2,010,000 2,010,000 2,010,000
Potential common shares pursuant
to stock options............... -- -- -- -- 230,479
Potential common shares pursuant
to conversion of redeemable
convertible preferred stock.... -- -- -- -- 753,246
------------ ------------ ------------ ------------ ------------
Diluted weighted average
shares......................... 2,000,000 2,000,792 2,010,000 2,010,000 2,993,725
Pro forma potential common shares
pursuant to stock options...... 119,527 --
Pro forma conversion of
convertible preferred stock.... 753,246 --
------------ ------------
Pro forma diluted weighted
average shares outstanding..... 2,882,773 2,993,725
------------ ------------
Basic net income (loss) per
common share................... $ (0.04) $ (0.42) $ (0.02) $ (0.06) $ 0.05
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted net income (loss) per
share and potential common
share.......................... $ (0.04) $ (0.42) $ (0.02) $ (0.06) $ 0.03
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Pro forma diluted net income
(loss) per common and potential
common share................... $ 0.02 $ 0.04
------------ ------------
------------ ------------
</TABLE>
(J) PRO FORMA PRESENTATION
The pro forma balance sheet as of March 31, 1998 reflects the automatic
conversion, based on a 1:1 ratio, of all outstanding shares Class A and Class B
Preferred Stock into an aggregate of 753,246 shares of common stock and the
forfeiture of $472,500 of cumulative dividends accrued, all of which will occur
upon the closing of the Company's proposed initial public offering.
F-12
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(K) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the March 31, 1997 and 1998
unaudited interim financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of results
for the respective interim period. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year or for any future period.
(L) RECENTLY ISSUED ACCOUNTING STANDARDS
In June and July 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, respectively. Both SFAS No. 130 and No. 131 are effective for
fiscal years beginning after December 15, 1997. The Company believes that the
adoption of these new accounting standards will not have a material impact on
the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COST OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 applies to all nongovernmental
entities and is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company believes that the adoption of SOP 98-1 will
not have a material impact on the Company's financial statements.
(3) REVOLVING LINE OF CREDIT
In 1997, the Company amended its revolving line of credit agreement with a
bank, which is based on qualified accounts receivable, as defined, not to exceed
$1,250,000. The line of credit bears interest at prime (8.5% at March 31, 1998)
plus 1% and is collateralized by substantially all of the assets of the Company.
As of March 31, 1998 the Company had approximately $740,000 of available
borrowings. The Company's line of credit expires January 1, 1999. Under the
terms of the agreement, the Company is not allowed to pay dividends on its
common stock and the right to require dividends by the preferred stockholder
discussed in Note 6(b) is subordinate to the line of credit and is not allowed
until all amounts outstanding under the line of credit have been repaid.
In addition, the Company is subject to certain financial covenants,
including total liabilities to tangible net worth, interest coverage ratio, no
net losses and minimum current ratio. For the three-month period ended March 31,
1997, the Company failed to comply with the total liability to tangible net
worth ratio, interest coverage ratio and no net loss covenant. For the
three-month period ended June 30, 1997, the Company failed to comply with the
total liability to tangible net worth ratio. In September 1997, the Company
received a waiver of its non-compliance with such covenants for each respective
period. Beginning with the three-month period ended September 30, 1997, the
Company has complied with its financial covenants on a quarterly reporting
basis. The Company was in compliance with all covenants as of December 31, 1997
and March 31, 1998.
(4) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES, the objective of which is to recognize the amount
of current and deferred income taxes at the date of the financial statements as
a result of all differences in the tax basis and financial statement carrying
amount of assets and liabilities as measured by enacted tax laws. The Practices
are separate taxable entities.
F-13
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The approximate income tax effect of each type of temporary difference and
carryforward, the balance of which is included in prepaid expenses and other
current assets, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.............................................. $ 68,000 $ 53,000
Accounts receivable reserve................................................... 149,000 146,000
Non-deductible accruals....................................................... 99,000 97,000
Depreciation.................................................................. (39,000) (39,000)
Other temporary differences................................................... 11,000 7,000
----------- -----------
288,000 264,000
Valuation allowance........................................................... (263,000) (239,000)
----------- -----------
Net deferred tax asset........................................................ $ 25,000 $ 25,000
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $132,000. These net
operating loss carryforwards expire in 2011 and are subject to review and
possible adjustment by the Internal Revenue Service. Due to the uncertainty
surrounding the ultimate realization of the majority of the net deferred tax
asset, the Company has provided a valuation allowance against all but $25,000 of
this amount.
U.S. tax rules impose limitations on the use of net operating losses
following certain changes in ownership. If such a change were to occur, the
limitation could reduce the amount of these benefits that would be available to
offset future taxable income each year, starting with the year of ownership
change.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate........................ 34.0% (34.0)% 34.0%
Increase (decrease)in tax resulting from--
Other permanent differences, consisting primarily of state income taxes and
meals and entertainment..................................................... -- (.7) 8.6
Change in valuation allowance................................................. -- 18.7 (16.3)
Utilization of net operating losses........................................... -- -- (27.2)
Other......................................................................... (34.0) (1.7) 0.9
--------- --------- ---------
Provision (benefit) for income taxes............................................ --% (17.7)% --%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company had no taxable income in 1995. The Company recorded a benefit
for income taxes of $160,000 in 1996 to the extent of the tax refund generated
by the carryback of the 1996 net operating losses against prior profitable
years. There was no provision for income taxes in 1997 due to the utilization of
a portion of the remaining net operating losses generated in 1996 that had not
been previously benefited.
F-14
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The benefit for income taxes in the accompanying statements of operations
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Current--
Federal............................................................ $ -- $ (160,000) $ --
State.............................................................. -- -- --
--------- ----------- ---------
Total provision (benefit)........................................ $ -- $ (160,000) $ --
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
(5) REDEEMABLE PREFERRED STOCK
On May 8, 1992, HealthDrive authorized and issued 571,428 shares of $.01 par
value Class A Convertible Preferred Stock (Class A Preferred Stock), and on
April 28, 1994, HealthDrive authorized and issued 181,818 shares of $.01 par
value Class B Convertible Preferred Stock (Class B Preferred Stock or
collectively, the Preferred Stock) to the preferred stockholder (the Preferred
Stockholder). The rights, privileges and preferences of the Preferred Stock are
as follows:
VOTING RIGHTS
The Preferred Stockholder is entitled to vote on all matters with the common
stockholders as if they were one class of stock. The Preferred Stockholder is
entitled to the number of votes equal to the number of shares of common stock
into which each share of the Preferred Stock is then convertible.
LIQUIDATION PREFERENCE
The Preferred Stockholder has preference in the event of a liquidation, sale
or dissolution of HealthDrive in the amount of the original purchase price, plus
any accrued but unpaid dividends (the Liquidation Value). Class A Preferred
Stock has preference in liquidation over Class B Preferred Stock.
CONVERSION
The Preferred Stock is convertible into common stock at the rate of one
share of common stock for each share of Preferred Stock, adjusted for certain
dilutive events, as defined. Conversion is at the option of the Preferred
Stockholder but becomes automatic upon the closing of an initial public offering
at a per share price of at least $7.50 and resulting in aggregate proceeds to
HealthDrive of at least $5,000,000 (a Qualified Public Offering). HealthDrive
has reserved the number of common shares issuable upon the conversion of the
Preferred Stock.
REDEMPTION
As of December 31, 1997, the Preferred Stockholder had the right to require
HealthDrive to redeem the Preferred Stock at the Liquidation Value with cash out
of HealthDrive's funds legally available therefor. As of February 5, 1998, the
Preferred Stockholder had not exercised its right to cause the redemption of the
Preferred Stock and, in accordance with the Certificate of Incorporation of
HealthDrive, the right to cause the redemption of the Preferred Stock expired.
F-15
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
DIVIDENDS
Dividends are cumulative and accrue on outstanding shares of the Preferred
Stock at an annual rate of 6%. Dividends are payable on the Preferred Stock if
and when declared by the Board of Directors. Dividends are forfeited upon
conversion of the Preferred Stock into common stock.
(6) STOCKHOLDERS' EQUITY
(A) AUTHORIZED CAPITAL STOCK
As of December 31, 1997, the Company's authorized capital stock consisted of
3,259,162 shares of common stock, $.01 par value per share, 571,428 shares of
Class A Preferred Stock, $.01 par value per share, and 181,818 shares of Class B
Preferred Stock, $.01 par value per share.
(B) RIGHT TO REQUIRE DIVIDENDS
Beginning in 1993, if the Company's revenue increases by less than 25% over
revenue in the preceding year, the Preferred Stockholder may require HealthDrive
to pay cash dividends totaling 30% of the net income of the Company for that
year to all common and preferred stockholders on a pro rata basis. The right of
the Preferred Stockholder to require such dividend payments will terminate if
the Preferred Stockholder ceases to hold at least 10% of the combined shares of
HealthDrive common and preferred stock outstanding or upon the completion of a
Qualified Public Offering of HealthDrive's common stock. Except for the required
dividends, as discussed above, all dividends payable to common stockholders are
subordinate to dividends payable to the Preferred Stockholder. The Preferred
Stockholder also has certain registration rights.
(C) STOCKHOLDERS AGREEMENTS
Of HealthDrive's total common stock outstanding, 1,996,200 shares were
subject to a stockholders agreement (the Stockholders Agreement). The agreement
provides the holders of 1,420,000 shares of HealthDrive's common stock (the
Principal Stockholders) and then the remaining common and preferred stockholders
with the right of first refusal to purchase, on a pro rata basis, any of the
Principal Stockholders' shares. In addition, the agreement provides all common
and preferred stockholders with the right of first refusal to purchase, on a pro
rata basis, any shares of common stock other than those shares held by the
Principal Stockholders. In the event that the common and preferred stockholders
elect to purchase less than the total number of shares offered for sale, the
right to purchase such shares will terminate.
(D) RESERVED COMMON STOCK
As of March 31, 1998, 1,248,037 shares of common stock were reserved for the
following:
<TABLE>
<S> <C>
Conversion of Class A Preferred Stock.................................... 571,428
Conversion of Class B Preferred Stock.................................... 181,818
Exercise of Stock Options................................................ 494,791
---------
1,248,037
---------
---------
</TABLE>
F-16
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) STOCK OPTION PLAN
In 1992, HealthDrive adopted the 1992 Stock Option Plan (the 1992 Plan). The
1992 Plan, as amended, is administered by the Board of Directors and authorizes
HealthDrive to issue options to purchase up to 505,916 shares of common stock.
Under the terms of the 1992 Plan, HealthDrive may grant incentive stock options
to employees at a price not less than the fair market value at the date of
grant, as determined by the Board of Directors. In addition, HealthDrive may
grant nonqualified options to directors and employees of the Company at a price
determined by the Board of Directors. The options generally vest over four years
and expire no more than 10 years from the date of grant. The 1992 Plan expires
in May 2002.
The following schedule summarizes the activity under the Company's stock
option plan for the three years ended December 31, 1997 and for the three months
ended March 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- -------------- ---------------
<S> <C> <C> <C>
Outstanding, December 31, 1994............................... 241,750 $1.00--$1.75 $ 1.43
Granted...................................................... 55,250 1.75-- 2.00 1.81
Canceled..................................................... (9,500) 1.00-- 2.00 1.33
--------- -------------- -----
Outstanding, December 31, 1995............................... 287,500 1.00-- 2.00 1.51
Granted...................................................... 70,400 2.00-- 3.00 2.91
Exercised.................................................... (10,000) 1.38 1.38
Canceled..................................................... (48,900) 1.38-- 2.00 1.84
--------- -------------- -----
Outstanding, December 31, 1996............................... 299,000 1.00-- 3.00 1.79
Granted...................................................... 131,600 3.00-- 4.00 3.15
Canceled..................................................... (25,800) 2.00-- 3.00 2.86
--------- -------------- -----
Outstanding, December 31, 1997............................... 404,800 1.00-- 4.00 2.16
Grants....................................................... 57,600 4.00 4.00
Canceled..................................................... (26,000) 1.75-- 4.00 2.78
--------- -------------- -----
Outstanding, March 31, 1998.................................. 436,400 $1.00--$4.00 $ 2.37
--------- -------------- -----
--------- -------------- -----
Exercisable, March 31, 1998.................................. 232,100 $1.00--$3.00 $ 1.60
--------- -------------- -----
--------- -------------- -----
</TABLE>
In October 1995, the FASB issued SFAS No. 123, which requires the
measurement of the fair value of stock-based compensation to be included in the
consolidated statement of operations or disclosed in the notes to the
consolidated financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under APB Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123 for
stock-based compensation awarded for the years ended December 31, 1995, 1996 and
1997, and the three months ended March 31, 1998 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. In accordance with the consensus
reached in EITF 97-2, the Company accounts for options issued to employees of
the Practices as if they were employees of
F-17
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
HealthDrive. Accordingly, options issued to employees of the Practices are
accounted for under APB Opinion No. 25. The underlying assumptions used are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C> <C>
MARCH 31,
1995 1996 1997 1998
---------- ---------- ---------- ----------
Risk-free interest rate................................ 7.27% 6.05% 6.28% 5.37%
Expected dividend yield................................ -- -- -- --
Expected lives......................................... 5 years 5 years 5 years 5 years
Expected volatility.................................... 60% 60% 60% 60%
Weighted average fair value of grants.................. $1.22 $1.67 $1.69 $ 2.26
Weighted average remaining contractual life of options
outstanding.......................................... 7.4 years 7.0 years 6.9 years 6.9 years
</TABLE>
Had compensation cost for the Company's stock option plan been determined
consistent with SFAS No. 123, pro forma net loss and net loss per share would
have been:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- MARCH 31,
1995 1996 1997 1998
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss)--
As reported.......................................... $ 169 $ (745,197) $ 55,193 $ 118,500
Accretion of dividends on preferred stock............ (90,000) (90,000) (90,000) (22,500)
---------- ----------- ---------- ----------
Available for common stockholders.................... (89,831) (835,197) (34,807) 96,000
Pro forma............................................ (102,343) (856,269) (113,327) 68,538
Net income (loss) per share, available to common
stockholders--
Basic................................................ $ (0.04) $ (0.42) $ (0.02) $ 0.05
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Diluted.............................................. $ (0.04) $ (0.42) $ (0.02) $ 0.03
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Pro forma diluted.................................... $ 0.02 $ 0.04
---------- ----------
---------- ----------
Net loss per share, pro forma--
Basic................................................ $ (0.05) $ (0.43) $ (0.06) $ 0.03
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Diluted.............................................. $ (0.05) $ (0.43) $ (0.06) $ 0.02
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Pro forma diluted.................................... $ (0.01) $ 0.03
---------- ----------
---------- ----------
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
(8) COMMITMENTS
HealthDrive leases its facilities and certain equipment under operating and
capital leases that expire through 2000. Aggregate rental expense under
operating leases was approximately $145,000, $194,000, $243,000, $52,000 and
$69,000 for the years ended December 31, 1995, 1996 and 1997, and the three
months ended March 31, 1997 and 1998, respectively.
F-18
<PAGE>
HEALTHDRIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) COMMITMENTS (CONTINUED)
The future minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31,
1998, nine months....................................................................... $ 105,000 $ 86,394
1999.................................................................................... 54,000 57,807
2000.................................................................................... -- 2,761
---------- ----------
Total............................................................................... $ 159,000 146,962
----------
----------
Less--Amount representing interest........................................................ 12,876
----------
Present value of minimum lease payments................................................... 134,086
Less--Current portion of capital lease obligations........................................ 99,265
----------
$ 34,821
----------
----------
</TABLE>
(9) HEALTHDRIVE 401(K) PLAN
The Company has a qualified 401(k) retirement savings plan (the 401(k)
Plan). Under the 401(k) Plan, participants may elect to defer a portion of their
compensation, subject to certain limitations. In addition, the Company, at the
discretion of the Board of Directors, may make contributions into the 401(k)
Plan. During 1995, 1996, 1997 and 1998, the Company made no contributions to the
401(k) Plan.
(10) OTHER EVENTS
(A) AMENDMENT, CONVERSION AND WAIVER AGREEMENT
On March 30, 1998, the Preferred Stockholder executed an Amendment,
Conversion and Waiver Agreement (the Agreement) with the Company in which the
Preferred Stockholder agreed to waive virtually all of the rights, privileges
and preferences of the preferred stock (except for certain registration rights),
to convert all shares of the preferred stock into common stock and to waive its
right to require dividends as described in Note 6 (b), effective with the
closing of the proposed initial public offering.
(B) RESTATED CERTIFICATE OF INCORPORATION
Effective upon the close of the Company's planned initial public offering
and after giving effect to the Company's Restated Certificate of Incorporation
immediately prior to the closing of the offering, the authorized capital stock
will consist of 7,500,000 shares of common stock, $0.01 par value per share.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY 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 THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 6
Use of Proceeds................................. 23
Dividend Policy................................. 24
Capitalization.................................. 25
Dilution........................................ 26
Selected Consolidated Financial Data............ 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 28
Business........................................ 45
Management...................................... 66
Certain Transactions............................ 73
Principal Stockholders.......................... 76
Selling Stockholders............................ 77
Description of Capital Stock.................... 78
Shares Eligible for Future Sale................. 81
Underwriting.................................... 82
Legal Matters................................... 84
Experts......................................... 84
Additional Information.......................... 84
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,600,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
H.C. WAINWRIGHT & CO., INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution
of the securities being registered, other than the underwriting discount and
commissions, are estimated as follows:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 4,255
NASD Fee.......................................................... 1,788
Nasdaq SmallCap Market Listing Fee................................ 9,364
Printing and Engraving Expenses................................... 110,000
Legal Fees and Expenses...........................................
Accounting Fees and Expenses......................................
Expenses of Qualification Under State Securities Laws, Including
Attorneys' Fees.................................................
Transfer Agent and Registrar's Fees............................... 3,500
Miscellaneous Costs...............................................
---------
Total....................................................... $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
The Amended and Restated Certificate of Incorporation and the By-Laws of the
Company, copies of which are filed herein as Exhibits 3.1 and 3.2, provide for
advancement of expenses and indemnification of officers and directors of the
Registrant and certain other persons against liabilities and expenses incurred
by any of them in certain stated proceedings and under certain stated conditions
to the fullest extent permissible under Delaware law.
Section 6 of the Underwriting Agreement between the Registrant and the
Underwriters, a copy of which is filed herewith as Exhibit 1.1, will provide for
indemnification by the Registrant of the Underwriters and each person, if any,
who controls any Underwriter, against certain liabilities and expenses, as
stated therein, which may include liabilities under the Securities Act of 1933.
The Underwriting Agreement also provides that the Underwriters shall similarly
indemnify the Registrant, its directors, officers and controlling persons, as
set forth therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Described below is information regarding all unregistered securities sold by
the Company within the three year period ending on the date of this Registration
Statement.
Between April 1, 1995 and April 3, 1998, the Company issued options to
purchase a total of 329,950 shares of its common stock, $.01 par value per share
("Common Stock") pursuant to the Company's 1992 Stock Option Plan. Each of these
option grants was made pursuant to a written Stock Option Agreement between the
Company and the recipient of the stock option. Each of these grants was deemed
by the Company to be a transaction exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to,
among other available exemptions, the exemption provided by Rule 701 promulgated
thereunder.
On December 3, 1996, the Company issued 10,000 shares of Common Stock to L.
Dennis Shapiro, a Director of the Company, pursuant to the exercise of a stock
option granted to Mr. Shapiro under the
II-1
<PAGE>
Company's 1992 Stock Option Plan. Mr. Shapiro paid the Company an aggregate
exercise price of $13,800. This sale of Common Stock upon the exercise of a
stock option was deemed by the Company to be a transaction exempt from the
registration requirements of the Securities Act pursuant to, among other
available exemptions, the exemption provided by Rule 701 thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant**
3.2 Form of Amended and Restated By-Laws of the Registrant**
4.1 Reference is made to exhibits 3.1 and 3.2
4.2 Specimen Certificate of Common Stock*
5.1 Form of Opinion of Bingham Dana LLP, with respect to the legality of the shares being registered
10.1 Second Amended and Restated 1992 Stock Option Plan of the Registrant**
10.2.3 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Jeffrey
Morer, O.D., P.C.**
10.2.6 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Steven
S. Charlap, M.D., P.C.**
10.2.7 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Alec H.
Jaret, D.M.D., P.C.**
10.2.8 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Mary C.
Manesis, D.P.M., P.C.**
10.2.9 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and
HealthDrive Michigan Corporation.**
10.3 Employment Agreement, dated as of May 27, 1998, between the Registrant and Steven S. Charlap, M.D.
10.4 Employment Agreement, dated as of May 27, 1998, between the Registrant and Michael R. Kaplan
10.5 Employment and Non-Competition Agreement between HealthDrive Michigan Corporation and Philip R.
Shriner**
10.6 Letter Agreement between the Registrant and Michael R. Kaplan relating to stock options*
10.7 Amended and Restated Stockholders Agreement, dated as of April 28, 1994, as amended, among the
Registrant and certain of its stockholders**
10.8 Stock Purchase Agreement, dated as of May 8, 1992, between the Registrant and DCC Limited**
10.9 Preferred Stock Purchase Agreement, dated as of April 28, 1994, between the Registrant and DCC
International Holdings B.V., as amended**
10.10 Amendment, Waiver and Conversion Agreement, dated as of March 30, 1998, among the Registrant and certain
of its stockholders**
10.11 Lease, dated July 1, 1992, as amended, by and between the Registrant and Magnum Realty Trust, relating
to property located at 25 Needham Street, Newton, Massachusetts**
10.12 Lease, dated June 26, 1996, by and between the Registrant and Joseph Barker Enterprises, relating to
property located at 1 Prestige Drive, Meriden, Connecticut**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
10.13 Lease, dated September 25, 1996, by and between the Registrant and 928 Jaymore Road Associates, L.P.,
relating to property located at 928 Jaymor Road, Upper Southampton Township, Pennsylvania**
10.14 Lease, dated July 2, 1996, by and between the Registrant and G & N Investment Company, relating to
property located at 3540 North 126 Street, Brookfield, Wisconsin**
10.15 Form of Financial Advisory Agreement between the Registrant and the Representative*
10.16 Form of Warrant Agreement between the Registrant and the Representative*
10.17 Form of Representative's Warrant*
10.18.1 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant Steven S. Charlap,
M.D. and Steven S. Charlap, M.D., P.C.
10.18.2 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Alec H. Jaret,
D.M.D. and Alec H. Jaret, D.M.D., P.C.
10.18.3 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Jeffrey Morer,
O.D., and Jeffrey L. Morer, O.D., P.C.
10.18.4 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Mary C. Manesis,
and Mary C. Manesis, D.P.M., P.C.
10.18.5 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Steven S.
Charlap, M.D. and HealthDrive Michigan Corporation
23.1 Consent of Bingham Dana LLP*
23.2 Consent of Arthur Andersen LLP
23.3 Consent of James A. Pitts**
24.1 Power of Attorney**
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules:
All financial statement schedules have been omitted because either they are
not required, are not applicable, or the information is otherwise set forth in
the Financial Statements and Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions described in Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To provide the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-3
<PAGE>
(2) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4), or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(3) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to registration statement on Form S-1 (Reg.
No. 333-49721) be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newton, Commonwealth of Massachusetts, on this 17th
day of July, 1998.
<TABLE>
<S> <C> <C>
HEALTHDRIVE CORPORATION
By: /s/ STEVEN S. CHARLAP, M.D.
-----------------------------------------
Steven S. Charlap, M.D.
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to registration statement on Form S-1 (Reg. No. 333-49721) has been signed
below by the following persons in the capacities indicated and on this 17th day
of July, 1998.
SIGNATURE TITLE
- --------------------------------- ------------------------
Chairman of the Board of
/s/ STEVEN S. CHARLAP, M.D. Directors, President
- --------------------------------- and Chief Executive
Steven S. Charlap, M.D. Officer (Principal
Executive Officer)
Chief Financial Officer
/s/ MICHAEL R. KAPLAN and Vice President of
- --------------------------------- Finance (Principal
Michael R. Kaplan Financial and
Accounting Officer)
*
- --------------------------------- Director
Susan Bailis
*
- --------------------------------- Director
Morgan Crowe
*
- --------------------------------- Director
Robert G. Eccles
*
- --------------------------------- Director
Brian Fagan
*
- --------------------------------- Director
Alec H. Jaret
*
- --------------------------------- Director
L. Dennis Shapiro
* By: /s/ STEVEN S. CHARLAP,
M.D.
- ---------------------------------
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant**
3.2 Form of Amended and Restated By-Laws of the Registrant**
4.1 Reference is made to exhibits 3.1 and 3.2
4.2 Specimen Certificate of Common Stock*
5.1 Form of Opinion of Bingham Dana LLP, with respect to the legality of the shares being registered
10.1 Second Amended and Restated 1992 Stock Option Plan of the Registrant**
10.2.3 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Jeffrey
Morer, O.D., P.C.**
10.2.6 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Steven
S. Charlap, M.D., P.C.**
10.2.7 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Alec H.
Jaret, D.M.D., P.C.**
10.2.8 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and Mary C.
Manesis, D.P.M., P.C.**
10.2.9 Amended and Restated Operating Agreement, dated as of June 19, 1998, between the Registrant and
HealthDrive Michigan Corporation.**
10.3 Employment Agreement, dated as of May 27, 1998, between the Registrant and Steven S. Charlap, M.D.
10.4 Employment Agreement, dated as of May 27, 1998, between the Registrant and Michael R. Kaplan
10.5 Employment and Non-Competition Agreement between HealthDrive Michigan Corporation and Philip R.
Shriner**
10.6 Letter Agreement between the Registrant and Michael R. Kaplan relating to stock options*
10.7 Amended and Restated Stockholders Agreement, dated as of April 28, 1994, as amended, among the
Registrant and certain of its stockholders**
10.8 Stock Purchase Agreement, dated as of May 8, 1992, between the Registrant and DCC Limited**
10.9 Preferred Stock Purchase Agreement, dated as of April 28, 1994, between the Registrant and DCC
International Holdings B.V., as amended**
10.10 Amendment, Waiver and Conversion Agreement, dated as of March 30, 1998, among the Registrant and certain
of its stockholders**
10.11 Lease, dated July 1, 1992, as amended, by and between the Registrant and Magnum Realty Trust, relating
to property located at 25 Needham Street, Newton, Massachusetts**
10.12 Lease, dated June 26, 1996, by and between the Registrant and Joseph Barker Enterprises, relating to
property located at 1 Prestige Drive, Meriden, Connecticut**
10.13 Lease, dated September 25, 1996, by and between the Registrant and 928 Jaymore Road Associates, L.P.,
relating to property located at 928 Jaymor Road, Upper Southampton Township, Pennsylvania**
10.14 Lease, dated July 2, 1996, by and between the Registrant and G & N Investment Company, relating to
property located at 3540 North 126 Street, Brookfield, Wisconsin**
10.15 Form of Financial Advisory Agreement between the Registrant and the Representative*
10.16 Form of Warrant Agreement between the Registrant and the Representative*
10.17 Form of Representative's Warrant*
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
10.18.1 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant Steven S. Charlap,
M.D. and Steven S. Charlap, M.D., P.C.
10.18.2 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Alec H. Jaret,
D.M.D. and Alec H. Jaret, D.M.D., P.C.
10.18.3 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Jeffrey Morer,
O.D., and Jeffrey L. Morer, O.D., P.C.
10.18.4 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Mary C. Manesis,
and Mary C. Manesis, D.P.M., P.C.
10.18.5 Amended and Restated Option Agreement, dated as of July 8, 1998, among the Registrant, Steven S.
Charlap, M.D. and HealthDrive Michigan Corporation
23.1 Consent of Bingham Dana LLP*
23.2 Consent of Arthur Andersen LLP
23.3 Consent of James A. Pitts**
24.1 Power of Attorney**
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
[Form of Opinion of Bingham Dana LLP]
EXHIBIT 5.1
July __, 1998
HealthDrive Corporation
25 Needham Street
Newton, Massachusetts 02161
Dear Ladies and Gentlemen:
We have acted as counsel for HealthDrive Corporation, a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of 1,600,000 shares of the
Company's Common Stock, $0.01 par value per share (the "Common Stock"), to be
sold by the Company (the "Firm Shares"), 160,000 warrants (the "Warrants"),
160,000 shares of Common Stock issuable upon exercise of the Warrants (the
"Warrant Shares") and an additional 240,000 shares of Common Stock which may
be offered by certain selling shareholders in order to cover over-allotments,
if any (the "Over-allotment Shares" and together with the Firm Shares the
"Shares"), pursuant to a Registration Statement (Reg. No. 333-49721) on Form
S-1 (as amended, the "Registration Statement"), initially filed with the
Securities and Exchange Commission on April 9, 1998.
We have reviewed the corporate proceedings of the Company with respect to
the authorization of the issuance of each of the Shares. We have also
examined and relied upon originals or copies, certified or otherwise
identified or authenticated to our satisfaction, of such corporate records,
instruments, agreements or other documents of the Company, and certificates
of officers of the Company as to certain factual matters, and have made such
investigation of law and have discussed with officers and representatives of
the Company such questions of fact, as we have deemed necessary or
appropriate as a basis for the opinions hereinafter expressed. In our
examinations, we have assumed the genuineness of all signatures, the
conformity to the originals of all documents reviewed by us as copies, the
authenticity and completeness of all original documents reviewed by us in
original or copy form and the legal competence of each individual executing
any document.
We have also assumed that an Underwriting Agreement substantially in the
form of Exhibit 1.1 to the Registration Statement, by and among the Company
and the underwriters named therein (the "Underwriting
<PAGE>
HealthDrive Corporation
July __, 1998
Page 2
Agreement") and a Warrant Agreement substantially in the form of Exhibit
10.16 to the Registration Statement, by and among the Company and H.C.
Wainwright & Co., Inc., will have been duly executed and delivered pursuant
to the respective authorizing resolutions of the Board of Directors of the
Company and that the Firm Shares will be issued only upon the payment
therefor as provided in the Underwriting Agreement and that the Warrants and
Warrant Shares will be issued only as provided in the Warrant Agreement. With
respect to our opinion below that the Over-allotment Shares are fully paid
and non-assessable, we are relying on a certificate of the Chief Financial
Officer of the Company that the Company received the consideration called for
by the resolutions of the Board of Directors authorizing the issuance of the
Over-allotment Shares. We have further assumed that the registration
requirements of the Act and all applicable requirements of state laws
regulating the sale of securities will have been duly satisfied.
This opinion is limited solely to the Delaware General Corporation Law as
interpreted by courts located in Delaware.
Based upon and subject to the foregoing, we are of the opinion that the
Firm Shares have been duly authorized and, when delivered and paid for in
accordance with the provisions of the Underwriting Agreement, will be validly
issued, fully-paid and non-assessable, the Over-allotment Shares have been
duly authorized and are fully-paid, validly issued and non-assessable, the
Warrants have been duly authorized and, when issued and delivered in
accordance with the provisions of the Warrant Agreement, will be validly
issued, fully-paid and non-assessable and the Warrant Shares have been duly
authorized and, when delivered and paid for in accordance with the provisions
of the Warrants, will be validly issued, fully-paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
BINGHAM DANA LLP
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
AGREEMENT dated as of July 9, 1998 between HealthDrive Corporation, a
Delaware corporation with its principal executive offices located at 25 Needham
Street, Newton, Massachusetts 02161-1615 (the "Company"), and Steven S. Charlap,
M.D., an individual residing at 54 Clements Road, Newton, Massachusetts 02158
(the "Employee").
1. Employment. The Company agrees to employ the Employee as Chairman,
President and Chief Executive Officer of the Company, rendering the services and
performing the duties prescribed by the Company's Board of Directors. The
Employee shall during the term hereof serve as a member of the Company's Board
of Directors and shall be the Chairman thereof. The Employee agrees, while
employed hereunder, to perform his duties faithfully and to the best of his
ability. The Employee shall be employed at the Company's offices in Newton,
Massachusetts, and his principal duties shall be performed primarily in Boston,
Massachusetts, except for business trips reasonable in number and duration with
regard to current practice.
2. Term. The employment of the Employee hereunder shall begin on the
date hereof and shall continue through the earlier of (a) July 1, 2003 or (b)
the occurrence of a Termination Date, as defined in Section 5 (the "Term"),
provided, however, that the Term shall automatically be extended for an
additional five-year period (subject to the occurrence of a Termination Date)
after July 1, 2003 unless the Company or the Employee gives notice to the other
prior to July 1, 2002 of its or his intention not to renew the Term.
3. Compensation.
3.1. As compensation for the Employee's services during the
Term, the Company shall pay the Employee an annual base salary at the
rate of $250,000 per year, effective as of June 1, 1998, payable in
accordance with the Company's standard payroll procedures. Prior to the
end of each year during the Term, the Compensation Committee of the
Board of Directors of the Company (the "Compensation Committee") shall
consider the performance of the Employee, his contribution to the
success of the Company, and such other factors as its members shall
deem appropriate and shall fix an annual base salary to be paid to the
Employee during the ensuing year. If the Board of Directors has not
established a Compensation Committee, the annual salary shall be
established by the Board of Directors of the Company on the basis of
the same factors.
3.2. Notwithstanding the foregoing, the Employee's annual base
salary for any year during the Term shall in no event be less than his
annual base salary for the prior year multiplied by 105% or, if
greater, his annual base salary for the prior year adjusted to reflect
the increase in the cost of living over such prior year.
3.3. The Employee shall be eligible for a cash bonus at the
discretion of the Compensation Committee, to be awarded upon the
achievement of reasonable performance goals established by the
Compensation Committee, after consultation with the Employee, at the
beginning of each year during the Term. At the time these
<PAGE>
performance goals are established, the maximum and minimum target
bonuses for such year shall be established by the Compensation
Committee or, if the Board of Directors has not established a
Compensation Committee, the Board of Directors. The minimum bonus for
the Employee for any year shall not be less than 15% of the Employee's
annual base salary for such year and shall be guaranteed, regardless
of whether or not the performance goals are achieved, and the maximum
bonus shall not be more than 50% of such base salary.
3.4. If the Employee is prevented by disability, for a period
of six consecutive months, from continuing fully to perform his
obligations hereunder, the Employee shall perform his obligations
hereunder to the extent he is able and, after the expiration of such
six month period, the Company may reduce his annual base salary during
the continuation of such disability to reflect the extent of the
disability; provided that in no event may such rate, when added to
payments received by him under any disability or qualified retirement
or pension plan to which the Company contributes or has contributed, be
less than the annual base salary in effect at the time that such
disability commenced. If there should be a dispute about the Employee's
disability, disability shall be determined by the Board of Directors of
the Company in good faith based upon a report from a physician who
shall have examined the Employee. If the Employee claims disability,
the Employee agrees to submit to a physical examination at any
reasonable time or times by a qualified physician designated by the
Board of Directors and reasonably acceptable to the Employee.
3.5. The Company hereby acknowledges that the Employee is owed
an accrued bonus for the five month period commencing on January 1,
1998 and ending on May 31, 1998. The Company agrees to pay this bonus
in accordance with its established practice.
4. Employee Benefits. The Employee shall be entitled to participate in
all "employee pension benefit plans," all "employee welfare benefit plans" (each
as defined in the Employee Retirement Income Security Act of 1974) and all pay
practices and other compensation arrangements maintained by the Company, on a
basis at least as advantageous to the Employee as the basis on which other
similarly situated executive employees of the Company are eligible to
participate and on a basis at least as advantageous to the Employee as the basis
on which he participates therein on the date hereof. Without limiting the
generality of the foregoing, the Employee shall be entitled to the following
employee benefits (collectively, with the benefits contemplated by this Section
4, the "Benefits"):
4.1. The Employee and the Employee's dependents shall be
covered by medical and dental insurance comparable in scope to the
coverage afforded on the date hereof, provided, that the Company shall
pay the full amount of any premiums to be paid with respect to such
insurance. In addition, the Company shall reimburse the Employee for
all out-of-pocket medical and dental expenses incurred by the Employee
during the Term. If a Change in Control of the Company, as defined in
Section 5.2, shall have occurred, the Company may not change the
carriers providing medical insurance immediately before the change
without the consent of the Employee, which consent will not
unreasonably be withheld.
2
<PAGE>
4.2. The Employee shall be eligible each year during the Term
to receive stock options under a stock option plan maintained by the
Company for such numbers of shares and upon such terms and conditions
as determined by the Compensation Committee or if the Board of
Directors has not established a Compensation Committee, such numbers of
shares and terms and conditions shall be determined by the Board of
Directors. If the Company does not have a class of stock
publicly-traded by reason of a Change in Control of the Company, as
defined in Section 5.2, the Company's obligation under this Section 4.2
will be satisfied through options granted by the issuer with public
stock then in control of the Company.
4.3. The Company shall reimburse the Employee from time to
time for the reasonable expenses incurred by the Employee in connection
with the performance of his obligations hereunder.
4.4. The Employee shall be entitled to legal holidays and to
annual paid vacation in accordance with the Company's holiday and
vacation policy in effect on the date hereof.
4.5. During the Term, the Employee shall be entitled to the
personal use of a leased automobile similar in character to that
currently provided to the Employee, and the reimbursement of all
maintenance and other related expenses incurred by the Employee, under
the practice in effect on the date hereof.
Notwithstanding the foregoing, the Company may from time to time change or
substitute a plan or program under which one or more of the Benefits are
provided to the Employee, provided that the Company first obtains the written
consent of the Employee, which the Employee agrees not to withhold unreasonably,
taking into account his personal situation.
5. Termination Date; Consequences for Compensation and Benefits
------------------------------------------------------------
5.1. Definition of Termination Date. The first to occur of the
following events shall be the "Termination Date":
5.1.1. The date on which the Employee becomes
entitled to receive long-term or short-term disability
payments by reason of total and permanent disability;
5.1.2. The Employee's death;
5. 1.3. Voluntary resignation ("Resignation with
Reason") after one of the following events shall have
occurred, which event shall be specified to the Company by the
Employee at the time of resignation: (i) material reduction in
the responsibility, authority, power or duty of the Employee;
(ii) a material breach by the Company of any provision of this
Agreement, which breach continues for 30 days following notice
by the Employee to the Company setting forth the nature of the
breach; (iii) the Company relocates its principal executive
offices more than
3
<PAGE>
25 miles from Newton, Massachusetts upon the direction of the
Board of Directors of the Company; or (iv) a Change of
Control shall have occurred;
5.1.4. Voluntary resignation not accompanied by
a notice of reason described in Section 5.1.3 ("General
Resignation");
5.1.5. Discharge of the Employee by the Company
("Discharge for Cause") after one of the following events
shall have occurred, which event shall be specified to the
Employee by the Company at the time of discharge: (i)
conviction of the Employee of, or the entry of a plea of
guilty or nolo contendre by the Employee to, any felony
involving moral turpitude; or (ii) any material breach of any
term of this Agreement by the Employee which is not cured
within 30 days after written notice from the Board of
Directors of the Company to the Employee setting forth the
nature of the breach; and
5.1.6. Discharge of the Employee by the Company not
accompanied by a notice of cause described in Section 5.1.5
("General Discharge"), provided, however, that (i) the Company
shall not be entitled to terminate the Employee other than
with respect to a Discharge for Cause unless such action has
been previously authorized by the affirmative vote of
two-thirds or more of the then-elected members of the Board of
Directors of the Company (other than the Employee), and (ii)
the Company shall not be entitled to terminate the Employee as
a Discharge for Cause unless such action has been authorized
by the affirmative vote of all of the then-elected members of
the Board of Directors of the Company (other than the
Employee).
5.2. Consequences for Compensation and Benefits. (a) If the
Termination Date occurs by reason of disability, death, General
Resignation or Discharge for Cause, the Company shall pay compensation
to the Employee through the Termination Date and shall pay to the
Employee all Benefits accrued through the Termination Date, payable in
accordance with the respective terms of the plans, practices and
arrangements under which the Benefits were accrued. If the Termination
Date occurs by reason of General Discharge or Resignation with Reason,
(i) all stock options held by the Employee shall become immediately
exercisable and shall remain exercisable for no less than 30 days after
the Termination Date, (ii) the Company shall continue the health
coverage contemplated by Section 4.1 through the twenty-four month
anniversary of the Termination Date, (iii) the Company shall engage for
the Employee, at the Company's expense, outplacement services
appropriate to the Employee's position, for up to twelve months after
the Termination Date, (iv) in the event that the Termination Date
occurs by reason of General Discharge or Resignation with Reason other
than in connection with a Change in Control, the Employee shall be
paid, within 15 days after the Termination Date, an amount in cash
equal to the present value, calculated using the Pension Benefit
Guaranty Corporation immediate discount rate for valuing benefits upon
plan termination, of the product of the sum of (A) the Employee's
annual base salary at the Termination Date plus (B) the maximum target
bonus established by the Compensation Committee for the year in which
the Termination Date occurs, multiplied by two; and (v)
4
<PAGE>
in the event that the Termination Date occurs by reason of a
Resignation with Reason in connection with a Change in Control, the
Employee shall be paid, within 15 days after the Termination Date, an
amount in cash equal to the sum of (A) the Employee's annual base
salary at the Termination Date plus (B) the maximum target bonus
established by the Compensation Committee for the year in which the
Termination Date occurs.
(b) A "Change in Control" of the Company shall be
deemed to have occurred for purposes of this Agreement upon the first
to occur of the date when a person "beneficially owns" (as defined in
Rule 13d-3 promulgated under the Securities Exchange Act of 1934) in
the aggregate 50% or more of the outstanding shares of capital stock
entitled to vote generally in the election of the Directors of the
Company. If the payments made pursuant to this Section 5.2 give rise to
an excise tax under Section 4999 of the Internal Revenue Code of 1986,
the Company shall also pay to the Employee or directly to the Internal
Revenue Service in a timely fashion an amount sufficient, after federal
and state income taxes, to pay the excise tax so payable and all
directly related interest and penalties (whether reported initially or
subsequently assessed). In the event of a dispute between the Company
and the Employee with respect to the amount contemplated by the
preceding sentence, the matter shall be determined (at the Company's
expense) by an independent nationally-recognized accounting firm
reasonably acceptable to both parties; provided, however, that the
Employee shall cooperate with the Company in his tax reporting position
and any defense thereof (which the Company shall control) in order to
minimize the amount of such payments to the extent the Company has a
reasonable legal basis therefor.
5.3. Liquidated Damages; No Duty to Mitigate Damages. The
amounts payable pursuant to Section 5.2 shall be deemed liquidated
damages for the early termination of this Agreement and shall be paid
to the Employee regardless of any income the Employee may receive from
any other employer, and the Employee shall have no duty of any kind to
seek employment from any other employer during the balance of the Term.
5.4. Payment of Benefits. The amounts payable and other
benefits provided pursuant to Section 5.2 shall also include any
reasonably incurred costs of collection. Any cash payment required to
be made pursuant to Section 5.2 shall bear interest, accruing monthly,
beginning on the fifteenth day after the Termination Date, at a rate of
18% per annum, until paid in full.
6. Indemnification. The Company shall indemnify the Employee against
all loss, cost, liability and expense arising from the Employee's service to the
Company or any affiliate, whether as officer, director, employee, fiduciary of
any employee benefit plan or otherwise, upon terms at least as favorable to the
Employee as those provided by the (i) the Certificate of Incorporation and
By-laws of the Company in effect on the date hereof; and (ii) the forms of
Amended and Restated Certificate of Incorporation and Amended and Restated
By-laws of the Company filed as Exhibits 3.1 and 3.2, respectively, to the
registration statement on Form S-1 of the Company filed with the Securities and
Exchange Commission (reg. no. 333-49721).
5
<PAGE>
7. Non-Competition. During the term of the Employee's employment and
for a period of twenty-four (24) months following the termination of such
employment (the "Restricted Period"), the Employee shall not in any state of
the United States in which the Company shall then be doing business, directly
or indirectly, enter the employ of, or render any services to, any person,
firm, corporation or other entity engaged in any business which is directly
competitive with the business of the Company as it is conducted at the
termination of employment, or as at such time contemplated by the Company to
be conducted, or any of the dental, podiatry, eye care or other health care
providers which have entered into agreements with the Company pursuant to
which the Company provides management, administrative, billing and accounting
or other services to such entity (each, a "Medical and Dental Practice"),
without the prior written approval of the Company; the Employee shall not
engage in such business for his own account; and he shall not become
interested in any such business, directly or indirectly, as an individual,
partner, shareholder, director, officer, principal, agent, employee, trustee,
consultant, or representative for, any company, business, individual or other
entity; provided, however, that nothing contained in this Section 7 shall be
deemed to prohibit the Employee from acquiring, solely as an investment, two
(2%) percent or less of the outstanding shares of capital stock of any public
corporation. For purposes of this paragraph the "business of the Company and
the Medical and Dental Practices" shall include the provision of management,
administration, billing, accounting and other services for dental and health
care providers who provide services at corporate and institutional sites,
including long term care facilities, and the provision of dental and health
care services at corporate or institutional sites, including such facilities.
Notwithstanding anything to the contrary in this Agreement, the restrictions
contained in this paragraph 7 shall terminate and be of no further force and
effect in the event that (i) the Company materially breaches any provision of
this Agreement which breach continues for 30 days following notice by the
Employee to the Company setting forth the nature of the breach or (ii) the
Company gives notice to the Employee of its intention not to renew the Term
pursuant to Section 2 of this Agreement.
8. Non-Solicitation. During the Restricted Period, the Employee
shall not, directly or indirectly, hire or solicit any employee of the
Company or of any of the Medical and Dental Practices, encourage any such
employee to leave such employment with the Company, any of the Medical and
Dental Practices or any customer of the Company or any of the Medical and
Dental Practices or encourage any such customer to take his or her business
to any competitor thereof. Notwithstanding anything to the contrary in this
Agreement, the restrictions contained in this paragraph 8 shall terminate and
be of no further force and effect in the event that (i) the Company
materially breaches any provision of this Agreement, which breach continues
for 30 days following notice by the Employee to the Company setting forth the
nature of the breach, or (ii) the Company gives notice to the Employee of its
intention not to renew the Term pursuant to Section 2 of this Agreement.
9. Disclosure of Developments. The Employee will make full and prompt
disclosure to the Company of all inventions, works of authorship, improvements,
modifications, discoveries, methods and developments (all of which are
collectively termed "developments" hereinafter), whether patentable or not,
whether copyrightable or not, made or conceived by him or under his direction
during his employment, whether or not made or conceived during normal working
hours or on the premises of the Company.
10. Assignment of Inventions. Upon request by the Company, the Employee
shall assign to the Company all developments covered by Section 9 and any
copyrights, patents or patent applications covering such developments and to
execute and deliver such assignments, copyrights, patents or patent
applications, and other documents as the Company may direct and to fully
cooperate with the Company to enable the patent, copyright or otherwise protect
such developments in any and all countries. However, this Section 10 shall not
apply to developments which do not relate to the actual or anticipated business
or research and development or the Company's tools, works of authorship, devices
or equipment, but the Employee agrees that the
6
<PAGE>
Company shall have a non-exclusive royalty-free license to use such developments
for all purposes.
11. Confidential Information. Unless the Employee shall first secure
consent of the Company, the Employee shall not disclose or use, either during or
after the Term, any secret or confidential information of the Company or any
affiliate, whether or not developed by the Employee, except as required by his
duties to the Company or the affiliate.
12. Arbitration. In the event that any party hereto has any claim
hereunder, the party shall promptly notify each other party of such claim. If
within 30 days of the receipt of such notice of claim, the parties cannot agree
on a resolution of such claim, the parties agree to submit such dispute to
binding arbitration to be held in Boston, Massachusetts under the rules of the
American Arbitration Association. Any such arbitration shall be conducted by
three arbitrators, one of whom shall be selected by the Employee, one of whom
shall be selected by the Company and one of whom shall be selected by the
arbitrators so selected. The expenses of any such arbitration shall be paid by
the non-prevailing party, as determined by the final order of the arbitrators.
13. Notices. Whenever under this Agreement any notice is to be given by
the Company to the Employee, it shall be delivered to the Employee at the
address set forth in the first paragraph hereof, or at such other address as the
Employee shall specify to the Company in writing prior to the delivery of such
notice. Whenever under this Agreement any notice is to be given by the Employee
to the Company, it shall be delivered to the Company at the address set forth in
the first paragraph hereof, or at such other address as the Company shall
specify to the Employee in writing prior to the delivery of such notice.
14. Governing Law. This Agreement shall be deemed a contract made and
performed in the Commonwealth of Massachusetts, and shall be governed by the
laws of the Commonwealth of Massachusetts.
15. Entire Agreement; Amendment. This Agreement constitutes the entire
agreement of the parties, supersedes all prior agreements between the Company
and the Employee with respect to his employment by the Company and the
consequences of a termination of such employment, and may be altered or amended
or any provision hereof waived only by an agreement in writing signed by the
party against whom enforcement of any alteration, amendment, or waiver is
sought. No waiver by any party of any breach of this Agreement shall be
considered as a waiver of any subsequent breach.
16. Binding Obligations. This Agreement shall be binding upon and inure
to the benefit of the Company and its successors and assigns and the Employee
and his personal representatives.
17. Assignability. Neither this Agreement nor any benefits payable to
the Employee hereunder shall be assigned, pledged, anticipated, or otherwise
alienated by the Employee, or subject to attachment or other legal process by
any creditor of the Employee, and notwithstanding any attempted assignment,
pledge, anticipation, alienation, attachment, or other
7
<PAGE>
legal process, any benefit payable to the Employee hereunder shall be paid only
to the Employee or his estate.
[Remainder of page left intentionally blank]
8
<PAGE>
IN WITNESS WHEREOF, the Company, by its officer hereunto duly
authorized, and the Employee have signed and sealed this Agreement as of the
date first written above.
HEALTHDRIVE CORPORATION
By: /s/ Michael R. Kaplan
---------------------------
Its: Chief Financial Officer and
Vice President of Finance
By: /s/ Steven S. Charlap
---------------------------
Steven S. Charlap, M.D.
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<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
AGREEMENT dated July 9, 1998 between HealthDrive Corporation, a
Delaware corporation with its principal executive offices located at 25 Needham
Street, Newton, Massachusetts 02161-1615 (the "Company"), and Michael R. Kaplan,
an individual residing at 80 Bourne Street, Newton, Massachusetts 02166 (the
"Employee").
1. Employment. The Company agrees to employ the Employee as Chief
Financial Officer and Vice President of Finance, rendering the services and
performing the duties prescribed by the Company's Board of Directors. The
Employee agrees, while employed hereunder, to perform his duties faithfully and
to the best of his ability. The Employee shall be employed at the Company's
offices in Newton, Massachusetts, and his principal duties shall be performed
primarily in Boston, Massachusetts, except for business trips reasonable in
number and duration with regard to current practice.
2. Term. The employment of the Employee hereunder shall begin on the
date hereof and shall continue through the earlier of (a) July 1, 2001 or (b)
the occurrence of a Termination Date, as defined in Section 5 (the "Term"),
provided, however, that the Term shall automatically be extended for successive
additional three-year periods (subject to the occurrence of a Termination Date)
after July 1, 2001 unless the Company or the Employee gives notice to the other
at least one year prior to the scheduled termination of its or his intention not
to renew the Term.
3. Compensation.
3.1. As compensation for the Employee's services during the
Term, the Company shall pay the Employee an annual base salary at the
rate of $130,000 per year, effective as of June 1, 1998, payable in
accordance with the Company's standard payroll procedures. Prior to the
end of each year during the Term, the Compensation Committee of the
Board of Directors of the Company (the "Compensation Committee") shall
consider the performance of the Employee, his contribution to the
success of the Company, and such other factors as its members shall
deem appropriate and shall fix an annual base salary to be paid to the
Employee during the ensuing year. In the event that the Board of
Directors of the Company has not established a Compensation Committee,
such salary shall be fixed by the Board of Directors.
3.2. Notwithstanding the foregoing, the Employee's annual base
salary for any year during the Term shall in no event be less than his
annual base salary for the prior year multiplied by 105% or, if
greater, his annual base salary for the prior year adjusted to reflect
the increase in the cost of living over such prior year.
3.3. The Employee shall be eligible for a cash bonus at the
discretion of the Compensation Committee, to be awarded upon the
achievement of reasonable
<PAGE>
performance goals established by the Compensation Committee, after
consultation with the Employee, at the beginning of each year during
the Term. At the time these performance goals are established, the
maximum and minimum target bonuses for such year shall be established
by the Compensation Committee. In the event that the Board of
Directors has not established a Compensation Committee, the Board of
Directors shall determine the performance goals and maximum and
minimum target bonuses for the Employee pursuant to this Section 3.3.
3.4. If the Employee is prevented by disability, for a period
of six consecutive months, from continuing fully to perform his
obligations hereunder, the Employee shall perform his obligations
hereunder to the extent he is able and, after the expiration of such
six month period, the Company may reduce his annual base salary during
the continuation of such disability to reflect the extent of the
disability; provided that in no event may such rate, when added to
payments received by him under any disability or qualified retirement
or pension plan to which the Company contributes or has contributed, be
less than 80% of the annual base salary of the Employee in effect at
the time that such disability commenced. If there should be a dispute
about the Employee's disability, disability shall be determined by the
Board of Directors of the Company in good faith based upon a report
from a physician who shall have examined the Employee. If the Employee
claims disability, the Employee agrees to submit to a physical
examination at any reasonable time or times by a qualified physician
designated by the Board of Directors and reasonably acceptable to the
Employee.
3.5. The Company hereby acknowledges that the Employee is owed
an accrued bonus for the five month period commencing on January 1,
1998 and ending on May 31, 1998. The Company agrees to pay this bonus
in accordance with its established practice.
4. Employee Benefits. The Employee shall be entitled to participate in
all "employee pension benefit plans," all "employee welfare benefit plans" (each
as defined in the Employee Retirement Income Security Act of 1974) and all pay
practices and other compensation arrangements maintained by the Company, on a
basis at least as advantageous to the Employee as the basis on which other
similarly situated executive employees of the Company are eligible to
participate and on a basis at least as advantageous to the Employee as the basis
on which he participates therein on the date hereof. Without limiting the
generality of the foregoing, the Employee shall be entitled to the following
employee benefits (collectively, with the benefits contemplated by this Section
4, the "Benefits"):
4.1. The Employee and the Employee's dependents shall be
covered by medical insurance comparable in scope to the coverage
afforded on the date hereof, provided, that the Company shall pay the
full amount of any premiums to be paid with respect to such insurance.
4.2. The Employee shall be eligible each year during the Term
to receive stock options under a stock option plan maintained by the
Company for such numbers of shares and upon such terms and conditions
as determined by the Compensation Committee or if the Board of
Directors has not established a Compensation Committee, such numbers
of
2
<PAGE>
shares and terms and conditions shall be determined by the Board of
Directors. If the Company no longer has a class of stock
publicly-traded by reason of a Change in Control of the Company, as
defined in Section 5.2, the Company's obligation under this Section
4.2 will be satisfied through options granted by the issuer with
public stock then in control of the Company.
4.3. The Company shall reimburse the Employee from time to
time for the reasonable expenses incurred by the Employee in connection
with the performance of his obligations hereunder.
4.4. The Employee shall be entitled to legal holidays and to
annual paid vacation in accordance with the Company's holiday and
vacation policy in effect on the date hereof.
4.5. During the Term, the Employee shall be entitled to the
personal use of a leased automobile similar in character to that
currently provided to the Employee, and the reimbursement of all
maintenance and other related expenses incurred by the Employee, under
the practice in effect on the date hereof.
Notwithstanding the foregoing, the Company may from time to time change or
substitute a plan or program under which one or more of the Benefits are
provided to the Employee, provided that the Company first obtains the written
consent of the Employee, which the Employee agrees not to withhold unreasonably,
taking into account his personal situation.
5. Termination Date; Consequences for Compensation and Benefits
------------------------------------------------------------
5.1. Definition of Termination Date. The first to occur of the
following events shall be the "Termination Date":
5.1.1. The date on which the Employee becomes
entitled to receive long-term or short-term disability
payments by reason of total and permanent disability;
5.1.2. The Employee's death;
5.1.3. Voluntary resignation ("Resignation with
Reason") after one of the following events shall have
occurred, which event shall be specified to the Company by the
Employee at the time of resignation: (i) material reduction in
the responsibility, authority, power or duty of the Employee;
(ii) a material breach by the Company of any provision of this
Agreement, which breach continues for 30 days following notice
by the Employee to the Company setting forth the nature of the
breach; (iii) the Company relocates its principal executive
offices more than 30 miles from Newton, Massachusetts; or (iv)
a Change of Control shall have occurred;
3
<PAGE>
5.1.4. Voluntary resignation not accompanied by
a notice of reason described in Section 5.1.3 ("General
Resignation");
5.1.5. Discharge of the Employee by the Company
("Discharge for Cause") after one of the following events
shall have occurred, which event shall be specified to the
Employee by the Company at the time of discharge: (i)
conviction of the Employee of, or the entry of a plea of
guilty or nolo contendere by the Employee to, any felony
involving moral turpitude; or (ii) any material breach of any
term of this Agreement by the Employee which is not cured
within 30 days after written notice from the Chief Executive
Officer of the Company to the Employee setting forth the
nature of the breach, provided, that the Company shall not be
entitled to terminate the Employee as a Discharge for Cause
unless such action has been authorized by the affirmative vote
of all of the then-elected members of the Board of Directors
of the Company; and
5.1.6. Discharge of the Employee by the Company not
accompanied by a notice of cause described in Section 5.1.5
("General Discharge").
5.2. Consequences for Compensation and Benefits. (a) If the
Termination Date occurs by reason of disability, death, General
Resignation or Discharge for Cause, the Company shall pay compensation
to the Employee through the Termination Date and shall pay to the
Employee all Benefits accrued through the Termination Date, payable in
accordance with the respective terms of the plans, practices and
arrangements under which the Benefits were accrued. If the Termination
Date occurs by reason of General Discharge or Resignation with Reason,
(i) all stock options held by the Employee shall become immediately
exercisable and shall remain exercisable for no less than 30 days after
the Termination Date, (ii) the Company shall continue the health
coverage contemplated by Section 4.1 through the twelve month
anniversary of the Termination Date, (iii) the Company shall engage for
the Employee, at the Company's expense, outplacement services
appropriate to the Employee's position, for up to twelve months after
the Termination Date, and (iv) the Employee shall be paid, within 15
days after the Termination Date, an amount in cash equal to the present
value, calculated using the Pension Benefit Guaranty Corporation
immediate discount rate for valuing benefits upon plan termination, of
the sum of (A) the Employee's annual base salary at the Termination
Date plus (B) the maximum target bonus established by the Compensation
Committee for the year in which the Termination Date occurs.
(b) A Change in Control of the Company shall be
deemed to have occurred for purposes of this Agreement upon the first
to occur of the date when a person "beneficially owns" (as defined in
Rule 13d-3 promulgated under the Securities Exchange Act of 1934) in
the aggregate 50% or more of the outstanding shares of capital stock
entitled to vote generally in the election of the Directors of the
Company. If the payments made pursuant to this Section 5.2 give rise to
an excise tax under Section 4999
4
<PAGE>
of the Internal Revenue Code of 1986, the Company shall also pay to
the Employee or directly to the Internal Revenue Service in a timely
fashion an amount sufficient, after federal and state income taxes, to
pay the excise tax so payable and all directly related interest and
penalties (whether reported initially or subsequently assessed). In
the event of a dispute between the Company and the Employee with
respect to the amount contemplated by the preceding sentence, the
matter shall be determined (at the Company's expense) by an
independent nationally-recognized accounting firm reasonably
acceptable to both parties; provided, however, that the Employee shall
cooperate with the Company in his tax reporting position and any
defense thereof (which the Company shall control) in order to minimize
the amount of such payments to the extent the Company has a reasonable
legal basis therefor.
5.3. Liquidated Damages; No Duty to Mitigate Damages. The
amounts payable pursuant to Section 5.2 shall be deemed liquidated
damages for the early termination of this Agreement and shall be paid
to the Employee regardless of any income the Employee may receive from
any other employer, and the Employee shall have no duty of any kind to
seek employment from any other employer during the balance of the Term.
5.4 Payment of Benefits. The amounts payable and other
benefits provided pursuant to Section 5.2 shall also include any
reasonably incurred costs of collection. Any cash payment required to
be made pursuant to Section 5.2 shall bear interest, accuring monthly,
beginning on the fifteenth (15) day after the Termination Date, at a
rate of 18% per annum, until paid in full.
6. Indemnification. The Company shall indemnify the Employee against
all loss, cost, liability and expense arising from the Employee's service to the
Company or any affiliate, whether as officer, director, employee, fiduciary of
any employee benefit plan or otherwise, upon terms at least as favorable to the
Employee as those provided by the (i) the Certificate of Incorporation and
By-laws of the Company in effect on the date hereof; and (ii) the forms of
Amended and Restated Certificate of Incorporation and Amended and Restated
By-laws of the Company filed as Exhibits 3.1 and 3.2, respectively, to the
registration statement on Form S-1 of the Company filed with the Securities and
Exchange Commission (reg. no. 333-49721).
7. Non-Competition. During the term of the Employee's employment and
for a period of twelve (12) months following the termination of such employment
(the "Restricted Period"), the Employee shall not in any state of the United
States in which the Company shall then be doing business, directly or
indirectly, enter the employ of, or render any services to, any person, firm,
corporation or other entity engaged in any business which is directly
competitive with the business of the Company as it is conducted at the
termination of employment, or as at such time contemplated by the Company to be
conducted, or any of the dental, podiatry, eye care or other health care
providers which have entered into agreements with the Company pursuant to which
the Company provides management, administrative, billing and accounting or other
services to such entity (each, a "Medical and Dental Practice"), without the
prior written approval of the Company; the Employee shall not engage in such
business for his own account; and he shall not become interested in any such
business, directly or indirectly, as an individual, partner,
5
<PAGE>
shareholder, director, officer, principal, agent, employee, trustee,
consultant, or representative for, any company, business, individual or other
entity; provided, however, that nothing contained in this Section 7 shall be
deemed to prohibit the Employee from acquiring, solely as an investment, two
(2%) percent or less of the outstanding shares of capital stock of any public
corporation. For purposes of this paragraph the "business of the Company and
the Medical and Dental Practices" shall include the provision of management,
administration, billing, accounting and other services for dental and health
care providers who provide services at corporate and institutional sites,
including long term care facilities, and the provision of dental and health
care services at corporate or institutional sites, including such facilities.
Notwithstanding anything to the contrary in this Agreement, the restrictions
contained in this paragraph 7 shall terminate and be of no further force and
effect in the event that (i) the Company materially breaches any provision of
the Agreement, which breach continues for 30 days following notice by the
Employee to the Company setting forth the nature of the breach, or (ii) the
Company gives notice to the Employee of its intention not to renew the Term
pursuant to Section 2 of this Agreement.
8. Non-Solicitation. During the Restricted Period, the Employee
shall not, directly or indirectly, hire or solicit any employee of the
Company or of any of the Medical and Dental Practices, encourage any such
employee to leave such employment with the Company, any of the Medical and
Dental Practices or any customer of the Company or any of the Medical and
Dental Practices or encourage any such customer to take his or her business
to any competitor thereof. Notwithstanding anything to the contrary in this
Agreement, the restrictions contained in this paragraph 8 shall terminate and
be of no further force and effect in the event that (i) the Company
materially breaches any provision of this Agreement, which breach continues
for 30 days following notice by the Employee to the Company setting forth the
nature of the breach, or (ii) the Company gives notice to the Employee of its
intention not to renew the Term pursuant to Section 2 of this Agreement.
9. Disclosure of Developments. The Employee will make full and prompt
disclosure to the Company of all inventions, works of authorship, improvements,
modifications, discoveries, methods and developments (all of which are
collectively termed "developments" hereinafter), whether patentable or not,
whether copyrightable or not, made or conceived by him or under his direction
during his employment, whether or not made or conceived during normal working
hours or on the premises of the Company.
10. Assignment of Inventions. Upon request by the Company, the Employee
shall assign to the Company all developments covered by Section 9 and any
copyrights, patents or patent applications covering such developments and to
execute and deliver such assignments, copyrights, patents or patent
applications, and other documents as the Company may direct and to fully
cooperate with the Company to enable the patent, copyright or otherwise protect
such developments in any and all countries. However, this Section 10 shall not
apply to developments which do not relate to the actual or anticipated business
or research and development or the Company's tools, works of authorship, devices
or equipment, but the Employee agrees that the Company shall have a
non-exclusive royalty-free license to use such developments for all purposes.
11. Confidential Information. Unless the Employee shall first secure
consent of the Company, the Employee shall not disclose or use, either during or
after the Term, any secret or confidential information of the Company or any
affiliate, whether or not developed by the Employee, except as required by his
duties to the Company or the affiliate.
12. Arbitration. In the event that any party hereto has any claim
hereunder, the party shall promptly notify each other party of such claim. If
within 30 days of the receipt of such notice of claim, the parties cannot agree
on a resolution of such claim, the parties agree to submit such dispute to
binding arbitration to be held in Boston, Massachusetts under the rules of the
6
<PAGE>
American Arbitration Association. Any such arbitration shall be conducted by
three arbitrators, one of whom shall be selected by the Employee, one of whom
shall be selected by the Company and one of whom shall be selected by the
arbitrators so selected. The expenses of any such arbitration shall be paid by
the non-prevailing party, as determined by the final order of the arbitrators.
13. Notices. Whenever under this Agreement any notice is to be given by
the Company to the Employee, it shall be delivered to the Employee at the
address set forth in the first paragraph hereof, or at such other address as the
Employee shall specify to the Company in writing prior to the delivery of such
notice. Whenever under this Agreement any notice is to be given by the Employee
to the Company, it shall be delivered to the Company at the address set forth in
the first paragraph hereof, or at such other address as the Company shall
specify to the Employee in writing prior to the delivery of such notice.
14. Governing Law. This Agreement shall be deemed a contract made and
performed in the Commonwealth of Massachusetts, and shall be governed by the
laws of the Commonwealth of Massachusetts.
15. Entire Agreement; Amendment. This Agreement constitutes the entire
agreement of the parties, supersedes all prior agreements between the Company
and the Employee with respect to his employment by the Company and the
consequences of a termination of such employment, and may be altered or amended
or any provision hereof waived only by an agreement in writing signed by the
party against whom enforcement of any alteration, amendment, or waiver is
sought. No waiver by any party of any breach of this Agreement shall be
considered as a waiver of any subsequent breach.
16. Binding Obligations. This Agreement shall be binding upon and inure
to the benefit of the Company and its successors and assigns and the Employee
and his personal representatives.
17. Assignability. Neither this Agreement nor any benefits payable to
the Employee hereunder shall be assigned, pledged, anticipated, or otherwise
alienated by the Employee, or subject to attachment or other legal process by
any creditor of the Employee, and notwithstanding any attempted assignment,
pledge, anticipation, alienation, attachment, or other legal process, any
benefit payable to the Employee hereunder shall be paid only to the Employee or
his estate.
[Remainder of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, the Company, by its officer hereunto duly
authorized, and the Employee have signed and sealed this Agreement as of the
date first written above.
HEALTHDRIVE CORPORATION
By: /s/ Steven Charlap
---------------------------
Its: Chief Executive Officer
By: /s/ Michael R. Kaplan
---------------------------
Michael R. Kaplan
8
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
AMENDED AND RESTATED OPTION AGREEMENT (this "Agreement") dated as of
July 8, 1998, is among Steven S. Charlap, M.D. (the "Stockholder"), Steven S.
Charlap, M.D., P.C. (the "Practice") and HealthDrive Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Stockholder holds 100 shares, no stated par value per share,
of the Practice (the "Common Stock"), such shares being all of the issued and
outstanding capital stock of the Practice;
WHEREAS, the Practice is a professional corporation organized under the
laws of the Commonwealth of Massachusetts engaged in the practice of dentistry;
WHEREAS, the Company and the Practice have entered into an Operating
Agreement, dated as of June 19, 1998 (the "Operating Agreement"), pursuant to
which, among other things, the Company will provide the Practice certain
services, capital and a license to the use of the service mark "HealthDrive";
WHEREAS, in connection with the execution and delivery of a precursor to
the Operating Agreement, the Company, the Stockholder and the Practice entered
into an Option Agreement, dated as of May 26, 1998 (the "Original Option
Agreement"), pursuant to which the Stockholder granted the Company an option to
purchase all of the outstanding Common Stock of the Practice, and the Company
granted to the Stockholder a right to cause the Company to purchase all of the
outstanding Common Stock of the Practice, each for the purchase prices set forth
therein;
WHEREAS, the Company, the Stockholder and the Practice desire to amend and
restate the Original Option Agreement to conform the terms of such agreement to
the terms of the Operating Agreement and to make certain other modifications;
and
WHEREAS, as a result of the relationship established by the Operating
Agreement, the Stockholder and the Company believe that the Common Stock has
little inherent value and the Stockholder is willing to grant to the Company, on
the terms and subject to the conditions set forth herein, an option to purchase
from the Stockholder all of the outstanding shares of the Common Stock, and the
Company is willing to enter into this Agreement and grant the Stockholder an
option to cause the Company to purchase all of the outstanding shares of Common
Stock at a nominal purchase price, and be bound by the terms, provisions,
covenants and conditions set forth herein;
NOW, THEREFORE, the parties hereto mutually covenant and agree as follows:
1. Company Stock Option. Subject to the terms and conditions set forth
in this Agreement, the Stockholder hereby grants to the Company an option (the
"Company
<PAGE>
Option") to purchase from the Stockholder at any time, from and after the date
hereof, all of the shares (the "Shares") of Common Stock then outstanding at the
nominal price of $50.00.
2. Stockholder Option. Subject to the terms and conditions set forth in
this Agreement, the Company hereby grants to the Stockholder an option (the
"Stockholder Option") to cause the Company to purchase from the Stockholder at
any time, from and after the date hereof, all of the Shares for a nominal
purchase price equal to $50.00 (the "Stockholder Exercise Price").
3. Exercise and Payment; Designation of Purchaser; Termination.
(a) The Company shall, at its sole discretion, have the right to appoint a
designated purchaser (the "Company Designee") to purchase the Shares from the
Stockholder in accordance with the terms hereof upon the exercise of either the
Company Option or the Stockholder Option.
(b) The Company Option may be exercised by the Company by delivering to
the Stockholder, on a date (the "Company Notice Date") no less than five (5)
days prior to the date on which the Company wishes to exercise the Option (the
"Company Exercise Date"), written notice which shall specify that the Company
elects to exercise the Option and the identity of the Company Designee.
(c) The Stockholder Option may be exercised by the Stockholder by
delivering to the Company, on a date (the "Stockholder Notice Date"), no less
than two years prior to the date on which the Stockholder wishes to exercise the
Stockholder Option (the "Stockholder Exercise Date"), written notice which shall
specify that the Stockholder elects to exercise the Stockholder Option.
(d) On the applicable Exercise Date, the Company or the Company Designee
shall deliver to the Stockholder the applicable Exercise Price for the Shares to
be purchased in the form of cash, check, bank draft or postal or express money
order payable to the order of the Stockholder in United States dollars.
Immediately following receipt of the applicable Exercise Price, the Stockholder
shall cause the Practice to, and the Practice shall, issue and promptly deliver
to the Company or the Company Designee, if any, a certificate or certificates
for such number of Shares registered in the name of the Company or such Company
Designee, which certificate shall bear a legend substantially in the form of
that set forth in Section 7. In addition, the Practice shall cancel a
certificate or certificates for such number of Shares registered in the name of
the Stockholder as of such date.
(e) As soon as reasonably practicable after the applicable Exercise Date,
the Company Designee shall cause the Practice to change its name to the name of
the Company Designee or such other name selected by the Company or the Company
Designee that does not include the name of the Stockholder.
2
<PAGE>
4. Additional Agreements of Practice. Without limiting the Company's
right to waive such restrictions created hereby prior to the earlier of
expiration of the Company Option or the termination of this Agreement, the
Practice shall not, without the consent of the Company, (i) authorize, issue,
sell, redeem or repurchase any class of capital stock of the Practice, including
without limitation Common Stock, or grant any options, warrants or other rights
to purchase any class of capital stock of the Practice, including without
limitation Common Stock, or (ii) be a party to any merger, consolidation, sale
of all or substantially all, or a material portion, of the Practice's assets,
liquidation or recapitalization in which the previously outstanding shares of
capital stock of the Practice shall be changed into or exchanged for different
securities of the Practice or securities of another corporation or interests in
a noncorporate entity other property (including cash). In the event that the
Shares are transferred to a Company Designee pursuant to the exercise of the
Company Option or the Stockholder Option, the Practice shall enter into an
Option Agreement, in substantially the form of this Agreement, with the Company
and such Company Designee.
5. Practice and Stockholder Representations. Each of the Practice and
the Stockholder hereby represents and warrants to the Company as follows: this
Agreement has been duly executed and delivered by each of the Practice and the
Stockholder and constitutes a legal, valid and binding obligation of each of the
Practice and the Stockholder enforceable against each of the Practice and the
Stockholder in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, violate any provision of the Charter or By-laws of the Practice, any
agreement to which either or both of the Practice or the Stockholder is a party
or by which either or both the Practice or the Stockholder is bound and will not
violate any other restriction of any kind or character to which either or both
of the Practice or the Stockholder is subject.
6. Rights as Shareholder. Neither the Company nor any Company Designee
shall have any rights as a shareholder with respect to any Shares covered by the
Company Option until the date of tender of the Exercise Price.
7. Segregation of Shares. The Stockholder shall cause the Practice to,
and the Practice shall, issue in the Stockholder's name, a new certificate
representing all of the Shares outstanding on the date hereof, which certificate
shall be held, together with an appropriate stock power in favor of Company and
executed by the Stockholder, by the Clerk of the Practice or another mutually
agreed-upon party. The new certificates representing such Shares, and any other
certificates issued prior to the earlier of the exercise of the Company Option
or the Stockholder Option or the termination of this Agreement, that represent
any Shares, shall bear a legend in substantially the following form:
PURSUANT TO AN OPTION AGREEMENT, AMONG HEALTHDRIVE CORPORATION, THE ISSUER
OF THE SECURITIES REPRESENTED HEREBY AND THE HOLDER HEREOF, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE ASSIGNED, TRANSFERRED OR
OTHERWISE
3
<PAGE>
DISPOSED OF WITHOUT THE EXPLICIT WRITTEN CONSENT OF THE COMPANY UNTIL THE
OPTION GRANTED TO THE COMPANY BY SUCH OPTION AGREEMENT HAS BEEN EXERCISED
OR SUCH OPTION AGREEMENT HAS BEEN TERMINATED.
8. Restrictions on Transfer. The Stockholder shall not assign, transfer
or otherwise dispose of the Shares unless and until the Company Option has been
exercised or this Agreement has been terminated. The Practice agrees that,
unless and until the Company Option has been exercised or this Agreement has
been terminated, the Practice will not recognize any purported assignment or
transfer of any of the Shares.
9. Compliance with Law. The Stockholder shall cause the Practice, and
the Practice shall be obligated, to take any and all actions as are necessary or
desirable in order to cause the issuance and delivery of stock certificates to
the Company Designee upon exercise of the Company Option or the Stockholder's
Option to comply with all applicable laws and regulations of any governmental
authority.
10. No Medical Practice By the Company. It is acknowledged that the
Company is not authorized or qualified to engage in any activity which may be
construed or considered to constitute the practice of medicine or any ancillary
health care service ("Medical Services"). To the extent any act or service of
the Company under this Agreement is construed or considered to definitely
constitute Medical Service, the performance of such act or service by the
Company shall be deemed waived and excused and such act or service shall not be
permitted under this Agreement. If notwithstanding any waiver or excuse of the
Company's performance of an act or service as contemplated in the immediately
preceding sentence, any of the provisions of this Agreement or any action that
may be taken hereunder (1) may be construed or considered to be in material
violation of any rules, regulations or policies of the Board of Registration in
Medicine (or such ancillary health care service) of The Commonwealth of
Massachusetts, the Board of Registration of any other jurisdiction in which the
Practice provides Medical Services, or the statutes, laws, rules or regulations
of the United States or any state, governmental agency, authority, or other body
having jurisdiction over the Practice or the Company, or (2) may be construed or
considered to impose a substantial threat to the license to practice medicine
and/or any ancillary health care service of any Medical Practitioner, or to the
authorization of the Practice to render Medical Services, then the parties
hereto agree to use their best efforts to negotiate in good faith an amendment
to this Agreement, the purpose and substance of which shall be modification of
only those provisions giving rise to the issues set forth in clauses (1) and (2)
of this sentence so that the Agreement as modified continues to reflect, as
nearly as possible, the intent of the parties as expressed herein. If
notwithstanding negotiation in good faith as contemplated in the immediately
preceding sentence, an amendment to this Agreement cannot be agreed to that
resolves the issues set forth in clauses (1) and (2) of the preceding sentence
and continues to reflect, as nearly as possible, the intent of the parties
expressed herein, this Agreement shall terminate thirty (30) days
4
<PAGE>
after the date either party hereto provides notice to the other party hereto
that such circumstances exist.
11. Term of Agreement. This Agreement shall be in effect from the date
first set forth above through May 26, 2038 (the "Expiration Date"); provided,
however, that the term hereof shall be automatically extended for additional
periods of twelve (12) months each, unless either party gives written notice as
provided below to the other at least ninety (90) days prior to the expiration of
the initial term or any extended term hereof.
12. Prior Agreement; Amendments. This Agreement supersedes all prior
agreements and understandings between the parties hereto with respect to the
subject matter hereof, including but not limited to the Original Option
Agreement, which is terminated upon the effectiveness of this Agreement
provided, however, that in the event of the termination of this Agreement prior
to the Expiration Date, the Original Option Agreement shall automatically, and
without further action by any of the parties hereto, be reinstated and in full
force and effect in accordance with the terms thereof. This Agreement may not
be amended, altered, changed, or terminated orally. No amendment, alteration,
change, or attempted waiver of any of the provisions hereof shall be binding
without the written consent of both parties, and such amendment, alteration,
change, termination or waiver shall in no way affect the other terms and
conditions of this Agreement, which in all other respects shall remain in full
force.
13. Assignment; Binding Effect. The Company shall have the right to
assign or sell its rights and obligations under this Agreement to any person,
corporation, partnership, or other legal entity. Neither the Practice nor the
Stockholder shall be permitted to assign this Agreement or its respective rights
and obligations under this Agreement without the written consent of the Company,
which consent may be withheld in the Company's sole discretion. Any attempted
assignment by the Practice or the Stockholder shall be void and of no force and
effect. The provisions of this Agreement shall be binding upon and shall inure
to the benefit of the parties' successors and assigns, respectively, but this
provision shall not constitute a consent by the Company to assignment by the
Practice or the Stockholder otherwise prohibited by the preceding sentences.
14. Construction of Agreement. The failure to insist upon strict
compliance with any of the terms, covenants or conditions herein shall not be
deemed a waiver of such terms, covenants, or conditions, nor shall any waiver or
relinquishment of any right at any one or more times be deemed a waiver or
relinquishment of such right at any other time or times.
15. Governing Law. This Agreement has been signed by the parties under
seal in Massachusetts, and the parties agree that it shall be governed and
construed in accordance with the laws of The Commonwealth of Massachusetts to
the fullest extent permitted by law, without regard to the application of
conflict of laws rules. If any portion of the provisions hereof shall to any
extent be invalid or unenforceable, the remainder of this Agreement, or the
application of such portion or provisions in circumstances other than those in
which it is
5
<PAGE>
held invalid or unenforceable, shall not be affected thereby, and each portion
or provision of this Agreement shall be valid and enforced to the fullest extent
permitted by law.
16. Additional Documents. The parties hereto shall execute such
additional documents as are reasonably required for the purpose of carrying out
the intent and purpose of this Agreement.
17. Headings. Section and paragraph headings are not part of this
Agreement and are included solely for convenience and are not intended to be
full or accurate descriptions of the contents thereof.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all which together shall
constitute one instrument.
19. Notices. Any notice which either party hereto may be required or
permitted to give to the other shall be in writing and may be delivered
personally or by mail, postage prepaid addressed as follows:
If to the Company, to:
HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: Chief Executive Officer
If to the Practice, to:
Steven S. Charlap, M.D., P.C.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: President
If to the Stockholder, to:
Steven S. Charlap, M.D.
54 Clements Road
Newton, MA 02158
20. Remedies. The parties hereto will be entitled to enforce their rights
under this Agreement specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights
6
<PAGE>
existing in their favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party hereto may in its sole discretion apply to any
court of law or equity of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce or prevent any violation of the provisions
of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Option Agreement as of the day and year first above written.
STOCKHOLDER:
/s/ Steven Charlap
----------------------------------
STEVEN S. CHARLAP, M.D., P.C.
By: /s/ Steven Charlap
------------------------------
Name: Steven Charlap
------------------------------
Title: Chief Executive Officer
------------------------------
HEALTHDRIVE CORPORATION
By: /s/ Michael R. Kaplan
------------------------------
Name: Michael R. Kaplan
------------------------------
Title: Chief Financial Officer
------------------------------
8
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers
unto ______________ ( ) Shares of Common Stock of _______________,
P.C. standing in its name on the books of said Corporation represented by
Certificate No. __ herewith, and do hereby irrevocably constitute and appoint
__________ attorney to transfer the said stock on the books of said Corporation
with full power and substitution in the premises.
Dated ____________
______________________________
In presence of
______________________________
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
AMENDED AND RESTATED OPTION AGREEMENT (this "Agreement"), dated as of July
8, 1998, is among Alec H. Jaret, D.M.D. (the "Stockholder"), Alec H. Jaret,
D.M.D., P.C. (the "Practice") and HealthDrive Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Stockholder holds 100 shares, no stated par value per share,
of the Practice (the "Common Stock"), such shares being all of the issued and
outstanding capital stock of the Practice;
WHEREAS, the Practice is a professional corporation organized under the
laws of the Commonwealth of Massachusetts engaged in the practice of dentistry;
WHEREAS, the Company and the Practice have entered into an Operating
Agreement, dated as of June 19, 1998 (the "Operating Agreement"), pursuant to
which, among other things, the Company will provide the Practice certain
services, capital and a license to the use of the service mark "HealthDrive";
WHEREAS, in connection with the execution and delivery of a precursor to
the Operating Agreement, the Company, the Stockholder and the Practice entered
into an Option Agreement, dated as of May 26, 1998 (the "Original Option
Agreement"), pursuant to which the Stockholder granted the Company an option to
purchase all of the outstanding Common Stock of the Practice, and the Company
granted to the Stockholder a right to cause the Company to purchase all of the
outstanding Common Stock of the Practice, each for the purchase prices set forth
therein;
WHEREAS, the Company, the Stockholder and the Practice desire to amend and
restate the Original Option Agreement to conform the terms of such agreement to
the terms of the Operating Agreement and to make certain other modifications;
and
WHEREAS, as a result of the relationship established pursuant to the
Operating Agreement, the Stockholder and the Company believe that the Common
Stock has little inherent value and the Stockholder is willing to grant to the
Company, on the terms and subject to the conditions set forth herein, an option
to purchase from the Stockholder all of the outstanding shares of the Common
Stock, and the Company is willing to enter into this Agreement and grant the
Stockholder an option to cause the Company to purchase all of the outstanding
shares of Common Stock at a nominal purchase price, and be bound by the terms,
provisions, covenants and conditions set forth herein;
NOW, THEREFORE, the parties hereto mutually covenant and agree as follows:
1. Company Stock Option. Subject to the terms and conditions set forth
in this Agreement, the Stockholder hereby grants to the Company an option (the
"Company
<PAGE>
Option") to purchase from the Stockholder at any time, from and after the date
hereof, all of the shares (the "Shares") of Common Stock then outstanding at the
nominal price of $50.00.
2. Stockholder Option. Subject to the terms and conditions set forth in
this Agreement, the Company hereby grants to the Stockholder an option (the
"Stockholder Option") to cause the Company to purchase from the Stockholder at
any time, from and after the date hereof, all of the Shares at the nominal
purchase price equal to $50.00 (the "Stockholder Exercise Price").
3. Exercise and Payment; Designation of Purchaser; Termination.
(a) The Company shall, at its sole discretion, have the right to appoint a
designated purchaser (the "Company Designee") to purchase the Shares from the
Stockholder in accordance with the terms hereof upon the exercise of either the
Company Option or the Stockholder Option.
(b) The Company Option may be exercised by the Company by delivering to
the Stockholder, on a date (the "Company Notice Date") no less than five (5)
days prior to the date on which the Company wishes to exercise the Option (the
"Company Exercise Date"), written notice which shall specify that the Company
elects to exercise the Option and the identity of the Company Designee.
(c) The Stockholder Option may be exercised by the Stockholder by
delivering to the Company, on a date (the "Stockholder Notice Date"), no less
than two years prior to the date on which the Stockholder wishes to exercise the
Stockholder Option (the "Stockholder Exercise Date"), written notice which shall
specify that the Stockholder elects to exercise the Stockholder Option.
(d) On the applicable Exercise Date, the Company or the Company Designee
shall deliver to the Stockholder the applicable Exercise Price for the Shares to
be purchased in the form of cash, check, bank draft or postal or express money
order payable to the order of the Stockholder in United States dollars.
Immediately following receipt of the applicable Exercise Price, the Stockholder
shall cause the Practice to, and the Practice shall, issue and promptly deliver
to the Company or the Company Designee, if any, a certificate or certificates
for such number of Shares registered in the name of the Company or such Company
Designee, which certificate shall bear a legend substantially in the form of
that set forth in Section 7. In addition, the Practice shall cancel a
certificate or certificates for such number of Shares registered in the name of
the Stockholder as of such date.
(e) As soon as reasonably practicable after the applicable Exercise Date,
the Company Designee shall cause the Practice to change its name to the name of
the Company Designee or such other name selected by the Company or the Company
Designee that does not include the name of the Stockholder.
2
<PAGE>
4. Additional Agreements of Practice. Without limiting the Company's
right to waive such restrictions created hereby prior to the earlier of
expiration of the Company Option or the termination of this Agreement, the
Practice shall not, without the consent of the Company, (i) authorize, issue,
sell, redeem or repurchase any class of capital stock of the Practice, including
without limitation Common Stock, or grant any options, warrants or other rights
to purchase any class of capital stock of the Practice, including without
limitation Common Stock, or (ii) be a party to any merger, consolidation, sale
of all or substantially all, or a material portion, of the Practice's assets,
liquidation or recapitalization in which the previously outstanding shares of
capital stock of the Practice shall be changed into or exchanged for different
securities of the Practice or securities of another corporation or interests in
a noncorporate entity other property (including cash). In the event that the
Shares are transferred to a Company Designee pursuant to the exercise of the
Company Option or the Stockholder Option, the Practice shall enter into an
Option Agreement, in substantially the form of this Agreement, with the Company
and such Company Designee.
5. Practice and Stockholder Representations. Each of the Practice and
the Stockholder hereby represents and warrants to the Company as follows: this
Agreement has been duly executed and delivered by each of the Practice and the
Stockholder and constitutes a legal, valid and binding obligation of each of the
Practice and the Stockholder enforceable against each of the Practice and the
Stockholder in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, violate any provision of the Charter or By-laws of the Practice, any
agreement to which either or both of the Practice or the Stockholder is a party
or by which either or both the Practice or the Stockholder is bound and will not
violate any other restriction of any kind or character to which either or both
of the Practice or the Stockholder is subject.
6. Rights as Shareholder. Neither the Company nor any Company Designee
shall have any rights as a shareholder with respect to any Shares covered by the
Company Option until the date of tender of the Exercise Price.
7. Segregation of Shares. The Stockholder shall cause the Practice to,
and the Practice shall, issue in the Stockholder's name, a new certificate
representing all of the Shares outstanding on the date hereof, which certificate
shall be held, together with an appropriate stock power in favor of Company and
executed by the Stockholder, by the Clerk of the Practice or another mutually
agreed-upon party. The new certificates representing such Shares, and any other
certificates issued prior to the earlier of the exercise of the Company Option
or the Stockholder Option or the termination of this Agreement, that represent
any Shares, shall bear a legend in substantially the following form:
PURSUANT TO AN OPTION AGREEMENT, AMONG HEALTHDRIVE CORPORATION, THE ISSUER
OF THE SECURITIES REPRESENTED HEREBY AND THE HOLDER HEREOF, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE ASSIGNED, TRANSFERRED OR
OTHERWISE
3
<PAGE>
DISPOSED OF WITHOUT THE EXPLICIT WRITTEN CONSENT OF THE COMPANY UNTIL THE
OPTION GRANTED TO THE COMPANY BY SUCH OPTION AGREEMENT HAS BEEN EXERCISED
OR SUCH OPTION AGREEMENT HAS BEEN TERMINATED.
8. Restrictions on Transfer. The Stockholder shall not assign, transfer
or otherwise dispose of the Shares unless and until the Company Option has been
exercised or this Agreement has been terminated. The Practice agrees that,
unless and until the Company Option has been exercised or this Agreement has
been terminated, the Practice will not recognize any purported assignment or
transfer of any of the Shares.
9. Compliance with Law. The Stockholder shall cause the Practice, and
the Practice shall be obligated, to take any and all actions as are necessary or
desirable in order to cause the issuance and delivery of stock certificates to
the Company Designee upon exercise of the Company Option or the Stockholder's
Option to comply with all applicable laws and regulations of any governmental
authority.
10. No Dental Practice By the Company. It is acknowledged that the
Company is not authorized or qualified to engage in any activity which may be
construed or considered to constitute the practice of dentistry or any ancillary
health care service ("Dental Services"). To the extent any act or service of
the Company under this Agreement is construed or considered to definitely
constitute Dental Service, the performance of such act or service by the Company
shall be deemed waived and excused and such act or service shall not be
permitted under this Agreement. If notwithstanding any waiver or excuse of the
Company's performance of an act or service as contemplated in the immediately
preceding sentence, any of the provisions of this Agreement or any action that
may be taken hereunder (1) may be construed or considered to be in material
violation of any rules, regulations or policies of the Board of Registration in
Dentistry (or such ancillary health care service) of The Commonwealth of
Massachusetts, the Board of Registration of any other jurisdiction in which the
Practice provides Dental Services, or the statutes, laws, rules or regulations
of the United States or any state, governmental agency, authority, or other body
having jurisdiction over the Practice or the Company, or (2) may be construed or
considered to impose a substantial threat to the license to practice dentistry
and/or any ancillary health care service of any Dental Practitioner, or to the
authorization of the Practice to render Dental Services, then the parties hereto
agree to use their best efforts to negotiate in good faith an amendment to this
Agreement, the purpose and substance of which shall be modification of only
those provisions giving rise to the issues set forth in clauses (1) and (2) of
this sentence so that the Agreement as modified continues to reflect, as nearly
as possible, the intent of the parties as expressed herein. If notwithstanding
negotiation in good faith as contemplated in the immediately preceding sentence,
an amendment to this Agreement cannot be agreed to that resolves the issues set
forth in clauses (1) and (2) of the preceding sentence and continues to reflect,
as nearly as possible, the intent of the parties expressed herein, this
Agreement shall terminate thirty (30) days after the date either party hereto
provides notice to the other party hereto that such circumstances exist.
4
<PAGE>
11. Term of Agreement. This Agreement shall be in effect from the date
first set forth above through May 26, 2038 (the "Expiration Date"); provided,
however, that the term hereof shall be automatically extended for additional
periods of twelve (12) months each, unless either party gives written notice as
provided below to the other at least ninety (90) days prior to the expiration of
the initial term or any extended term hereof.
12. Prior Agreement; Amendments. This Agreement supersedes all prior
agreements and understandings between the parties hereto with respect to the
subject matter hereof, including but not limited to the Original Option
Agreement, which is terminated upon the effectiveness of this Agreement
provided, however, that in the event of the termination of this Agreement prior
to the Expiration Date, the Original Option Agreement shall automatically, and
without further action by any of the parties hereto, be reinstated and in full
force and effect in accordance with the terms thereof. This Agreement may not
be amended, altered, changed, or terminated orally. No amendment, alteration,
change, or attempted waiver of any of the provisions hereof shall be binding
without the written consent of both parties, and such amendment, alteration,
change, termination or waiver shall in no way affect the other terms and
conditions of this Agreement, which in all other respects shall remain in full
force.
13. Assignment; Binding Effect. The Company shall have the right to
assign or sell its rights and obligations under this Agreement to any person,
corporation, partnership, or other legal entity. Neither the Practice nor the
Stockholder shall be permitted to assign this Agreement or its respective rights
and obligations under this Agreement without the written consent of the Company,
which consent may be withheld in the Company's sole discretion. Any attempted
assignment by the Practice or the Stockholder shall be void and of no force and
effect. The provisions of this Agreement shall be binding upon and shall inure
to the benefit of the parties' successors and assigns, respectively, but this
provision shall not constitute a consent by the Company to assignment by the
Practice or the Stockholder otherwise prohibited by the preceding sentences.
14. Construction of Agreement. The failure to insist upon strict
compliance with any of the terms, covenants or conditions herein shall not be
deemed a waiver of such terms, covenants, or conditions, nor shall any waiver or
relinquishment of any right at any one or more times be deemed a waiver or
relinquishment of such right at any other time or times.
15. Governing Law. This Agreement has been signed by the parties under
seal in Massachusetts, and the parties agree that it shall be governed and
construed in accordance with the laws of The Commonwealth of Massachusetts to
the fullest extent permitted by law, without regard to the application of
conflict of laws rules. If any portion of the provisions hereof shall to any
extent be invalid or unenforceable, the remainder of this Agreement, or the
application of such portion or provisions in circumstances other than those in
which it is held invalid or unenforceable, shall not be affected thereby, and
each portion or provision of this Agreement shall be valid and enforced to the
fullest extent permitted by law.
5
<PAGE>
16. Additional Documents. The parties hereto shall execute such
additional documents as are reasonably required for the purpose of carrying out
the intent and purpose of this Agreement.
17. Headings. Section and paragraph headings are not part of this
Agreement and are included solely for convenience and are not intended to be
full or accurate descriptions of the contents thereof.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all which together shall
constitute one instrument.
19. Notices. Any notice which either party hereto may be required or
permitted to give to the other shall be in writing and may be delivered
personally or by mail, postage prepaid addressed as follows:
If to the Company, to:
HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: Chief Executive Officer
If to the Practice, to:
Alec H. Jaret, D.M.D., P.C.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: President
If to the Stockholder, to:
Alec H. Jaret, D.M.D.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
20. Remedies. The parties hereto will be entitled to enforce their rights
under this Agreement specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights existing in their favor. The parties hereto agree
and acknowledge that money damages may not be an adequate remedy for any breach
of the provisions of this Agreement and that any
6
<PAGE>
party hereto may in its sole discretion apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive relief in
order to enforce or prevent any violation of the provisions of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Option Agreement as of the day and year first above written.
STOCKHOLDER:
/s/ Alec Jaret
------------------------------
ALEC H. JARET, D.M.D., P.C.
By: /s/ Alec Jaret
------------------------------
Name: Alec Jaret
------------------------------
Title: Director of Dental Services
------------------------------
HEALTHDRIVE CORPORATION
By: /s/ Steven S. Charlap
------------------------------
Name: Steven Charlap
------------------------------
Title: Chief Executive Officer
------------------------------
8
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers
unto ______________ ( ) Shares of Common Stock of _______________,
P.C. standing in its name on the books of said Corporation represented by
Certificate No. __ herewith, and do hereby irrevocably constitute and appoint
__________ attorney to transfer the said stock on the books of said Corporation
with full power and substitution in the premises.
Dated ____________
______________________________
In presence of
_________________________
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
AMENDED AND RESTATED OPTION AGREEMENT (this "Agreement") dated as of
July 8, 1998, is among Jeffrey Morer, O.D. (the "Stockholder"), Jeffrey Morer,
O.D., P.C. (the "Practice") and HealthDrive Corporation, a Delaware corporation
(the "Company").
WHEREAS, the Stockholder holds 100 shares, no stated par value per share,
of the Practice (the "Common Stock"), such shares being all of the issued and
outstanding capital stock of the Practice;
WHEREAS, the Practice is a professional corporation organized under the
laws of the Commonwealth of Massachusetts engaged in the practice of dentistry;
WHEREAS, the Company and the Practice have entered into an Operating
Agreement, dated as of June 19, 1998 (the "Operating Agreement"), pursuant to
which, among other things, the Company will provide the Practice certain
services, capital and a license to the use of the service mark "HealthDrive";
WHEREAS, in connection with the execution and delivery of a precursor to
the Operating Agreement, the Company, the Stockholder and the Practice entered
into an Option Agreement, dated as of May 26, 1998 (the "Original Option
Agreement"), pursuant to which the Stockholder granted the Company an option to
purchase all of the outstanding Common Stock of the Practice, and the Company
granted to the Stockholder a right to cause the Company to purchase all of the
outstanding Common Stock of the Practice, each for the purchase prices set forth
therein;
WHEREAS, the Company, the Stockholder and the Practice desire to amend and
restate the Original Option Agreement to conform the terms of such agreement to
the terms of the Operating Agreement and to make certain other modifications;
and
WHEREAS, as a result of the relationship established by the Operating
Agreement, the Stockholder and the Company believe that the Common Stock has
little inherent value and the Stockholder is willing to grant to the Company, on
the terms and subject to the conditions set forth herein, an option to purchase
from the Stockholder all of the outstanding shares of the Common Stock, and the
Company is willing to enter into this Agreement and grant the Stockholder an
option to cause the Company to purchase all of the outstanding shares of Common
Stock at a nominal purchase price, and be bound by the terms, provisions,
covenants and conditions set forth herein;
NOW, THEREFORE, the parties hereto mutually covenant and agree as follows:
1. Company Stock Option. Subject to the terms and conditions set forth
in this Agreement, the Stockholder hereby grants to the Company an option (the
"Company Option") to purchase from the Stockholder at any time, from and after
the date hereof, all of the shares (the "Shares") of Common Stock then
outstanding at the nominal price of $50.00.
<PAGE>
2. Stockholder Option. Subject to the terms and conditions set forth in
this Agreement, the Company hereby grants to the Stockholder an option (the
"Stockholder Option") to cause the Company to purchase from the Stockholder at
any time, from and after the date hereof, all of the Shares for a nominal
purchase price equal to $50.00 (the "Stockholder Exercise Price").
3. Exercise and Payment; Designation of Purchaser; Termination.
(a) The Company shall, at its sole discretion, have the right to appoint a
designated purchaser (the "Company Designee") to purchase the Shares from the
Stockholder in accordance with the terms hereof upon the exercise of either the
Company Option or the Stockholder Option.
(b) The Company Option may be exercised by the Company by delivering to
the Stockholder, on a date (the "Company Notice Date") no less than five (5)
days prior to the date on which the Company wishes to exercise the Option (the
"Company Exercise Date"), written notice which shall specify that the Company
elects to exercise the Option and the identity of the Company Designee.
(c) The Stockholder Option may be exercised by the Stockholder by
delivering to the Company, on a date (the "Stockholder Notice Date"), no less
than two years prior to the date on which the Stockholder wishes to exercise the
Stockholder Option (the "Stockholder Exercise Date"), written notice which shall
specify that the Stockholder elects to exercise the Stockholder Option.
(d) On the applicable Exercise Date, the Company or the Company Designee
shall deliver to the Stockholder the applicable Exercise Price for the Shares to
be purchased in the form of cash, check, bank draft or postal or express money
order payable to the order of the Stockholder in United States dollars.
Immediately following receipt of the applicable Exercise Price, the Stockholder
shall cause the Practice to, and the Practice shall, issue and promptly deliver
to the Company or the Company Designee, if any, a certificate or certificates
for such number of Shares registered in the name of the Company or such Company
Designee, which certificate shall bear a legend substantially in the form of
that set forth in Section 7. In addition, the Practice shall cancel a
certificate or certificates for such number of Shares registered in the name of
the Stockholder as of such date.
(e) As soon as reasonably practicable after the applicable Exercise Date,
the Company Designee shall cause the Practice to change its name to the name of
the Company Designee or such other name selected by the Company or the Company
Designee that does not include the name of the Stockholder.
4. Additional Agreements of Practice. Without limiting the Company's
right to waive such restrictions created hereby prior to the earlier of
expiration of the Company Option or the termination of this Agreement, the
Practice shall not, without the consent of the Company, (i) authorize, issue,
sell, redeem or repurchase any class of capital stock of the
2
<PAGE>
Practice, including without limitation Common Stock, or grant any options,
warrants or other rights to purchase any class of capital stock of the Practice,
including without limitation Common Stock, or (ii) be a party to any merger,
consolidation, sale of all or substantially all, or a material portion, of the
Practice's assets, liquidation or recapitalization in which the previously
outstanding shares of capital stock of the Practice shall be changed into or
exchanged for different securities of the Practice or securities of another
corporation or interests in a noncorporate entity other property (including
cash). In the event that the Shares are transferred to a Company Designee
pursuant to the exercise of the Company Option or the Stockholder Option, the
Practice shall enter into an Option Agreement, in substantially the form of this
Agreement, with the Company and such Company Designee.
5. Practice and Stockholder Representations. Each of the Practice and
the Stockholder hereby represents and warrants to the Company as follows: this
Agreement has been duly executed and delivered by each of the Practice and the
Stockholder and constitutes a legal, valid and binding obligation of each of the
Practice and the Stockholder enforceable against each of the Practice and the
Stockholder in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, violate any provision of the Charter or By-laws of the Practice, any
agreement to which either or both of the Practice or the Stockholder is a party
or by which either or both the Practice or the Stockholder is bound and will not
violate any other restriction of any kind or character to which either or both
of the Practice or the Stockholder is subject.
6. Rights as Shareholder. Neither the Company nor any Company Designee
shall have any rights as a shareholder with respect to any Shares covered by the
Company Option until the date of tender of the Exercise Price.
7. Segregation of Shares. The Stockholder shall cause the Practice to,
and the Practice shall, issue in the Stockholder's name, a new certificate
representing all of the Shares outstanding on the date hereof, which certificate
shall be held, together with an appropriate stock power in favor of Company and
executed by the Stockholder, by the Clerk of the Practice or another mutually
agreed-upon party. The new certificates representing such Shares, and any other
certificates issued prior to the earlier of the exercise of the Company Option
or the Stockholder Option or the termination of this Agreement, that represent
any Shares, shall bear a legend in substantially the following form:
PURSUANT TO AN OPTION AGREEMENT, AMONG HEALTHDRIVE CORPORATION, THE ISSUER
OF THE SECURITIES REPRESENTED HEREBY AND THE HOLDER HEREOF, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF WITHOUT THE EXPLICIT WRITTEN CONSENT OF THE COMPANY
UNTIL THE OPTION GRANTED TO THE COMPANY BY SUCH OPTION AGREEMENT HAS BEEN
EXERCISED OR SUCH OPTION AGREEMENT HAS BEEN TERMINATED.
3
<PAGE>
8. Restrictions on Transfer. The Stockholder shall not assign, transfer
or otherwise dispose of the Shares unless and until the Company Option has been
exercised or this Agreement has been terminated. The Practice agrees that,
unless and until the Company Option has been exercised or this Agreement has
been terminated, the Practice will not recognize any purported assignment or
transfer of any of the Shares.
9. Compliance with Law. The Stockholder shall cause the Practice, and
the Practice shall be obligated, to take any and all actions as are necessary or
desirable in order to cause the issuance and delivery of stock certificates to
the Company Designee upon exercise of the Company Option or the Stockholder's
Option to comply with all applicable laws and regulations of any governmental
authority.
10. No Optometry Practice By the Company. It is acknowledged that the
Company is not authorized or qualified to engage in any activity which may be
construed or considered to constitute the practice of optometry or any ancillary
health care service ("Optometry Services"). To the extent any act or service of
the Company under this Agreement is construed or considered to definitely
constitute Optometry Service, the performance of such act or service by the
Company shall be deemed waived and excused and such act or service shall not be
permitted under this Agreement. If notwithstanding any waiver or excuse of the
Company's performance of an act or service as contemplated in the immediately
preceding sentence, any of the provisions of this Agreement or any action that
may be taken hereunder (1) may be construed or considered to be in material
violation of any rules, regulations or policies of the Board of Registration in
Optometry (or such ancillary health care service) of The Commonwealth of
Massachusetts, the Board of Registration of any other jurisdiction in which the
Practice provides Optometry Services, or the statutes, laws, rules or
regulations of the United States or any state, governmental agency, authority,
or other body having jurisdiction over the Practice or the Company, or (2) may
be construed or considered to impose a substantial threat to the license to
practice dentistry and/or any ancillary health care service of any Optometry
Practitioner, or to the authorization of the Practice to render Optometry
Services, then the parties hereto agree to use their best efforts to negotiate
in good faith an amendment to this Agreement, the purpose and substance of which
shall be modification of only those provisions giving rise to the issues set
forth in clauses (1) and (2) of this sentence so that the Agreement as modified
continues to reflect, as nearly as possible, the intent of the parties as
expressed herein. If notwithstanding negotiation in good faith as contemplated
in the immediately preceding sentence, an amendment to this Agreement cannot be
agreed to that resolves the issues set forth in clauses (1) and (2) of the
preceding sentence and continues to reflect, as nearly as possible, the intent
of the parties expressed herein, this Agreement shall terminate thirty (30) days
after the date either party hereto provides notice to the other party hereto
that such circumstances exist.
11. Term of Agreement. This Agreement shall be in effect from the date
first set forth above through May 26, 2038 (the "Expiration Date"); provided,
however, that the term
4
<PAGE>
hereof shall be automatically extended for additional periods of twelve (12)
months each, unless either party gives written notice as provided below to the
other at least ninety (90) days prior to the expiration of the initial term or
any extended term hereof.
12. Prior Agreement; Amendments. This Agreement supersedes all prior
agreements and understandings between the parties hereto with respect to the
subject matter hereof, including but not limited to the Original Option
Agreement, which is terminated upon the effectiveness of this Agreement
provided, however, that in the event of the termination of this Agreement prior
to the Expiration Date, the Original Option Agreement shall automatically, and
without further action by any of the parties hereto, be reinstated and in full
force and effect in accordance with the terms thereof. This Agreement may not
be amended, altered, changed, or terminated orally. No amendment, alteration,
change, or attempted waiver of any of the provisions hereof shall be binding
without the written consent of both parties, and such amendment, alteration,
change, termination or waiver shall in no way affect the other terms and
conditions of this Agreement, which in all other respects shall remain in full
force.
13. Assignment; Binding Effect. The Company shall have the right to
assign or sell its rights and obligations under this Agreement to any person,
corporation, partnership, or other legal entity. Neither the Practice nor the
Stockholder shall be permitted to assign this Agreement or its respective rights
and obligations under this Agreement without the written consent of the Company,
which consent may be withheld in the Company's sole discretion. Any attempted
assignment by the Practice or the Stockholder shall be void and of no force and
effect. The provisions of this Agreement shall be binding upon and shall inure
to the benefit of the parties' successors and assigns, respectively, but this
provision shall not constitute a consent by the Company to assignment by the
Practice or the Stockholder otherwise prohibited by the preceding sentences.
14. Construction of Agreement. The failure to insist upon strict
compliance with any of the terms, covenants or conditions herein shall not be
deemed a waiver of such terms, covenants, or conditions, nor shall any waiver or
relinquishment of any right at any one or more times be deemed a waiver or
relinquishment of such right at any other time or times.
15. Governing Law. This Agreement has been signed by the parties under
seal in Massachusetts, and the parties agree that it shall be governed and
construed in accordance with the laws of The Commonwealth of Massachusetts to
the fullest extent permitted by law, without regard to the application of
conflict of laws rules. If any portion of the provisions hereof shall to any
extent be invalid or unenforceable, the remainder of this Agreement, or the
application of such portion or provisions in circumstances other than those in
which it is held invalid or unenforceable, shall not be affected thereby, and
each portion or provision of this Agreement shall be valid and enforced to the
fullest extent permitted by law.
5
<PAGE>
16. Additional Documents. The parties hereto shall execute such
additional documents as are reasonably required for the purpose of carrying out
the intent and purpose of this Agreement.
17. Headings. Section and paragraph headings are not part of this
Agreement and are included solely for convenience and are not intended to be
full or accurate descriptions of the contents thereof.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all which together shall
constitute one instrument.
19. Notices. Any notice which either party hereto may be required or
permitted to give to the other shall be in writing and may be delivered
personally or by mail, postage prepaid addressed as follows:
If to the Company, to:
HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: Chief Executive Officer
If to the Practice, to:
Jeffrey Morer, O.D., P.C.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: President
If to the Stockholder, to:
Jeffrey Morer, O.D.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
20. Remedies. The parties hereto will be entitled to enforce their rights
under this Agreement specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights existing in their favor. The parties hereto agree
and acknowledge that money damages may not be an adequate remedy for any breach
of the provisions of this Agreement and that any
6
<PAGE>
party hereto may in its sole discretion apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive relief in
order to enforce or prevent any violation of the provisions of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Option Agreement as of the day and year first above written.
STOCKHOLDER:
/s/ Jeffrey Morer
----------------------------------
JEFFREY MORER, O.D., P.C.
By: /s/ Jeffrey Morer
-------------------------------
Name: Jeffrey L. Morer
-----------------------------
Title: President
----------------------------
HEALTHDRIVE CORPORATION
By: /s/ Steven Charlap
-------------------------------
Name: Steven Charlap
-----------------------------
Title: Chief Executive Officer
----------------------------
8
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers
unto ______________ ( ) Shares of Common Stock of _______________,
P.C. standing in its name on the books of said Corporation represented by
Certificate No. __ herewith, and do hereby irrevocably constitute and appoint
__________ attorney to transfer the said stock on the books of said Corporation
with full power and substitution in the premises.
Dated ____________
-------------------------------
In presence of
- -------------------------------
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
AMENDED AND RESTATED OPTION AGREEMENT (this "Agreement") dated as of
July 8, 1998, is among Mary C. Manesis, D.P.M. (the "Stockholder"), Mary C.
Manesis, D.P.M., P.C. (the "Practice") and HealthDrive Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Stockholder holds 100 shares, no stated par value per share,
of the Practice (the "Common Stock"), such shares being all of the issued and
outstanding capital stock of the Practice;
WHEREAS, the Practice is a professional corporation organized under the
laws of the Commonwealth of Massachusetts engaged in the practice of dentistry;
WHEREAS, the Company and the Practice have entered into an Operating
Agreement, dated as of June 19, 1998 (the "Operating Agreement"), pursuant to
which, among other things, the Company will provide the Practice certain
services, capital and a license to the use of the service mark "HealthDrive";
WHEREAS, in connection with the execution and delivery of a precursor to
the Operating Agreement, the Company, the Stockholder and the Practice entered
into an Option Agreement, dated as of May 26, 1998 (the "Original Option
Agreement"), pursuant to which the Stockholder granted the Company an option to
purchase all of the outstanding Common Stock of the Practice, and the Company
granted to the Stockholder a right to cause the Company to purchase all of the
outstanding Common Stock of the Practice, each for the purchase prices set forth
therein;
WHEREAS, the Company, the Stockholder and the Practice desire to amend and
restate the Original Option Agreement to conform the terms of such agreement to
the terms of the Operating Agreement and to make certain other modifications;
and
WHEREAS, as a result of the relationship established pursuant to the
Operating Agreement, the Stockholder and the Company believe that the Common
Stock has little inherent value and the Stockholder is willing to grant to the
Company, on the terms and subject to the conditions set forth herein, an option
to purchase from the Stockholder all of the outstanding shares of the Common
Stock, and the Company is willing to enter into this Agreement and grant the
Stockholder an option to cause the Company to purchase all of the outstanding
shares of Common Stock at a nominal purchase price, and be bound by the terms,
provisions, covenants and conditions set forth herein;
NOW, THEREFORE, the parties hereto mutually covenant and agree as follows:
1. Company Stock Option. Subject to the terms and conditions set forth
in this Agreement, the Stockholder hereby grants to the Company an option (the
"Company
<PAGE>
Option") to purchase from the Stockholder at any time, from and after the date
hereof, all of the shares (the "Shares") of Common Stock then outstanding at the
nominal price of $50.00.
2. Stockholder Option. Subject to the terms and conditions set forth in
this Agreement, the Company hereby grants to the Stockholder an option (the
"Stockholder Option") to cause the Company to purchase from the Stockholder at
any time, from and after the date hereof, all of the Shares at the nominal
purchase price equal to $50.00 (the "Stockholder Exercise Price").
3. Exercise and Payment; Designation of Purchaser; Termination.
(a) The Company shall, at its sole discretion, have the right to appoint a
designated purchaser (the "Company Designee") to purchase the Shares from the
Stockholder in accordance with the terms hereof upon the exercise of either the
Company Option or the Stockholder Option.
(b) The Company Option may be exercised by the Company by delivering to
the Stockholder, on a date (the "Company Notice Date") no less than five (5)
days prior to the date on which the Company wishes to exercise the Option (the
"Company Exercise Date"), written notice which shall specify that the Company
elects to exercise the Option and the identity of the Company Designee.
(c) The Stockholder Option may be exercised by the Stockholder by
delivering to the Company, on a date (the "Stockholder Notice Date"), no less
than two years prior to the date on which the Stockholder wishes to exercise the
Stockholder Option (the "Stockholder Exercise Date"), written notice which shall
specify that the Stockholder elects to exercise the Stockholder Option.
(d) On the applicable Exercise Date, the Company or the Company Designee
shall deliver to the Stockholder the applicable Exercise Price for the Shares to
be purchased in the form of cash, check, bank draft or postal or express money
order payable to the order of the Stockholder in United States dollars.
Immediately following receipt of the applicable Exercise Price, the Stockholder
shall cause the Practice to, and the Practice shall, issue and promptly deliver
to the Company or the Company Designee, if any, a certificate or certificates
for such number of Shares registered in the name of the Company or such Company
Designee, which certificate shall bear a legend substantially in the form of
that set forth in Section 7. In addition, the Practice shall cancel a
certificate or certificates for such number of Shares registered in the name of
the Stockholder as of such date.
(e) As soon as reasonably practicable after the applicable Exercise Date,
the Company Designee shall cause the Practice to change its name to the name of
the Company Designee or such other name selected by the Company or the Company
Designee that does not include the name of the Stockholder.
2
<PAGE>
4. Additional Agreements of Practice. Without limiting the Company's
right to waive such restrictions created hereby prior to the earlier of
expiration of the Company Option or the termination of this Agreement, the
Practice shall not, without the consent of the Company, (i) authorize, issue,
sell, redeem or repurchase any class of capital stock of the Practice, including
without limitation Common Stock, or grant any options, warrants or other rights
to purchase any class of capital stock of the Practice, including without
limitation Common Stock, or (ii) be a party to any merger, consolidation, sale
of all or substantially all, or a material portion, of the Practice's assets,
liquidation or recapitalization in which the previously outstanding shares of
capital stock of the Practice shall be changed into or exchanged for different
securities of the Practice or securities of another corporation or interests in
a noncorporate entity other property (including cash). In the event that the
Shares are transferred to a Company Designee pursuant to the exercise of the
Company Option or the Stockholder Option, the Practice shall enter into an
Option Agreement, in substantially the form of this Agreement, with the Company
and such Company Designee.
5. Practice and Stockholder Representations. Each of the Practice and
the Stockholder hereby represents and warrants to the Company as follows: this
Agreement has been duly executed and delivered by each of the Practice and the
Stockholder and constitutes a legal, valid and binding obligation of each of the
Practice and the Stockholder enforceable against each of the Practice and the
Stockholder in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, violate any provision of the Charter or By-laws of the Practice, any
agreement to which either or both of the Practice or the Stockholder is a party
or by which either or both the Practice or the Stockholder is bound and will not
violate any other restriction of any kind or character to which either or both
of the Practice or the Stockholder is subject.
6. Rights as Shareholder. Neither the Company nor any Company Designee
shall have any rights as a shareholder with respect to any Shares covered by the
Company Option until the date of tender of the Exercise Price.
7. Segregation of Shares. The Stockholder shall cause the Practice to,
and the Practice shall, issue in the Stockholder's name, a new certificate
representing all of the Shares outstanding on the date hereof, which certificate
shall be held, together with an appropriate stock power in favor of Company and
executed by the Stockholder, by the Clerk of the Practice or another mutually
agreed-upon party. The new certificates representing such Shares, and any other
certificates issued prior to the earlier of the exercise of the Company Option
or the Stockholder Option or the termination of this Agreement, that represent
any Shares, shall bear a legend in substantially the following form:
PURSUANT TO AN OPTION AGREEMENT, AMONG HEALTHDRIVE CORPORATION, THE ISSUER
OF THE SECURITIES REPRESENTED HEREBY AND THE HOLDER HEREOF, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE ASSIGNED, TRANSFERRED OR
OTHERWISE
3
<PAGE>
DISPOSED OF WITHOUT THE EXPLICIT WRITTEN CONSENT OF THE COMPANY UNTIL THE
OPTION GRANTED TO THE COMPANY BY SUCH OPTION AGREEMENT HAS BEEN EXERCISED
OR SUCH OPTION AGREEMENT HAS BEEN TERMINATED.
8. Restrictions on Transfer. The Stockholder shall not assign, transfer
or otherwise dispose of the Shares unless and until the Company Option has been
exercised or this Agreement has been terminated. The Practice agrees that,
unless and until the Company Option has been exercised or this Agreement has
been terminated, the Practice will not recognize any purported assignment or
transfer of any of the Shares.
9. Compliance with Law. The Stockholder shall cause the Practice, and
the Practice shall be obligated, to take any and all actions as are necessary or
desirable in order to cause the issuance and delivery of stock certificates to
the Company Designee upon exercise of the Company Option or the Stockholder's
Option to comply with all applicable laws and regulations of any governmental
authority.
10. No Podiatry Practice By the Company. It is acknowledged that the
Company is not authorized or qualified to engage in any activity which may be
construed or considered to constitute the practice of podiatry or any ancillary
health care service ("Podiatry Services"). To the extent any act or service of
the Company under this Agreement is construed or considered to definitely
constitute Podiatry Service, the performance of such act or service by the
Company shall be deemed waived and excused and such act or service shall not be
permitted under this Agreement. If notwithstanding any waiver or excuse of the
Company's performance of an act or service as contemplated in the immediately
preceding sentence, any of the provisions of this Agreement or any action that
may be taken hereunder (1) may be construed or considered to be in material
violation of any rules, regulations or policies of the Board of Registration in
Podiatry (or such ancillary health care service) of The Commonwealth of
Massachusetts, the Board of Registration of any other jurisdiction in which the
Practice provides Podiatry Services, or the statutes, laws, rules or regulations
of the United States or any state, governmental agency, authority, or other body
having jurisdiction over the Practice or the Company, or (2) may be construed or
considered to impose a substantial threat to the license to practice dentistry
and/or any ancillary health care service of any Podiatry Practitioner, or to the
authorization of the Practice to render Podiatry Services, then the parties
hereto agree to use their best efforts to negotiate in good faith an amendment
to this Agreement, the purpose and substance of which shall be modification of
only those provisions giving rise to the issues set forth in clauses (1) and (2)
of this sentence so that the Agreement as modified continues to reflect, as
nearly as possible, the intent of the parties as expressed herein. If
notwithstanding negotiation in good faith as contemplated in the immediately
preceding sentence, an amendment to this Agreement cannot be agreed to that
resolves the issues set forth in clauses (1) and (2) of the preceding sentence
and continues to reflect, as nearly as possible, the intent of the parties
expressed herein, this Agreement shall terminate thirty (30) days
4
<PAGE>
after the date either party hereto provides notice to the other party hereto
that such circumstances exist.
11. Term of Agreement. This Agreement shall be in effect from the date
first set forth above through May 26, 2038 (the "Expiration Date"); provided,
however, that the term hereof shall be automatically extended for additional
periods of twelve (12) months each, unless either party gives written notice as
provided below to the other at least ninety (90) days prior to the expiration of
the initial term or any extended term hereof.
12. Prior Agreement; Amendments. This Agreement supersedes all prior
agreements and understandings between the parties hereto with respect to the
subject matter hereof, including but not limited to the Original Option
Agreement, which is terminated upon the effectiveness of this Agreement
provided, however, that in the event of the termination of this Agreement prior
to the Expiration Date, the Original Option Agreement shall automatically, and
without further action by any of the parties hereto, be reinstated and in full
force and effect in accordance with the terms thereof. This Agreement may not
be amended, altered, changed, or terminated orally. No amendment, alteration,
change, or attempted waiver of any of the provisions hereof shall be binding
without the written consent of both parties, and such amendment, alteration,
change, termination or waiver shall in no way affect the other terms and
conditions of this Agreement, which in all other respects shall remain in full
force.
13. Assignment; Binding Effect. The Company shall have the right to
assign or sell its rights and obligations under this Agreement to any person,
corporation, partnership, or other legal entity. Neither the Practice nor the
Stockholder shall be permitted to assign this Agreement or its respective rights
and obligations under this Agreement without the written consent of the Company,
which consent may be withheld in the Company's sole discretion. Any attempted
assignment by the Practice or the Stockholder shall be void and of no force and
effect. The provisions of this Agreement shall be binding upon and shall inure
to the benefit of the parties' successors and assigns, respectively, but this
provision shall not constitute a consent by the Company to assignment by the
Practice or the Stockholder otherwise prohibited by the preceding sentences.
14. Construction of Agreement. The failure to insist upon strict
compliance with any of the terms, covenants or conditions herein shall not be
deemed a waiver of such terms, covenants, or conditions, nor shall any waiver or
relinquishment of any right at any one or more times be deemed a waiver or
relinquishment of such right at any other time or times.
15. Governing Law. This Agreement has been signed by the parties under
seal in Massachusetts, and the parties agree that it shall be governed and
construed in accordance with the laws of The Commonwealth of Massachusetts to
the fullest extent permitted by law, without regard to the application of
conflict of laws rules. If any portion of the provisions hereof shall to any
extent be invalid or unenforceable, the remainder of this Agreement, or the
application of such portion or provisions in circumstances other than those in
which it is
5
<PAGE>
held invalid or unenforceable, shall not be affected thereby, and each portion
or provision of this Agreement shall be valid and enforced to the fullest extent
permitted by law.
16. Additional Documents. The parties hereto shall execute such
additional documents as are reasonably required for the purpose of carrying out
the intent and purpose of this Agreement.
17. Headings. Section and paragraph headings are not part of this
Agreement and are included solely for convenience and are not intended to be
full or accurate descriptions of the contents thereof.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all which together shall
constitute one instrument.
19. Notices. Any notice which either party hereto may be required or
permitted to give to the other shall be in writing and may be delivered
personally or by mail, postage prepaid addressed as follows:
If to the Company, to:
HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: Chief Executive Officer
If to the Practice, to:
Mary C. Manesis, D.P.M., P.C.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: President
If to the Stockholder, to:
Mary C. Manesis, D.P.M.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
20. Remedies. The parties hereto will be entitled to enforce their rights
under this Agreement specifically (without posting a bond or other security), to
recover damages by
6
<PAGE>
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in their favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party hereto may in its sole
discretion apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive relief in order to enforce or prevent any
violation of the provisions of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Option Agreement as of the day and year first above written.
STOCKHOLDER:
/s/ Mary C. Manesis
----------------------------------
MARY C. MANESIS, D.P.M., P.C.
By: /s/ Mary C. Manesis
-------------------------------
Name: Mary C. Manesis
-----------------------------
Title: President
----------------------------
HEALTHDRIVE CORPORATION
By: /s/ Steven Charlap
-------------------------------
Name: Steven Charlap
-----------------------------
Title: Chief Financial Officer
----------------------------
8
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers
unto ______________ ( ) Shares of Common Stock of _______________,
P.C. standing in its name on the books of said Corporation represented by
Certificate No. __ herewith, and do hereby irrevocably constitute and appoint
__________ attorney to transfer the said stock on the books of said Corporation
with full power and substitution in the premises.
Dated ____________
-------------------------------
In presence of
- -------------------------------
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
AMENDED AND RESTATED OPTION AGREEMENT (this "Agreement") dated as of
July 8, 1998, is among Steven S. Charlap, M.D. (the "Stockholder"), HealthDrive
Michigan Corporation (the "Practice") and HealthDrive Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Stockholder holds 100 shares, no stated par value per share,
of the Practice (the "Common Stock"), such shares being all of the issued and
outstanding capital stock of the Practice;
WHEREAS, the Practice is a professional corporation organized under the
laws of the Commonwealth of Massachusetts engaged in the practice of dentistry;
WHEREAS, the Company and the Practice have entered into an Operating
Agreement, dated as of June 19, 1998 (the "Operating Agreement"), pursuant to
which, among other things, the Company will provide the Practice certain
services, capital and a license to the use of the service mark "HealthDrive";
WHEREAS, in connection with the execution and delivery of a precursor to
the Operating Agreement, the Company, the Stockholder and the Practice entered
into an Option Agreement, dated as of May 26, 1998 (the "Original Option
Agreement"), pursuant to which the Stockholder granted the Company an option to
purchase all of the outstanding Common Stock of the Practice, and the Company
granted to the Stockholder a right to cause the Company to purchase all of the
outstanding Common Stock of the Practice, each for the purchase prices set forth
therein;
WHEREAS, the Company, the Stockholder and the Practice desire to amend and
restate the Original Option Agreement to conform the terms of such agreement to
the terms of the Operating Agreement and to make certain other modifications;
and
WHEREAS, as a result of the relationship established by the Operating
Agreement, the Stockholder and the Company believe that the Common Stock has
little inherent value and the Stockholder is willing to grant to the Company, on
the terms and subject to the conditions set forth herein, an option to purchase
from the Stockholder all of the outstanding shares of the Common Stock, and the
Company is willing to enter into this Agreement and grant the Stockholder an
option to cause the Company to purchase all of the outstanding shares of Common
Stock at a nominal purchase price, and be bound by the terms, provisions,
covenants and conditions set forth herein;
NOW, THEREFORE, the parties hereto mutually covenant and agree as follows:
1. Company Stock Option. Subject to the terms and conditions set forth
in this Agreement, the Stockholder hereby grants to the Company an option (the
"Company
<PAGE>
Option") to purchase from the Stockholder at any time, from and after the date
hereof, all of the shares (the "Shares") of Common Stock then outstanding at the
nominal price of $50.00.
2. Stockholder Option. Subject to the terms and conditions set forth in
this Agreement, the Company hereby grants to the Stockholder an option (the
"Stockholder Option") to cause the Company to purchase from the Stockholder at
any time, from and after the date hereof, all of the Shares for a nominal
purchase price equal to $50.00 (the "Stockholder Exercise Price").
3. Exercise and Payment; Designation of Purchaser; Termination.
(a) The Company shall, at its sole discretion, have the right to appoint a
designated purchaser (the "Company Designee") to purchase the Shares from the
Stockholder in accordance with the terms hereof upon the exercise of either the
Company Option or the Stockholder Option.
(b) The Company Option may be exercised by the Company by delivering to
the Stockholder, on a date (the "Company Notice Date") no less than five (5)
days prior to the date on which the Company wishes to exercise the Option (the
"Company Exercise Date"), written notice which shall specify that the Company
elects to exercise the Option and the identity of the Company Designee.
(c) The Stockholder Option may be exercised by the Stockholder by
delivering to the Company, on a date (the "Stockholder Notice Date"), no less
than two years prior to the date on which the Stockholder wishes to exercise the
Stockholder Option (the "Stockholder Exercise Date"), written notice which shall
specify that the Stockholder elects to exercise the Stockholder Option.
(d) On the applicable Exercise Date, the Company or the Company Designee
shall deliver to the Stockholder the applicable Exercise Price for the Shares to
be purchased in the form of cash, check, bank draft or postal or express money
order payable to the order of the Stockholder in United States dollars.
Immediately following receipt of the applicable Exercise Price, the Stockholder
shall cause the Practice to, and the Practice shall, issue and promptly deliver
to the Company or the Company Designee, if any, a certificate or certificates
for such number of Shares registered in the name of the Company or such Company
Designee, which certificate shall bear a legend substantially in the form of
that set forth in Section 7. In addition, the Practice shall cancel a
certificate or certificates for such number of Shares registered in the name of
the Stockholder as of such date.
(e) As soon as reasonably practicable after the applicable Exercise Date,
the Company Designee shall cause the Practice to change its name to the name of
the Company Designee or such other name selected by the Company or the Company
Designee that does not include the name of the Stockholder.
2
<PAGE>
4. Additional Agreements of Practice. Without limiting the Company's
right to waive such restrictions created hereby prior to the earlier of
expiration of the Company Option or the termination of this Agreement, the
Practice shall not, without the consent of the Company, (i) authorize, issue,
sell, redeem or repurchase any class of capital stock of the Practice, including
without limitation Common Stock, or grant any options, warrants or other rights
to purchase any class of capital stock of the Practice, including without
limitation Common Stock, or (ii) be a party to any merger, consolidation, sale
of all or substantially all, or a material portion, of the Practice's assets,
liquidation or recapitalization in which the previously outstanding shares of
capital stock of the Practice shall be changed into or exchanged for different
securities of the Practice or securities of another corporation or interests in
a noncorporate entity other property (including cash). In the event that the
Shares are transferred to a Company Designee pursuant to the exercise of the
Company Option or the Stockholder Option, the Practice shall enter into an
Option Agreement, in substantially the form of this Agreement, with the Company
and such Company Designee.
5. Practice and Stockholder Representations. Each of the Practice and
the Stockholder hereby represents and warrants to the Company as follows: this
Agreement has been duly executed and delivered by each of the Practice and the
Stockholder and constitutes a legal, valid and binding obligation of each of the
Practice and the Stockholder enforceable against each of the Practice and the
Stockholder in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, violate any provision of the Charter or By-laws of the Practice, any
agreement to which either or both of the Practice or the Stockholder is a party
or by which either or both the Practice or the Stockholder is bound and will not
violate any other restriction of any kind or character to which either or both
of the Practice or the Stockholder is subject.
6. Rights as Shareholder. Neither the Company nor any Company Designee
shall have any rights as a shareholder with respect to any Shares covered by the
Company Option until the date of tender of the Exercise Price.
7. Segregation of Shares. The Stockholder shall cause the Practice to,
and the Practice shall, issue in the Stockholder's name, a new certificate
representing all of the Shares outstanding on the date hereof, which certificate
shall be held, together with an appropriate stock power in favor of Company and
executed by the Stockholder, by the Clerk of the Practice or another mutually
agreed-upon party. The new certificates representing such Shares, and any other
certificates issued prior to the earlier of the exercise of the Company Option
or the Stockholder Option or the termination of this Agreement, that represent
any Shares, shall bear a legend in substantially the following form:
PURSUANT TO AN OPTION AGREEMENT, AMONG HEALTHDRIVE CORPORATION, THE ISSUER
OF THE SECURITIES REPRESENTED HEREBY AND THE HOLDER HEREOF, THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE ASSIGNED, TRANSFERRED OR
OTHERWISE
3
<PAGE>
DISPOSED OF WITHOUT THE EXPLICIT WRITTEN CONSENT OF THE COMPANY UNTIL THE
OPTION GRANTED TO THE COMPANY BY SUCH OPTION AGREEMENT HAS BEEN EXERCISED
OR SUCH OPTION AGREEMENT HAS BEEN TERMINATED.
8. Restrictions on Transfer. The Stockholder shall not assign, transfer
or otherwise dispose of the Shares unless and until the Company Option has been
exercised or this Agreement has been terminated. The Practice agrees that,
unless and until the Company Option has been exercised or this Agreement has
been terminated, the Practice will not recognize any purported assignment or
transfer of any of the Shares.
9. Compliance with Law. The Stockholder shall cause the Practice, and
the Practice shall be obligated, to take any and all actions as are necessary or
desirable in order to cause the issuance and delivery of stock certificates to
the Company Designee upon exercise of the Company Option or the Stockholder's
Option to comply with all applicable laws and regulations of any governmental
authority.
10. No Health Care Practice By the Company. It is acknowledged that the
Company is not authorized or qualified to engage in any activity which may be
construed or considered to constitute the practice of dentistry, optometry,
podiatry or any ancillary health care service ("Health Care Services"). To the
extent any act or service of the Company under this Agreement is construed or
considered to definitely constitute Health Care Service, the performance of such
act or service by the Company shall be deemed waived and excused and such act or
service shall not be permitted under this Agreement. If notwithstanding any
waiver or excuse of the Company's performance of an act or service as
contemplated in the immediately preceding sentence, any of the provisions of
this Agreement or any action that may be taken hereunder (1) may be construed or
considered to be in material violation of any rules, regulations or policies of
the Board of Registration in Dentistry, Optometry or Podiatry (or such ancillary
health care service) of the State of Michigan, the Board of Registration of any
other jurisdiction in which the Practice provides Dental, Optometry or Podiatry
Services, or the statutes, laws, rules or regulations of the United States or
any state, governmental agency, authority, or other body having jurisdiction
over the Practice or the Company, or (2) may be construed or considered to
impose a substantial threat to the license to practice dentistry, optometry or
podiatry and/or any ancillary health care service, or to the authorization of
the Practice to render Health Care Services, then the parties hereto agree to
use their best efforts to negotiate in good faith an amendment to this
Agreement, the purpose and substance of which shall be modification of only
those provisions giving rise to the issues set forth in clauses (1) and (2) of
this sentence so that the Agreement as modified continues to reflect, as nearly
as possible, the intent of the parties as expressed herein. If notwithstanding
negotiation in good faith as contemplated in the immediately preceding sentence,
an amendment to this Agreement cannot be agreed to that resolves the issues set
forth in clauses (1) and (2) of the preceding sentence and continues to reflect,
as nearly as possible, the intent of the parties expressed herein, this
Agreement shall terminate thirty (30)
4
<PAGE>
days after the date either party hereto provides notice to the other party
hereto that such circumstances exist.
11. Term of Agreement. This Agreement shall be in effect from the date
first set forth above through May 26, 2038 (the "Expiration Date"); provided,
however, that the term hereof shall be automatically extended for additional
periods of twelve (12) months each, unless either party gives written notice as
provided below to the other at least ninety (90) days prior to the expiration of
the initial term or any extended term hereof.
12. Prior Agreement; Amendments. This Agreement supersedes all prior
agreements and understandings between the parties hereto with respect to the
subject matter hereof, including but not limited to the Original Option
Agreement, which is terminated upon the effectiveness of this Agreement
provided, however, that in the event of the termination of this Agreement prior
to the Expiration Date, the Original Option Agreement shall automatically, and
without further action by any of the parties hereto, be reinstated and in full
force and effect in accordance with the terms thereof. This Agreement may not
be amended, altered, changed, or terminated orally. No amendment, alteration,
change, or attempted waiver of any of the provisions hereof shall be binding
without the written consent of both parties, and such amendment, alteration,
change, termination or waiver shall in no way affect the other terms and
conditions of this Agreement, which in all other respects shall remain in full
force.
13. Assignment; Binding Effect. The Company shall have the right to
assign or sell its rights and obligations under this Agreement to any person,
corporation, partnership, or other legal entity. Neither the Practice nor the
Stockholder shall be permitted to assign this Agreement or its respective rights
and obligations under this Agreement without the written consent of the Company,
which consent may be withheld in the Company's sole discretion. Any attempted
assignment by the Practice or the Stockholder shall be void and of no force and
effect. The provisions of this Agreement shall be binding upon and shall inure
to the benefit of the parties' successors and assigns, respectively, but this
provision shall not constitute a consent by the Company to assignment by the
Practice or the Stockholder otherwise prohibited by the preceding sentences.
14. Construction of Agreement. The failure to insist upon strict
compliance with any of the terms, covenants or conditions herein shall not be
deemed a waiver of such terms, covenants, or conditions, nor shall any waiver or
relinquishment of any right at any one or more times be deemed a waiver or
relinquishment of such right at any other time or times.
15. Governing Law. This Agreement has been signed by the parties under
seal in Massachusetts, and the parties agree that it shall be governed and
construed in accordance with the laws of The Commonwealth of Massachusetts to
the fullest extent permitted by law, without regard to the application of
conflict of laws rules. If any portion of the provisions hereof shall to any
extent be invalid or unenforceable, the remainder of this Agreement, or the
application of such portion or provisions in circumstances other than those in
which it is
5
<PAGE>
held invalid or unenforceable, shall not be affected thereby, and each portion
or provision of this Agreement shall be valid and enforced to the fullest extent
permitted by law.
16. Additional Documents. The parties hereto shall execute such
additional documents as are reasonably required for the purpose of carrying out
the intent and purpose of this Agreement.
17. Headings. Section and paragraph headings are not part of this
Agreement and are included solely for convenience and are not intended to be
full or accurate descriptions of the contents thereof.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all which together shall
constitute one instrument.
19. Notices. Any notice which either party hereto may be required or
permitted to give to the other shall be in writing and may be delivered
personally or by mail, postage prepaid addressed as follows:
If to the Company, to:
HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: Chief Executive Officer
If to the Practice, to:
HealthDrive Michigan Corporation
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
Attention: President
If to the Stockholder, to:
Steven S. Charlap, M.D.
c/o HealthDrive Corporation
25 Needham Street
Newton, MA 02161
20. Remedies. The parties hereto will be entitled to enforce their rights
under this Agreement specifically (without posting a bond or other security), to
recover damages by
6
<PAGE>
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in their favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party hereto may in its sole
discretion apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive relief in order to enforce or prevent any
violation of the provisions of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Option Agreement as of the day and year first above written.
STOCKHOLDER:
/s/ Steven Charlap
----------------------------------
HEALTHDRIVE MICHIGAN CORPORATION
By:/s/ Steven Charlap
-------------------------------
Name: Steven Charlap
-------------------------------
Title: Chief Executive Officer
-------------------------------
HEALTHDRIVE CORPORATION
By: /s/ Michael R. Kaplan
-------------------------------
Name: Michael R. Kaplan
-----------------------------
Title: Chief Financial Officer
----------------------------
8
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers
unto ______________ ( ) Shares of Common Stock of _______________,
P.C. standing in its name on the books of said Corporation represented by
Certificate No. __ herewith, and do hereby irrevocably constitute and appoint
__________ attorney to transfer the said stock on the books of said Corporation
with full power and substitution in the premises.
Dated ____________
-------------------------------
In presence of
- -------------------------------
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15
<SECURITIES> 0
<RECEIVABLES> 2,082
<ALLOWANCES> 349
<INVENTORY> 0
<CURRENT-ASSETS> 1,969
<PP&E> 2,052
<DEPRECIATION> 1,309
<TOTAL-ASSETS> 2,713
<CURRENT-LIABILITIES> 1,258
<BONDS> 56
1,950
0
<COMMON> 20
<OTHER-SE> (571)
<TOTAL-LIABILITY-AND-EQUITY> 2,713
<SALES> 0
<TOTAL-REVENUES> 12,930
<CGS> 0
<TOTAL-COSTS> 8,213
<OTHER-EXPENSES> 4,602
<LOSS-PROVISION> 809
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 55
<INCOME-TAX> 0
<INCOME-CONTINUING> 55
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
</TABLE>
