-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UW8CGqk54jrBrsl69RD25DYyvnOkB4RBby5/PIllBORLzQF71ltZcI6K+qokGMMW PVVWzUVUotAOLO6w5DSfCA== 0000950112-96-003190.txt : 19960910 0000950112-96-003190.hdr.sgml : 19960910 ACCESSION NUMBER: 0000950112-96-003190 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19960909 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED HEALTH CORP CENTRAL INDEX KEY: 0001002628 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 133832365 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06283 FILM NUMBER: 96627662 BUSINESS ADDRESS: STREET 1: 560 WHITE PLAINS RD STREET 2: 2ND FL CITY: TARRYTOWN STATE: NY ZIP: 10591 BUSINESS PHONE: 9143326688 MAIL ADDRESS: STREET 1: 560 WHITE PLAINS RD STREET 2: 2ND FLOOR CITY: TARRYTOWN STATE: NY ZIP: 10591 S-1/A 1 ADVANCED HEALTH CORPORATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1996 REGISTRATION NO. 333-06283 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- ADVANCED HEALTH CORPORATION (Exact name of registrant as specified in charter) DELAWARE 8099 13-3893841 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
------------------- 560 WHITE PLAINS ROAD TARRYTOWN, NEW YORK 10591 (914) 524-4200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------- JONATHAN EDELSON, M.D. CHAIRMAN AND CHIEF EXECUTIVE OFFICER ADVANCED HEALTH CORPORATION 560 WHITE PLAINS ROAD TARRYTOWN, NEW YORK 10591 (914) 524-4200 (Name, address, including zip code, and telephone number, including area code, of agent for service of process) ------------------- WITH COPIES TO: JOHN J. SUYDAM, ESQ. MARK KESSEL, ESQ. O'SULLIVAN GRAEV & KARABELL, LLP SHEARMAN & STERLING 30 ROCKEFELLER PLAZA 599 LEXINGTON AVENUE NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10022 (212) 408-2400 (212) 848-4000 ------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. / / ___________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ___________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS (SUBJECT TO COMPLETION) DATED SEPTEMBER 9, 1996 2,000,000 SHARES [LOGO] ADVANCED HEALTH CORPORATION COMMON STOCK ---------------------- All of the 2,000,000 shares of Common Stock offered hereby are being sold by Advanced Health Corporation ("Advanced Health" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "ADVH", subject to official notice of issuance. ---------------------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS. ---------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------------------------- Per Share................................ $ $ $ Total (3)................................ $ $ $ - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, estimated to be $850,000. (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase an aggregate of up to 300,000 additional shares at the Price to Public less Underwriting Discounts and Commissions to cover over-allotments, if any. If all such additional shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ---------------------- The Common Stock is offered by the several Underwriters named herein when, as and if received and accepted by them, subject to their right to reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of certificates for the shares will be made at the offices of Cowen & Company, New York, New York, on or about , 1996. ---------------------- COWEN & COMPANY VOLPE, WELTY & COMPANY , 1996 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. A diagram captioned "Advanced Health Corporation/Integrating Physician Management Services with Information Technology", which includes a center circle with the caption "Advanced Health Integrated Solutions for Physicians" with boxes above it captioned "Physician Practice Management Services", "Physician Network Management Services" and "Clinical Information Systems" and boxes below it captioned "Preserving Practice Ownership by Physicians", "Empowering Physicians to Succeed in Managed Care", "Providing Point-of-Care Clinical Decision Support", "Enhancing Physician Communication and Information Access", "Providing Operations Support and Administrative Efficiencies", "Providing Disease Management Program Services for High-Cost, High-Volume Specialties". Med-E-PracticeTM, Smart ScriptsTM, Internet Script WriterTM, Med-E-VisitTM, Practice Management IntegratorTM, Med-E-NetworkTM, Med-E-Net CentralTM, Med-E-Net OfficeTM, Med-E-Net IntegratorTM and Med-E-Net CardiologyTM are trademarks of the Company. Trade names and trademarks of other companies appearing in this Prospectus are the property of their respective holders. ------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects a 1.5-for-1 split of the Common Stock effected in the form of a stock dividend in April 1996 and a .59581-for-1 reverse split of the Common Stock to be effected prior to the date of this Prospectus (the "Stock Splits") and (iii) reflects the conversion of all outstanding Convertible Preferred Stock of the Company into Common Stock upon the consummation of this offering (the "Preferred Stock Conversion"). Unless the context otherwise requires, all references in this Prospectus to the Company refer collectively to Advanced Health Corporation, its predecessor and its subsidiaries. THE COMPANY Advanced Health Corporation provides a full range of integrated management services and clinical information systems to physician group practices, single legal entities comprised of multiple physicians, and to physician networks, aggregations of individual physicians and physician groups formed for the purpose of entering into contracts with third-party payors. The management services provided by the Company include physician practice and network development, marketing, payor contracting, financial and administrative management, clinical information management, human resource management and practice and network governance. The Company developed its clinical information systems to provide physicians, at the point of care and on a real-time basis, with patient-specific clinical and payor information and the ability to generate patient medical orders and facilitate the implementation of disease management programs. Through the management of multi-specialty and single-specialty physician group practices and networks, the Company focuses its management efforts on high-cost, high-volume disease specialties, such as cardiology, oncology and orthopedics. The Company currently manages two multi-specialty physician group practices and two single-specialty physician group practices comprised of more than 75 physicians in the New York metropolitan area and eight physician networks with approximately 800 physicians in the greater New York and Atlanta metropolitan areas, and provides physician group consulting services to more than 100 physicians. Health care expenditures in the U.S. totalled approximately $1 trillion in 1994, with approximately 85% of such expenditures controlled by physician decisions. Increasing concern over the rising cost of health care has led to the development of managed care programs, which have shifted traditional fee- for-service reimbursement for physicians to capitated and other fixed-fee arrangements. As the financial risk of delivering health care shifts from payors to providers, physicians are faced with increasing management responsibilities and declining compensation. Because the majority of physicians practice individually or in two-person groups, they tend to have limited financial and administrative capacity. Consequently, physician practice management companies have emerged in recent years to manage the financial and administrative requirements of physician organizations. More importantly, the Company believes there exists an even greater need among physicians for clinical management services and information systems. The Company believes that assisting physicians in managing the clinical aspects of their practices represents the greatest opportunity to enhance the quality and reduce the cost of health care. The Company believes that it is well positioned to attract, organize and manage physician group practices and networks by offering a full range of integrated management services and clinical information systems. The Company believes that its clinical information systems will allow physicians, at the point of care and on a real-time basis, (i) to access patient-specific clinical and payor information, (ii) to generate patient instructions, prescriptions and orders for tests, specialty referrals and specialty procedures and (iii) to access databases containing managed care and disease management protocols, diagnostic/treatment preferences and guidelines affecting medical orders. By combining its group practice and network management services with its clinical information systems, the Company believes it can provide physicians with integrated solutions for managing the increased financial opportunities and risks associated with managed care contracts while allowing physicians to improve the quality of care. 3 The Company's strategy includes (i) establishing long-term contractual alliances with physician organizations, (ii) managing high-cost, high-volume disease specialties such as cardiology, oncology and orthopedics, (iii) providing physicians with clinical information at the point of care, (iv) focusing on selected geographic markets that offer concentrations of physicians seeking the Company's services and (v) continuing to develop relationships with key industry participants. The Company has entered into a software license and integration agreement with Merck Medco Managed Care, Inc. for the Company's prescription writing software. In addition, the Company has entered into a contract with an affiliate of PCS Health Systems, Inc., the managed care unit of Eli Lilly & Company, to provide disease management information services and software for the treatment of certain diseases. THE OFFERING Common Stock offered hereby.................... 2,000,000 shares Common Stock to be outstanding after the 6,500,267 shares(1) offering....................................... Use of proceeds................................ To repay certain indebtedness and for working capital and general corporate purposes, which may include acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol......... ADVH
SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
PERIOD FROM YEAR ENDED SIX MONTHS ENDED INCEPTION DECEMBER 31, JUNE 30, (AUGUST 27, 1993) TO ----------------- --------------------------------- DECEMBER 31, 1993 1994 1995 1995 1996 -------------------- ------- ------- --------------- --------------- STATEMENT OF OPERATIONS DATA: Revenue.......................... $ -- $ 379 $ 1,054 $ 100 $ 7,617 Cost of sales.................... -- 12 340 22 3,512 ------ ------- ------- ------- ------- Gross profit..................... -- 367 714 78 4,105 Operating expenses............... 66 1,318 3,255 617 4,034 Research and development expenses........................... 455 1,582 3,157 1,512 1,875 ------ ------- ------- ------- ------- Operating loss................... (521) (2,533) (5,698) (2,051) (1,804) Other income (expense)........... -- (15) (8) 1 (54) ------ ------- ------- ------- ------- Net loss......................... $ (521) $(2,548) $(5,706) $(2,050) $(1,858) ------ ------- ------- ------- ------- ------ ------- ------- ------- ------- Net loss per share............... $(0.23) $ (1.03) $ (1.47) $ (0.65) $ (0.37) ------ ------- ------- ------- ------- ------ ------- ------- ------- ------- Weighted average number of common shares and common share equivalents outstanding(2)......... 2,229 2,482 3,893 3,136 4,991 JUNE 30, 1996 --------------------------------- ACTUAL AS ADJUSTED (3) --------------- --------------- BALANCE SHEET DATA: Cash....................................................................... $ 837 $18,307 Working capital (deficit).................................................. (2,713) 18,757 Total assets............................................................... 8,191 25,661 Total debt................................................................. 4,504 504 Total stockholders' equity................................................. 863 22,333
- ------------ (1) Excludes 783,032 shares issuable upon the exercise of outstanding stock options at a weighted average exercise price of $3.44 per share and 481,489 shares issuable upon the exercise of outstanding warrants to purchase Common Stock at a weighted average exercise price of $8.50 per share. Also excluded are 306,769 shares and 113,995 shares issuable upon the exercise of options and warrants, respectively, which, in each case, are contingent upon the Company's achieving certain capitalization levels related to regulatory requirements or upon the Company's achieving certain performance targets. See "Management -- Stock Plans" and Notes 3 and 10 of Notes to Consolidated Financial Statements. (2) See Notes 2 and 14 of Notes to Consolidated Financial Statements. (3) Adjusted to give effect to (i) the sale by the Company of 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses and (ii) the receipt and initial application of the net proceeds therefrom. See "Use of Proceeds." 4 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. The following factors should be carefully considered in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. The discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company was incorporated in August 1993, began providing physician practice and network management services in December 1995 and has not yet commercially installed its clinical information systems. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. As of June 30, 1996, the Company had an accumulated deficit of approximately $10.6 million. The Company has never achieved profitability and expects to continue to incur operating losses through at least the end of 1996. Due to anticipated increases in operating expenses, the Company's operating results will be adversely affected if sales of its management services and clinical information systems do not increase. In addition, the Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in rapidly evolving markets. To address these risks, the Company must, among other things, expand sales of its physician practice and network management services, commercialize its clinical information systems, respond to competitive developments and continue to attract and retain qualified personnel. Accordingly, there can be no assurance that the Company will be able to generate sufficient revenue to achieve profitability, to maintain such profitability, if achieved, on a quarterly or annual basis or to sustain or increase its revenue growth in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." DEPENDENCE ON MANAGEMENT CONTRACTS WITH AFFILIATED PHYSICIAN GROUPS AND NETWORKS The Company's revenue to date has been derived from a limited number of management agreements between the Company and certain physician groups and networks. Such management agreements generally have an initial term of five to 20 years and are automatically renewable for additional terms. See "Risk Factors - -- Concentration of Revenues" and "Business--Contractual Relationships with Affiliated Physicians." The termination of any one or more of such management agreements would have a material adverse effect on the Company's revenues and results of operations. The Company's future growth and profitability is substantially dependent upon obtaining new contracts for the provision of services to physician groups and physician networks on satisfactory terms and conditions. The Company must accurately assess the costs it will incur in providing services in order to negotiate contracts on terms under which the Company can expect to realize adequate profit margins or otherwise meet its objectives. The future growth and profitability of the Company is also dependent on the Company's ability to effectively integrate the practices of its affiliated physicians, to manage and control costs and to realize economies of scale. The integration of new physician practice and network management contracts, as well as the maintenance of existing contracts, is made more difficult by reduced reimbursement rates of health care payors at a time when the cost of providing medical services continues to increase. There can be no assurance that the Company will obtain new physician practice and network management contracts on satisfactory terms, or at all. Any failure of the Company to obtain new contracts and price its services appropriately would have a material adverse effect on the Company's business, financial condition and results of operations and the price of the Common Stock. See "Business -- Physician Practice and Network Services." 5 UNCERTAINTY OF SUCCESSFUL COMMERCIALIZATION OF CLINICAL INFORMATION SYSTEMS Since its inception in August 1993, the Company has focused on developing its clinical information systems. However, to date, the Company has commercially installed its clinical information systems only on a limited basis. The Company's future growth and profitability is substantially dependent upon the success of its clinical information systems. The Company believes that market acceptance of such systems will depend upon the continued growth of managed care in the Company's markets, the continued increase in the administrative and clinical complexity of ambulatory medicine, the clinical efficacy of the disease management programs developed by its affiliated physicians and third parties, the continued downward trend in the cost of computer hardware, particularly handheld computing devices and wireless network infrastructures, and the continued consolidation of physician group practices. No assurance can be given that the Company's clinical information systems will be accepted or competitive or that the Company will be successful in taking systems from their current state of limited commercial introduction to commercial acceptance. If the Company's clinical information systems do not achieve market acceptance or if the Company does not develop and maintain sales, marketing and service expertise, the Company's growth, revenues and results of operations will be materially adversely affected. See "Business -- Clinical Information Systems." CONCENTRATION OF REVENUES In the year ended December 31, 1995, Madison Medical -- The Private Practice Group of New York, L.L.P. ("Madison") accounted for approximately 36% of the Company's revenues. In the six months ended June 30, 1996, Madison and the Advanced Heart Physicians & Surgeons Network, P.C. ("AHP&S") accounted for approximately 49% and 23% of revenues, respectively. The Company's management services agreements generally have an initial term of five to 20 years and may be terminated only for cause. The management services agreement with Madison, however, gives Madison the right to terminate without cause following the first year of the term and prior to the end of the tenth year of the term upon payment of a penalty and thereafter without penalty. In addition, in the year ended December 31, 1995, the Company's disease management software license and integration agreement with an affiliate of PCS Health Systems, Inc., the managed care unit of Eli Lilly & Company, accounted for approximately 32% of the Company's revenues. Although such affiliate of PCS Health Systems has agreed to sponsor two pilot programs involving the software applications developed by the Company, it has no obligation thereafter to use or distribute the Company's software. Although the Company seeks to build long-term customer relationships, no assurance can be given that such relationships will continue. Any termination or significant deterioration of the Company's relationships with its principal customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a deterioration in the financial condition of any of its principal customers would materially adversely affect the Company's financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANAGEMENT OF GROWTH The Company recently has experienced, and expects to continue to experience, substantial growth and has significantly expanded, and expects to continue to expand, its operations. This growth and expansion has placed, and will continue to place, significant demands on the Company's management, technical, financial and other resources. To manage growth effectively, the Company must maintain a high level of operational quality and efficiency, and must continue to enhance its operational, financial and management systems and to expand, train and manage its employee base. To date, the Company has only limited experience in providing physician practice and network management services and clinical information systems. To execute its growth strategy, the Company plans to significantly increase the number of physician practices and networks under management, expand its clinical information systems customer base, develop disease management services and develop a sales and marketing organization. There can be no assurance that the Company will be able to manage growth effectively, and any failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations and the price of the Common Stock. 6 COST CONTAINMENT AND REIMBURSEMENT TRENDS The health care industry is experiencing a trend toward cost containment as government and private third-party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with service providers. The federal government has implemented, through the Medicare program, a resource-based relative value scale ("RBRVS") payment methodology for physician services. This methodology went into effect in 1992 and is continuing to be implemented in annual increments through December 31, 1996. RBRVS is a fee schedule that, except for certain geographical and other adjustments, pays similarly situated physicians the same amount for the same services. The RBRVS is adjusted each year, and is subject to increases or decreases at the discretion of Congress. To date, the implementation of RBRVS has reduced payment rates for certain of the procedures historically provided by the physician groups and networks managed by the Company. Management estimates that 35% of the revenues of physician groups managed by the Company are derived from government sponsored health care programs (principally, Medicare, Medicaid and state reimbursed programs). RBRVS-type of payment systems have also been adopted by certain private third-party payors and may become a predominant payment methodology. More wide-spread implementation of such programs would reduce payments by private third-party payors. Rates paid by many private third-party payors, including those that provide Medicare supplemental insurance, are based on established physician and hospital charges and are generally higher than Medicare payment rates. A change in the patient mix of the practices under Company management that results in a decrease in patients covered by private insurance could adversely affect the Company's results of operations if the Company is unable to assist physicians in containing the cost of the provision of medical services. To the extent that affiliated physicians receive lower revenue for medical services, there can be no assurance that the Company will be able to derive sufficient revenues from its relationship with any such affiliated physicians to achieve or maintain profitability. The Company believes that cost containment trends will continue to result in a reduction from historical levels in per-patient revenue for medical practices. Further reductions in payments to physicians or other changes in reimbursement for health care services could have an adverse effect on the Company's operations, unless the Company is otherwise able to offset such payment reductions. There can be no assurance that the effect of any or all of these changes in third-party reimbursement could be offset by the Company through cost reductions, increased volume, introduction of new services and systems or otherwise. See "Risk Factors -- Uncertainty Related to Health Care Reform" and "Business -- Government Regulation." RISKS ASSOCIATED WITH CAPITATED FEE ARRANGEMENTS As an increasing percentage of patients are coming under the control of managed care entities, the Company believes that its success will, in part, be dependent upon the Company's ability to negotiate and manage, on behalf of physician practice groups and networks, agreements with health maintenance organizations ("HMOs"), employer groups and other private third-party payors pursuant to which professional services will be provided on a risk-sharing or capitated basis by some or all of the physicians affiliated with the Company. Under some of such agreements, the health care provider accepts a pre-determined amount per patient per month in exchange for providing all necessary covered services to the patients covered by the agreement. Such agreements pass the economic risk of providing care from the payor to the provider. In the Company's target markets, capitated fee arrangements are relatively new and the Company has limited experience in negotiating or managing capitated fee agreements. The proliferation of such agreements in markets served by the Company could result in greater predictability of revenues, but not necessarily of profits, for physicians affiliated with the Company. There can be no assurance that the Company will be able to negotiate, on behalf of the physicians, satisfactory arrangements on a risk-sharing or capitated basis or that the physician organizations managed by the Company will be able to provide medical services at a profit under such arrangements. To the extent affiliated physicians incur medical costs that limit such affiliated physicians' profitability, there can be no assurance that the Company will be able to derive sufficient revenues from its relationship with any such affiliated physicians to achieve or maintain profitability. 7 RISKS ASSOCIATED WITH DIRECT CAPITATION The Company anticipates entering into managed care or capitated arrangements, either indirectly through the assignment of managed care contracts entered into between its affiliated physicians and third-party payors or directly through the formation of an independent physician association ("IPA") in states in which such entities are permitted to do so without being regulated as an insurance company. The Company has little experience in managing capitated-risk arrangements. Revenues under managed care or capitated arrangements entered into by the Company will generally be a fixed amount per enrollee. Under such an arrangement, the Company would contract with affiliated physicians for the provision of health care services and the Company would be responsible for the provision of all or a portion of the health care requirements of such enrollees. To the extent that such enrollees require more care than is anticipated by the Company upon entering into such a contract, the Company's revenues under such contracts may be insufficient to cover its costs. Although the Company expects to enter into reinsurance agreements with third-party insurers in respect of such risk, no assurances can be given that the Company will be able to obtain such reinsurance on favorable terms, if at all. In addition, the Company has no experience in forming or managing an IPA. See "Business -- Contractual Relationships with Affiliated Physicians -- Capitated and Other Fixed-Fee Arrangements." HIGHLY COMPETITIVE INDUSTRY The physician practice and network management industry is highly competitive. The industry is also subject to continuing changes in how services and products are provided and how providers are selected and paid. As prepaid medical care continues to grow, the Company may encounter increased competition. Certain companies are expanding their presence in the physician management market through the use of several approaches. A number of companies provide broad management services to primary, multi-specialty and specialty physician groups, while other companies provide claims processing, utilization review and other more focused management services. In addition, certain of the Company's competitors are dedicated to the management of single-specialty practices focused on diseases such as cardiology, oncology and orthopedics. Certain of the Company's competitors are significantly larger, have access to greater resources, provide a wider variety of services and products, have greater experience in providing health care management services and products and/or have longer established relationships with customers for these services and products. The Company believes that competition for services is based on cost and quality of services. There can be no assurance that the Company's strategy will allow it to compete favorably in contracting with payors or expanding or maintaining its physician group practices or networks in existing or new markets. In addition, many health care providers are consolidating to create larger health care delivery enterprises with greater regional market power. Such consolidation could erode the Company's customer base and reduce the size of the Company's target market. In addition, the resulting enterprises could have greater bargaining power, which could lead to price erosion affecting the Company's services. The reduction in the size of the Company's target market or the failure of the Company to maintain adequate price levels could have a material adverse effect on the Company's business, financial condition and results of operations and on the price of the Common Stock. The market for health care information systems is highly competitive and rapidly changing. The Company believes that the principal competitive factors for clinical information systems are the usefulness of the data and reports generated by the software, customer service and support, compatibility with the customer's existing information systems, potential for product enhancement, vendor reputation, price and the effectiveness of sales and marketing efforts. Many of the Company's competitors and potential competitors have greater financial, product development, technical and marketing resources than the Company, and currently have, or may develop or acquire, substantial installed customer bases in the health care industry. In addition, as the market for clinical information systems develops, additional competitors may enter the market and competition may intensify. While the Company believes that it has successfully differentiated itself from competitors, for example, by offering clinical information systems that provide patient-specific, point-of-care information, there can be no assurance that, in the future, competition will not have a material adverse effect on the Company's 8 business, financial condition and results of operations and on the price of the Common Stock. See "Business -- Competition." GOVERNMENT REGULATION As a participant in the health care industry, the Company's operations and relationships are subject to extensive and increasing regulation under numerous laws administered by governmental entities at the federal, state and local levels. These laws include the fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit the solicitation, payment, receipt or offer of any direct or indirect remuneration for the referral of Medicare or Medicaid patients or for the order or provision of Medicare or Medicaid covered services, items or equipment. These laws also impose restrictions on physicians' referrals for designated health services to entities with which they have financial relationships. Violations of these laws may result in substantial civil or criminal penalties for individuals or entities, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. Such exclusion, if applied to the physician groups or networks managed by the Company, could result in significant loss of reimbursement. Several states, including states in which the Company operates, have adopted similar laws that cover patients in private programs as well as government programs. In addition, the laws of many states prohibit physicians from splitting fees with non-physicians and prohibit non-physician entities from practicing medicine. These laws vary from state to state and are enforced by the courts and by regulatory authorities. New York State, for example, prohibits percentage payments from physicians or physician groups to management entities for services other than billing and collecting and prohibits management entities from engaging in the delivery of medical services. The Company believes its operations are in material compliance with applicable laws in all jurisdictions in which it operates. In addition to complying with the statutory prohibitions on the corporate practice of medicine, the Company's affiliated management entities agree contractually not to practice medicine or otherwise provide medical services. Nevertheless, because of the structure of its relationship with its affiliated physician groups and networks, many aspects of the Company's business operations have not been the subject of state or federal regulatory interpretation and there can be no assurance that a review of the Company's or its affiliated physicians' businesses by courts or regulatory authorities will not result in a determination that could adversely affect the operations of the Company or its affiliated physicians (for example, by rendering the Company's management services agreements with a physician organization unenforceable) or that the health care regulatory environment will not change so as to restrict the Company's or its affiliated physicians' existing operations or expansion. In addition, recently released regulations dealing with the use of physician incentives may restrict the extent to which payors or the Company may impose financial risk upon physicians (or other providers). Violation of such regulations could result in substantial penalties. Such regulations may reduce the Company's ability to control its expenses. The confidentiality of patient records and the circumstances under which such records may be released are subject to substantial regulation by state and federal laws and regulations, which govern both the disclosure and use of confidential patient medical record information. The Company believes that it complies with the laws and regulations regarding the collection and distribution of patient data in all jurisdictions in which it operates, but regulations governing patient confidentiality rights are evolving rapidly and are often unclear and difficult to apply in the rapidly restructuring health care market. Additional legislation governing the dissemination of medical record information is continually being proposed at both the state and federal level. Such proposed legislation could require patient consent before even coded or anonymous patient information may be shared with third parties and that holders or users of such information implement security measures. In addition, the American Medical Association (the "AMA") has issued a Current Opinion to the effect that a physician who does not obtain a patient's consent to disclosure of patient information for commercial purposes, including anonymous disclosure, violates the AMA's ethical standards with respect to patient confidentiality. While the AMA's Current Opinions are not law, they may influence physicians' willingness to obtain patient consents or agree to permit the Company to access clinical data in their systems without such consents. Any such restrictions could have a material adverse effect on the Company's ability to market its 9 services and systems. Although the Company intends to safeguard patient privacy when clinical data is accessed and to enter patient medical information into or receive such information from its database only with the consent of the patient, if a patient's privacy is violated, the Company could be liable for damages incurred by such patients. There can be no assurance that changes to state or federal laws will not materially restrict the ability of the Company to obtain or disseminate patient information. See "Business -- Government Regulation." FDA REGULATION Products, including software applications, intended for use in the diagnosis of disease or other conditions, or in the cure, treatment, mitigation or prevention of disease, are subject to regulation by the United States Food and Drug Administration (the "FDA") as medical devices. The laws administered by the FDA impose substantial regulatory controls over the manufacturing, labeling, testing, distribution, sale, marketing and promotion of medical devices and other related activities. These regulatory controls can include compliance with the following requirements: manufacturer establishment registration and device listing; current good manufacturing practices; FDA clearance of a premarket notification submission or FDA approval of a premarket approval application; medical device adverse event reporting; and general prohibitions on misbranding and adulteration. Violations of the laws concerning medical devices can result in, among other things, severe criminal and civil penalties, product seizure, recall, repair or refund orders, withdrawal or denial of premarket notifications or premarket approval applications, denial or suspension of government contracts and injunctions against unlawful product manufacture, labeling, promotion and distribution or other activities. In its 1989 Draft Policy for the Regulation of Computer Products (the "1989 Draft Policy Statement"), the FDA stated that it intended to exempt certain clinical decision support software products from a number of regulatory controls, and that until those regulations were issued it would not require manufacturers of such products to comply with requirements other than the prohibitions on misbranding and adulteration. The Company believes that its clinical information systems are not medical devices and, thus, are not subject to the controls imposed on manufacturers of such products and do not fall within the scope of the 1989 Draft Policy Statement. The Company further believes that to the extent that its systems were determined to be medical devices, the systems would fall within the exemptions for decision support systems provided by the 1989 Draft Policy Statement. The Company has not sought or obtained a formal opinion of counsel with respect to the issue of FDA exemption nor has the Company taken action to comply with the controls that would otherwise apply if the Company's systems were determined to be non-exempt medical devices. The FDA has stated that it intends to revise its 1989 Draft Policy Statement and that it may eliminate some or all of the exemptions that it currently allows. Accordingly, there can be no assurance that the FDA will not now or in the future make a determination that the Company's current or future clinical information systems are medical devices subject to FDA regulations and are ineligible for the exemptions from those regulations. Furthermore, there can be no assurance that the Company would be able to comply in a timely manner, if at all, with FDA regulations if the agency made such determinations. Thus, such determinations by the FDA could significantly delay, or even prevent, the Company's ability to offer its systems and could otherwise have a material adverse effect on the Company's business, financial condition and results of operations and on the price of the Common Stock. See "Business -- Government Regulation." UNCERTAINTY RELATED TO HEALTH CARE REFORM The Company anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include mandated basic health care benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups and other fundamental changes to the health care delivery system. Proposals have also been discussed which would provide incentives for the provision of cost-effective, quality health care through formation of regional delivery systems. Private sector providers and payors have embraced certain elements of reform, resulting in increased consolidation of medical groups and competition among managers of medical practice groups as these providers and payors seek to form 10 alliances in order to provide quality, cost-effective care. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, the Company cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or what impact they may have on the Company, and there can be no assurance that the adoption of reform proposals will not have a material adverse effect on the Company's business, operating results or financial condition. In addition, the announcement of reform proposals and the investment community's reaction to such proposals, as well as announcements by competitors and third-party payors of their strategies to respond to such initiatives, could produce volatility in the trading and market price of the Common Stock. See "Business -- Government Regulation." TECHNOLOGICAL CHANGE The health care information industry is relatively new and is experiencing rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards. In addition, as the computer and software industries continue to experience rapid technological change, the Company must be able to quickly and successfully adapt its clinical information systems so that they continue to integrate well with the computer platforms and other software employed by its customers. There can be no assurance that the Company will not experience difficulties, including lack of necessary capital or expertise, that could delay or prevent the successful development and introduction of system enhancements or new systems in response to technological changes. The Company's inability to respond to technological changes in a timely and cost-effective manner could have a material adverse effect on the Company's business, financial condition and results of operations and on the price of the Common Stock. See "Business -- Clinical Information Systems." DEPENDENCE ON PROPRIETARY ASSETS The Company has made significant investments in its clinical information systems and relies on a combination of patent, trade secret and copyright laws, nondisclosure and other contractual provisions and technological measures to protect its proprietary rights. The Company has two U.S. patent applications and a foreign patent application commensurate with both U.S. applications but no issued patents. There can be no assurance that any patent will be issued or, if issued, that such patent or any other protections will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to those of the Company. In addition, there can be no assurance that the legal protections and precautions taken by the Company will be adequate to prevent infringement or misappropriation of the Company's proprietary assets. Although the Company believes that its clinical information systems do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable outcome on any such claim. In addition, any such claim may require the Company to incur substantial litigation expenses or subject the Company to significant liabilities and could have a material adverse effect on the Company's business, financial condition and results of operations and the price of the Common Stock. See "Business -- Proprietary Rights." MANAGEMENT SERVICES ORGANIZATIONS NOT WHOLLY-OWNED; PHYSICIAN PUT RIGHTS; DILUTION The Company typically establishes a management service organization (an "MSO") for each physician practice group or network to which it provides services, which MSO is majority-owned by the Company. The physician group or network served typically has a minority interest in the MSO. The MSO's assets consist primarily of its management service contracts with the physician group or network served and its liabilities consist primarily of its obligations under its agreements with the Company and its obligations to its employees. Although the Company has sufficient interests in the MSOs to exercise control over them, the Company may owe a fiduciary duty to the holders of various minority interests in such MSOs. Accordingly, the Company may not be able to exercise unfettered control over such MSOs and may be required to deal with them on terms no less favorable to such MSOs than could be obtained from unaffiliated third parties. 11 Under certain specified circumstances, the Company has the option to cause certain MSOs to be merged with and into a wholly-owned subsidiary of the Company in a transaction in which the interests of the physician groups and networks in such MSOs would be exchanged for Common Stock of the Company (the "Roll Up Transaction"). The Company has reserved 548,224 shares of Common Stock for issuance upon consummation of the Roll Up Transaction, all of which shares are required to be issued if the Company effects the Roll Up Transaction. Accordingly, the Roll Up Transaction, if effected, will be dilutive to investors. In addition, certain of the physician groups and networks managed by the Company have rights to require the Company to purchase all or part of such physicians' interest in their respective MSOs in the event that the Company does not consummate the Roll Up Transaction within one year after the satisfaction of specified conditions. There can be no assurance that the Company will have the financial resources to purchase such interests in accordance with its obligations at the time any such rights are exercised, or that the Company would be able to obtain financing on satisfactory terms or conditions, if at all, to purchase such interests. To the extent that any future financing requirements with respect to such put rights are satisfied through the issuance of equity securities, investors may experience dilution. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Contractual Relationships with Affiliated Physicians." DEPENDENCE ON KEY PERSONNEL The Company's ability to market and deliver its services and systems and to achieve and maintain a competitive position is dependent in large part upon the efforts of its senior management, particularly Jonathan Edelson, M.D., the Company's Chairman of the Board and Chief Executive Officer, and Steven Hochberg, the Company's President. Although the Company is the beneficiary of $250,000 "key man" life insurance policies on the lives of each of Dr. Edelson and Mr. Hochberg, the Company does not believe such amount would be adequate to compensate for the loss of the services of either executive. In addition, although the Company has entered into employment agreements with most of its senior executives, including Dr. Edelson and Mr. Hochberg, such agreements will not assure the services of such employees. The loss of the services of one or more members of its senior management could have a material adverse effect on the Company. The Company's future success also will depend upon its ability to attract and retain qualified management, technical and marketing employees to support its future growth. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The failure to attract and retain such persons could materially adversely affect the Company. See "Management." RISK OF LIABILITY CLAIMS Customer reliance on the Company's services and systems could result in exposure of the Company to liability claims if the Company's services and systems fail to perform as intended or if patient care decisions based in part on guidance from the Company's services and systems are challenged. Even unsuccessful claims could result in the expenditure of funds in litigation, diversion of management time and resources or damage to the Company's reputation and the marketability of the Company's services and systems. While no such claims have been made against the Company to date, and although the Company takes contractual steps to obtain indemnification for certain liabilities and maintains general commercial liability insurance, there can be no assurance that a successful claim could not be made against the Company, that the amount of indemnification payments or insurance would be adequate to cover the costs of defending against or paying such a claim or that the costs of defending against such a claim or the payment of damages by the Company would not have a material adverse effect on the Company's business, financial condition and results of operations and on the price of the Common Stock. NO PRIOR PUBLIC MARKET; OFFERING PRICE DETERMINED BY AGREEMENT; VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock. Although the Common Stock has been approved for quotation on the Nasdaq National Market, subject to official notice of issuance, there can be no assurance that an active trading market for the Common Stock will 12 develop or continue after this offering. The initial public offering price of the Common Stock will be determined by negotiation between the Company and the Representatives of the Underwriters, and may not be indicative of the market price for the Common Stock after this offering. See "Underwriting." From time to time after this offering, there may be significant volatility in the market price for the Common Stock. Results of the Company's operations may fluctuate significantly from quarter to quarter and will depend on numerous factors, primarily the timing of the addition of new physician practice groups and networks under management and the sale of clinical information systems and associated services. Such fluctuations in quarterly operating results of the Company, changes in general conditions in the economy, the financial markets or the health care industry or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. DILUTION The purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the pro forma net tangible book value of their shares of Common Stock in the amount of $8.86 per share, at an assumed initial public offering price of $12.00 per share (after deducting underwriting discounts and commissions and estimated offering expenses). Such investors will experience additional dilution upon the exercise of outstanding options and warrants. In addition, in the event the Company issues additional Common Stock in the future, including shares that may be issued in connection with the Roll Up Transaction or future acquisitions, investors may experience further dilution. See "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Contractual Relationships with Affiliated Physicians." SHARES ELIGIBLE FOR FUTURE SALE Sales of shares of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this offering could adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate. Upon completion of this offering, the Company will have approximately 6,500,267 shares of Common Stock outstanding. The 2,000,000 shares offered hereby will be freely tradeable without restriction unless they are held by "affiliates" of the Company as the term is used under the Securities Act of 1933 (the "Securities Act") and the regulations promulgated thereunder. The remaining approximately 4,500,267 shares are restricted securities that may be sold only if registered under the Securities Act or sold in accordance with an applicable exemption from registration, such as Rule 144 promulgated under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701 under the Securities Act, additional shares will be available for sale in the public market as follows: (i) no shares of Common Stock (other than those shares sold hereby and not held by affiliates) will be available for immediate sale in the public market on the date of this Prospectus, (ii) 19,272 shares of Common Stock subject to options exercisable within 90 days of the date of this Prospectus will be freely tradeable by non-affiliates upon the effectiveness of a registration statement relating to such stock options, (iii) 224,566 shares of Common Stock and 18,432 shares of Common Stock subject to options exercisable within 90 days of the date of this Prospectus will be eligible for sale 90 days after the date of this Prospectus, subject to the volume, manner of sale and reporting requirements of Rule 144, and (iv) approximately 4,266,800 shares of Common Stock and approximately 9,500 shares of Common Stock subject to options exercisable within 180 days of the date of this Prospectus will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus, subject to the volume, manner of sale and reporting requirements of Rule 144. The holders of 2,941,985 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's 13 Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders pursuant to the exercise of their "piggyback" registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. See "Shares Eligible for Future Sale," "Description of Capital Stock" and "Underwriting." UNSPECIFIED USE OF PROCEEDS Following this offering, the Company will have approximately $16.4 million ($19.7 million if the Underwriters' over-allotment option is exercised in full) of the net proceeds of this offering available for working capital and general corporate purposes, which may include acquisitions. The Company's management, subject to approval by the Board of Directors in certain circumstances, will have broad discretion with respect to the application of such proceeds. See "Use of Proceeds." POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS AND THE DGCL The Company's Restated Certificate of Incorporation (the "Certificate of Incorporation") and By-laws (the "By-laws") and the Delaware General Corporation Law (the "DGCL") contain provisions which may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors. Such provisions may also render the removal of directors and management more difficult. The Certificate of Incorporation and By-laws provide for, among other things, a classified Board of Directors serving staggered terms of three years, certain advance notice requirements for stockholder nominations of candidates for election to the Board of Directors and certain other stockholder proposals, restrictions on who may call a special meeting of stockholders and a prohibition on stockholder action by written consent. In addition, the Company's Board of Directors has the ability to authorize the issuance of up to 5,000,000 shares of preferred stock in one or more series and to fix the voting powers, designations, preferences and relative, participating, optional and other special rights and qualifications, limitations or restrictions thereof without stockholder approval. The DGCL also contains provisions preventing certain stockholders from engaging in business combinations with the Company, subject to certain exceptions. See "Description of Capital Stock." INVESTMENT COMPANY ACT CONSIDERATIONS The Investment Company Act of 1940, as amended (the "1940 Act"), requires the registration of, and imposes various substantive restrictions on, certain companies that engage primarily, or propose to engage primarily, in the business of investing, reinvesting or trading in securities, or that fail certain statistical tests regarding the composition of assets and sources of income, and are not primarily engaged in business other than investing, holding, owning or trading securities. The Company believes that it is, and it intends to remain, primarily engaged in business other than investing, holding, owning or trading securities. The Company will seek to invest temporarily the proceeds of this offering, pending their use as described under the caption "Use of Proceeds," and to utilize the proceeds of this offering in the manner described under "Use of Proceeds," so as to avoid becoming subject to the registration requirements of the 1940 Act. Such investment is likely to result in the Company obtaining lower yields on the funds invested than might be available in the securities markets generally. There can be no assurance, however, that such investments and utilization can be made. If the Company were required to register as an investment company under the 1940 Act, it would become subject to substantial regulation with respect to its capital structure, management, operations, transactions with affiliates, and other matters. 14 THE COMPANY The Company's predecessor, Med-E-Systems Corporation ("MES"), was incorporated on August 27, 1993 as a clinical information systems development company. Effective August 23, 1995, MES became a subsidiary of the Company through a tax-free reorganization. The Company was subsequently merged with and into Majean, Inc., a Delaware corporation, and the surviving corporation changed its name to Advanced Health Corporation. The Company's executive offices are located at 560 White Plains Road, Tarrytown, New York 10591, and its telephone number at that address is (914) 524-4200. USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $21.5 million ($24.8 million if the Underwriters' over-allotment option is exercised in full), at an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses. The Company will use approximately $5.1 million of the net proceeds of this offering to repay an aggregate of $5.0 million principal amount of indebtedness, plus interest, including the repayment of an aggregate of $2.0 million principal amount of indebtedness, plus interest, to certain 21st Century Partnerships. 21st Century Partnerships is a principal stockholder of the Company. See "Principal Stockholders." The Company issued three 8% promissory notes in the principal amounts of $1.5 million, $750,000 and $750,000 on February 28, April 26 and June 28, 1996, respectively. The Company issued six 9% promissory notes in an aggregate principal amount of $2.0 million on June 19 and August 13, 1996 to certain 21st Century Partnerships. All of such notes will mature on the earlier of the consummation of this offering and the one-year anniversary of their issuance, in the case of the 8% notes, or July 31, 1997, in the case of the 9% notes. The proceeds of such notes are being used to finance working capital. See "Certain Transactions." The Company intends to use the balance of the net proceeds, approximately $16.4 million, for working capital and general corporate purposes, which may include acquisitions. From time to time in the ordinary course of its business, the Company evaluates possible acquisitions of businesses, products and technologies that are complementary to those of the Company. The Company currently has no agreements or understandings, and is not engaged in active negotiations, with respect to any such acquisition. Pending the application of the net proceeds of this offering, the Company intends to invest such proceeds in short-term, investment-grade, interest-bearing instruments or money market funds. DIVIDEND POLICY The Company has not declared or paid any cash dividends on its capital stock since inception and does not expect to pay dividends in the foreseeable future. The Company presently intends to retain future earnings, if any, to finance the expansion of its business. The payment of any cash dividends in the future will depend on the Company's earnings, financial condition, results of operations, capital needs, and other factors deemed pertinent by the Company's Board of Directors, subject to laws and regulations then in effect. 15 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1996 (i) on a pro forma basis giving effect to the Stock Splits and the Preferred Stock Conversion and (ii) as adjusted to reflect the receipt and initial application of the estimated net proceeds from the sale by the Company of 2,000,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $12.00 per share (after deducting underwriting discounts and commissions and estimated offering expenses):
JUNE 30, 1996 -------------------------- PRO FORMA PRO FORMA AS ADJUSTED ----------- ----------- Current portion of long-term debt................................ $ 4,378,910 $ 378,910 ----------- ----------- ----------- ----------- Long-term debt, less current portion............................. $ 125,096 $ 125,096 ----------- ----------- Stockholders' equity: Preferred Stock, $.01 par value, 5,000,000 shares authorized and no shares issued and outstanding......................... -- -- Common Stock, $.01 par value, 15,000,000 shares authorized, 4,500,267 shares issued and outstanding pro forma; and 6,500,267 shares issued and outstanding as adjusted(1)........... 45,003 65,003 Additional paid-in capital....................................... 11,526,538 32,976,538 Accumulated deficit.............................................. (10,633,192) (10,633,192) Treasury stock, at cost (8,937 shares pro forma and as adjusted)........................................................ (75,000) (75,000) ----------- ----------- Total stockholders' equity..................................... 863,349 22,333,349 ----------- ----------- Total capitalization......................................... $ 988,445 $22,458,445 ----------- ----------- ----------- -----------
- ------------ (1) Excludes 783,032 shares issuable upon the exercise of outstanding stock options at a weighted average exercise price of $3.44 per share and 481,489 shares issuable upon the exercise of outstanding warrants to purchase Common Stock at a weighted average exercise price of $8.50 per share. Also excluded are 306,769 shares and 113,995 shares issuable upon the exercise of options and warrants, respectively, which, in each case, are contingent upon the Company's achieving certain capitalization levels related to regulatory requirements or upon the Company's achieving certain performance targets. See "Management -- Stock Plans" and Notes 3 and 10 of Notes to Consolidated Financial Statements. 16 DILUTION The net tangible book value of the Company as of June 30, 1996 was $(1,048,338), or $(0.23) per share of Common Stock on a pro forma basis, after giving effect to the Stock Splits and the Preferred Stock Conversion. "Net tangible book value per share" represents the amount of the Company's total tangible assets less the Company's total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale of 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share (after deducting underwriting discounts and commissions and estimated offering expenses), and the initial application of the net proceeds therefrom, the pro forma net tangible book value of the Company at June 30, 1996 would have been $20,421,662, or $3.14 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $3.37 per share to existing stockholders and an immediate, substantial dilution in pro forma net tangible book value per share of $8.86 per share to purchasers of shares of Common Stock offered hereby, as illustrated in the following table: Assumed initial public offering price per share........... $12.00 Pro forma net tangible book value per share at June 30, 1996...................................................... $(0.23) Increase per share attributable to new investors........ 3.37 ------ Pro forma net tangible book value per share after this offering.................................................. 3.14 ------ Dilution per share to new investors....................... $ 8.86 ------ ------ The following table sets forth, on a pro forma basis, after giving effect to the Stock Splits and the Preferred Stock Conversion, as of June 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing stockholders and to be paid by purchasers of shares of Common Stock offered hereby based upon assumed initial public offering price of $12.00 per share (before deducting underwriting discounts and commissions and estimated offering expenses).
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing stockholders.................. 4,500,267 69.2% $11,571,541 32.5% $ 2.57 New investors.......................... 2,000,000 30.8 24,000,000 67.5 12.00 --------- ------- ----------- ------- Total............................ 6,500,267 100.0% $35,571,541 100.0% --------- ------- ----------- ------- --------- ------- ----------- -------
The foregoing tables assume no exercise of stock options to purchase 783,032 shares of Common Stock outstanding at a weighted average exercise price of $3.44 per share and 481,489 shares issuable upon the exercise of outstanding warrants to purchase Common Stock at a weighted average exercise price of $8.50 per share. The foregoing tables also assume no exercise of 306,769 shares and 113,995 shares issuable upon the exercise of options and warrants, respectively, which, in each case, are contingent upon the Company's achieving certain capitalization levels related to regulatory requirements or upon the Company's achieving certain performance targets. To the extent that any of such options or warrants are exercised, there will be further dilution to new investors in this offering. See "Management -- Stock Plans" and Notes 3 and 10 of Notes to Consolidated Financial Statements. 17 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of operations data for the period from inception (August 27, 1993) to December 31, 1993 and for the years ended December 31, 1994 and 1995, and the balance sheet data as of December 31, 1994 and 1995, are derived from the Consolidated Financial Statements of the Company included elsewhere in this Prospectus, which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated balance sheet data as of December 31, 1993 are derived from the consolidated financial statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants, but which are not included in this Prospectus. The selected consolidated statement of operations data for the six months ended June 30, 1995 and 1996 and the selected consolidated balance sheet data as of June 30, 1996 are derived from the Company's unaudited consolidated financial statements, which include all adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position and results of operations as of and for the periods then ended. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996 or any future period. The selected consolidated financial data set forth below is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Prospectus.
YEAR ENDED SIX MONTHS ENDED PERIOD FROM INCEPTION DECEMBER 31, JUNE 30, (AUGUST 27, 1993) TO ----------------- ----------------- DECEMBER 31, 1993 1994 1995 1995 1996 --------------------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue................................ $ -- $ 379 $ 1,054 $ 100 $ 7,617 Cost of sales.......................... -- 12 340 22 3,512 ------- ------- ------- ------- ------- Gross profit........................... -- 367 714 78 4,105 Operating expenses..................... 66 1,318 3,255 617 4,034 Research and development expenses...... 455 1,582 3,157 1,512 1,875 ------- ------- ------- ------- ------- Operating loss......................... (521) (2,533) (5,698) (2,051) (1,804) Other income (expense)................. -- (15) (8) 1 (54) ------- ------- ------- ------- ------- Net loss............................... $ (521) $(2,548) $(5,706) $(2,050) $(1,858) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss per share..................... $ (0.23) $ (1.03) $ (1.47) $ (0.65) $ (0.37) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Weighted average number of common shares and common share equivalents outstanding(1)........................... 2,229 2,482 3,893 3,136 4,991 DECEMBER 31, -------------------------- JUNE 30, 1993 1994 1995 1996 ----- ------- ------ -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash................................................... $ 7 $ 7 $1,464 $ 837 Working capital (deficit).............................. (435) (1,032) (741) (2,713) Total assets........................................... 27 913 6,462 8,191 Total debt............................................. -- 416 567 4,504 Total stockholders' equity (deficit)................... (416) (325) 2,675 863
- ------------ (1) See Notes 2 and 14 of Notes to Consolidated Financial Statements. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere in this Prospectus. OVERVIEW The Company provides a full range of integrated management services and clinical information systems to physician group practices and physician networks. The Company generates revenues from (i) fees for managing and providing consulting services to physician group practices, (ii) fees for managing physician networks and (iii) fees for use and support of its clinical information systems, including recurring license, software installation, software integration, training and data conversion fees. The Company contracts with its physician practice and network management clients pursuant to long-term agreements with its MSOs, the results of which MSOs are consolidated in the Consolidated Financial Statements. Through its MSOs, the Company enters into long-term management services agreements with physician group practices, whereby such physician group practices outsource their non-medical and administrative functions to an MSO. The MSO earns fees for the provision of such outsourced services, as well as fees for management, marketing and information services. Fees are based on the level of services provided and are recognized as these services are rendered. The Company manages four medical practices consisting of more than 75 physicians in the greater New York metropolitan area. The Company also provides physician group consulting services to more than 100 physicians. See "Business -- Physician Practice and Network Services -- Physician Practice Services." Through its MSOs, the Company enters into management service agreements with physician networks, pursuant to which the aggregate capitated payments to be made by a third-party payor to such network are assigned to the MSO. In return for a management fee, the MSO administers the claims and payments related to the payor contract by paying a portion, typically 90%, of the capitated payments to network physicians in return for the physicians' provision of medical services to network enrollees. At the end of a defined measurement period, the MSO may pay an additional portion of the capitated payments to the network physicians in the case of higher than expected medical costs, and the MSO shares any remaining capitated payments with the physicians. The Company manages eight physician networks, and is developing additional networks, primarily in the fields of cardiology, oncology and orthopedics. See "Business -- Physician Practice and Network Services -- Physician Network Services." The payor contracts contain risk-sharing provisions whereby incentive revenue can be earned or losses incurred, by the physician networks, based on the utilization of physician and hospital services by assigned enrollees. There can be no assurance that the Company will be able to negotiate, on behalf of the physicians, satisfactory arrangements on a risk-sharing or capitated basis or that the physician organizations managed by the Company will be able to provide medical services at a profit under such arrangements. To the extent affiliated physicians incur medical costs that limit their profitability, there can be no assurance that the Company will be able to derive profits from any such affiliated relationship. The Company anticipates entering into managed care or capitated arrangements, either indirectly through the assignment of managed care contracts entered into between its affiliated physicians and third-party payors or directly through the formation of an IPA. The Company has little experience in managing capitated-risk arrangements and has no experience in forming or managing an IPA. Revenues under any such arrangements entered into by the Company would generally be a fixed amount per enrollee. Under such an arrangement, the Company would contract with affiliated physicians for the provision of health care services and the Company would be responsible for the provision of all or a portion of the health care requirements of such enrollees. To the extent that enrollees require more care than is anticipated by the Company upon entering into such a contract, the Company's revenues under such contracts may be insufficient to cover its costs. The Company expects to enter into reinsurance agreements with third-party insurers in respect of a portion of its risk under such arrangements. See 19 "Business -- Contractual Relationships with Affiliated Physicians -- Capitated and Other Fixed-Fee Arrangements." The Company recognizes revenue from the sale and license of its clinical information systems upon installation and acceptance, and from software development and integration as services are provided. The Company has only recently begun to generate revenues from the commercial sale and installation of its clinical information systems. The Company has made substantial investment in the development of its clinical information systems and expects to continue such investment in the future. To date, the Company has been dependent on a small number of contracts to generate the majority of its revenues. In the year ended December 31, 1995, approximately 68% of the Company's revenues were derived from its contracts with Madison and an affiliate of PCS Health Systems, Inc., the managed care unit of Eli Lilly & Company, while in the six months ended June 30, 1996, approximately 72% of the Company's revenues were derived from its contracts with Madison and AHP&S. The Company expects that the concentration of its revenues will be reduced as the Company enters into additional contracts to provide management services and clinical information systems to physician organizations. The Company believes that its historical results of operations from period to period are not comparable and that such results are not necessarily indicative of results for any future periods because the Company was a development stage company investing in technology development and did not provide physician practice and network management services prior to December 11, 1995. ACQUISITIONS On August 28, 1995, the Company acquired certain assets and assumed certain liabilities of Peltz Ventimiglia, Inc. ("Peltz"), a physician practice management consulting company with physician clients located throughout the East Coast of the United States, for 75,996 shares of Common Stock and contingent warrants to purchase 113,995 shares of Common Stock at $4.38 per share. The warrants are only exercisable, as contingent consideration, based on the achievement of targeted operating performance criteria. The audited financial statements of Peltz are included elsewhere in this Prospectus. On September 1, 1995, the Company acquired U.S. Health Connections, Inc. ("Health Connections"), a network management company servicing the Southeastern United States and headquartered in Atlanta, Georgia, for $150,000 in cash, 30,193 shares of the Common Stock and $150,000 in notes payable. As of June 30, 1996, $75,000 of notes payable remained outstanding. The purchase price also included an additional 56,611 shares of Common Stock issued into escrow at closing. These escrowed shares represent contingent consideration that will be released from escrow based on the achievement of targeted operating performance criteria. The audited financial statements of Health Connections are included elsewhere in this Prospectus. On April 1, 1996, the Company acquired certain assets of Benenson & Associates, Inc. ("Benenson"), a physician network development company with approximately 10 network clients located throughout the East Coast of the United States, for 8,937 shares of Common Stock and $45,000 in cash, payable in two installments of $22,500 each on the closing date and the first anniversary thereof. RESULTS OF OPERATIONS Six Months Ended June 30, 1996 and 1995 Net revenue for the six months ended June 30, 1996 increased to $7.6 million from $100,000 in the comparable period ended June 30, 1995, primarily as a result of the initiation of the Company's physician group practice and network management services. The Company began providing physician group practice management and related services to Madison in December 1995 and to AHP&S in January 1996. The provision of physician group practice management and related services accounted for approximately $5.8 million of the Company's net revenue for the six months ended June 30, 1996. The provision of physician network management services accounted for approximately $273,000 of the Company's net revenue for the six months ended June 30, 1996. The Company earned fees for the use and support of its clinical information systems, including the recognition of license revenues under its contract with Merck Medco Managed Care, Inc., and software installation and training revenues, of 20 approximately $1.5 million for the six months ended June 30, 1996, as compared to approximately $100,000 of such revenues for the comparable period ended June 30, 1995. Cost of sales for the six months ended June 30, 1996 increased to $3.5 million from $21,822 for the comparable period ended June 30, 1995. The increase in cost of sales related primarily to the non-medical and system expenses outsourced to the Company from Madison and AHP&S. Operating expenses for the six months ended June 30, 1996 increased to $4.0 million from $616,503 for the comparable period ended June 30, 1995. The increase in operating expenses reflected expenses related to the provision of management services for the six months ended June 30, 1996, whereas the Company was a development stage company for the comparable period ended June 30, 1995. Research and development expenses for the six months ended June 30, 1996 increased to $1.9 million from $1.5 million for the comparable period ended June 30, 1995, due to an increase in the Company's development activities for its clinical information systems. Other expense for the six months ended June 30, 1996 was $53,628 and related to interest on capital lease obligations and interest on $3.0 million and $1.0 million of indebtedness issued as of June 20, 1996, bearing interest at 8% and 9%, respectively. The Company incurred no interest expense for the comparable period ended June 30, 1995. The net loss for the six months ended June 30, 1996 was $1.9 million compared to a loss of $2.0 million for the six months ended June 30, 1995. Year Ended December 31, 1995 and 1994 Net revenue for the year ended December 31, 1995 increased to $1.1 million from $378,878 in the year ended December 31, 1994, primarily as a result of the initiation of the Company's physician group practice services to Madison in December 1995, which generated approximately $505,000 of the Company's net revenue for the year ended December 31, 1995. The Company began to provide physician network management services in September 1995, which accounted for approximately $163,000 of the Company's net revenue for the year ended December 31, 1995. The Company earned fees for the use and support of its clinical information systems, including the recognition of license revenues under its contract with an affiliate of PCS Health Systems, Inc., the managed care unit of Eli Lilly & Company, and software installation and training revenues, of approximately $386,000 for the year ended December 31, 1995, as compared to $378,878 of such revenues for the year ended December 31, 1994. Operating expenses for the year ended December 31, 1995 increased to $3.3 million from $1.3 million for the year ended December 31, 1994. The increase in operating expenses was due to the increases in staffing and general corporate expenses required to fund the Company's transition from a development stage company involved in the development of clinical information systems to a full service physician practice and network management company. Research and development expenses for the year ended December 31, 1995 increased to $3.2 million from $1.6 million, due to an increase in the Company's development activities for its clinical information systems. The net loss for the year ended December 31, 1995 was $5.7 million compared to a loss of $2.5 million for the year ended December 31, 1994. As of December 31, 1995, the Company had net operating loss carryforwards ("NOLs") available to offset future book and taxable income of approximately $8.7 million and $6.2 million, respectively, which expire through 2010. The difference between the book and tax NOLs relates principally to the differences between book and tax accounting with respect to start-up costs, depreciation of fixed assets, amortization of intangible assets and recognition of deferred revenue. The book income tax benefits of $3.5 million and $1.3 million as of December 31, 1995 and December 31, 1994, respectively, have been fully reserved due to the uncertainty of their future realization. Year Ended December 31, 1994 and Period from Inception (August 27, 1993) through December 31, 1993 Net revenue for the year ended December 31, 1994 was $378,878, including license revenues from a third party and development revenues from Physicians' Online, Inc. See "Certain Transactions." The 21 Company realized no revenue during the period from inception through December 31, 1993. During both of such periods, the Company was a development stage company primarily engaged in the development of clinical information systems. Operating expenses for the year ended December 31, 1994 increased to $1.3 million, from $66,192 in the period from inception to December 31, 1993. The increase in operating expenses was due, in part, to the inclusion of 12 months of operating results in 1994 compared with approximately four months in 1993 and, in part, to the increase in staffing expenses and general corporate expenses required to further develop the Company's clinical information systems. Research and development expenses for the year ended December 31, 1994 increased to $1.6 million from $454,622 for the period from inception to December 31, 1993. These expenses related to the Company's development activities for its clinical information systems. The net loss for the year ended December 31, 1994 was $2.5 million compared to a loss of $520,814 for the period from inception through December 31, 1993. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its capital requirements through the sale of equity and debt securities. The Company issued three 8% promissory notes in the principal amounts of $1.5 million, $750,000 and $750,000 on February 28, April 26 and June 28, 1996, respectively. The Company issued six 9% promissory notes in the aggregate principal amount of $2.0 million on June 19 and August 13, 1996. All of such notes will mature on the earlier of the consummation of this offering and the one-year anniversary of their issuance, in the case of the 8% notes, or July 31, 1997, in the case of the 9% notes. The proceeds of such notes are being used to finance working capital. At June 30, 1996, the Company had cash and cash equivalents of $836,863. For the year ended December 31, 1995, the Company had a negative cash flow from its operating activities of $4.3 million, compared with $4.1 million for the six months ended June 30, 1996. Net cash used in investing activities was $1.0 million for the year ended December 31, 1995 and principally related to purchases of property, plant and equipment. Net cash provided by financing activities was $6.8 million for the year ended December 31, 1995 and related to the private placement of equity securities. See "Certain Transactions." Net cash provided by financing activities for the six months ended June 30, 1996 was $3.7 million, principally attributable to the above-described debt issuances. The Company's operating plan for the remainder of 1996 and for the first two quarters of 1997 includes continued development of the Company's integrated management services and clinical information systems. The principal categories of expenditures include research and development of the Company's clinical information systems as well as ongoing business development and marketing. The Company believes that the net proceeds of this offering, cash on hand, interest income and revenues from operations will be sufficient to fund planned operations of the Company through at least the end of 1998. The Company has no planned material capital expenditures or capital commitments. See "Risk Factors - -- Limited Operating History; History of Losses; Uncertainty of Future Profitability." From time to time in the ordinary course of its business, the Company evaluates possible acquisitions of businesses, products and technologies that are complementary to those of the Company. The Company currently has no agreements or understandings, and is not engaged in active negotiations, with respect to any such acquisition. Under certain specified circumstances, the Company has the option to cause the Roll Up Transaction to occur. The Company has reserved 548,224 shares of Common Stock for issuance upon consummation of the Roll Up Transaction, all of which will be issued if the Company effects the Roll Up Transaction. Accordingly, the Roll Up Transaction, if effected, will be dilutive to investors. In addition, certain of the physician groups and networks managed by the Company have rights to require the Company to purchase all or part of such physicians' interest in their respective MSO in the event that the Company does not consummate the Roll Up Transaction within one year after the satisfaction of specified conditions. There can be no assurance that the Company will have the financial resources to purchase such interests in accordance with its obligations at the time any such rights are exercised, or that the Company would be able to obtain financing on satisfactory terms or conditions, if at all, to purchase such interests. See "Business--Contractual Relationships with Affiliated Physicians." 22 BUSINESS OVERVIEW Advanced Health Corporation provides a full range of integrated management services and clinical information systems to physician group practices, single legal entities comprised of multiple physicians, and physician networks, aggregations of individual physicians and physician groups formed for the purpose of entering into contracts with third-party payors. The management services provided by the Company include physician practice and network development, marketing, payor contracting, financial and administrative management, clinical information management, human resource management and practice and network governance. The Company developed its clinical information systems to provide physicians, at the point of care and on a real-time basis, with patient-specific clinical and payor information and the ability to generate patient medical orders and facilitate the implementation of disease management programs. Through the management of multi-specialty and single-specialty physician group practices and networks, the Company focuses its management efforts on high-cost, high-volume disease specialties, such as cardiology, oncology and orthopedics. The Company currently manages two multi-specialty physician group practices and two single-specialty physician group practices comprised of more than 75 physicians in the New York metropolitan area and eight physician networks with approximately 800 physicians in the greater New York and Atlanta metropolitan areas, and provides physician group consulting services to more than 100 physicians. The Company believes its management services and clinical information systems will enable physicians to enhance the quality and reduce the cost of health care. INDUSTRY Health care expenditures in the United States have risen rapidly over the past two decades and totalled approximately $1 trillion in 1994. One significant factor affecting health care expenditures in the United States is the aging of the population. Older Americans utilize more health care services. In 1992, the number of Americans 65 years old or over represented 12% of the U.S. population, but were responsible for approximately 23% of all health care expenditures. In particular, older Americans spend more on certain medical specialties, such as cardiology, oncology and orthopedics. In 1992, spending on cardiology, oncology and orthopedics totalled approximately $200 billion and represented approximately 17%, 5% and 5%, respectively, of total direct health care costs in the United States. Increasing concern over the rising cost of health care in the United States has led to the development of managed care organizations and programs. Under such programs, managed care payors typically govern the provision of health care with the objective of ensuring delivery of quality care in a cost-effective manner. The traditional fee-for-service method of compensating health care providers offers few incentives for the efficient utilization of resources and is generally believed to contribute to health care cost increases at rates significantly higher than inflation. Consequently, fee-for-service reimbursement is rapidly being replaced by alternative reimbursement models, including capitated and other fixed-fee arrangements. The number of private insurance beneficiaries who are enrolled in HMOs increased by approximately 45% from 1991 to 1995, with approximately 40 million beneficiaries enrolled in HMOs in 1991 and approximately 58 million beneficiaries enrolled in HMOs in 1995. In addition, the number of Medicare beneficiaries enrolled in managed care programs increased by approximately 52% from December 1994 to April 1996. The growth in enrollment in these new reimbursement models is shifting the financial risk of delivering health care from payors to providers. As a result of this changing health care environment, health care cost containment pressures have increased physician management responsibilities while lowering reimbursement rates to physicians. Consequently, physician compensation has declined; the average net income for physicians decreased by approximately 4% from 1993 to 1994. Because approximately 67% of all physicians currently practice individually or in two-person groups, their ability to lower costs and to negotiate with payors is limited. Individual physicians and small group practices also tend to have limited administrative capacity, limited ties to other health care providers (restricting their ability to coordinate care across a variety of 23 specialties), limited capital to invest in new clinical equipment and technologies and limited purchasing power with vendors of medical supplies. In addition, individual physicians and small group practices typically lack the information systems necessary to enter into and manage risk-sharing contracts with payors and to implement disease management programs efficiently. In response to the foregoing factors, individual physicians and small group practices are increasingly affiliating with larger group practices and physician practice management companies ("PPMs"). From 1991 to 1995, the number of physicians practicing in group practices increased by approximately 14% to a total of 185,000 physicians, with approximately 5% of such physicians managed by PPMs. By acquiring physician practices, PPMs are successfully providing physicians with lower administrative costs, leverage with vendors and payors and economies of scale necessary to attract capital resources. In addition, management companies and consultants are organizing independent physician practices, independent physician associations, physician hospital organizations and other physician organizations for the purpose of enabling physicians to contract with managed care payors. The Company believes that significant opportunities exist, in the consolidating health care industry, to assist physicians in managing the administrative aspects of group practices and networks. More importantly, since clinical decisions made by physicians impact 85% of overall health care expenditures, the Company believes that even greater opportunities exist to assist physicians in managing the clinical aspects of group practices and networks. The Company believes its integrated physician practice and network management services and clinical information systems will enable physicians to more effectively control both the quality and cost of health care. STRATEGY The objective of the Company is to become a leading provider of integrated management services and clinical information systems to physician organizations. By enabling physicians to develop and efficiently manage group practices and networks, the Company seeks to assist physicians in facilitating risk-based managed care contracts, developing and implementing disease management programs and monitoring and controlling health care outcomes and costs. The Company intends to achieve its objective through the implementation of the following strategy: .Establishing Long-Term Alliances with Physician Organizations. The Company is seeking to partner with physician group practices and networks through long-term management contracts under which the Company provides a full range of integrated management and information services. The Company believes that contracting with physician organizations, rather than acquiring them, permits physicians to remain independent while providing them with the proper incentives and resources to improve their organizations. The Company typically develops an alliance with each physician organization through the establishment of an MSO. See "Business -- Contractual Relationships with Affiliated Physicians." . Managing High-Cost, High-Volume Disease Specialties. The Company believes that the greatest opportunity for achieving clinical efficiencies is in high-cost, high-volume disease specialties such as cardiology, oncology and orthopedics. Total health care expenditures for these medical specialties are expected to increase with the aging of the U.S. population. The Company seeks to integrate physicians into multi-specialty and single-specialty practices and networks to provide them with greater access to managed care contracts and to implement disease management programs. The Company believes that the evolution of disease specialty treatment organizations will play a major role in managed care contracting as payors recognize that the quality of care is improved and the cost of care reduced when reimbursement and health care services target a specific disease through coordinated networks of health care providers. . Providing Physicians with Clinical Information at the Point of Care. The Company has designed and developed point-of-care clinical information systems that link physician users and their offices on a real-time basis to other physicians, health care providers and third-party databases. By facilitating the 24 integration of clinical guidelines and efficient access to information, the Company believes it can assist physicians in improving the quality and lowering the cost of patient care. . Focusing on Selected Geographic Markets. The Company seeks to provide its services to physician group practices and networks located principally in geographic markets where fee-for-service reimbursement is shifting to capitated and other risk-based reimbursement and where there are significant concentrations of physicians specializing in high-cost, high-volume disease specialties. The Company's initial target markets include the greater New York, Philadelphia and Atlanta metropolitan areas. . Developing Strategic Industry Relationships. The Company believes that developing strategic industry relationships will enhance its ability to penetrate existing markets, gain access to new markets and develop new products and services. The Company has entered into a software license and integration agreement with Merck Medco Managed Care, Inc. for the Company's prescription writing software. In addition, the Company has entered into a contract with an affiliate of PCS Health Systems, Inc., the managed care unit of Eli Lilly & Company, to provide disease management information services and software for the treatment of certain diseases. The Company is continuing to seek relationships for the development and distribution to third parties of its clinical information systems. The Company intends to use the balance of the net proceeds of this offering remaining after the repayment of certain indebtedness (see "Use of Proceeds") to pursue its strategy. The Company's operating plan for the remainder of 1996 and the first two quarters of 1997 includes continued development of the Company's integrated management services and clinical information systems. The principal categories of expenditures include research and development of the Company's clinical information systems as well as ongoing business development and marketing. The Company believes that the net proceeds of this offering, cash on hand, interest income and revenues from operations will be sufficient to fund planned operations of the Company through at least the end of 1998. The Company has no planned material capital expenditures or capital commitments. See "Risk Factors--Limited Operating History; History of Losses; Uncertainty of Future Profitability." PHYSICIAN PRACTICE AND NETWORK SERVICES The Company provides physicians with a full range of integrated services to form and develop group practices and networks, to manage group practice and network operations, to develop disease management programs and to manage medical risk. These integrated services include clinical support and administrative and marketing services as well as point-of-care information systems and support. The Company often initially provides physician practice and network services pursuant to a consulting arrangement. The Company believes that its point-of-care clinical information systems provide physicians with the information needed to improve the quality and reduce the cost of health care. The Company manages two multi-specialty group practices and two single-specialty group practices located in the New York metropolitan area. The two multi-specialty group practices are made up of more than 50 physicians who have, with the Company's assistance, aggregated their practices into group practices. The medical specialties represented by these two groups include adult primary care, cardiology, oncology and orthopedics. The two single-specialty group practices are collectively comprised of more than 25 clinical cardiologists, interventional cardiologists and cardiothoracic surgeons, including leading physicians in the areas of minimally invasive coronary artery bypass grafts and angioplasties employing coronary stents. The Company is currently negotiating the terms of management agreements with additional physician group practices in the greater New York, Philadelphia and Atlanta metropolitan areas. The Company currently provides physician group consulting services to more than 100 physicians. Such services have traditionally included group formation services. More recently, the Company has begun to provide operations development and strategic planning services to established groups. The Company believes that the provision of consulting services, particularly operations development and 25 strategic planning services, may lead to the establishment of long-term practice management agreements. The Company manages eight physician networks covering approximately 738,000 lives, with a total of seven payor contracts among such networks. The Company manages three networks consisting of approximately 225 cardiologists in New Jersey, Pennsylvania and Delaware, and is developing additional cardiology networks in New York and Connecticut. The Company anticipates that these cardiovascular networks will provide comprehensive cardiac care, including ancillary services. The Company manages a community and medical center-based oncology network in Atlanta serving approximately 150,000 lives that includes both medical and radiation oncology. The Company is currently developing an oncology network in New Jersey. The Company manages an orthopedic network in Atlanta, covering approximately 205,000 lives and is developing orthopedic networks in New York, New Jersey, Pennsylvania and Connecticut. In addition, the Company manages three additional networks in the greater Atlanta area covering approximately 383,000 lives, including a multi-specialty network, an obstetrics and gynecology network and a plastic surgery network. In addition to providing administrative management services to physician organizations, the Company seeks to differentiate itself by assisting physicians in managing the clinical aspects of their practices. The Company believes that its integrated management services and clinical information systems will enhance the ability of physician group practices and networks to implement disease management programs and to manage practices under risk-based contracts. The Company is working to assist physicians in developing disease-specific clinical practice guidelines and in practicing in accordance with applicable standards of care. The Company has initially focused the implementation of its single-specialty disease management strategy on the creation of an integrated comprehensive cardiovascular care program, which includes physician group practices, networks and medical support services. It is anticipated that this disease management program will be delivered through linked practices and networks of cardiovascular specialists under management and/or development by the Company who will provide integrated, high-quality care for patients based on clinical care guidelines developed by the physician network. The Company anticipates that the physicians within these practices and networks will be linked together by the Company's clinical information systems. The Company has expanded its physician practice and network management expertise through acquisitions. In August 1995, the Company acquired the assets of Peltz, which provides consulting services to physicians seeking to form group practices on the East Coast, including assistance in the legal, administrative, technical, and logistical aspects of group formation and the subsequent recruiting of new physicians. In September 1995, the Company acquired Health Connections, an Atlanta-based physician network management company with over two years of network management experience in disease-specific areas, including oncology and orthopedics. In April 1996, the Company acquired certain assets of Benenson, a physician network development company specializing in the formation of state-wide and regional cardiology and orthopedic networks capable of marketing and servicing risk-based contracts. The Company markets its physician practice management and network management services through (i) direct sales methods, (ii) consultative sales that include providing advice on the development, consolidation and financing of group practices and networks and (iii) cross-selling to customers of its clinical information systems. PHYSICIAN PRACTICE SERVICES The Company offers a comprehensive set of physician practice management services, including practice formation, operations development and strategic planning, marketing, payor contracting and management, financial and administrative management, clinical information management, human resource management and practice governance. Practice Formation, Operations Development and Strategic Planning. The Company assists physician group practices in developing and expanding their practices through a combination of 26 physician recruitment, physician specialty mix analysis, acquisition evaluation and integration, ancillary services evaluation, financial consulting and operations development and strategic planning. Marketing. The Company assists physician group practices in marketing their medical services to HMOs, insurance companies, self-insured companies and the patient community. Working closely with the physician group practice, the Company develops public relations and community outreach programs designed to educate managed care entities and the patient community about the medical services provided by the physician group practice. Payor Contracting and Management. The Company assists physician group practices in negotiating and structuring managed care contracts with payors for the provision of physician services. The Company works with physician group practices to meet credentialling standards and specialty mix requirements of payors. The Company administers payments to physician providers under payor contracts. Financial and Administrative Management. The Company offers a variety of financial and administrative management services to physician group practices. The Company's financial management services include accounting, payroll, finance, payables management, financial reporting, financial controls, insurance negotiation and billing and collection. The Company's administrative management services include lease negotiations, facilities contracting and inventory management. Clinical Information Management. The Company offers physician group practices its proprietary clinical information management systems. The Med-E-Practice suite of applications is delivered as an integrated system of computer hardware, software and clinical information intended to provide a physician, at the point of care and on a real-time basis, with access to databases containing clinical, diagnostic, disease management, patient medical record and other medical information. The Company's clinical information system provides a seamless interface with third-party administrative software. See "Business -- Clinical Information Systems." Human Resource Management. The Company, through its MSOs, employs and manages all non-medical personnel that perform administrative, clerical and secretarial support, billing and collection and records management for a physician practice. The Company evaluates such employees, establishes personnel policies and procedures and manages employee benefit programs. The Company also provides payroll administration on behalf of the physician practice for the medical personnel. Practice Governance. The management services agreement that the Company enters into with a physician practice provides for the establishment of a management advisory board. Such board is responsible for developing management and administrative policies for the overall operation of the physician group practice and guidelines for the delivery of medical services. The management advisory board is controlled by licensed physicians within the physician group practice. PHYSICIAN NETWORK SERVICES The Company's physician network management services include network development and strategic planning, disease management program development, payor marketing and contracting, financial and administrative management, clinical information management and network governance. Network Development and Strategic Planning. The Company provides network development services including feasibility studies, organizational services, financial services, payor identification services, physician recruiting, credentialling services and operations development and strategic planning services. Disease Management Program Development. The Company provides physician networks with disease management program development services, including clinical guidelines development, implementation and management services, data collection, outcomes measurement and clinical trials development. 27 Payor Marketing and Contracting. The Company assists physician networks in marketing their medical services to health care payors, including HMOs, insurance companies, self-insured companies and other managed care entities. The Company works with each physician network to educate payors about the medical services provided by such network. The Company structures and negotiates risk- based contracts on behalf of its affiliated physician networks. The Company works with physician networks to meet credentialling standards and specialty mix requirements of payors. Financial and Administrative Management. The Company offers a variety of financial and administrative services to physician networks. The financial services provided by the Company include risk management, capitation allocation and distribution, claims processing and accounting services. The administrative services provided by the Company include records maintenance, utilization management and communications. Clinical Information Management. The Company offers clinical information management services to physician networks. The Med-E-Network suite of applications allows network physicians to process electronic referrals and electronic claims. Med-E-Network also provides access to electronic payor and patient eligibility information, third-party databases and patient-specific diagnostic and clinical information. Network Governance. The Company assists network medical directors and governance committees with a variety of governance issues. CLINICAL INFORMATION SYSTEMS The Company has developed clinical information systems that link physician users at the point of care and on a real-time basis with patient data and clinical guidelines maintained by the Company and third parties. The Company's clinical information systems consist of proprietary software, third-party hardware, proprietary and third-party databases and related support services. The Company's clinical information systems are designed to allow physicians (i) to access patient-specific clinical and payor information, (ii) to generate patient instructions, prescriptions and orders for tests, specialty referrals and specialty procedures and (iii) to access databases containing managed care and disease management guidelines, diagnostic/treatment preferences and guidelines affecting medical orders. The Company's clinical information systems are designed to complement existing health care information systems and to function with third-party applications. The clinical information system connects to physician users either through the use of a hand-held computer equipped with a wireless modem or a desktop computer using a standard wireline modem. It is anticipated that access to the Company's clinical information systems will be delivered to physician users and other health care professionals via both private and public networks, including the Internet. The Company's product suites operate within a client/server-based open architecture. The Company's products support HL-7 interfaces, incorporate TCP/IP protocols for real-time data transmission and run on the Microsoft Windows operating system and standard hardware platforms. The Company employs proprietary processes and standard commercial security measures to ensure the privacy of the data communication paths within its products. The Company has made only limited commercial sales of its clinical information systems to date. Since October 1994, the Company has provided its clinical information systems, including user support, data center operations and network operations, to two pilot sites in Michigan, consisting of approximately 10 physicians and, since December 1995, to a multi-specialty group, consisting of approximately 35 physicians, that the Company manages in New York. The Company has developed training and installation templates for its products and has experience using these templates in its two pilot sites and in a New York-based physician group practice. The Company has a contract with a third-party to provide training to its clients. In addition to providing its clinical information systems to its affiliated physicians, the Company intends to continue licensing its clinical information systems to third-party health care organizations. The Company has one employee dedicated to developing distribution 28 channels for its clinical information systems. In addition, the Company markets its clinical information systems to physician group practices and networks together with its management services. On September 27, 1995, the Company entered into a software license and integration agreement with Merck Medco Managed Care, Inc. for the Company's prescription writing software, which provides formulary management, drug utilization and review ("DUR") edits and linkage to drug therapy protocols. On August 1, 1995, the Company signed an agreement to provide disease management information systems and software to an affiliate of PCS Health Systems, Inc., the managed care unit of Eli Lilly & Company. The Eli Lilly & Company affiliate has agreed to sponsor two pilot programs involving the software applications developed by the Company. The Company continues to pursue strategic relationships with health care providers as well as hospital information systems companies, physician practice management systems companies and on-line services companies for the purpose of further developing and marketing its information systems. SYSTEMS The Company offers a broad range of clinical information systems for physician users through two suites of applications, Med-E-Practice and Med-E-Network. Med-E-Practice is designed to be used directly by physician group practices in support of clinical decision making, clinical ordering and administrative management. Med-E-Network is designed to support administrative and clinical decision making for physician networks engaged in capitated and other fixed-fee arrangements under managed care contracts. These systems have only been developed by the Company recently, and the initial limited commercial installations of the Med-E-Practice suite of applications occurred in June 1996. The Med-E-Network suite of applications is expected to be initially installed during the fourth quarter of 1996. See "Risk Factors -- Uncertainty of Successful Commercialization of Clinical Information Systems." The following table summarizes the two suites of applications offered and being developed by the Company:
PRODUCT NAME PRODUCT DESCRIPTION - --------------------------------- ---------------------------------------------------------- MED-E-PRACTICE Smart Scripts.................. Pharmaceutical prescription writing application providing formulary management, DUR edits and diagnostic coding linkage to drug therapy protocols. Med-E-Visit.................... Patient encounter application generating a Superbill with fully-qualified diagnostic coding linked to appropriate billing codes required to support outcomes analysis. Referral....................... Supports multiple referral networks by recording referral information and providing both network-specific referral rules and appropriate network specialists. Conditions Editor.............. Tracks and maintains an active conditions list by patient. Allergies Editor............... Maintains active and inactive allergy conditions by patient, supporting charting and DUR editing. Practice Management Integrator................... Allows Med-E-Practice applications to integrate with third-party physician practice management systems using industry-standard HL-7 records. Clinical Note.................. Allows physicians to complete clinical notes at the point of care. Currently in development. MED-E-NETWORK Med-E-Net Central.............. Provides centralized administrative functions necessary to manage risk-taking specialty networks. Med-E-Net Office............... Integrates physicians in geographically dispersed networks. Med-E-Net Integrator........... Provides integration and connectivity between the applications in the Med-E-Network suite and third-party databases. Med-E-Net Cardiology........... Provides cardiology-specific extensions to Med-E-Network for managing risk-taking cardiology networks.
29 Med-E-Practice provides administrative and clinical support for physician group practices. The Med-E-Practice suite is designed for use by physicians at the point of care and on a real-time basis and is intended to allow better care decisions by providing better information. All of the applications in the Med-E-Practice suite are designed to be run on a pen-based, portable, wireless computer for use in a busy ambulatory practice. The Med-E-Practice suite consists of the following applications: Smart Scripts. Smart Scripts is a prescription writing application that provides the clinician: (i) patient-specific prescription history, (ii) real-time formulary management, specific to each patient's insurance coverage, (iii) clinical intervention screening, using third-party DUR modules, (iv) default dosing, (v) generic substitution, (vi) condition/drug relationship maintenance and (vii) support for individual customer lists. The Company also markets Smart Scripts as a stand-alone product. The Company is also developing an Internet/intranet version of Smart Scripts, "Internet Script Writer." Internet Script Writer is designed to allow any physician with access to the Internet to gain the advantages of on-line prescription management. The Internet Script Writer will provide (i) patient-specific prescription history, (ii) real-time formulary management, specific to each patient's insurance coverage, (iii) clinical intervention screening, using third-party DUR modules and (iv) legible, printed prescriptions. The Company expects that the Internet Script Writer will be commercially available in the fourth quarter of 1996. Med-E-Visit. Med-E-Visit is a patient encounter management application that records procedures and conditions. Med-E-Visit allows for the selection of laboratory, x-ray, immunization, visit and procedure codes, using standard diagnostic and billing coding. Med-E-Visit links all procedures with conditions for outcomes analysis and facilitates correct insurance billing. Med-E-Visit records follow-up visit requirements and, in conjunction with the Practice Management Integrator, submits a Superbill to a third-party practice management system. Referral. The Referral application simplifies patient referrals through real-time access to each individual patient's appropriate physician network. The Referral application records referral information, provides network-specific referral rules and helps to select the appropriate referral physician by specialty and location and allows a complete referral form to be created and printed. Conditions Editor. The Conditions Editor automatically tracks a patient's medical condition information generated by the other applications in the Med-E-Practice suite. It uses disease-specific algorithms to monitor and permit a physician to record a patient encounter. The Conditions Editor also allows the clinical user to directly edit and manage the current conditions list. Allergies Editor. The Allergies Editor allows the clinical user to easily maintain allergy information for use in the Med-E-Practice suite. Allergy information is provided by the Conditions Editor to the Smart Scripts application and other Med-E-Practice applications. Practice Management Integrator. The Practice Management Integrator integrates the Med-E-Practice suite with third-party practice management systems through a Company-designed interface using the industry standard HL-7 interface. Clinical Note. The Clinical Note is designed to be an "at a glance" utility bringing the most appropriate information to the physician at the point of care. The Clinical Note application is intended to enable the physician to review the most current information regarding the patient's medical history, including current medications, active and inactive conditions, office visits, past referrals and pertinent test results. The Clinical Note also permits the physician to update patient information during the patient encounter with new clinical findings, new prescriptions, new referrals and new procedure orders. The automated Clinical Note application structures the input of information and orders in a focused and customizable format to allow rapid physician-driven data entry and retrieval. The Clinical Note is expected to be commercially available in 1997. 30 Med-E-Network is a suite of network management applications supporting physician networks engaged in risk-based contracts with payors. Med-E-Network automates network configuration, maintenance of network rules, referral management, utilization review management, claims and encounter submissions and financial and clinical reporting. Med-E-Network utilizes a relational database engine which integrates various sources of information and provides a flexible repository for developing administrative, financial and clinical reports. The Med-E-Network suite consists of the following applications: Med-E-Net Central. Med-E-Net Central is designed to centralize and support the administrative functions of a risk-taking physician network by (i) providing pre-certification, (ii) processing claims and encounters, (iii) generating, managing and matching referrals, (iv) providing financial and clinical utilization review reporting, (v) providing automated utilization review approvals and denials and (vi) providing eligibility assistance. Med-E-Net Office. Med-E-Net Office links physician offices to Med-E-Net Central. Med-E-Net Office is a forms-based, scaleable, client/server application supporting referral creation and receipt, claims and encounter submission and the creation and submission of treatment plans. Med-E-Net Integrator. The Med-E-Net Integrator provides connectivity between the applications in the Med-E-Network suite and third-party databases. Med-E-Net Cardiology. Med-E-Net Cardiology is designed to deliver procedure-specific guidelines for the management of cardiac disease coupled with an automated procedure approval and referral engine. Med-E-Net Cardiology is expected to be commercially available in the third quarter of 1996. CLINICAL INFORMATION SYSTEMS DEVELOPMENT The Company believes that the timely development of new clinical information applications and the enhancement of existing clinical information systems are important to its competitive position. The Company's product development strategy is directed toward creating new applications that (i) increase the functionality of current products by providing enhanced interfaces to third-party systems and data repositories, (ii) expand coverage along the continuum of clinical care, (iii) increase coverage to additional disease and procedure groups and (iv) provide customers with a range of decision support systems at various price points. The Company has approximately 20 professionals dedicated to systems development. See "Risk Factors -- Technological Change." CONTRACTUAL RELATIONSHIPS WITH AFFILIATED PHYSICIANS The Company typically establishes an MSO for each physician organization it manages. The MSO is a joint venture between the physician organization and the Company, with the Company owning at least 51% of the equity in the MSO. The MSO enters into a long-term management services agreement with the physician organization pursuant to which the MSO provides group practice management or network management services that provide both administrative and clinical support to members of the physician organization. The MSO concurrently enters into a services agreement with the Company pursuant to which it gains access to management services and clinical information systems from the Company. The MSO's assets consist primarily of its management service contracts with the physician group or network served and its liabilities consist primarily of its obligations under its agreement with the Company and its obligations to its employees. For certain MSOs, a stockholders agreement is entered into among the MSO, the physician organization and the Company. The stockholders agreement, among other things, (i) restricts the transfer of MSO equity, (ii) provides the terms upon which, after the occurrence of the Trigger Event (as hereinafter defined), the MSO can, at the Company's option, be merged with and into a wholly-owned subsidiary of the Company in the Roll Up Transaction and (iii) grants to the physician organization the right to put its equity in the MSO to the Company at a price equal to 110% of the then-current fair market value of the shares of Common Stock that would have otherwise been issued in the Roll Up Transaction if the Company does not exercise its option to 31 cause the Roll Up Transaction to occur within one year after the occurrence of the Trigger Event. In the case of each such MSO, a Trigger Event will occur at such time as (i) the Company is providing physician practice management services to at least 300 physicians, (ii) the Company is providing physician network management services to at least 2,000 physicians, (iii) the Company has at least $75,000,000 in stockholders' equity and (iv) the Company's Common Stock is publicly traded. As of August 31, 1996, the Company was providing (i) physician practice management services to 77 physicians and (ii) physician network management services to 798 physicians and as of June 30, 1996, the Company had $863,349 in stockholders' equity. The Company has reserved 548,224 shares of Common Stock for issuance upon the merger of such MSOs into the Company. See "Risk Factors -- Management Service Organizations Not Wholly-Owned; Physician Put Rights; Dilution." Physician Practices. The management services agreements between the MSO and a physician practice group generally have an initial term of five to 20 years and are automatically renewable for additional terms. Such agreements typically are subject to early termination for cause. The management services agreements generally obligate an MSO to provide certain non-medical practice management services to the physician practice group for a monthly fee. The fee paid to the MSO is generally a combination of fixed fees for certain services and percentage fees for certain services. For risk-based contracts that the physician practice group enters into, the management services agreement will generally provide for additional management fees based upon savings recognized by the physician practice group because of any cost efficiencies resulting from the MSO's performance. The fees are set to be competitive within the geographic area in which the physician practice group is located. A provision restricting the physician practice group from competing against the MSO or employing the MSO's employees is generally included in the agreement. Physician Networks. The management services agreements between the MSO and a physician network generally have an initial term of at least five years and are automatically renewable for additional terms. Such agreements typically are subject to early termination for cause. The management services agreements generally obligate an MSO to provide certain non-medical practice management services to the physician network for a fee. The fee paid to the MSO for risk-based or capitated contracts is generally a service fee equal to the actual cost, not to exceed a specified percentage of capitated revenues, for providing the non-medical management services plus an incentive based on savings generated by the network. The fee paid to the MSO for fee-for-service contracts is generally equal to the administrative fees included in the managed care contract plus a management processing fee agreed upon by the MSO and the physician network. The fees are set to be competitive within the geographic area in which the physician network is located. In the agreement, the physician network agrees that the MSO will be the exclusive provider of non-medical management services to the physician network. Capitated and Other Fixed-Fee Arrangements. The Company anticipates entering into managed care or capitated arrangements, either indirectly through the assignment of managed care contracts entered into between its affiliated physicians and third-party payors or directly through the formation of an IPA. The Company has little experience in managing capitated-risk arrangements and has no experience in forming or managing an IPA. Revenues under any managed care or capitated arrangements entered into by the Company, whether through the assignment of a capitated contract entered into by its affiliated physicians or directly through an IPA, will generally be a fixed amount per enrollee. Under such an arrangement, the Company would contract with affiliated physicians for the provision of health care services and the Company would be responsible for the provision of all or a portion of the health care requirements of such enrollees. To the extent that enrollees require more care than is anticipated by the Company upon entering into such a contract, the Company's revenues under such contracts may be insufficient to cover its costs. The Company expects to enter into reinsurance agreements with third-party insurers in respect of a portion of such risk. 32 PROPRIETARY RIGHTS The Company is relying upon the effectiveness of protection provided by a combination of patent, trade secret and copyright laws, nondisclosure and other contractual provisions and technological measures to protect its proprietary position in its methodologies, databases and software. The Company has two U.S. patent applications and a foreign patent application commensurate with both U.S. applications, but no issued patents. The patent applications are directed to the Company's Smart Scripts prescription management system and related technologies. No assurance can be provided that a patent or patents will be issued or will provide the Company with adequate protection. Nor can any assurance be given that patent, trade secret, copyright or other intellectual property rights can be successfully asserted in any court action. The Company has also filed applications for registration of copyrights in its software, user documentation and databases. The copyright protection accorded to databases, however, is fairly limited. While the arrangement and selection of data are protectable, the actual data are not, and others are free to create databases that perform the same function. The Company distributes its clinical information systems products under agreements that grant customers non-exclusive licenses and generally contain terms and conditions restricting the disclosure and use of the Company's systems. In addition, the Company attempts to protect the secrecy of its proprietary databases and other trade secrets and proprietary information through confidentiality agreements with employees, consultants and third parties. The Company believes that, aside from the various legal protections of its proprietary information and technologies, factors such as the technological and creative skills of its personnel and product maintenance and support are integral to establishing and maintaining its position within the health care industry. Although the Company believes that its products do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future. See "Risk Factors -- Dependence on Proprietary Assets." COMPETITION The provision of physician practice and network management services is a highly competitive business in which the Company competes for contracts with several national and many regional and local companies. The Company also competes with traditional managers of health care services that directly recruit and manage physicians. In addition, certain of the Company's competitors are dedicated to or specialize in the management of single-specialty practices focused on diseases such as cardiology, oncology and orthopedics, specialties on which the Company intends to focus. Certain of the Company's competitors have access to substantially greater financial resources than the Company. The Company believes that competition in this industry is generally based on cost and quality of services. The market for health care information systems and services is highly competitive and rapidly changing. The Company believes that the principal competitive factors for clinical information systems are the proprietary nature of methodologies, databases and technical resources, the usefulness of the data and reports generated by the software, customer service and support, compatibility with the customer's existing information systems, potential for product enhancement, vendor reputation, price and the effectiveness of marketing and sales efforts. The Company's competitors include other providers of clinical information systems and practice management systems. Many of the Company's competitors and potential competitors have greater financial, product development, technical and marketing resources than the Company, and currently have, or may develop or acquire, substantial installed customer bases in the health care industry. In addition, as the market for clinical information systems and practice management systems develops, additional competitors may enter the market and competition may intensify. While the Company believes that it will successfully differentiate its clinical information systems from those of its competitors, there can be no assurance that future competition will not have a material adverse effect on the Company. 33 GOVERNMENT REGULATION As a participant in the health care industry, the Company's operations and relationships are subject to extensive and increasing regulation by a number of governmental entities at the federal, state, and local levels. The Company believes its operations are in material compliance with applicable laws. Nevertheless, because of the nature of the Company's relationship with physician organizations, many aspects of the Company's business operations have not been the subject of state or federal regulatory interpretations and there can be no assurance that a review by courts or regulatory authorities of the Company's business or that of its affiliated physician organizations will not result in a determination that could adversely affect the operations of the Company or that the health care regulatory environment will not change so as to restrict the Company's or the affiliated physicians' existing operations or their expansion. During the first six months of 1996, approximately 35% of the revenues of the Company's affiliated physician group practices was derived from payments made by government-sponsored health care programs (principally, Medicare, Medicaid and state reimbursed programs). As a result, any change in reimbursement regulations, policies, practices, interpretations or statutes could adversely affect the operations of the Company. The federal Medicare program adopted a system of reimbursement of physician services, RBRVS, which took effect in 1992 and is expected to be fully implemented by December 31, 1996. The Company expects that the RBRVS fee schedule and other future changes in Medicare reimbursement will result in some cases in a reduction and in some cases in an increase from historical levels in the per-patient Medicare revenue received by certain of the physician organizations with which the Company contracts. Although the Company does not believe such reductions will have a material adverse effect on the Company's operating results, the RBRVS fee schedule may be adopted by other payors, which could have a material adverse effect on the Company. See "Risk Factors -- Cost Containment and Reimbursement Trends." There are also state and federal civil and criminal statutes imposing substantial penalties, including civil and criminal fines and imprisonment, on health care providers that fraudulently or wrongfully bill governmental or other third-party payors for health care services. The federal law prohibiting false billings allows a private person to bring a civil action in the name of the U.S. government for violations of its provisions. The Company believes it is in material compliance with such laws, but there is no assurance that the Company's activities will not be challenged or scrutinized by governmental authorities. Moreover, technical Medicare and other reimbursement rules affect the structure of physician billing arrangements. The Company believes it is in material compliance with such regulations, but regulatory authorities may differ and in such event the Company may have to modify its relationship with physician organizations. Noncompliance with such regulations may adversely affect the business, financial condition and results of operations of the Company and subject it and affiliated physician groups to penalties and additional costs. The laws of many states prohibit business corporations such as the Company from practicing medicine and employing physicians to practice medicine. The Company provides only non-medical services and clinical information systems to physician organizations, does not represent to the public or its clients that it offers medical services and does not exercise control over the practice of medicine by the physician organizations with which it contracts. Accordingly, the Company believes that it is not in violation of applicable state laws relating to the practice of medicine. The laws in most states regarding the corporate practice of medicine have been subjected to limited judicial and regulatory interpretation and, therefore, no assurances can be given that the Company's activities will be found to be in compliance, if challenged. There can be no assurance that a review of the Company's or its affiliated physicians' businesses by courts or regulatory authorities will not result in a determination that could adversely affect the operations of the Company or its affiliated physicians (for example, by rendering the Company's management services agreements with a physician organization unenforceable). In addition to prohibiting the practice of medicine, numerous states prohibit entities like the Company from engaging in certain health care related activities such as fee-splitting with physicians. New York State, 34 for instance, prohibits percentage-based payments from physicians or physician groups to management companies for services other than billing and collection. Accordingly, expansion of the operations of the Company to certain jurisdictions may require it to comply with such jurisdictions' regulations which could lead to structural and organizational modifications of the Company's form of relationships with physician organizations. Such changes, if any, could have a material adverse effect on the Company. Certain provisions of the Social Security Act, commonly referred to as the "Anti-kickback Statute," prohibit the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare or state health program patients or patient care opportunities, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by Medicare or state health programs. The Anti-kickback Statute is broad in scope and has been broadly interpreted by courts in many jurisdictions. Read literally, the statute places at risk many legitimate business arrangements, potentially subjecting such arrangements to lengthy, expensive investigations and prosecutions initiated by federal and state governmental officials. Many states, including those in which the Company does business, have adopted similar prohibitions against payments intended to induce referrals of Medicaid and other third-party payor patients. The Company believes that, although it is receiving remuneration under the management services agreements for management services, it is not in a position to make or influence the referral of patients or services reimbursed under government programs to the physician groups and, therefore, believes it has not violated the Anti-kickback Statute. The Company also is not a separate provider of Medicare or state health program reimbursed services. To the extent the Company is deemed to be either a referral source or a separate provider under its management services agreements and to receive referrals from physicians, the financial arrangements under such agreements could be subject to scrutiny and prosecution under the Anti-kickback Statute. Violation of the Anti-kickback Statute is a felony, punishable by fines up to $25,000 per violation and imprisonment for up to five years. In addition, the Department of Health and Human Services may impose civil penalties excluding violators from participation in Medicare or state health programs. In July 1991, in part to address concerns regarding the Anti-kickback Statute, the federal government published regulations that provide exceptions, or "safe harbors," for transactions that will be deemed not to violate the Anti-kickback Statute. Among the safe harbors included in the regulations were provisions relating to the sale of practitioner practices, management and personal services agreements and employee relationships. Additional safe harbors were published in September 1993 offering new protections under the Anti-kickback Statute to eight activities, including referrals within group practices consisting of active investors. Proposed amendments to clarify these safe harbors were published in July 1994 which, if adopted, would cause substantive retroactive changes to the 1991 regulations. Although the Company believes that it is not in violation of the Anti-kickback Statute, its operations may not fit within any of the existing or proposed safe harbors. Significant prohibitions against physician referrals were enacted by Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions, commonly known as "Stark II," amended prior physician self-referral legislation known as "Stark I" by dramatically enlarging the field of physician-owned or physician-interested entities to which the referral prohibitions apply. Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a physician or a member of his immediate family from referring Medicare patients to an entity providing "designated health services" in which the physician has an ownership or investment interest, or with which the physician has entered into a compensation arrangement including the physician's own group practice. The designated health services include radiology and other diagnostic services, radiation therapy services, physical and occupational therapy services, durable medical equipment, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics, outpatient prescription drugs, home health services and inpatient and outpatient hospital services. The penalties for violating Stark II include a prohibition on payment by these government programs and civil penalties of as much as $15,000 for each violative referral and $100,000 for participation in a "circumvention scheme." The Company believes that its activities are not in violation of Stark I or Stark II. However, the Stark legislation is broad and ambiguous. Interpretative 35 regulations clarifying the provisions of Stark II have not been issued. While the Company believes it is in compliance with the Stark legislation, future regulations could require the Company to modify the form of its relationships with physician organizations. Moreover, the violation of Stark I or II by the Company's affiliated physician organizations could result in significant fines and loss or reimbursement which could materially adversely affect the Company. Many states in which the Company conducts business have enacted similar laws applicable to all services. The Health Care Finance Administration ("HCFA") has issued final regulations (the "PIP regulations") covering the use of physician incentive plans ("PIPs") by HMOs and other managed care contractors and subcontractors ("Organizations"), potentially including the Company. Any Organization that contracts with a physician group that places the individual physician members of the group at substantial financial risk for the provision of services (e.g., if a primary care group takes risk but subcontracts with a specialty group to provide certain services) must satisfy certain disclosure, survey and stop-loss requirements. Under the PIP regulations, payments of any kind, direct or indirect, to induce providers to reduce or limit covered or medically necessary services ("Prohibited Payments") are prohibited. Further, where there are no Prohibited Payments but there is risk sharing among participating providers related to utilization of services by their patients, the regulations contain three groups of requirements: (i) requirements for physician incentive plans that place physicians at "substantial financial risk;" (ii) disclosure requirements for all Organizations with PIPs; and (iii) requirements related to subcontracting arrangements. In the case of substantial financial risk (defined in the regulations according to several methods, but essentially risk in excess of 25% of the maximum payments anticipated under a plan with less than 25,000 covered lives), Organizations must: (1) conduct enrollee surveys; and (2) ensure that all providers have specified stop-loss protection. The violation of the requirements of the PIP regulations may result in a variety of sanctions, including suspension of enrollment of new Medicaid or Medicare members, or a civil monetary penalty of $25,000 for each determination of noncompliance. In addition, because of the increasing public concerns regarding PIPs, the PIP regulations may become the model for the industry as a whole. The new regulations could have an affect on the ability of the Company to effectively reduce the costs of providing services, by limiting the amount of risk that may be imposed upon physicians. Because the affiliated physician organizations remain separate legal entities, they may be deemed competitors subject to a range of antitrust laws which prohibit anti-competitive conduct, including price fixing, concerted refusals to deal and division of market. The Company intends to comply with such state and federal laws as may affect its development of integrated health care delivery networks, but there can be no assurance that a review of the Company's business by courts or regulatory authorities will not result in a determination that could adversely affect the operation of the Company and its affiliated physician groups. Laws in all states regulate the business of insurance and the operation of HMOs. Many states also regulate the establishment and operation of networks of health care providers. There can be no assurance that regulatory authorities of the states in which the Company operates would not apply these laws to require licensure of the Company's operations as an insurer, as an HMO or as a provider network. The Company believes that it is in compliance with these laws in the states in which it does business, but there can be no assurance that future interpretations of insurance laws and health care network laws by the regulatory authorities in these states or in the states into which the Company may expand will not require licensure or a restructuring of some or all of the Company's operations. As a result of the continued escalation of health care costs and the inability of many individuals to obtain health insurance, numerous proposals have been or may be introduced in the U.S. Congress and state legislatures relating to health care reform. There can be no assurance as to the ultimate content, timing or effect of any health care reform legislation, nor is it possible at this time to estimate the impact of potential legislation, which may be material, on the Company. 36 The confidentiality of patient records and the circumstances under which such records may be released is subject to substantial regulation under state and federal laws and regulations. To protect patient confidentiality, data entries to the Company's databases delete any patient identifiers, including name, address, hospital and physician. The Company believes that its procedures comply with the laws and regulations regarding the collection of patient data in substantially all jurisdictions, but regulations governing patient confidentiality rights are evolving rapidly and are often difficult to apply. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of such information to implement security measures that may be of substantial cost to the Company. There can be no assurance that changes to state or federal laws would not materially restrict the ability of the Company to obtain patient information originating from records. The health care industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of health care industry participants. During the past several years, government regulation of reimbursement rates in the United States health care industry has increased. Lawmakers continue to propose programs to reform the United States health care system, which may contain proposals to increase governmental involvement in health care, lower reimbursement rates and otherwise change the operating environment for the Company's customers. Health care industry participants may react to these proposals by curtailing or deferring investments, including investments in the Company's products. The Company cannot predict what impact, if any, such factors may have on its business, financial condition and results of operations or on the price of the Common Stock. Certain products, including software applications, intended for use in the diagnosis of disease or other conditions, or in the cure, treatment, mitigation or prevention of disease, are subject to regulation by the FDA under the Federal Food, Drug and Cosmetic Act of 1938, as amended (the "FDCA"). The FDCA imposes substantial regulatory controls over the manufacturing, testing, labeling, sale, distribution, marketing and promotion of medical devices and other related activities. These regulatory controls can include, for example, compliance with the following: manufacturer establishment registration and device listing; current good manufacturing practices; FDA clearance of a premarket notification submission or FDA approval of a premarket approval application; medical device adverse event reporting; and general prohibitions on misbranding and adulteration. Violations of the FDCA can result in severe criminal and civil penalties, and other sanctions, including, but not limited to, product seizure, recall, repair or refund orders, withdrawal or denial of premarket notifications or premarket approval applications, denial or suspension of government contracts, and injunctions against unlawful product manufacture, labeling, promotion, and distribution or other activities. In its 1989 Draft Policy Statement, the FDA stated that it intended to exempt certain clinical decision support software products from a number of regulatory controls. Under the 1989 Draft Policy Statement, the FDA stated that it intended to exempt decision support software products that involve "competent human intervention before any impact on human health occurs (e.g., where clinical judgment and experience can be used to check and interpret a system output)" from the following controls: manufacturer establishment registration and device listing, premarket notification, and compliance with the medical device reporting and current good manufacturing practice regulations. In the 1989 Draft Policy Statement, the FDA stated that until it formally exempted decision support software products from these requirements, manufacturers of eligible decision support software products would to be required to comply with those controls. Since issuing the 1989 Draft Policy Statement, the FDA has not issued a final policy on this issue and has not formally exempted any products as discussed in the 1989 Draft Policy Statement. The FDA has referred to the 1989 Draft Policy Statement in official presentations regarding software regulation and in decisions and opinions regarding the regulatory status of various products. Over the last few years, however, the FDA has stated that it intends to issue a new policy concerning computer products. Under this new policy, exemptions from regulatory controls, if any, would be based upon a product 37 specific "risk factor" analysis. For purposes of this analysis, the FDA has considered, among other things, the following: (i) seriousness of the disease to be diagnosed or treated; (ii) time frame for use of the information; (iii) concordance with accepted medical practice; (iv) format of data and its presentation; (v) individualized versus aggregate patient care recommendations; and (vi) clarity of algorithms used in the software. Given the FDA's intent to issue a new policy concerning the regulation of computer software, there can be no assurance as to the effect of such a policy, if any, upon the regulatory status of the Company's products. The Company believes that its clinical information systems are not medical devices under the FDCA and, thus, are not subject to the controls imposed on manufacturers of medical devices and do not fall within the scope of the 1989 Draft Policy Statement. The Company further believes that to the extent that its products are determined to be medical devices, they fall within the exemptions for decision support systems provided by the 1989 Draft Policy Statement. The Company has not taken action to comply with the requirements that would otherwise apply if the Company's products were determined to be non-exempt medical devices. There can be no assurance that the FDA will not make a request or take other action to require the Company to comply with any or all current or future controls applicable to medical devices under the FDCA. There can be no assurance that, if such a request were made or other action were taken, the Company could comply in a timely manner, if at all, or that any failure to comply would not have a material adverse effect on the Company's business, financial condition or results of operations, or that the Company would not be subjected to significant penalties or other sanctions. There can be no assurance that the FDA will continue to permit any or all of the exemptions provided in the 1989 Draft Policy Statement, or in a new policy statement, if any, or that the FDA will promulgate regulations formally implementing such exemptions. There can be no assurance that the Company's current or future clinical information systems will qualify for future exemptions, if any, nor can there be any assurance that any future requirements will not have a material adverse effect on the Company's business, financial condition or results of operations. LEGAL PROCEEDINGS The Company is not a party to any litigation that would have a material adverse effect on its business, results of operations or financial condition. EMPLOYEES As of August 31, 1996, the Company had a total of approximately 160 employees, approximately 30 of whom were employed in the Company's information systems subsidiary. None of the Company's employees is subject to a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are satisfactory. PROPERTIES The Company currently occupies 16,580 square feet of leased office space in Tarrytown, New York, 4,065 square feet of leased office space in Marietta, Georgia, 1,180 square feet of leased office space in Wayne, Pennsylvania and 10,742 square feet of leased office and data center space in Chicago, Illinois. The current lease (including 4,500 square feet of space subleased from Physicians' Online, Inc. as more fully described under "Certain Transactions") for the Tarrytown office expires in March 1997 and has an annual rental of approximately $290,790. The Company has entered into a lease, effective April 1, 1997, for 25,000 square feet at the Tarrytown office. Such lease will have an annual rental of approximately $500,000 and will expire March 2002. See "Certain Transactions". The lease for the Marietta office expires in January 2001 and has an annual rental of approximately $50,000. The lease for the Wayne office expires in April 1997 and has an annual rental of approximately $20,000. The lease for the Chicago office expires in March 2001 and has an annual rental of $180,000 for the current year. The Company believes that these facilities are adequate for the foreseeable future. 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
NAME AGE POSITION - ---------------------------------------- --- ---------------------------------------- Jonathan Edelson, M.D................... 36 Chairman of the Board and Chief Executive Officer Steven Hochberg......................... 34 President and Director Alan B. Masarek......................... 35 Chief Operating Officer and Chief Financial Officer Robert Alger............................ 41 Vice President and Chief Information Officer Andrew C. Garling, M.D.................. 50 Vice President and Chief Medical Officer James T. Carney(2)...................... 52 Director Barry Kurokawa(1)(2).................... 40 Director Jonathan Lieber(1)(2)................... 30 Director
- ------------ (1) Member of Audit Committee. (2) Member of Compensation Committee. JONATHAN EDELSON, M.D. has been the Chairman of the Board and Chief Executive Officer of the Company since its inception. Dr. Edelson is a board-certified internist. Prior to co-founding the Company, Dr. Edelson served as the Chief Executive Officer of Physicians' Online, Inc. from August 1993 to December 1994 and as a director from August 1993 to the present. Dr. Edelson was a senior vice president with ValueRx, Inc., the prescription drug benefits management unit of Value Health, Inc., from October 1990 to June 1993. As a practicing physician prior to joining ValueRx, Inc., Dr. Edelson founded Medical Decision Resources, Inc., a physician profiling and education business, in March 1989, and served as its President through September 1990. Dr. Edelson attended Yale University, University of Chicago School of Medicine and the Harvard School of Public Health. STEVEN HOCHBERG has been President and a director of the Company since its inception. He is a co-founder of the Company and a co-founder of Physicians' Online, Inc. Mr. Hochberg served as the President of Physicians' Online, Inc. from January 1993 to June 1994. Mr. Hochberg served as the President of Ascent Group, Inc., a financial consulting business that he founded, from February 1992 to January 1993, and as a Vice President of Sigoloff & Associates, management consultants, from September 1989 to February 1992. In addition, he worked with Alex. Brown & Sons as a Corporate Finance Associate in 1985 and with Bain & Company as a Strategy Consultant from 1986 to 1987. Mr. Hochberg, a CPA, holds an MBA from Harvard Business School. ALAN B. MASAREK has been Chief Operating Officer and Chief Financial Officer of the Company since November 1995. Prior to joining the Company, from April 1995 to November 1995, Mr. Masarek was acting as an independent consultant. Mr. Masarek was President and Chief Executive Officer of the Scovill Group, an international manufacturer of fasteners and other component items with annual revenues of approximately $125 million, from February 1994 to April 1995. Prior to Scovill, Mr. Masarek was President of two divisions of the Bibb Company, a diversified textile manufacturer, from December 1991 to February 1994. Prior to that, Mr. Masarek worked for three years as a buyout specialist with the NTC Group and for five years in the audit division of Arthur Andersen & Co. Mr. Masarek, a CPA, holds an MBA from Harvard Business School. ROBERT ALGER has been Vice President and Chief Information Officer of the Company since February 1995. Prior to joining the Company, Mr. Alger was Chief Information Officer and Vice President of Information Systems at Blue Shield of California, from December 1991 to February 1995, and a partner at Scribner, Jackson & Associates, a technology consulting group, from January 1986 to December 1991. Mr. Alger received his B.S. from California State University--Northridge. 39 ANDREW C. GARLING, M.D. has been Vice President and Chief Medical Officer of the Company since November 1995. Dr. Garling's experience in medical information systems includes serving as Vice President of Medical Affairs for TDS, Inc. from August 1988 to December 1992 and as Chief Information Officer and Vice President for the Prudential Health Care System's Southern Group Operations from December 1992 to November 1995. Dr. Garling completed his medical degree at Harvard Medical School with initial specialty training in surgery. He later became board certified in Emergency Medicine and practiced clinical medicine with the Kaiser Permanente Medical Group of Northern California from July 1977 to August 1988. At Kaiser, he also had administrative responsibilities, including serving as staff president for the hospital system. JAMES T. CARNEY has been a director of the Company since September 1996. Mr. Carney has served as General Manager of Benefits Administration for USX Corporation and Vice President of Administration for United States Steel and Carnegie Pension Fund since 1989. Mr. Carney was named General Attorney-Employee Benefits of USX Corporation in 1978, Senior General Attorney-Employee Benefits and Workers' Compensation in 1985 and Senior General Attorney-Commercial and Employee Relations for the U.S. Diversified Group in 1986. BARRY KUROKAWA has been a director of the Company since March 1996. Since February 1996, Mr. Kurokawa has served as a Managing Director of ProMed Asset Management, L.L.C. ("ProMed"), a private health care investment management and services company, and as the President of Blackriver Capital Management, Ltd., the general partner of ProMed Partners, L.P. and a consultant to INVESCO Trust Company, a mutual fund company. From May 1992 to January 1996, he was employed by INVESCO Trust Company as Senior Vice President and portfolio manager of four health care funds managed by the firm. From July 1992 to January 1996, Mr. Kurokawa was also the Vice President of Global Health Services, a closed-end mutual fund. Before he joined INVESCO, Mr. Kurokawa served as Vice President Equity Research and health care analyst at Trust Company of the West, an investment management company, from July 1987 to April 1992. JONATHAN LIEBER has been a director of the Company since September 1995. Mr. Lieber has served as an investment analyst focusing on special situation investments, including the areas of healthcare, banking and other consumer services, of GeoCapital Corp., since July 1992. Mr. Lieber has served since June 1992 as Vice President of Applewood Capital, where he specializes in consumer services including healthcare, banking and finance. Additionally, Mr. Lieber has served as a Vice President of Infomedia Management Co., Inc., the management company for the general partner of the 21st Century investment partnerships since February 1995. Prior to joining GeoCapital, Mr. Lieber was employed as a research analyst at Gabelli & Co., an investment management and brokerage firm, from 1990 to 1991. Each of Barry Kurokawa and Jonathan Lieber were elected to the Board of Directors pursuant to voting agreements which give the holders of the Series B and C Preferred Stock of the Company the right to elect one director and the holders of the Series D Preferred Stock of the Company the right to elect one director. Such agreements will terminate upon the consummation of this offering. The Board of Directors is divided into three classes, as nearly equal in number as possible, having terms expiring at the annual meeting of the Company's stockholders in 1997 (comprised of Mr. Lieber), 1998 (comprised of Messrs. Carney and Kurokawa) and 1999 (comprised of Dr. Edelson and Mr. Hochberg). At each annual meeting of stockholders, successors to the class of directors whose term expires at such meeting will be elected to serve for three-year terms and until their successors are elected and qualified. BOARD COMMITTEES The Board of Directors has established two committees, the Audit Committee and the Compensation Committee. The Audit Committee is comprised of Messrs. Kurokawa and Lieber and oversees the 40 activities of the Company's independent auditors and the Company's internal controls. The Compensation Committee, which is comprised of Messrs. Carney, Kurokawa and Lieber, makes recommendations to the Board of Directors with respect to general compensation and benefit levels, determines the compensation and benefits for the Company's executive officers and administers the Company's stock option plans and employee stock purchase plan. DIRECTOR COMPENSATION Directors do not currently receive any cash compensation from the Company for their service as members of the Board of Directors, although they are reimbursed for certain expenses in connection with attendance at Board and Committee meetings. Non-employee directors of the Company are eligible to receive options under the Company's 1995 Stock Option Plan. See "Management -- Stock Plans." LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY The Company's Certificate of Incorporation provides that directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions will be to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions will not limit the liability of directors under federal securities laws. The Company's Certificate of Incorporation provides that the Company shall indemnify its directors, officers, employees and agents to the fullest extent permitted by law. The Company's Certificate of Incorporation also permits it to secure insurance on behalf of any director, officer, employee or agent against any expense, liability or loss arising out of his or her actions in such capacity. The Company intends to obtain directors' and officers' liability insurance ("D&O Insurance") prior to the date of this Prospectus, and expects to continue to carry D&O Insurance following this offering. In addition, the Company has entered into an indemnification agreement with each of its directors and officers under which the Company has indemnified each of them against expenses and losses incurred for claims brought against them by reason of a director or officer of the Company. The Company believes that the limitation of liability and indemnification provisions in its Certificate of Incorporation, the D&O Insurance and the indemnification agreements will enhance the Company's ability to continue to attract and retain qualified individuals to serve as directors and officers. There is no pending litigation or proceeding involving a director, officer or employee of the Company to which the indemnification provisions would apply. EXECUTIVE COMPENSATION The following table sets forth a summary of the compensation earned by the Company's Chief Executive Officer and the other executive officers of the Company whose combined salary and bonus for the year ended December 31, 1995 was in excess of $100,000 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during the Company's fiscal year ended December 31, 1995. 41 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL SECURITIES COMPENSATION UNDERLYING ------------ OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) (#) COMPENSATION - ------------------------------------------------ ---- ------------ ------------ ------------ Jonathan Edelson, M.D........................... 1995 $187,115(1) 101,286 $ 0 Chief Executive Officer Steven Hochberg................................. 1995 187,115(1) 101,286 0 President Richard W. Kaplan(2)............................ 1995 142,000(3) 193,637 14,800(4) Executive Vice President Robert Alger.................................... 1995 123,937(5) 41,706 0 Vice President and Chief Information Officer
- ------------ (1) Current annual salary is $220,000. (2) Mr. Kaplan ceased to be an executive officer of the Company in August 1996. (3) Mr. Kaplan joined the Company in April 1995. Includes a $17,000 signing bonus. (4) Includes living expenses as part of a relocation package for Mr. Kaplan. (5) Mr. Alger joined the Company in February 1995. Mr. Alger's current annual salary is $154,000. The compensation of each of Alan B. Masarek, the Company's Chief Operating Officer and Chief Financial Officer, and Andrew C. Garling, M.D., the Company's Vice President and Chief Medical Officer, each of whom joined the Company in November 1995, is currently in excess of $100,000 on an annual basis. The following tables set forth, with respect to the Named Executive Officers, the option grants made during the Company's fiscal year ended December 31, 1995 and the option values at the end of such fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL INDIVIDUAL GRANTS REALIZABLE --------------------------------------------------------- VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM (1) OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------ NAME GRANTED (#)(3) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) - -------------------------------- -------------- ------------ -------- -------------- ------- -------- Jonathan Edelson, M.D........... 53,622 4.25% $ 2.52 Mar. 31, 2005 $84,723 $215,560 47,664 3.78% 3.52 Dec. 31, 2005 105,337 267,395 Steven Hochberg................. 53,622 4.25% 2.52 Mar. 31, 2005 84,723 215,560 47,664 3.78% 3.52 Dec. 31, 2005 105,357 267,395 Richard W. Kaplan(2)............ 178,742 14.17% 2.52 -- -- -- 14,895 1.18% 3.52 -- -- -- Robert Alger.................... 35,748 2.83% 2.52 Feb. 28, 2005 56,482 143,707 5,958 0.47% 3.52 Dec. 31, 2005 13,167 33,424
- ------------ (1) Gains are reported net of the option exercise price, but before taxes associated with exercise. These amounts represent assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock. The amounts reflected in this table may not necessarily be achieved. (2) All options granted to Mr. Kaplan terminated upon the termination of his employment with the Company. (3) All options were granted under the Company's 1995 Stock Option Plan. All options granted had an exercise price equal to the fair market value on the date of grant. All options were granted on dates that 42 were 10 years prior to such options' expiration dates. All options may become fully exercisable on the occurrence of a change in control as described in the Company's 1995 Stock Option Plan. Options vest at the rate of one-third per year over a three-year period from the date of grant. The following table sets forth information with respect to options exercised during the fiscal year ended December 31, 1995 by each of the Named Executive Officers and certain information regarding options held at December 31, 1995 by each of the Named Executive Officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END EXERCISE REALIZED --------------------------- ---------------------------- NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(2) - --------------------------- ----------- -------- ----------- ------------- ----------- ------------- Jonathan Edelson, M.D...... 239,515 $840,413 0 101,286 $ 0 $ 356,527 Steven Hochberg............ 268,114 $940,761 0 101,286 $ 0 $ 356,527 Richard W. Kaplan(3)....... -- -- -- -- -- -- Robert Alger............... -- -- 0 41,706 $ 0 $ 146,805
- ------------ (1) Value realized is based on a value of $3.52 per share of the Company's Common Stock, the fair market value of the Company's Common Stock on December 31, 1995, net of the exercise price paid. Value realized based upon the $12 proposed offering price per share of the Company's Common Stock, net of the exercise price paid, would be $2,871,497 for Dr. Edelson's options and $3,214,365 for Mr. Hochberg's options. (2) Value of unexercised in-the-money options is based on a value of $3.52 per share of the Company's Common Stock, the fair market value of the Company's Common Stock on December 31, 1995. Amounts reflected are based on the assumed value minus the exercise price and multiplying the result by the number of shares subject to the option. (3) All options granted to Mr. Kaplan terminated upon the termination of his employment with the Company. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements (the "Employment Agreements") with Jonathan Edelson, M.D., its Chairman and Chief Executive Officer, Steven Hochberg, its President, Alan B. Masarek, its Chief Operating Officer and Chief Financial Officer, Robert Alger, its Vice President and Chief Information Officer, and Andrew C. Garling, M.D., its Vice President and Chief Medical Officer (each, an "Employee"). The Employment Agreements provide that the annual base salary of each of the Employees is: Dr. Edelson, $220,000; Mr. Hochberg, $220,000; Mr. Masarek, $200,000; Mr. Alger, $154,000; and Dr. Garling, $200,000. The Employees are also entitled to receive discretionary bonuses. The Employment Agreements generally provide for a three-year term that is automatically renewable for successive one-year terms unless either party gives prior written notice of its intent not to renew. The Employment Agreements set forth the compensation arrangements and the employee fringe benefits provided by the Company to each Employee. In addition, the Employment Agreements set forth the compensation payable to an Employee in the event of a termination of the Employee's employment by the Company. Generally, upon the termination of an Employee's employment by the Company for cause, the Employee is entitled to receive earned but unpaid salary and reimbursement for business expenses incurred during the performance of the Employee's duties. If an Employee's employment with the Company is terminated without cause, due to the death or incapacity of the Employee or within a specified period after a change of control (as defined in the Employment Agreements), the Employee is entitled to receive the amounts payable in the event of a termination for cause plus a cash severance payment not to exceed the cash compensation received by the Employee in the prior 12-month period and the vesting of certain shares of Common Stock and options to purchase 43 Common Stock of the Company then held by such Employee. Each Employment Agreement provides a non-compete provision that restricts an Employee from competing against the Company for a period of one-year following such Employee's termination of employment with the Company. STOCK PLANS 1995 Stock Option Plan. The Company has adopted the 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan permits the grant of (i) options to purchase shares of Common Stock intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Stock Options"), and (ii) options that do not so qualify ("Non-Qualified Options"). No award may be granted under the 1995 Plan after the tenth anniversary of the Plan's adoption. The 1995 Plan is administered by the Compensation Committee. 1,500,000 shares of Common Stock have been reserved for issuance under the 1995 Plan, subject to adjustment for stock splits, stock dividends, recapitalizations, reclassifications and similar events. If an option granted under the 1995 Plan expires unexercised or is terminated or cancelled for any reason, the shares of Common Stock previously reserved for issuance thereunder will be available for future option grants under the 1995 Plan. Options may be granted to persons who are, at the time of grant, employees, officers or directors of, or consultants or advisors to, the Company, provided that Incentive Stock Options may only be granted to individuals who are employees of the Company (within the meaning of Section 3401(c) of the Code). Options granted under the 1995 Plan must be exercised within no more than ten years of the grant date, except that an Incentive Stock Option granted to a person owning more than 10% of the total combined voting power of all classes of stock of the Company (a "Ten Percent Stockholder") must be exercised within no more than five years of the grant date. No options may be assigned or transferred by the optionee other than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder). Each option may be exercised only by the optionee during his or her lifetime. The exercise price for each option granted will be determined by the Compensation Committee at the time of grant. For Incentive Stock Options granted to a Ten Percent Stockholder, the exercise price shall not be less than 110% of the fair market value per share of Common Stock. Options may be made exercisable in installments, and the exercisability of Options may be accelerated by the Compensation Committee. Options granted under the 1995 Plan typically vest over a three-year period. In the event of a consolidation or merger in which the Company is not the surviving corporation, or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity or a liquidation of the Company (a "Corporate Transaction"), the Compensation Committee, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any such option substituted for incentive stock options shall meet the requirements of Section 424(a) of the Code; (ii) upon written notice to the optionee, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice; (iii) in the event of a Corporate Transaction under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Corporate Transaction (the "Transaction Price"), make or provide for a cash payment to the optionees equal to the difference between (A) the Transaction Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Transaction Price) 44 and (B) the aggregate exercise price of all such outstanding options in exchange for the termination of such options, and (iv) provide that all or any outstanding options shall become exercisable in full immediately prior to any such event. As of the date of this Prospectus, an aggregate of 843,846 outstanding options had been granted to approximately 80 directors, officers, employees and consultants at a weighted average exercise price of $3.13 per share and an aggregate of 156,154 shares were available for future option grants. Of such outstanding options, 101,286 were granted to Dr. Edelson, 101,286 to Mr. Hochberg, 86,037 to Mr. Masarek, 43,196 to Mr. Alger, 39,472 to Dr. Garling, 7,507 to Mr. Kurokawa and 7,507 to Mr. Lieber. Employee Stock Purchase Plan. The Company has adopted, effective upon the date of this Prospectus, an employee stock purchase plan (the "Stock Purchase Plan"). The purpose of the Stock Purchase Plan is to allow the employees of the Company to acquire a proprietary interest in the Company through the purchase of shares of Common Stock. Under the Stock Purchase Plan, eligible employees will be granted options (exercisable by electing to participate in the Plan) to purchase shares of Common Stock through regular payroll deductions. The Stock Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The total number of shares of Common Stock that are authorized for issuance under the Stock Purchase Plan is 1,200,000. All full- time employees of the Company who have completed at least one year of employment will be eligible to participate in the Stock Purchase Plan, subject to certain limited exceptions. Options will be granted every six months to eligible employees and, if not exercised, will expire on the last day of the six-month period in which granted. Employees electing to participate for any plan year will authorize payroll deductions at a stated whole percentage ranging from 2% to 10% of compensation, as determined by the participant. Employees may also elect to make payments by check payable to the Company to purchase shares of Common Stock. Options will be nontransferable other than by will or by operation of the laws of descent and distribution. The purchase price for shares offered under the Stock Purchase Plan each year will be equal to a percentage designated by the Board of Directors (not less than 85%) of the lower of the fair market value of the Common Stock at the date of grant or the semi-annual date of exercise as evidenced by the high and low sales prices of the Common Stock on such date as reported on the Nasdaq National Market. The Stock Purchase Plan will expire on the tenth anniversary of the date of this Prospectus, unless sooner terminated by the Board of Directors. The Board of Directors of the Company may amend, suspend or terminate the Stock Purchase Plan at any time and from time to time, subject to certain limitations. The Stock Purchase Plan will be administered by the Compensation Committee. 45 CERTAIN TRANSACTIONS In connection with the formation of the Company, Jonathan Edelson, M.D., the Chairman of the Board and Chief Executive Officer of the Company, was issued 157,293 shares of Common Stock for an aggregate purchase price of $1,760. In February 1994, the Company issued Dr. Edelson 893 shares of Common Stock in lieu of interest on advances made to the Company. In May 1995, Dr. Edelson exercised options to purchase 239,515 shares, for which he paid the Company $2,680. In August 1995, Dr. Edelson purchased 48,260 shares for $576. In 1994, Dr. Edelson loaned the Company an aggregate of $50,000 to fund working capital. Such loans have been repaid in full. In connection with the formation of the Company, Steven Hochberg, President and a director of the Company, was issued 128,694 shares of Common Stock for an aggregate purchase price of $1,440. In March 1995, Mr. Hochberg exercised options to purchase 268,114 shares, for which he paid the Company $3,000. In August 1995, Mr. Hochberg purchased 48,260 shares for $576. In 1995, Mr. Hochberg loaned the Company an aggregate of $32,000 to fund working capital. Such loans have been repaid in full. In August 1995, the Company issued 2,978 shares of Common Stock to Richard W. Kaplan, a former officer and director of the Company, for $25,000. On March 15, 1996, the Company loaned Mr. Kaplan $15,000 at a 5% interest rate, to be repaid over a twelve-month period beginning July 1, 1996. As of August 15, 1996, Mr. Kaplan had repaid $1,875 of the principal of such loan. The balance of such loan was forgiven upon termination of Mr. Kaplan's employment with the Company. In August 1993, the Company issued 971,800 shares of Series A Convertible Preferred Stock to affiliates of INVESCO Trust Company, a principal stockholder of the Company, for $97,180. In March 1994, the Company issued 282,900 shares of Series B Convertible Preferred Stock to affiliates of INVESCO Trust Company for $2,000,103. In January 1995, the Company issued 200,000 shares of Series C Convertible Preferred Stock to affiliates of INVESCO Trust Company for $1,500,000. In August 1995, the Company issued 666,360 shares of Series D Convertible Preferred Stock to certain 21st Century partnerships, a principal stockholder of the Company, for $4,997,700. Each share of Series A, B, C and D Convertible Preferred Stock (collectively, the "Preferred Stock") is convertible into 1.1189249 shares of Common Stock upon the consummation of this offering. In June 1996, the Company issued three 9% Series B Promissory Notes in the aggregate principal amount of $1 million to certain 21st Century Partnerships. In August 1996, the Company issued three additional 9% Series B Promissory Notes in the aggregate principal amount of $1 million to certain 21st Century Partnerships. 21st Century Partnerships is a principal stockholder of the Company. In connection with the formation of the Company in 1993, Christian Mayaud, M.D., a principal stockholder of the Company, was issued 300,288 shares of Common Stock for an aggregate purchase price of $3,360. In August 1994, Dr. Mayaud was granted options to purchase 96,521 shares of Common Stock at an exercise price of $.0112 per share. In March 1995, Dr. Mayaud was granted options to purchase 11,171 shares of Common Stock at exercise prices of $2.52 per share. In March 1995, Dr. Mayaud exercised the 1994 options to purchase 96,521 shares of Common Stock for which he paid the Company $1,080. In August 1995, Dr. Mayaud purchased 32,174 shares of Common Stock for $360. In 1995, Mr. Mayaud loaned the Company $25,000 to fund working capital. Such loan has been repaid in full. The Company currently subleases approximately 4,500 square feet of office space in Tarrytown, New York from Physicians' Online, Inc. ("Physicians' Online"), a Delaware corporation of which Dr. Edelson, Mr. Hochberg and Dr. Mayaud own approximately 16% of the currently outstanding capital stock. Physicians' Online was founded in January 1992 by Mr. Hochberg and Dr. Mayaud. The 46 yearly base rental on the Physicians' Online sublease equals $77,707, plus escalations. During the period ended December 31, 1993, the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996, Physicians' Online incurred administrative expenses totalling $105,116, $135,825, $180,631 and $25,500, respectively, on behalf of the Company for which the Company reimbursed Physicians' Online. During 1993, Physicians' Online paid the Company a $175,000 fee for the development and implementation of a wireless application. The Company does not expect to continue to receive administrative services from Physicians' Online in the future. During 1994, Physicians' Online loaned the Company $300,000, which loan bore interest at the prime rate. At December 31, 1994, $304,262 was outstanding, which included accrued interest of $4,262. Such loan was repaid in full in 1995, and the accrued interest was forgiven. During 1995, Physicians' Online borrowed $500,000 from the Company. Such amount bore interest at the prime rate plus 1% and was repaid in full prior to December 31, 1995. See Note 4 of Notes to Consolidated Financial Statements. The Company has granted options to purchase shares of Common Stock to its directors and executive officers. See "Management -- Stock Plans" and Note 10 of Notes to Consolidated Financial Statements. The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors and principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors of the Board of Directors. 47 PRINCIPAL STOCKHOLDERS The following table sets forth certain information known to the Company regarding the beneficial ownership of the Common Stock of the Company as of the date of this Prospectus and as adjusted to reflect the sale of the shares of Common Stock offered hereby with respect to (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all directors and officers as a group. Unless otherwise indicated, the address for each stockholder is c/o the Company, 560 White Plains Road, Tarrytown, New York 10591.
NUMBER PERCENTAGE OF BENEFICIALLY OWNED(1) SHARES ----------------------- BENEFICIALLY BEFORE THE AFTER THE NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING - -------------------------------------------------------------- ------------ ---------- --------- INVESCO Trust Company(2)...................................... 1,300,086 28.9% 20.0% 7800 E. Union Avenue Denver, CO 80237 21st Century Partnerships(3).................................. 595,535 13.2 9.2 767 Fifth Avenue New York, NY 10153 Christian Mayaud, M.D.(4)..................................... 432,707 9.6 6.7 1235 Oenoke Ridge New Canaan, CT 06840 Jonathan Edelson(5)........................................... 446,261 9.9 6.9 Steven Hochberg(5)............................................ 457,153 10.2 7.0 Robert Alger(6)............................................... 11,916 * * Richard W. Kaplan............................................. 2,979 * * James T. Carney............................................... -- -- -- Barry Kurokawa................................................ -- -- -- Jonathan Lieber............................................... -- -- -- All directors and executive officers as a group (9 925,403 20.4 14.2 persons)(7)...................................................
- ------------ * Represents less than 1% of the outstanding shares of Common Stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "Commission") and generally includes voting or investment power with respect to securities and includes options exercisable within 60 days of the date of this Prospectus. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 4,500,267 shares of Common Stock outstanding as of June 30, 1996 and 6,500,267 shares of Common Stock outstanding upon the consummation of this offering. (2) Includes 687,087 shares of Common Stock owned of record by INVESCO Strategic Portfolios, Inc.--Health Sciences Portfolio ("ISP--HSP") and 618,999 shares of Common Stock owned of record by The Global Health Sciences Fund ("GHS"). ISP--HSP and GHS are mutual fund companies advised by INVESCO Funds Group, Inc., which is a subsidiary of INVESCO PLC. INVESCO Trust Company is a subsidiary of INVESCO Funds Group, Inc. (3) Includes shares owned by 21st Century Communications Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st Century Foreign Partners, L.P. (4) Includes options to purchase 3,723 shares of Common Stock that are exercisable within 60 days of the date of this Prospectus. (5) Includes options to purchase 17,874 shares of Common Stock that are exercisable within 60 days of the date of this Prospectus. (6) Includes options to purchase 11,916 shares of Common Stock that are exercisable within 60 days of the date of this Prospectus. (7) See notes (5) and (6). Also includes options to purchase 7,092 shares of Common Stock held by Alan B. Masarek that are exercisable within 60 days of the date of this Prospectus.
48 DESCRIPTION OF CAPITAL STOCK GENERAL Following the closing of the sale of the shares offered hereby, the Company's authorized capital stock will consist of 15,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share. The following summaries of certain provisions of the Common Stock and Preferred Stock do not purport to be complete and are subject to, and qualified by, the provisions of the Company's Restated Certificate of Incorporation and By-laws, which are included as exhibits to the Registration Statement of which this Prospectus is a part, and by applicable law. COMMON STOCK As of July 12, 1996, there were 4,500,267 shares of Common Stock outstanding that were held of record by approximately 80 stockholders, after giving effect to the Stock Splits and the Preferred Stock Conversion. The holders of Common Stock are entitled to one vote for each share on all matters voted upon by stockholders, including the election of directors. Subject to the rights of any then out Preferred Shares, the holders of the Common Stock are entitled to such dividends as may be declared in the discretion of the Board of Directors out of funds legally available therefor. Holders of the Common Stock are entitled to share ratably in the net assets of the Company upon liquidation after payment or provision for all liabilities and any preferential liquidation rights of any Preferred Shares then outstanding. The holders of Common Stock have no preemptive rights to purchase shares of stock of the Company. Shares of Common Stock are not subject to any redemption provisions and are not convertible into any other securities of the Company. All outstanding shares of Common Stock are, and the shares of Common Stock to be issued pursuant to this offering will be, upon payment of consideration therefor, fully paid and nonassessable. PREFERRED STOCK Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Restated Certificate of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for a change in the voting power, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the stockholders. Although the Company has no present plans to issue any shares of Preferred Stock following the consummation of this offering, the issuance of shares of Preferred Stock, or the issuance of rights to purchase such shares, may have the effect of delaying, deferring or preventing a change in control of the Company or an unsolicited acquisition proposal. REGISTRATION RIGHTS The holders of 2,941,985 shares of the Company's Common Stock are entitled to certain rights with respect to the registration of shares of Common Stock under the Securities Act. Under the terms of the agreements between the Company and the holders of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. These registration rights have been waived in connection with this Offering. The stockholders benefiting from these rights may also require the Company to file a registration statement under the Securities Act at its expense 49 with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration. These registration rights will expire within three years from the consummation of this Offering and have been waived by such holders in connection with this Offering. In addition, these stockholders have the right to require the Company to file up to two additional registration statements on Form S-3. This right becomes available upon the eligibility of the Company to use such Form S-3 and will expire within three years from the consummation of this Offering. All of these rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in such registration. In connection with the outstanding warrants, the holders of the Common Stock issuable upon exercise of the warrants have certain rights to request the Company to use its best efforts to effect the registration of the Common Stock issuable upon the exercise of the warrants in connection with a registered offering of Common Stock by the Company; provided that the Company will be required to use its best efforts to include any such Common Stock issuable upon the exercise of the warrants only after the registration of the Company's own securities to the extent the underwriter for any such offering would not deem any inclusion of such Common Stock issuable upon exercise of the warrants to interfere with such offering. The warrant holders have waived these rights in connection with this Offering. The rights to notice and inclusion in any registration terminates with respect to each such share of Common Stock when such shares issuable upon exercise of the warrants have been registered or sold. CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS As described below, the Company's Restated Certificate of Incorporation and By-laws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and which may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors. Such provisions may also render the removal of the directors and management more difficult. Pursuant to the Restated Certificate of Incorporation, the Board of Directors of the Company is divided into three classes serving staggered three-year terms. The By-laws establish an advance notice procedure with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors and with regard to certain matters to be brought before an annual meeting of stockholders of the Company. In general, notice must be received by the Company not less than 130 days prior to the meeting and must contain certain specified information concerning the person to be nominated or the matter to be brought before the meeting and concerning the stockholder submitting the proposal. Special meetings of stockholders may be called only by the Chairman of the Board, the President of the Company or the Board of Directors. In addition, the Certificate of Incorporation provides that stockholders may act only at an annual or special meeting and stockholders may not act by written consent. SECTION 203 OF THE DGCL Section 203 of the DGCL ("Section 203") prevents an "interested stockholder" (defined in Section 203, generally, as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (as defined in Section 203) with a publicly-held Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who 50 are also officers of the corporation and by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the shares of Common Stock of the Company is The Bank of New York. SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price from time to time. Furthermore, because only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of Common Stock in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. See "Risk Factors -- Shares Eligible for Future Sale." Upon completion of this offering, the Company will have outstanding 6,500,267 shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option or outstanding options). Of these shares, the 2,000,000 shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company as that term is defined in Rule 144 of the Securities Act (an "Affiliate"), which shares will be subject to the resale limitations of Rule 144 adopted under the Securities Act. The remaining 4,500,267 shares outstanding upon completion of this offering and held by existing shareholders will be "restricted securities" as that term is defined under Rule 144 (the "Restricted Shares"). Restricted Shares generally may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market as follows: (i) no shares of Common Stock (other than those shares sold hereby and not held by Affiliates) will be available for immediate sale in the public market on the date of this Prospectus, (ii) 19,272 shares of Common Stock subject to options exercisable within 90 days of the date of this Prospectus will be freely tradeable by non-Affiliates upon the effectiveness of a registration statement relating to such stock options, (iii) 224,566 shares of Common Stock and 18,432 shares of Common Stock subject to options exercisable within 90 days of the Effective Date will be eligible for sale 90 days after the Effective Date, subject to the volume, manner of sale and reporting requirements of Rule 144 and (iv) approximately 4,266,800 shares of Common Stock and approximately 9,500 shares of Common Stock subject to options exercisable within 180 days of the Effective Date will be eligible for sale upon expiration of the lock-up agreements 180 days after the Effective Date, subject to the volume, manner of sale and reporting requirements of Rule 144. The Company plans to file registration statements to register Common Shares reserved for issuance under its stock option plans and employee stock purchase plan. See "Management -- Stock Plans." Once registered, persons acquiring such shares, whether or not they are Affiliates, will be permitted to resell their shares in the public market without regard to the Rule 144 holding period. 51 Upon completion of this offering, the holders of 2,941,985 shares of Common Stock, or their transferees, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock -- Registration Rights." Registration of such shares under the Securities Act would result in such shares (except for shares purchased by Affiliates) becoming eligible for sale immediately upon the effectiveness of such registration. The Company has agreed not to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, for a period of 180 days after the Effective Date, without the prior written consent of Cowen & Company, subject to certain limited exceptions. Additionally, all directors and executive officers and certain other shareholders of the Company, holding in the aggregate approximately 4,266,800 shares of Common Stock outstanding prior to this offering, have agreed with the Underwriters not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the Effective Date (the "Lockup Period") without the prior written consent of Cowen & Company. See "Underwriting." The number of shares of Common Stock available for sale in the public market is further limited by restrictions under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the number of shares of Common Stock then outstanding or the average weekly trading volume of the Common Stock as reported through the Nasdaq National Market during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned for at least three years the Restricted Shares proposed to be sold, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale provisions, public information requirements or notice requirements. The Commission has proposed certain amendments to Rule 144 and Rule 144(k) that reduce the applicable requisite holding periods to one year and two years, respectively. Subject to certain limitations on the aggregate offering price of a transaction and certain other conditions, Rule 701 permits resales of shares issued prior to the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Exchange Act, in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirements, contained in Rule 144. In addition, the Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of this Prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this Prospectus, may be sold by persons other than Affiliates subject only to the manner of sale provisions of Rule 144 and by Affiliates under Rule 144 without compliance with its two-year minimum holding period requirements. 52 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, Cowen & Company and Volpe, Welty & Company, have severally agreed to purchase from the Company the following respective number of shares at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES - ------------------------------------------------------------------------------ ------------ Cowen & Company............................................................... Volpe, Welty & Company........................................................ ------------ Total................................................................... 2,000,000 ------------ ------------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may re-allow a concession not in excess of $ per share to certain other dealers. The Underwriters have informed the Company that they do not intend to confirm sales to any accounts over which they exercise discretionary authority. After the initial public offering of the shares, the offering price and other selling terms may from time to time be varied by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock at the initial public offering price, less the underwriting discounts and commissions, set forth on the cover page of this Prospectus, to cover over-allotments, if any. If the Underwriters exercise such over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by each of them shown in the foregoing table bears to the total number of shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. The Company's officers and directors and certain other shareholders of the Company holding in the aggregate approximately 4,266,800 shares of Common Stock and approximately 9,500 shares of Common Stock subject to options exercisable within 180 days of the effective date have agreed that they 53 will not, without the prior written consent of Cowen & Company, offer, sell, contract or grant any option to purchase or otherwise dispose of any shares of Common Stock, options, rights or warrants to acquire shares of Common Stock, or securities exchangeable for or convertible into shares of Common Stock owned by them during the 180-day period commencing on the Effective Date. In addition, the Company has agreed that it will not, without the prior written consent of Cowen & Company, offer, sell, contract or grant any option to purchase or otherwise dispose of any shares of Common Stock, options, rights or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during such 180-day period except in certain limited circumstances. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors considered in determining the initial public offering price will be prevailing market and economic conditions, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors, if any, deemed relevant. The estimated initial public offering price range set forth on the cover of this Prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by O'Sullivan Graev & Karabell, LLP, New York, New York and for the Underwriters by Shearman & Sterling, New York, New York. EXPERTS The financial statements included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. ADDITIONAL INFORMATION A Registration Statement on Form S-1 under the Securities Act, including amendments thereto, relating to Common Stock offered hereby has been filed by the Company with the Commission. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus concerning the provisions or contents of any contract or other document referred to herein are not necessarily complete. With respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description, and each such statement is deemed to be qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto filed with the Commission may be inspected, without charge, at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Company is required to file electronic versions of these documents with the Commission through the Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 54 INDEX TO FINANCIAL STATEMENTS
PAGE --------- ADVANCED HEALTH CORPORATION (FORMERLY MED-E-SYSTEMS CORPORATION) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-2 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets: As of December 31, 1994 and December 31, 1995 and June 30, 1996 (unaudited).. F-3 Consolidated Statements of Operations: For the period from inception to December 31, 1993 and for the years ended December 31, 1994 and 1995 For the six months ended June 30, 1995 and 1996 (unaudited).................. F-4 Consolidated Statement of Shareholders' Equity (Deficit): From inception to December 31, 1995 For the six months ended June 30, 1996 (unaudited)........................... F-5 Consolidated Statements of Cash Flows: For the period from inception to December 31, 1993 and for the years ended December 31, 1994 and 1995 For the six months ended June 30, 1995 and 1996 (unaudited).................. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................... F-7-F-19 PELTZ VENTIMIGLIA, INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-20 FINANCIAL STATEMENTS: Balance Sheets as of December 31, 1994 and August 31, 1995................... F-21 Statements of Operations for the years ended December 31, 1993 and 1994 and for the eight months ended August 31, 1995..................................... F-22 Statement of Shareholders' Equity for the years ended December 31, 1993 and 1994 and for the eight months ended August 31, 1995............................ F-23 Statements of Cash Flows for the years ended December 31, 1993 and 1994 and for the eight months ended August 31, 1995..................................... F-24 NOTES TO FINANCIAL STATEMENTS.................................................. F-25 U.S. HEALTH CONNECTIONS, INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................................... F-26 FINANCIAL STATEMENTS: Balance Sheets as of December 31, 1994 and August 31, 1995................... F-27 Statements of Operations for the year ended December 31, 1994 and for the eight months ended August 31, 1995................................. F-28 Statement of Shareholders' Equity for the year ended December 31, 1994 and for the eight months ended August 31, 1995................................. F-29 Statements of Cash Flows for the year ended December 31, 1994 and for the eight months ended August 31, 1995................................. F-30 NOTES TO FINANCIAL STATEMENTS.................................................. F-31-F-32 PRO FORMA FINANCIAL INFORMATION Pro Forma Statement of Operations of Advanced Health Corporation and Subsidiaries for the year ended December 31, 1995.............................. F-33
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Advanced Health Corporation: We have audited the accompanying consolidated balance sheets of Advanced Health Corporation (formerly Med-E-Systems Corporation) (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the period from inception (August 27, 1993) to December 31, 1993 and for the years ended December 31, 1994 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advanced Health Corporation (formerly Med-E-Systems Corporation) and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for the period from inception to December 31, 1993 and for the years ended December 31, 1994 and 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York June 19, 1996 (except for the matters described in Note 14, as to which the date is August 14, 1996) F-2 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- JUNE 30, 1994 1995 1996 ---------- ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash................................................... $ 6,903 $ 1,464,427 $ 836,863 Accounts receivable.................................... -- 1,020,558 3,302,583 Note receivable........................................ -- 125,000 15,000 Prepaid expenses and deferred registration costs....... 7,134 278,305 335,958 ---------- ----------- ----------- Total current assets............................... 14,037 2,888,290 4,490,404 PROPERTY AND EQUIPMENT, net............................. 773,333 1,538,898 1,614,947 DEFERRED INCOME TAXES, net of valuation allowance of $1,290,849, $3,506,540 and $4,253,278, respectively..... -- -- -- INTANGIBLE ASSETS, net.................................. -- 1,875,611 1,911,687 OTHER ASSETS............................................ 125,711 159,112 173,943 ---------- ----------- ----------- Total assets....................................... $ 913,081 $ 6,461,911 $ 8,190,981 ---------- ----------- ----------- ---------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable....................................... $ 319,126 $ 1,312,571 $ 971,331 Accrued expenses....................................... 126,845 407,241 851,795 Due to affiliate....................................... 375,825 -- 50,500 Deferred revenue....................................... -- 1,500,000 950,000 Promissory notes....................................... -- -- 4,000,000 Loan payable related to acquisitions................... 50,000 150,000 100,500 Current portion of capital lease obligations........... 174,247 259,805 278,410 ---------- ----------- ----------- Total current liabilities.......................... 1,046,043 3,629,617 7,202,536 ---------- ----------- ----------- CAPITAL LEASE OBLIGATIONS............................... 191,799 157,254 125,096 ---------- ----------- ----------- Total liabilities.................................. 1,237,842 3,786,871 7,327,632 ---------- ----------- ----------- COMMITMENTS (Note 13) SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 5,000,000 shares authorized:............................................. Series A Convertible Preferred Stock, $.01 par value; 971,800 shares authorized; 971,800, 971,800 and 0 shares issued and outstanding, respectively.......... 9,718 9,718 -- Series B Convertible Preferred Stock, $.01 par value; 282,900 shares authorized; 282,900, 282,900 and 0 shares issued and outstanding, respectively.......... 2,829 2,829 -- Series C Convertible Preferred Stock, $.01 par value; 0, 200,000 and 200,000 shares authorized; 0, 200,000 and 0 shares issued and outstanding, respectively.... -- 2,000 -- Series D Convertible Preferred Stock, $.01 par value; 0, 666,360 and 666,360 shares authorized; 0, 666,360 and 0 shares issued and outstanding, respectively.... -- 6,664 -- Common stock, $.01 par value; 15,000,000 shares authorized; 930,196, 2,595,649 and 4,500,267 shares issued and outstanding, respectively................. 9,302 25,957 45,003 Additional paid-in capital............................. 2,726,254 11,479,223 11,526,538 Common stock subscriptions receivable.................. (3,120) -- -- Accumulated deficit.................................... (3,069,744) (8,776,351) (10,633,192) Less: Treasury stock, at cost (0, 8,937 and 8,937 shares, respectively)................................ -- (75,000) (75,000) ---------- ----------- ----------- Total shareholders' equity (deficit)............... (324,761) 2,675,040 863,349 ---------- ----------- ----------- Total liabilities and shareholders' equity (deficit)............................................... $ 913,081 $ 6,461,911 $ 8,190,981 ---------- ----------- ----------- ---------- ----------- -----------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FOR THE YEARS FOR THE SIX FROM INCEPTION ENDED DECEMBER 31, MONTHS ENDED JUNE 30, (AUGUST 27, 1993) TO ------------------------- ------------------------- DECEMBER 31, 1993 1994 1995 1995 1996 -------------------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUE..................... $-- $ 203,878 $ 712,292 $ 100,000 $ 1,530,245 REVENUE FROM MSOs (Note 2).......................... -- -- 341,657 -- 6,086,819 REVENUE FROM RELATED PARTY (Note 4).................. -- 175,000 -- -- -- ----------- ----------- ----------- ----------- ----------- Total Revenues........ -- 378,878 1,053,949 100,000 7,617,064 COST OF SALES............... -- 12,297 340,326 21,822 3,511,787 ----------- ----------- ----------- ----------- ----------- Gross profit.......... -- 366,581 713,623 78,178 4,105,277 OPERATING EXPENSES.......... 66,192 1,318,145 3,254,978 616,503 4,033,502 RESEARCH AND DEVELOPMENT EXPENSES.................... 454,622 1,582,332 3,157,389 1,511,681 1,874,988 ----------- ----------- ----------- ----------- ----------- Operating loss........ (520,814) (2,533,896) (5,698,744) (2,050,006) (1,803,213) OTHER INCOME (EXPENSE)...... -- (15,034) (7,863) 1,341 (53,628) ----------- ----------- ----------- ----------- ----------- Net loss.............. $ (520,814) $(2,548,930) $(5,706,607) $(2,048,665) $(1,856,841) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE INFORMATION: Net loss per share (Note 2).......................... $ (0.23) $ (1.03) $ (1.47) $ (0.65) $ (0.37) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding (Note 2).................. 2,229,136 2,482,213 3,893,244 3,135,780 4,991,135 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated statements. F-4 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
SERIES A SERIES B SERIES C SERIES D CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE COMMON PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK -------------------- -------------------- -------------------- -------------------- --------- SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES -------- --------- -------- --------- -------- --------- -------- --------- --------- BALANCE AT INCEPTION (August 27, 1993)... -- $ -- -- $ -- -- $ -- -- $ -- -- Common stock subscriptions....... -- -- -- -- -- -- -- -- 185,893 Issuance of common stock............... -- -- -- -- -- -- -- -- 718,984 Issuance of Series A Convertible Preferred Stock (Notes 8 and 14)... 971,800 9,718 -- -- -- -- -- -- -- Net loss............ -- -- -- -- -- -- -- -- -- -------- --------- -------- --------- -------- --------- -------- --------- --------- BALANCE, December 31, 1993............ 971,800 9,718 -- -- -- -- -- -- 904,877 Sale and issuance of common stock (Note 7c)................. -- -- -- -- -- -- -- -- 25,319 Issuance of Series B Convertible Preferred Stock (Notes 8 and 14)... -- -- 282,900 2,829 -- -- -- -- -- Net loss............ -- -- -- -- -- -- -- -- -- -------- --------- -------- --------- -------- --------- -------- --------- --------- BALANCE, December 31, 1994............ 971,800 9,718 282,900 2,829 -- -- -- -- 930,196 Issuance of Common Stock (Note 7c).... -- -- -- -- -- -- -- -- 50,641 Issuance of Series C Convertible Preferred Stock (Notes 8 and 14)... -- -- -- -- 200,000 2,000 -- -- -- Issuance of common stock in private placement........... -- -- -- -- -- -- -- -- 79,780 Redemption of common stock subscriptions....... -- -- -- -- -- -- -- -- -- Exercise of stock options............. -- -- -- -- -- -- -- -- 885,279 Common stock issued for acquisitions... -- -- -- -- -- -- -- -- 649,753 Issuance of Series D Convertible Preferred Stock (Notes 8 and 14)... -- -- -- -- -- -- 666,360 6,664 -- Purchase of treasury stock............... -- -- -- -- -- -- -- -- -- Net loss............ -- -- -- -- -- -- -- -- -- -------- --------- -------- --------- -------- --------- -------- --------- --------- BALANCE, December 31, 1995............ 971,800 9,718 282,900 2,829 200,000 2,000 666,360 6,664 2,595,649 Net loss (unaudited)......... -- -- -- -- -- -- -- -- -- Common stock issued for acquisition.... -- -- -- -- -- -- -- -- 8,937 Exercise of stock options............. -- -- -- -- -- -- -- -- 60 Conversion of Series A, B, C and D Convertible Preferred Stock to Common Stock (Notes 8 and 14).......... (971,800) (9,718) (282,900) (2,829) (200,000) (2,000) (666,360) (6,664) 1,895,621 -------- --------- -------- --------- -------- --------- -------- --------- --------- BALANCE, June 30, 1996 (unaudited)... -- $ -- -- $ -- -- $ -- -- $ -- 4,500,267 -------- --------- -------- --------- -------- --------- -------- --------- --------- -------- --------- -------- --------- -------- --------- -------- --------- --------- COMMON STOCK SUBSCRIPTIONS ADDITIONAL RECEIVABLE TREASURY STOCK PAID-IN ----------------- ACCUMULATED ------------------- PAR VALUE CAPITAL SHARES AMOUNT DEFICIT SHARES AMOUNT TOTAL --------- ----------- -------- ------ ------------ ------ ---------- ---------- BALANCE AT INCEPTION (August 27, 1993)... $ -- $ -- -- $-- $ -- -- $ -- $ -- Common stock subscriptions....... 1,859 1,261 185,893 (3,120) -- -- -- -- Issuance of common stock............... 7,190 855 -- -- -- -- -- 8,045 Issuance of Series A Convertible Preferred Stock (Notes 8 and 14)... -- 87,462 -- -- -- -- -- 97,180 Net loss............ -- -- -- -- (520,814) -- -- (520,814) --------- ----------- -------- ------ ------------ ------ ---------- ---------- BALANCE, December 31, 1993............ 9,049 89,578 185,893 (3,120) (520,814) -- -- (415,589) Sale and issuance of common stock (Note 7c)................. 253 639,402 -- -- -- -- -- 639,655 Issuance of Series B Convertible Preferred Stock (Notes 8 and 14)... -- 1,997,274 -- -- -- -- -- 2,000,103 Net loss............ -- -- -- -- (2,548,930) -- -- (2,548,930) --------- ----------- -------- ------ ------------ ------ ---------- ---------- BALANCE, December 31, 1994............ 9,302 2,726,254 185,893 (3,120) (3,069,744) -- -- (324,761) Issuance of Common Stock (Note 7c).... 506 (506) -- -- -- -- -- -- Issuance of Series C Convertible Preferred Stock (Notes 8 and 14)... -- 1,498,000 -- -- -- -- -- 1,500,000 Issuance of common stock in private placement........... 798 624,261 -- -- -- -- -- 625,059 Redemption of common stock subscriptions....... -- -- (185,893) 3,120 -- -- -- 3,120 Exercise of stock options............. 8,853 10,864 -- -- -- -- -- 19,717 Common stock issued for acquisitions... 6,498 1,629,314 -- -- -- -- -- 1,635,812 Issuance of Series D Convertible Preferred Stock (Notes 8 and 14)... -- 4,991,036 -- -- -- -- -- 4,997,700 Purchase of treasury stock............... -- -- -- -- -- 8,937 (75,000) (75,000) Net loss............ -- -- -- -- (5,706,607) -- -- (5,706,607) --------- ----------- -------- ------ ------------ ------ ---------- ---------- BALANCE, December 31, 1995............ 25,957 11,479,223 -- -- (8,776,351) 8,937 (75,000) 2,675,040 Net loss (unaudited)......... -- -- -- -- (1,856,841) -- -- (1,856,841) Common stock issued for acquisition.... 89 44,911 -- -- -- -- -- 45,000 Exercise of stock options............. 1 149 -- -- -- -- -- 150 Conversion of Series A, B, C and D Convertible Preferred Stock to Common Stock (Notes 8 and 14).......... 18,956 2,255 -- -- -- -- -- -- --------- ----------- -------- ------ ------------ ------ ---------- ---------- BALANCE, June 30, 1996 (unaudited)... $45,003 $11,526,538 -- $-- $(10,633,192) 8,937 $ (75,000) $ 863,349 --------- ----------- -------- ------ ------------ ------ ---------- ---------- --------- ----------- -------- ------ ------------ ------ ---------- ----------
The accompanying notes are an integral part of these consolidated statements. F-5 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FOR THE YEARS FOR THE SIX MONTHS FROM INCEPTION ENDED DECEMBER 31, ENDED JUNE 30, (AUGUST 27, 1993) TO -------------------------- -------------------------- DECEMBER 31, 1993 1994 1995 1995 1996 -------------------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................... $ (520,814) $(2,548,930) $(5,706,607) $(2,048,665) $(1,856,841) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization... 1,552 146,681 456,819 167,940 422,746 Changes in operating assets and liabilities- Accounts receivable........... -- -- (1,020,558) -- (2,282,025) Note receivable............... -- -- (125,000) -- 110,000 Prepaids and deferred registration costs............... -- (7,134) (271,171) (49,176) (57,653) Other assets.................. -- (125,711) (33,401) -- (14,831) Accounts payable.............. 118,413 200,713 993,445 305,288 (341,240) Accrued expenses.............. 43,872 82,973 280,396 9,904 444,554 Due to affiliate.............. 105,116 270,709 (375,825) -- 50,500 Deferred revenue.............. 175,000 (175,000) 1,500,000 -- (550,000) ------- ----------- ----------- ----------- ----------- Net cash used in operating activities....................... (76,861) (2,155,699) (4,301,902) (1,614,709) (4,074,790) ------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Issuance of note receivable from affiliate........................ -- -- (500,000) -- -- Proceeds from repayment of note receivable from affiliate....... -- -- 500,000 -- -- Net purchase price of acquisitions..................... -- -- (150,000) -- -- Purchases of property and equipment, net................... (21,088) (505,997) (881,531) (75,799) (249,056) ------- ----------- ----------- ----------- ----------- Net cash used in investing activities....................... (21,088) (505,997) (1,031,531) (75,799) (249,056) ------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: (Repayment of) proceeds from loans payable related to acquisitions..................... -- 50,000 (50,000) -- (94,500) Net proceeds from sale and issuance of common stock........ 8,045 639,655 628,179 -- -- Net proceeds from exercise of stock options.................... -- -- 19,717 -- 150 Net proceeds from promissory notes............................ -- -- -- -- 4,000,000 Purchase of treasury stock....... -- -- (75,000) -- -- Net proceeds from issuance of Series A Convertible Preferred Stock............................ 97,180 -- -- -- -- Net proceeds from issuance of Series B Convertible Preferred Stock............................ -- 2,000,103 -- -- -- Net proceeds from issuance of Series C Convertible Preferred Stock............................ -- -- 1,500,000 1,815,362 -- Net proceeds from issuance of Series D Convertible Preferred Stock............................ -- -- 4,997,700 -- -- Repayment of capital lease obligations...................... -- (28,435) (229,639) (100,552) (209,368) ------- ----------- ----------- ----------- ----------- Net cash provided by financing activities....... 105,225 2,661,323 6,790,957 1,714,810 3,696,282 ------- ----------- ----------- ----------- ----------- Net change in cash........... 7,276 (373) 1,457,524 24,302 (627,564) CASH, beginning of period........ -- 7,276 6,903 6,903 1,464,427 ------- ----------- ----------- ----------- ----------- CASH, end of period.............. $ 7,276 $ 6,903 $ 1,464,427 $ 31,205 $ 836,863 ------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest......................... $-- $ 3,267 $ 21,497 $ 4,557 $ 46,440 ------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- ----------- Income taxes..................... $-- $ 3,189 $ 14,854 $ -- $ 573 ------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: Capital lease obligations incurred......................... $-- $ 394,481 $ 280,652 $ 152,177 $ 195,815 ------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- ----------- Fair market value of common stock issued for acquisitions......... $-- $ -- $ 1,635,812 $ -- $ 45,000 ------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- ----------- Loan payable issued for acquisition...................... $-- $ -- $ 150,000 $ -- $ -- ------- ----------- ----------- ----------- ----------- ------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated statements. F-6 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1995 1. ORGANIZATION AND BUSINESS Advanced Health Corporation and subsidiaries (collectively, the "Company" or "AHC"), provides physician groups and networks with practice and network management services and clinical information systems and services. The Company's wholly-owned subsidiary was incorporated on August 27, 1993 as Med-E-Systems Corporation (formerly Med-E-Mail Corporation), and was engaged at inception to design and develop clinical information systems for physician users. Effective August 1995, Med-E-Systems Corporation became a wholly-owned subsidiary of AHC, an entity incorporated in March 1995, through a stock-for-stock transfer in which preferred and common shareholders of Med-E-Systems Corporation exchanged their interests for the same amounts and classes of preferred and common stock in AHC as those then outstanding in Med-E-Systems Corporation. The Company was subsequently merged with and into Majean, Inc. (Note 3), a Delaware corporation, and the surviving corporation changed its name to Advanced Health Corporation. Concurrent with this transaction, the Company raised approximately $5 million in a private placement of its securities for the principal purposes of funding the ongoing development of the Company's clinical information systems and services and the Company's forward integration into physician practice and network management services. Management of the Company believes that this financing, as well as the bridge financing described in Note 14, will be adequate to fund the Company's operations at least through January 1997. The Company operates in a highly-regulated environment in which its sources of revenues are dependent on the Company's ability to successfully negotiate with third parties for its various services. Currently, the Company depends on revenue generated by a limited number of customers, including physician groups and networks which are under long-term contracts. For a discussion of risks associated with the Company and its business, see "Risk Factors" in the accompanying initial public offering (Note 14) registration statement of which these consolidated financial statements and notes to consolidated financial statements are a part. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of AHC and its wholly-owned subsidiaries: Advanced Health Management Corporation ("AHM", formerly Advanced Clinical Networks Corporation), Med-E-Systems Corporation ("MES") and Management Service Organization subsidiaries ("MSOs") established to facilitate the provision of management services to physician practice and network clients. These consolidated financial statements include the results of operations of the Company from the inception of MES in August 1993, including other entities formed or acquired from their formation or acquisition, through December 31, 1995. The structure of the Company's wholly or majority-owned MSOs presently provides for the Company to receive activity-based fee income from the MSOs for management services provided, and reimbursement from the MSOs for certain expenses incurred, with the result being that there are no profits in the MSO entity for which a minority interest is required to be calculated. Accordingly, the consolidated financial statements do not reflect any minority interest in the operations of the MSOs. In the event that profits remain in MSO entities in the future, minority interests will be reflected in the Company's consolidated financial statements. Intercompany accounts and transactions have been eliminated in consolidation. F-7 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) REVENUE RECOGNITION Operating revenues are generated from three principal sources: (a) Physician Practice Revenues: A physician group practice is a single legal entity comprised of multiple physicians. Through its majority or wholly-owned consolidated MSOs, the Company enters into management services agreements with physician group practices, whereby such physician practices outsource their non-medical and administrative functions to the MSO. Activity-based fees are generated by the MSO through the provision of these outsourced services as well as certain additional management, marketing and information services. Fees are based on the level of services provided and are recognized as these services are rendered. (b) Physician Network Revenues: A physician network is an aggregation of individual physicians and physician groups formed for the purpose of entering into contracts with third-party payors. A physician network enters into a contract with a third-party payor pursuant to which the physicians comprising the network agree to provide medical services to network enrollees in return for a fixed per enrollee fee. Such contracts are known as "capitated contracts." The physician network then enters into a management services agreement with the Company's majority-owned, consolidated MSO, pursuant to which the aggregate capitated payments are assigned to the MSO. In return for a management fee, the MSO administers the claims and payments related to the payor contract by paying a portion, typically 90%, of the capitated payments to network physicians in return for the physicians' provision of medical services to network enrollees. At the end of a defined measurement period, the MSO may pay an additional portion of the capitated payments to the network physicians in the case of higher than expected medical costs, and the MSO shares any remaining capitated payments with the physicians. In the event that contracts between MSOs and physician practices and networks are terminated, the terms of the related contracts do not require the Company, through the MSOs, to return any previously-earned revenues. (c) Information Systems and Services Revenue: The Company's current business strategy for providing integrated physician practice and network management services includes selling its information systems and services as a means of ultimately providing a full range of services. The Company has, in order to generate funds and demonstrate the uses of its systems, licensed certain components of its software to third parties. The Company recognizes revenue from the sale of its information systems and services (upon installation and acceptance), and from the licensing of its software to third parties (upon delivery). Certain of these third parties provide payment in advance for the development and installation of software, databases and systems. The Company accounts for these advance payments as deferred revenue when received, and recognizes revenue ratably over the period of time during which the software is delivered and services are performed. In December 1991, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 91-1, "Software Revenue Recognition". The Company's revenue recognition policy is in compliance with the provisions of this SOP. F-8 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables from physician practice revenues, physician network revenues and information systems and services revenues. PROPERTY AND EQUIPMENT Property and equipment, consisting primarily of electronic data processing equipment, are stated at cost and depreciated on a straight-line basis over the useful lives of the assets (3 to 5 years). Equipment held under capital leases is amortized utilizing the straight-line method over the lesser of the term of the lease or the estimated useful life of the asset. INTANGIBLE ASSETS The Company is in the process of allocating the excess of purchase price over tangible net assets acquired in the acquisitions described in Note 3 to specific categories of intangible assets. The total of such excess purchase price is included in intangible assets and is presently being amortized over periods of 15 to 20 years. These amortization periods are evaluated by management on a continuing basis, and will be adjusted if the lives of the related intangible assets (expected to be principally goodwill and management contracts) are impaired. COMPUTER SOFTWARE COSTS The Company develops computer software which is marketed to third parties. The Company capitalizes such costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". Amortization of such costs is provided using the straight-line method over the estimated economic life of the products, which is generally five years. The Company has $125,711, $100,569 and $87,998 of unamortized capitalized computer software costs included in other assets in the accompanying consolidated balance sheets as of December 31, 1994, December 31, 1995 and June 30, 1996 (unaudited), respectively. Computer software amortization expense aggregated $0, $0 and $25,142, respectively, for the period ended December 31, 1993 and for the years ended December 31, 1994 and 1995, and $12,571 in each of the six month periods ended June 30, 1995 and 1996 (unaudited). RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred by the Company. F-9 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES At inception, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the estimated future tax effects of events that have been recognized in the financial statements or income tax returns. Under this method, deferred tax liabilities and assets are determined based on (1) differences between the financial accounting and income tax bases of assets and liabilities, and (2) carry-forwards, using enacted tax rates in effect for the years in which the differences and carry-forwards are expected to reverse and be utilized, respectively (Note 11). NET LOSS PER COMMON SHARE Net loss per common share was computed by dividing net loss by the weighted average number of common shares and common share equivalents outstanding during the respective years, which includes, for all periods, (i) the effect of the conversion of common stock equivalent Class A, B, C and D Convertible Preferred Stock to common stock, (ii) the retroactive effect of the reverse stock split, both described in Note 14, which will occur concurrent with the consummation of the Company's initial public offering and (iii) the impact of the issuance, in the year prior to the Company's pending initial public offering (Note 14), of 504,477 warrants and options for all periods presented. Fully diluted net loss per common share has not been presented since the inclusion of the impact of stock options and warrants outstanding (Notes 3, 8, 10 and 14) would be antidilutive. RECENTLY ISSUED ACCOUNTING STANDARDS During March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement establishes financial accounting and reporting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. This statement is effective for financial statements for fiscal years beginning after December 15, 1995, although earlier application is encouraged. It is the Company's policy to account for these assets at the lower of amortized cost or fair value. As part of an ongoing review of the valuation and amortization of such assets, management assesses the carrying value of such assets on a continuing basis. If this review indicates that the assets will not be recoverable as determined by a nondiscounted cash flow analysis over the remaining amortization period, the carrying value of these assets would be reduced to their estimated fair market values. The Company does not expect the impact of the adoption of this pronouncement to be material. F-10 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) During October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages entities to adopt a fair value based method of accounting for stock compensation plans. However, SFAS No. 123 also permits the Company to continue to measure compensation costs under pre-existing accounting pronouncements. If the fair value based method of accounting is not adopted, SFAS No. 123 requires pro forma disclosures of net income (loss) and net income (loss) per common share in the notes to consolidated financial statements. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995, though they may be adopted on issuance. The disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially adopted for recognizing compensation cost. The Company has not yet quantified the expected impact of the adoption of this pronouncement. 3. ACQUISITION OF BUSINESSES ACQUISITIONS The transaction with Majean, Inc. described in Note 1 was accounted for as a purchase through the issuance of 543,564 shares of the Company's stock to the shareholders of Majean, Inc., who were not previously affiliated with the Company, for an aggregate purchase price of $1,368,471. Additionally, options to purchase 283,010 shares of common stock at $.0112 per share were issued as part of this transaction. These options are only exercisable, as contingent consideration, upon the achievement of certain capitalization levels related to regulatory requirements. The entire purchase price of this acquisition has been allocated to intangible assets in the accompanying consolidated balance sheet, as will any contingent consideration which arises due to the option described above, based on a twenty-year contract with a MSO, which was contributed to Majean, Inc. by its shareholders upon its formation immediately prior to the transaction. Accordingly, this intangible asset is being amortized over a period of twenty years. Pursuant to an asset purchase agreement with Peltz Ventimiglia, Inc. ("Peltz") dated August 28, 1995, AHC acquired certain assets and assumed certain liabilities of Peltz for 75,996 shares of common stock for an aggregate purchase price of $191,327. Additionally, the former owners of Peltz received warrants to purchase 113,995 shares of the Company's common stock at $4.38 per share, which management believes to be in excess of the fair market value of such shares at the date of grant. These warrants are only exercisable, as contingent consideration, based on the achievement of targeted operating performance. Pursuant to a purchase agreement with U.S. Health Connections, Inc. ("Health Connections") dated September 1, 1995, the Company acquired, through its subsidiary AHM, all of the outstanding stock of Health Connections for $150,000 in cash, a note for $150,000 due in two installments within one year of the acquisition and 30,193 shares of common stock, for an aggregate purchase price of $376,014. Furthermore, the Health Connections purchase agreement calls for the issuance of an F-11 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 3. ACQUISITION OF BUSINESSES--(CONTINUED) additional 56,611 shares of common stock, as contingent consideration, based on the achievement of targeted operating performance by this entity. The Company will record the effect of the contingent consideration related to these acquisitions based upon the provisions of Emerging Issues Task Force Issue 95-8, "Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Company in a Purchase Business Combination", which sets forth the criteria for determining the allocation of contingent consideration as either additional purchase price or compensation expense. These criteria provide for the recognition of contingent consideration, as opposed to compensation expense, upon the exercisability, if any, of such options and warrants where relevant facts and circumstances, such as continued employment of the sellers, components of the selling shareholder group, reasons for contingent payments and other agreements and issues, indicate that such accounting is warranted. Management of the Company believes that the terms of the acquisitions described above meet the criteria for recognition of contingent consideration. These acquisitions described above were valued based on management's estimate of the fair value of common stock at the date of acquisition, which was determined by the Company's management by comparisons to (i) arms-length transactions with unrelated third-parties for the same or similar securities and (ii) an independent third-party appraisal. Costs in excess of net assets acquired were recorded as intangible assets as follows:
PELTZ U.S. HEALTH MAJEAN, INC. VENTIMIGLIA, INC. CONNECTIONS, INC. ------------ ----------------- ----------------- Accounts receivable................................ $ -- $ 41,555 $ 40,775 Intangible assets.................................. 1,368,471 183,551 365,239 Current liabilities................................ -- (33,779) (30,000) ------------ ----------------- ----------------- Total purchase price........................... $ 1,368,471 $ 191,327 $ 376,014 ------------ ----------------- ----------------- ------------ ----------------- -----------------
PRO FORMA RESULTS OF OPERATIONS Summarized below are the unaudited pro forma results of operations of the Company as though these acquisitions had occurred at the beginning of 1994. This pro forma information does not give effect to any operations of Majean, Inc., which had no operations prior to the merger transaction with the Company. Adjustments have been made for pro forma income taxes and amortization of intangible assets related to these transactions. FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1994 1995 ----------- ----------- Pro Forma: Revenues................................... $ 1,228,409 $ 1,619,621 Net loss................................... (2,467,198) (5,742,954) Net loss per share......................... $ (1.18) $ (1.66) F-12 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 3. ACQUISITION OF BUSINESSES--(CONTINUED) These pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions been made at the beginning of 1994, or of results which may occur in the future. 4. RELATED PARTY TRANSACTIONS The Company shares office space and administrative services with Physicians' Online, Inc. ("POL"), a healthcare information services company which is partly owned by several of the Company's shareholders, including certain officers and directors. During the year ended December 31, 1994, the Company earned $175,000 of revenue from POL for information systems and services. During the period ended December 31, 1993 and the years ended December 31, 1994 and 1995, POL also incurred expenses totaling $105,116, $135,825 and $180,631, respectively, and $117,362 and $50,500, respectively, for the six months ended June 30, 1995 and 1996 (unaudited), on behalf of the Company for which the Company has reimbursed POL. The amount due POL, as well as a loan from POL in the amount of $300,000, which has been repaid, is reflected as due to affiliate in the accompanying consolidated balance sheet at December 31, 1994. In addition, during 1995, POL borrowed $500,000 from the Company. POL repaid this amount in full prior to December 31, 1995. Revenues from MSOs, which are also related parties, are separately set forth in the accompanying consolidated financial statements. Management of the Company believes that these related party transactions were effected on terms which approximate fair market value. 5. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
DECEMBER 31, JUNE 30, ---------------------- 1996 1994 1995 (UNAUDITED) -------- ---------- ------------ Computer equipment and software.......................... $486,155 $1,152,077 $ 1,378,407 Equipment under capital leases........................... 394,481 681,988 877,803 Leasehold improvements................................... 37,930 60,236 27,049 Furniture and fixtures................................... 3,000 189,448 245,361 -------- ---------- ------------ 921,566 2,083,749 2,528,620 Less: Accumulated depreciation and amortization.......... 148,233 544,851 913,673 -------- ---------- ------------ Property and equipment, net.............................. $773,333 $1,538,898 $ 1,614,947 -------- ---------- ------------ -------- ---------- ------------
Depreciation and amortization aggregated $1,552, $146,681 and $396,618, respectively, for the period ended December 31, 1993 and for the years ended December 31, 1994 and 1995, and $167,940 and $368,822, respectively, for the six months ended June 30, 1995 and 1996 (unaudited). F-13 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 6. INTANGIBLE ASSETS Intangible assets consist of the following:
JUNE 30, DECEMBER 31, 1996 1995 (UNAUDITED) ------------ ----------- Excess of purchase price over net assets acquired.................. $1,917,261 $ 2,007,261 Less: Accumulated amortization..................................... 41,650 95,574 ------------ ----------- Intangible assets, net......................................... $1,875,611 $ 1,911,687 ------------ ----------- ------------ -----------
Amortization aggregated $41,650 for the year ended December 31, 1995 and $53,924 for the six months ended June 30, 1996 (unaudited). There were no intangible assets or related amortization prior to 1995. 7. COMMON STOCK In connection with the formation of the Company, the Company entered into two common stock agreements as follows: (a) On August 30, 1993, the Company entered into agreements for the subscription of 185,893 shares of common stock for $3,120. (b) On December 27, 1993, the Company sold 718,984 shares of common stock for $8,045 pursuant to a private placement agreement dated November 8, 1993. The shares were offered only to the holders of POL stock on a one-for-one basis pro rata to their shareholdings in POL as of the close of business on August 30, 1993. In accordance with this agreement, the holders of these shares have the right, on two occasions, to participate on a "piggy-back" basis in a registration by the Company under the Securities Act of 1933, as amended, subject to certain restrictions, for a period ending on December 27, 1998, and commencing twelve months from the closing of an initial public offering of the securities of the Company. (c) In November 1994, the Company sold 75,960 shares of common stock pursuant to a private placement agreement dated August 22, 1994 for an aggregate of $639,655. Of these shares sold, all of which were paid for in 1994, 25,319 were issued prior to December 31, 1994 and 50,641 were issued in January 1995. In accordance with this agreement, the holders of these shares have the right, on two occasions, to participate on a "piggy-back" basis in a registration by the Company under the Securities Act of 1933, as amended, subject to certain restrictions, for a period ending on October 31, 1999, and commencing twelve months from the closing of an initial public offering of the securities of the Company. (d) In 1995, the Company sold 79,780 shares of common stock pursuant to a private placement agreement dated April 21, 1995 for an aggregate of $625,059. In accordance with this agreement, the holders of these shares have the right, on two occasions, to participate on a "piggy-back" basis in a registration by the Company under the Securities Act of 1933, as amended, subject to certain restrictions, for a period ending on September 30, 2000, and commencing twelve months from the closing of an initial public offering of the securities of the Company. 8. CONVERTIBLE PREFERRED STOCK During 1993, the Company's shareholders authorized 2,000,000 shares of Preferred Stock with a par value of $.01 per share, of which 971,800 shares were designated Series A Convertible Preferred Stock. On August 31, 1993, the Company sold 971,800 shares of Series A Convertible Preferred Stock F-14 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 8. CONVERTIBLE PREFERRED STOCK--(CONTINUED) for $97,180. In March 1994, the Company authorized and sold 282,900 shares of Series B Convertible Preferred Stock for $2,000,103 pursuant to a Private Placement Agreement. In January 1995, the Company authorized and sold 200,000 shares of Series C Convertible Preferred Stock for $1,500,000 pursuant to a Private Placement Agreement. In August 1995, the Company authorized and sold 666,360 shares of Series D Convertible Preferred Stock for $4,997,700 pursuant to a Private Placement Agreement. All of the above shares are not redeemable. Each individual share of Series A, B, C and D Convertible Preferred Stock was convertible into 1.5 common shares (see Note 14) at the holder's option, subject to adjustment for antidilution. The holders of Series A, B, C and D Convertible Preferred Stock were entitled to receive dividends as and if declared by the Board of Directors. In the event of liquidation, dissolution or winding up of the Company, the holders of Series A, B, C and D Convertible Preferred Stock were entitled to receive all accrued dividends, if applicable, plus the liquidation price per share of $.07, $4.71, $5.00 and $5.00, respectively. As described in Note 14, all information contained in the accompanying consolidated financial statements has been retroactively restated to give effect to the reverse stock split, and the information contained in the accompanying consolidated balance sheet as of June 30, 1996 (unaudited) has been retroactively restated to give effect to the conversion of Class A, B, C and D Convertible Preferred Stock to common stock, both of which transactions will be effected concurrently with the consummation of the pending initial public offering. Accordingly, the sale of common stock equivalent Series A, B, C and D Convertible Preferred Stock is reflected as the sale of 868,512, 252,831, 178,743 and 595,535 shares of common stock, respectively, in the accompanying consolidated statements of operations for the purpose of computing net loss per share and in the accompanying consolidated balance sheet as of June 30, 1996 (unaudited). Subject to certain provisions, prior to the conversion to common stock, registration rights, as defined in the agreement, were to be exercisable after the earlier of (1) August 23, 1999, or (2) the effective date of the first registration statement for a public offering of securities of the Company. Holders of Series B, C and D Convertible Preferred Stock have voting rights. Furthermore, holders of Series D Convertible Preferred Stock have the right to purchase 446,858 shares of common stock at $8.39 per share. 9. STOCK SPLITS In January 1995, the Company authorized a 100 for 1 stock split on its Series A and B Preferred Stock and a 100 for 1 stock split on the common stock sold in 1993 (Note 7 a). In April 1996, the Company effected a 1.5 for 1 stock split on its common stock in the form of a stock dividend. All information in the accompanying consolidated financial statements and footnotes has been retroactively restated to give effect to these stock splits. 10. STOCK OPTIONS AND WARRANTS STOCK OPTIONS During 1994, the Company issued options to employees to purchase 970,860 shares of common stock at prices ranging from $.0112 to $2.52 per share. During 1995, the Company issued options to employees to purchase 851,380 shares of common stock at prices ranging from $2.52 to $3.52 per share. During the six months ended June 30, 1996, the Company issued options to employees, directors and F-15 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 10. STOCK OPTIONS AND WARRANTS--(CONTINUED) advisors to purchase 105,244 shares of common stock at $5.04 per share. In the opinion of management, these option prices represented the fair market value of such shares at the dates of grant. Transactions involving the Stock Option Plan for the years ended December 31, 1994 and 1995 and for the six months ended June 30, 1996 are summarized as follows:
SIX MONTHS FOR THE YEARS ENDED ENDED DECEMBER 31, JUNE 30, --------------------------- 1996 1994 1995 (UNAUDITED) ------------ ----------- ----------- Outstanding at beginning of period.................. -- 970,860 888,924 Granted........................................... 970,860 851,380 105,244 Exercised......................................... -- (885,279) (60) Canceled.......................................... -- (48,037) (17,427) ------------ ----------- ----------- Outstanding at end of period........................ 970,860 888,924 976,681 ------------ ----------- ----------- ------------ ----------- ----------- Range of exercise prices............................ $.0112-$2.52 $2.52-$3.52 $2.52-$5.04 ------------ ----------- ----------- ------------ ----------- -----------
STOCK WARRANTS In October 1995, the Company issued warrants to a financial advisor to purchase 17,874 shares of common stock at $3.52 per share. In the opinion of management, the exercise price of $3.52 per share represents the fair value of such shares at the date the warrants were issued. Accordingly, management has determined that the intrinsic value of these warrants is not material to the Company's consolidated financial statements. 11. INCOME TAXES There is no provision for income taxes in the accompanying consolidated financial statements because the Company has incurred net operating losses from inception. As of December 31, 1995, the Company had net operating loss carry forwards ("NOLs") available to offset future book and taxable income of approximately $8.7 million and $6.2 million, respectively, which expire through 2010. The difference between the book and tax NOLs relates principally to the differences between book and tax accounting related to start-up costs, depreciation of fixed assets, amortization of intangible assets and recognition of deferred revenue. The future book income tax benefits of $1.3 million and $3.5 million as of December 31, 1994 and December 31, 1995, respectively, have been fully reserved due to the fact that it is more likely than not that these tax benefits will not be recognized in the future. 12. CAPITAL LEASE OBLIGATIONS The Company is the lessee of certain equipment under capital leases expiring through 1998. The assets and liabilities are recorded at the lower of the present value of minimum lease payments or the fair market value of the asset. The interest rates on the capital leases vary from 2.63% to 17.00%. F-16 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 12. CAPITAL LEASE OBLIGATIONS--(CONTINUED) Future minimum payments under these lease agreements are as follows: YEAR ENDING DECEMBER 31, - ---------------------------------------------------------------- 1996............................................................ $277,842 1997............................................................ 126,767 1998 and thereafter............................................. 39,994 -------- Total minimum lease payments.................................... 444,603 Less: Amount representing interest.............................. 27,544 -------- Present value of net minimum lease payments..................... $417,059 -------- -------- 13. COMMITMENTS The Company leases certain office space for its operations. Leases for this space expire through 2002 and call for annual rent with immaterial escalations through the end of the leases. The Company has also entered into several operating leases for office equipment. Future minimum payments for operating leases at December 31, 1995 are as follows: YEAR ENDING DECEMBER 31, - --------------------------------------------------------------- 1996........................................................... $ 247,447 1997........................................................... 673,317 1998........................................................... 784,772 1999........................................................... 781,844 2000 and thereafter............................................ 1,539,750 Rent expense for the period ended December 31, 1993 and for the years ended December 31, 1994 and 1995 was $20,000, $69,774 and $125,881, respectively, and $60,750 and $180,973 for the six months ended June 30, 1995 and 1996 (unaudited). 14. SUBSEQUENT EVENTS ACQUISITION On April 1, 1996, the Company acquired certain assets and assumed certain liabilities of a network development company in exchange for 8,937 shares of the Company's common stock and $45,000, to be paid in two installments of $22,500 on the closing date and the first anniversary thereof, for an aggregate purchase price of approximately $90,000, all of which is included in intangible assets (Note 6) in the accompanying unaudited balance sheet as of June 30, 1996. The pro forma effects of this transaction have not been presented, as the results are immaterial to the Company's consolidated financial statements taken as a whole. FORMATION OF MSOS In July 1996, the Company obtained a 51% interest in Cardiology First Management Company ("CFMC"), a newly formed MSO. The Company acquired this interest as part of the formation of CFMC and concurrent with the signing of a long-term management services agreement between CFMC and Cardiology First of New Jersey, P.A., which is a network of cardiologists based in the State of New Jersey. F-17 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 14. SUBSEQUENT EVENTS--(CONTINUED) In July 1996, the Company obtained a 51% interest in Diamond Physician Management, Inc. ("Diamond"), a newly formed MSO. The Company acquired this interest as part of the formation of Diamond and concurrent with the signing of a long-term management services agreement between Diamond and Long Island Interventional Cardiology, which is a private cardiovascular physician practice based in Long Island, New York. In forming these MSOs, the Company conveyed 49% interests to the physician practice or network in exchange for the execution of the long-term management services agreements described above. The Company will record the fair value of this arrangement, which is, in the opinion of management, more readily determinable than the 49% MSO interest conveyed. These intangible assets, which the Company does not expect to be material, will be amortized over the life of the related contracts. The stockholders agreements for these MSOs, among other things, (i) restrict the transfer of MSO equity, (ii) provide the terms upon which the MSO can, at the Company's option, be merged with and into a wholly-owned subsidiary of the Company in a transaction in which the physician practice or network will receive stock of the Company in exchange for shares in the MSO, and (iii) grant to the physician practice or network the right to put its equity share in the MSO to the Company within one year of the Company's satisfaction of certain specified targets if the Company has not called its right to acquire those interests within that period. The agreements provide that these call transactions will be paid in the Company's common stock, and put transactions will be paid in cash, and that either transaction, if effected, would be based on an agreed-upon amount at the time of the transaction. The Company will, in the event that these transactions take place, account for such transactions as purchases at the agreed-upon fair market value of the MSO interest being purchased. INITIAL PUBLIC OFFERING The Company is pursuing an initial public offering of its securities. The proposed offering presently contemplates the sale of 2,000,000 shares of common stock at $12 per share. The Company plans to use a portion of the proceeds of the proposed offering to repay the Bridge Financing described below, of which $4,000,000 was outstanding at June 30, 1996. The supplementary net loss per share for the six months ended June 30, 1996 (unaudited), which follows, gives supplemental effect to the issuance of 333,333 shares of common stock for the entire period during which the related Bridge Financing was outstanding, which is the number of shares to be issued in the proposed initial public offering, the proceeds of which would be used to repay the $4,000,000 outstanding at June 30, 1996, as well as to the effect of the reduction of related interest expense in that period. These shares are presumed outstanding for supplementary purposes only, and were neither issued nor outstanding for any purpose during the six months ended June 30, 1996.
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) ------------------- Supplementary net loss per share.......................................... $ (0.35) ---------- ---------- Supplementary weighted average common shares outstanding.................. 5,217,654 ---------- ----------
CONVERSION OF CONVERTIBLE PREFERRED STOCK Pursuant to the terms of the Series A, B, C and D Convertible Preferred Stock (Note 8), these securities will be converted, on a 1.5 to 1 share basis, to common stock concurrent with the consummation of the pending public offering described above. The accompanying unaudited consolidated financial F-18 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E-SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1995 14. SUBSEQUENT EVENTS--(CONTINUED) statements as of June 30, 1996 and for the period then ended give effect to the conversion of the Series A, B, C and D Convertible Preferred Stock as if it had occurred as of that date. REVERSE STOCK SPLIT AND RECAPITALIZATION In connection with the pending initial public offering described above, the Company will effect a recapitalization whereby the presently outstanding common stock (including converted Series A, B, C and D Convertible Preferred Stock) will be converted to shares of common stock on a .59581 to 1 share basis. After this reverse split is effected, the Company will have 5,000,000 shares of preferred stock authorized and 15,000,000 shares of common stock authorized. All information contained in the accompanying financial statements and footnotes has been retroactively restated to give effect to this transaction. BRIDGE FINANCING On February 28, 1996, the Company entered into an agreement to issue three 8% promissory notes to an investor for an aggregate amount of $3,000,000. The Company issued one promissory note and received $1,500,000 upon the closing, issued a second promissory note and received $750,000 at the second closing date, April 26, 1996, and issued a third promissory note and recieved the remaining $750,000 on the third closing date, June 28, 1996. Each note is due on the earlier of the initial public offering of the Company's securities or one year from the respective closing dates. Interest is due quarterly on each of the notes. In addition, the investor received warrants to purchase 16,757 shares of common stock of the Company at $16.78 per share which expire on June 28, 2001. The exercise price of $16.78 per share is, in the opinion of management, greater than the fair market value of such shares at the date the warrants were issued. The investor also received 8,937 contingent warrants to purchase the Company's stock at $8.39 per share. These contingent warrants may be exercised during the period of January 1, 1997 through June 28, 2001 if payment has not been made on the notes by the agreed upon payment dates described above or if an initial public offering is not consummated prior to January 1, 1997; however, if payments on the notes are made by the specified dates, these contingent warrants will be canceled. The Company has entered into an agreement with the owners of the Company's Series D Convertible Preferred Stock and related warrants (Note 8) for additional bridge financing in the amount of approximately $2,000,000. This financing is unsecured, bears interest at 9% and expires on the earlier of the consummation of an initial public offering or July 31, 1997. On June 19, 1996, the Company issued three promissory notes in the aggregate principal amount of $1 million and on August 13, 1996, the Company issued three additional promissory notes in the aggregate principal amount of $1 million under this agreement. 15. UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION The unaudited consolidated financial information for the six months ended June 30, 1995 and 1996 has been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of the Company, these unaudited consolidated financial statements reflect all adjustments necessary, consisting of normal recurring adjustments, for a fair presentation of such data on a basis consistent with that of the audited data presented herein. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. F-19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Advanced Health Corporation: We have audited the accompanying balance sheets of Peltz Ventimiglia, Inc. (a New York corporation) as of December 31, 1994 and August 31, 1995, and the related statements of operations, shareholders' equity and cash flows for the years ended December 31, 1993 and 1994 and for the eight months ended August 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peltz Ventimiglia, Inc. as of December 31, 1994 and August 31, 1995, and the results of its operations and its cash flows for the years ended December 31, 1993 and 1994 and for the eight months ended August 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York June 4, 1996 F-20 PELTZ VENTIMIGLIA, INC. BALANCE SHEETS
DECEMBER 31, AUGUST 31, 1994 1995 ------------ ---------- ASSETS CURRENT ASSETS: Cash............................................................... $ 3,179 $ 4,344 Accounts receivable................................................ 45,173 41,552 ------------ ---------- Total current assets........................................... 48,352 45,896 OTHER ASSETS......................................................... 7,108 7,817 ------------ ---------- Total assets................................................... $ 55,460 $ 53,713 ------------ ---------- ------------ ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................... $ 17,297 $ 30,394 Accrued expenses................................................... 7,337 3,385 ------------ ---------- Total liabilities.............................................. 24,634 33,779 ------------ ---------- SHAREHOLDERS' EQUITY: Common stock, $.001 par value; 1,000 shares authorized; 1,000 shares issued and outstanding, respectively...................... 1 1 Additional paid-in capital......................................... 3,085 3,085 Retained earnings.................................................. 27,740 16,848 ------------ ---------- Total shareholders' equity..................................... 30,826 19,934 ------------ ---------- Total liabilities and shareholders' equity..................... $ 55,460 $ 53,713 ------------ ---------- ------------ ----------
The accompanying notes are an integral part of these balance sheets. F-21 PELTZ VENTIMIGLIA, INC. STATEMENTS OF OPERATIONS
FOR THE FOR THE YEARS ENDED EIGHT MONTHS DECEMBER 31, ENDED -------------------- AUGUST 31, 1993 1994 1995 -------- -------- ------------ REVENUE................................................... $377,032 $499,543 $351,066 OPERATING EXPENSES........................................ 182,205 408,925 363,047 -------- -------- ------------ (LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR STATE AND LOCAL INCOME TAXES........................................ 194,827 90,618 (11,981) (BENEFIT) PROVISION FOR STATE AND LOCAL INCOME TAXES...... 17,712 8,238 (1,089) -------- -------- ------------ Net (loss) income................................... $177,115 $ 82,380 $(10,892) -------- -------- ------------ -------- -------- ------------
The accompanying notes are an integral part of these statements. F-22 PELTZ VENTIMIGLIA, INC. STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
COMMON STOCK ADDITIONAL ------------------- PAID-IN RETAINED SHARES PAR VALUE CAPITAL EARNINGS TOTAL ------ --------- ---------- -------- -------- BALANCE, January 1, 1993.................... 1,000 $ 1 $3,085 $ 3,960 $ 7,046 Distributions to shareholders............. -- -- -- (164,139) (164,139) Net income................................ -- -- -- 177,115 177,115 -- ------ ---------- -------- -------- BALANCE, December 31, 1993.................. 1,000 1 3,085 16,936 20,022 Distributions to shareholders............. -- -- -- (71,576) (71,576) Net income................................ -- -- -- 82,380 82,380 -- ------ ---------- -------- -------- BALANCE, December 31, 1994.................. 1,000 1 3,085 27,740 30,826 Net (loss)................................ -- -- -- (10,892) (10,892) -- ------ ---------- -------- -------- BALANCE, August 31, 1995.................... 1,000 $ 1 $3,085 $ 16,848 $ 19,934 -- -- ------ ---------- -------- -------- ------ ---------- -------- --------
The accompanying notes are an integral part of these statements. F-23 PELTZ VENTIMIGLIA, INC. STATEMENTS OF CASH FLOWS
FOR THE FOR THE YEARS ENDED EIGHT MONTHS DECEMBER 31, ENDED ------------------- AUGUST 31, 1993 1994 1995 -------- ------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income........................................ $177,115 $82,380 $(10,892) Adjustments to reconcile net (loss) income to net cash provided by operating activities- Changes in operating assets and liabilities- Accounts receivable.................................... (34,369) (10,804) 3,621 Other assets........................................... 5,171 (7,108) (709) Accounts payable....................................... 24,143 (7,171) 13,097 Accrued expenses....................................... -- 7,337 (3,952) -------- ------- ------------ Net cash provided by operating activities............ 172,060 64,634 1,165 -------- ------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to shareholders............................ (164,139) (71,576) -- -------- ------- ------------ Net cash used in financing activities................ (164,139) (71,576) -- -------- ------- ------------ Net change in cash................................... 7,921 (6,942) 1,165 CASH, beginning of period.................................. 2,200 10,121 3,179 -------- ------- ------------ CASH, end of period........................................ $ 10,121 $ 3,179 $ 4,344 -------- ------- ------------ -------- ------- ------------
The accompanying notes are an integral part of these statements. F-24 PELTZ VENTIMIGLIA, INC. NOTES TO FINANCIAL STATEMENTSE DECEMBER 31, 1994 AND AUGUST 31, 1995 1. ORGANIZATION AND BUSINESS Peltz Ventimiglia, Inc. (the "Company") provides physician practice management consulting services for physicians in the Eastern United States. On August 28, 1995, the Company entered into a purchase agreement with Advanced Health Management Corporation ("AHM", formerly Advanced Clinical Networks Corporation), a wholly-owned subsidiary of Advanced Health Corporation ("AHC"), whereby the Company sold its net assets to AHM for 75,996 shares of AHC common stock for an aggregate sale price of $191,327. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Fees for physician practice management consulting services are recognized as services are rendered. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the estimated future tax effects of events that have been recognized in the financial statements or income tax returns. Under this method, deferred tax liabilities and assets are determined based on (1) differences between the financial accounting and income tax bases of assets and liabilities, and (2) carry-forwards, using enacted tax rates in effect for the years in which the differences and carry-forwards are expected to reverse and be utilized, respectively. The Company operates under Subchapter S of the Internal Revenue Code and, consequently, is not subject to Federal and certain state income taxes. The stockholders include their pro rata share of the Company's income in their personal income tax returns. It is the Company's policy to reimburse its stockholders for any tax liability resulting from their inclusion of the Company's income in their respective tax returns. F-25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Advanced Health Corporation: We have audited the accompanying balance sheets of U.S. Health Connections, Inc. (a Georgia corporation) as of December 31, 1994 and August 31, 1995, and the related statements of operations, shareholders' equity and cash flows for the year ended December 31, 1994 and for the eight months ended August 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of U.S. Health Connections, Inc. as of December 31, 1994 and August 31, 1995, and the results of its operations and its cash flows for the year ended December 31, 1994 and for the eight months ended August 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York June 5, 1996 F-26 U.S. HEALTH CONNECTIONS, INC. BALANCE SHEETS
DECEMBER 31, AUGUST 31, 1994 1995 ------------ ---------- ASSETS CURRENT ASSETS: Cash............................................................... $ 4,708 $ -- Accounts receivable................................................ 72,596 40,775 ------------ ---------- Total current assets........................................... 77,304 40,775 PROPERTY AND EQUIPMENT, net.......................................... 20,052 23,736 OTHER ASSETS......................................................... 1,592 1,652 ------------ ---------- Total assets................................................... $ 98,948 $ 66,163 ------------ ---------- ------------ ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................... $ 24,834 $ 10,436 Accrued expenses................................................... 27,414 15,953 Current portion of long-term debt.................................. 2,838 8,309 Loan payable to shareholder........................................ -- 6,000 Deferred revenue................................................... 10,002 -- ------------ ---------- Total current liabilities...................................... 65,088 40,698 LONG-TERM DEBT, net of current portion............................... 8,513 -- ------------ ---------- Total liabilities.............................................. 73,601 40,698 ------------ ---------- SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 10,000 shares authorized; 100 shares issued and outstanding............................................... 1 1 Additional paid-in capital......................................... 99 99 Retained earnings.................................................. 25,247 25,365 ------------ ---------- Total shareholders' equity..................................... 25,347 25,465 ------------ ---------- Total liabilities and shareholders' equity..................... $ 98,948 $ 66,163 ------------ ---------- ------------ ----------
The accompanying notes are an integral part of these balance sheets. F-27 U.S. HEALTH CONNECTIONS, INC. STATEMENTS OF OPERATIONS
FOR THE FOR THE EIGHT MONTHS YEAR ENDED ENDED DECEMBER 31, AUGUST 31, 1994 1995 ------------ ------------ REVENUE............................................................ $349,988 $214,606 OPERATING EXPENSES................................................. 318,506 212,002 ------------ ------------ Operating income............................................. 31,482 2,604 INTEREST EXPENSE, net.............................................. 948 690 ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES........................... 30,534 1,914 PROVISION FOR INCOME TAXES......................................... 5,287 1,796 ------------ ------------ Net income................................................... $ 25,247 $ 118 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements. F-28 U.S. HEALTH CONNECTIONS, INC. STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1994 AND FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
COMMON STOCK ADDITIONAL ------------------ PAID-IN RETAINED SHARES PAR VALUE CAPITAL EARNINGS TOTAL ------ --------- ---------- -------- ------- BALANCE, January 1, 1994............................. -- $ -- $ -- $ -- $ -- Issuance of common stock............................. 100 1 99 -- 100 Net income........................................... -- -- -- 25,247 25,247 ------ --- --- -------- ------- BALANCE, December 31, 1994........................... 100 1 99 25,247 25,347 Net income........................................... -- -- -- 118 118 ------ --- --- -------- ------- BALANCE, August 31, 1995............................. 100 $ 1 $ 99 $ 25,365 $25,465 ------ --- --- -------- ------- ------ --- --- -------- -------
The accompanying notes are an integral part of this statement. F-29 U.S. HEALTH CONNECTIONS, INC. STATEMENTS OF CASH FLOWS
FOR THE FOR THE EIGHT MONTHS YEAR ENDED ENDED DECEMBER 31, AUGUST 31, 1994 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................... $ 25,247 $ 118 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation................................................... 5,200 5,200 Changes in operating assets and liabilities- Accounts receivable.......................................... (72,596) 31,821 Other assets................................................. (1,592) (60) Accounts payable............................................. 24,834 (14,398) Accrued expenses............................................. 27,414 (11,461) Deferred revenue............................................. 10,002 (10,002) ------------ ------------ Net cash provided by operating activities.................. 18,509 1,218 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net......................... (25,252) (8,884) ------------ ------------ Net cash used in investing activities...................... (25,252) (8,884) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from long-term debt................................. 11,351 (3,042) Proceeds from loan payable from related party.................... -- 6,000 Proceeds from sale and issuance of common stock.................. 100 -- ------------ ------------ Net cash provided by financing activities.................. 11,451 2,958 ------------ ------------ Net change in cash......................................... 4,708 (4,708) CASH, beginning of period.......................................... -- 4,708 ------------ ------------ CASH, end of period................................................ $ 4,708 $ -- ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements. F-30 U.S. HEALTH CONNECTIONS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 AND AUGUST 31, 1995 1. ORGANIZATION AND BUSINESS U.S. Health Connections, Inc. (the "Company") commenced operations on January 1, 1994. The Company provides physician network management services for physician groups in the Southeastern United States. On September 1, 1995, the Company entered into a purchase agreement with Advanced Health Management Corporation ("AHM", formerly Advanced Clinical Networks Corporation), a wholly-owned subsidiary of Advanced Health Corporation ("AHC"), whereby the Company's shareholders sold all of their outstanding stock to AHM for $150,000 in cash, a $150,000 note receivable and 30,193 shares of AHC common stock, for an aggregate sale price of $376,014. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company enters into management services agreements with its network clients whereby the Company recognizes administrative fees for managing capitated contracts between health maintenance organizations ("HMOs") and physician networks for the delivery of health care. PROPERTY AND EQUIPMENT Property and equipment, consisting primarily of electronic data processing equipment, are stated at cost and depreciated on a straight-line basis over the useful lives of the assets (5 years). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the estimated future tax effects of events that have been recognized in the financial statements or income tax returns. Under this method, deferred tax liabilities and assets are determined based on (1) differences between the financial accounting and income tax bases of assets and liabilities, and (2) carry-forwards, using enacted tax rates in effect for the years in which the differences and carry-forwards are expected to reverse and be utilized, respectively. The provision for income taxes for each period includes both federal and state income taxes. F-31 U.S. HEALTH CONNECTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND AUGUST 31, 1995 3. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
DECEMBER 31, AUGUST 31, 1994 1995 ------------ ---------- Vehicle............................................. $ 14,888 $ 14,888 Computer equipment and software..................... 7,618 12,499 Furniture and fixtures.............................. 2,746 6,749 ------------ ---------- 25,252 34,136 Less: Accumulated depreciation...................... 5,200 10,400 ------------ ---------- Property and equipment, net......................... $ 20,052 $ 23,736 ------------ ---------- ------------ ----------
Depreciation aggregated $5,200 for each of the year ended December 31, 1994 and the eight months ended August 31, 1995, respectively. 4. LONG-TERM DEBT The Company had a loan payable with a bank related to the acquisition of a vehicle. This loan was payable, with interest at 7.5%, in equal installments through December 1997 and was repaid in full subsequent to the sale of the Company to AHC. Accordingly, all long-term debt is reflected as a current liability in the accompanying balance sheet as of August 31, 1995. 5. RELATED PARTY TRANSACTION In 1995, the Company borrowed $6,000 from a related party of the majority shareholder. The loan is due on demand and interest is payable, and is accrued by the Company at August 31, 1995, at the payment date at a rate equal to the Company's average borrowing rate. F-32 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED) The following pro forma statement of operations for the year ended December 31, 1995 includes the results of operations of Advanced Health Corporation, Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. as if the acquisitions of Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. by Advanced Health Corporation were made on January 1, 1995. The Company believes that this pro forma statement of operations includes all necessary pro forma adjustments to give pro forma effect to these transactions as if they had occurred on January 1, 1995. The pro forma financial information presented below does not purport to be indicative of the operating results which would have been achieved had the acquisitions taken place on January 1, 1995 and should not be construed as representative of the Company's results of operations for any future period.
ADVANCED PELTZ U.S. HEALTH HEALTH VENTIMIGLIA, CONNECTIONS, PRO FORMA PRO FORMA CORPORATION(1) INC.(2) INC.(2) SUBTOTAL ADJUSTMENTS(3) OPERATIONS -------------- ------------ ------------ ----------- -------------- ----------- REVENUE................... $ 1,053,949 $351,066 $214,606 $ 1,619,621 $-- $ 1,619,621 COST OF SALES............. 340,326 -- -- 340,326 -- 340,326 -------------- ------------ ------------ ----------- -------------- ----------- Gross Profit.......... 713,623 351,066 214,606 1,279,295 -- 1,279,295 OPERATING EXPENSES........ 6,412,367 363,047 212,002 6,987,416 26,280 7,013,696 -------------- ------------ ------------ ----------- -------------- ----------- Operating income (loss).................... (5,698,744) (11,981) 2,604 (5,708,121) (26,280) (5,734,401) OTHER INCOME (EXPENSE).... (7,863) -- (690) (8,553) -- (8,553) -------------- ------------ ------------ ----------- -------------- ----------- Income (loss) before income taxes............ (5,706,607) (11,981) 1,914 (5,716,674) (26,280) (5,742,954) PROVISION (BENEFIT) FOR INCOME TAXES.............. -- (1,089) 1,796 707 (707) -- -------------- ------------ ------------ ----------- -------------- ----------- Net loss.............. $ (5,706,607) $(10,892) $ 118 $(5,717,381) $(25,573) $(5,742,954) -------------- ------------ ------------ ----------- -------------- ----------- -------------- ------------ ------------ ----------- -------------- ----------- Pro forma net loss per share..................... $ (1.66) ----------- ----------- Pro forma weighted average common shares outstanding(4)............ 3,458,838 ----------- -----------
- ------------ (1) Includes the results of operations of Advanced Health Corporation for the full year, and the results of operations of Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. from September 1, 1995 through December 31, 1995. (2) Includes the results of operations of Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. from January 1, 1995 through August 31, 1995. (3) Pro forma adjustments give effect to amortization of intangible assets related to the acquisitions of Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc., as well as to the tax provision (benefit) which would have resulted from the combined results of operations, had the acquisitions been made at the beginning of the year. (4) Includes the pro forma effect of shares of common stock issued in connection with the acquisitions of Peltz Ventimiglia, Inc. and U.S. Health Connections, Inc. as if those shares were issued and outstanding for the period from January 1, 1995 to December 31, 1995. F-33 [Inside Back Cover] Graphic captioned "Integrating Physician Management Services with Information Technology", which includes (i) a photograph of a physician holding a pen-based, portable, wireless computer, captioned "Med-E-Practice/All of the applications in the Med-E-Practice suite are designed to be run on a pen-based, portable wireless computer for use in a busy ambulatory practice.", (ii) a photograph of a computer screen from the Med-E-Visit application, captioned "Med-E-Visit/A patient encounter application generating a Superbill with fully-qualified diagnostic coding linked to appropriate billing codes required to support outcomes analysis.", (iii) a photograph of a computer screen from the Referral application, captioned "Referral/Support multiple referral networks by recording referral information and providing both network-specific referral rules and information regarding appropriate network specialists." and (iv) a photograph of a computer screen from the Smart Scripts application, captioned "Smart Scripts/A pharmaceutical prescription-writing application providing formulary management, DUR edits and diagnostic coding linkage to drug therapy protocols." ====================================== ======================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS 2,000,000 SHARES PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN [LOGO] AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A ADVANCED HEALTH SOLICITATION OF AN OFFER TO BUY A CORPORATION SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR COMMON STOCK SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------- TABLE OF CONTENTS PAGE ---------------------- ---- PROSPECTUS Prospectus Summary..................... 3 Risk Factors........................... 5 ---------------------- The Company............................ 15 Use of Proceeds........................ 15 Dividend Policy........................ 15 Capitalization......................... 16 Dilution............................... 17 Selected Consolidated Financial Data... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 19 Business............................... 23 Management............................. 39 Certain Transactions................... 46 Principal Stockholders................. 48 Description of Capital Stock........... 49 Shares Eligible for Future Sale........ 51 Underwriting........................... 53 Legal Matters.......................... 54 Experts................................ 54 COWEN & COMPANY Additional Information................. 54 VOLPE, WELTY & COMPANY Index to Financial Statements.......... F-1 ------------------- UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS , 1996 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. ====================================== ======================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimated except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee. SEC registration fee........................................... $ 11,104 NASD filing fee................................................ 3,520 Nasdaq National Market listing fee............................. * Blue sky fees and expenses..................................... 25,000 Printing and engraving expenses................................ * Legal fees and expenses........................................ * Accounting fees and expenses................................... * Transfer agent and registrar fees.............................. * Miscellaneous.................................................. * ---------- Total...................................................... $ * ---------- ---------- - ------------ * To be provided by amendment. The Company will bear all of the foregoing fees and expenses. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Act. Articles Nine and Ten of the Registrant's Certificate of Incorporation provide for indemnification of its directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the DGCL. Reference is made to the form of Director Indemnification Agreement filed as Exhibit 10.20 hereto, which provides for indemnification of directors. Reference is also made to the Underwriting Agreement filed as Exhibit 1.1 hereto, which sets forth certain indemnification provisions. In addition, the Registrant maintains liability insurance for its officers and directors. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Registrant has sold and issued the following securities during the past three years: On August 30, 1993, the Company sold 185,893 shares of Common Stock to the Chairman and an employee of the Company, for an aggregate of $3,120. On December 27, 1993, the Company sold 718,984 shares of Common Stock for $8,045 pursuant to a rights offering. The shares were offered only to the holders of Physicians' On-Line, Inc. stock on a one-for-one basis pro rata to their shareholdings in Physicians' On-Line, Inc. In November 1994, the Company sold 75,965 shares of Common Stock for an aggregate of $639,655. Of these shares sold, all of which were paid for in 1994, 25,319 were issued prior to December 31, 1994 and 50,641 were issued in January 1995. II-1 In August 1995, the Company issued 2,978 shares of Common Stock to a director of the Company for $25,000. In August 1995, the Company issued 543,564 shares of Common Stock to purchase Majean, Inc. and 75,996 shares of common stock to purchase Peltz Ventimiglia, Inc. and in September 1995, 30,193 shares of common stock to purchase U.S. Health Connections, Inc., as more fully described in Note 3 to the accompanying Consolidated Financial Statements. In 1995, the Company sold 76,802 shares of Common Stock to investors for an aggregate of $625,059. In August 1993, the Company issued 971,800 shares of Series A Convertible Preferred Stock to investors for $97,180. In March 1994, the Company issued 282,900 shares of Series B Convertible Preferred Stock to investors for $2,000,103. In January 1995, the Company issued 200,000 shares of Series C Convertible Preferred Stock to investors for $1,500,000. In August 1995, the Company issued 666,360 shares of Series D Convertible Preferred Stock to investors for $4,997,700. Each share of the Preferred Stock is convertible into 1.1189249 shares of Common Stock upon the consummation of this offering. In February, April and June 1996, the Company issued three 8% Promissory Notes in the aggregate principal amount of $3 million to an investor. In June 1996, the Company issued three 9% Series B Promissory Notes in the aggregate principal amount of $1 million to investors. In August 1996, the Company issued three additional 9% Series B Promissory Notes in the aggregate principal amount of $1 million to investors. During 1995, the Chairman, the President, the principal stockholder and certain employees exercised stock options for 288,681, 316,376, 128,695 and 151,547 shares, respectively, for $19,717. During 1996, a former employee exercised stock options for 60 shares of Common Stock for $150. In April 1996, the Company issued 8,937 shares of Common Stock to purchase the assets of Benenson & Associates, Inc. The Registrant issued rights to acquire Common Stock in the Roll Up Transaction to one physician organization in December 1995 and two physician organizations in July 1996. The above securities were offered and sold by the Registrant in reliance upon an exemption from registration under either (i) Section 4(2) of the Securities Act as transactions not involving any public offering or (ii) Rule 701 under the Securities Act. No underwriters were involved in connection with the sales of securities referred to in this Item 15. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- -------------------------------------------------------------------------------- *1.1 Form of Underwriting Agreement ***2.1 Agreement and Plan of Merger dated as of August 2, 1995, among Med-E-Systems Corporation, MES Acquisition Corp. and the Registrant ***2.2 Agreement and Plan of Merger dated as of August 7, 1995, between the Registrant and Majean, Inc. ***2.3 Asset Purchase Agreement dated as of August 28, 1995, among Advanced Clinical Networks Corporation, Peltz Ventimiglia, Inc., Richard Ventimiglia and Steven Peltz
II-2
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- -------------------------------------------------------------------------------- ***2.4 Agreement and Plan of Merger dated as of September 1, 1995, among U.S. Health Connections, Inc., the Registrant and Advanced Clinical Networks Corporation **3.1 Restated Certificate of Incorporation of the Registrant, as in effect on the effective date of the Registration Statement **3.2 Restated Certificate of Incorporation of the Registrant, as to be in effect upon the consummation of the Initial Public Offering **3.3 By-laws of the Registrant **5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm) +***10.1 Development and Marketing Agreement dated as of August 1, 1995, between Med-E- Systems Corporation and Integrated Disease Management, Inc. +***10.2 Software License Agreement dated as of September 27, 1995, between Med-E-Systems Corporation and Medco Containment Services Inc. +***10.3 System Implementation Agreement dated September 14, 1995, between IDX Systems Corporation and the Registrant ***10.4 Investors' Rights Agreement dated as of August 31, 1993, among Med-E-Mail Corporation, Financial Strategic Portfolios, Inc.--Health Sciences Portfolio and The Global Health Sciences Fund ***10.5 Amended and Restated Investors' Rights Agreement dated as of March 16, 1994, among Med-E-Mail Corporation, Financial Strategic Portfolios, Inc.--Health Sciences Portfolio and The Global Health Sciences Fund ***10.6 Amended and Restated Investors' Rights Agreement dated as of January 27, 1995, among Med-E-Systems Corporation, Invesco Strategic Portfolios, Inc.--Health Sciences Portfolio and The Global Health Sciences Fund ***10.7 Investors' Rights Agreement dated as of August 23, 1995, among the Registrant, 21st Century Communucations Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st Century Communications Foreign Partners, L.P. ***10.8 Registration Rights Agreement dated February 28, 1996, among the Registrant, Park Avenue Capital, L.P. and Access Industries, LLC +***10.9 Management Services Agreement dated as of December 11, 1995, between Madison Medical--The Private Practice Group of New York, L.L.P. and Uptown Physician Management, Inc. ***10.10 Stockholders' Agreement dated as of December 11, 1995, among Uptown Physician Management, Inc. and certain stockholders +***10.11 Management Services Agreement dated as of August 7, 1995, among Advanced Heart Institute of New York, P.C., Valavanur A. Subramanian, M.D., Jeffrey Moses, M.D. and Majean Sub 2, Inc. +***10.12 Management Services Agreement dated as of July 1, 1996 between Specialist Physicians Management, Inc. and Cardiology First of New Jersey, P.A. ***10.13 Stockholders' Agreement among Specialist Physicians Management, Inc., Specialist Physicians MSO, L.L.C. and Advanced Health Management Corporation +***10.14 Management Services Agreement dated as of July 1, 1996 between Diamond Physician Management, Inc. and Long Island Interventional Cardiology ***10.15 Stockholders' Agreement dated as of July 1, 1996 among Diamond Physician Management, Inc., Long Island Interventional Cardiology and Advanced Health Management Corporation +***10.16 Administrative Services Base Agreement dated as of June 30, 1994, between U.S. Health Connections, Inc. and The Emory Clinic, Inc.
II-3
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- -------------------------------------------------------------------------------- ***10.17 Tarrytown, New York Office Lease Agreement dated November 30, 1995, between Tarrytown Corporate Center IV, L.P. and the Registrant ***10.18 Tarrytown, New York Office Sublease Agreement dated October 31, 1995, between American Software, USA, Inc. and the Registrant ***10.19 Chicago Office Lease Agreement dated December 8, 1995, between Adams Family, L.L.C. and the Registrant **10.20 Form of Director Indemnification Agreement ***10.21 Employment Agreement between the Registrant and Jonathan Edelson, M.D. ***10.22 Employment Agreement between the Registrant and Steven Hochberg ***10.23 Employment Agreement between the Registrant and Alan B. Masarek **10.24 Amended and Restated Advanced Health Corporation 1995 Stock Option Plan **10.25 Employee Stock Purchase Plan **11.1 Supplemental Net Loss Per Common Share Computation ***21 List of Subsidiaries **23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its opinion filed as Exhibit 5 hereto) **23.2 Consent of Arthur Andersen LLP ***24 Powers of Attorney ***27 Financial Data Schedule
- ------------ * To be filed by amendment. ** Filed herewith. *** Previously filed. + Portions of such exhibit have been deleted therefrom pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended, and confidential treatment has been requested therefor. (b) Financial Statement Schedules All schedules are omitted because they are inapplicable or the requested information is shown in the consolidated financial statements or related notes. ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it II-4 is against public policy as expressed in such Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: 1. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. 2. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tarrytown, State of New York, on the 9th day of September, 1996. ADVANCED HEALTH CORPORATION By: * .................................. Jonathan Edelson, M.D. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to Registration Statement has been signed on the 9th day of September, 1996, by the following persons in the capacities indicated:
SIGNATURE TITLE - --------------------------------------------- --------------------------------------------- * Chairman of the Board, Chief Executive ............................................. Officer and Director (Principal Executive Jonathan Edelson, M.D Officer) * President and Director ............................................. Steven Hochberg /s/ ALAN B. MASAREK Chief Operating Officer and Chief Financial ............................................. Officer (Principal Financial and Accounting Alan B. Masarek Officer) ............................................. Director James T. Carney * Director ............................................. Barry Kurokawa * Director ............................................. Jonathan Lieber
*By: /s/ ALAN B. MASAREK ........................................ Alan B. Masarek As Attorney-in-Fact II-6 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE - ----------- -------------------------------------------------------------------------- ---- *1.1 Form of Underwriting Agreement ***2.1 Agreement and Plan of Merger dated as of August 2, 1995, among Med-E-Systems Corporation, MES Acquisition Corp. and the Registrant ***2.2 Agreement and Plan of Merger dated as of August 7, 1995, between the Registrant and Majean, Inc. ***2.3 Asset Purchase Agreement dated as of August 28, 1995, among Advanced Clinical Networks Corporation, Peltz Ventimiglia, Inc., Richard Ventimiglia and Steven Peltz ***2.4 Agreement and Plan of Merger dated as of September 1, 1995, among U.S. Health Connections, Inc., the Registrant and Advanced Clinical Networks Corporation **3.1 Restated Certificate of Incorporation of the Registrant, as in effect on the effective date of the Registration Statement **3.2 Restated Certificate of Incorporation of the Registrant, as to be in effect upon the consummation of the Initial Public Offering **3.3 By-laws of the Registrant **5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm) +***10.1 Development and Marketing Agreement dated as of August 1, 1995, between Med-E-Systems Corporation and Integrated Disease Management, Inc. +***10.2 Software License Agreement dated as of September 27, 1995, between Med-E- Systems Corporation and Medco Containment Services Inc. +***10.3 System Implementation Agreement dated September 14, 1995, between IDX Systems Corporation and the Registrant ***10.4 Investors' Rights Agreement dated as of August 31, 1993, among Med-E-Mail Corporation, Financial Strategic Portfolios, Inc.--Health Sciences Portfolio and The Global Health Sciences Fund ***10.5 Amended and Restated Investors' Rights Agreement dated as of March 16, 1994, among Med-E-Mail Corporation, Financial Strategic Portfolios, Inc.--Health Sciences Portfolio and The Global Health Sciences Fund ***10.6 Amended and Restated Investors' Rights Agreement dated as of January 27, 1995, among Med-E-Systems Corporation, Invesco Strategic Portfolios, Inc.--Health Sciences Portfolio and The Global Health Sciences Fund ***10.7 Investors' Rights Agreement dated as of August 23, 1995, among the Registrant, 21st Century Communucations Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st Century Communications Foreign Partners, L.P. ***10.8 Registration Rights Agreement dated February 28, 1996, among the Registrant, Park Avenue Capital, L.P. and Access Industries, LLC +***10.9 Management Services Agreement dated as of December 11, 1995, between Madison Medical--The Private Practice Group of New York, L.L.P. and Uptown Physician Management, Inc. ***10.10 Stockholders' Agreement dated as of December 11, 1995, among Uptown Physician Management, Inc., and certain stockholders +***10.11 Management Services Agreement dated as of August 7, 1995, among Advanced Heart Institute of New York, P.C., Valavanur A. Subramanian, M.D., Jeffrey Moses, M.D. and Majean Sub 2, Inc. +***10.12 Management Services Agreement dated as of July 1, 1996 between Specialist Physicians Management, Inc. and Cardiology First of New Jersey, P.A.
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE - ----------- -------------------------------------------------------------------------- ---- ***10.13 Stockholders' Agreement among Specialist Physicians Management, Inc., Specialist Physicians MSO, L.L.C. and Advanced Health Management Corporation +***10.14 Management Services Agreement dated as of July 1, 1996 between Diamond Physician Management, Inc. and Long Island Interventional Cardiology ***10.15 Stockholders' Agreement dated as of July 1, 1996 among Diamond Physician Management, Inc., Long Island Interventional Cardiology and Advanced Health Management Corporation +***10.16 Administrative Services Base Agreement dated as of June 30, 1994, between U.S. Health Connections, Inc. and The Emory Clinic, Inc. ***10.17 Tarrytown, New York Office Lease Agreement dated November 30, 1995, between Tarrytown Corporate Center IV, L.P. and the Registrant ***10.18 Tarrytown, New York Office Sublease Agreement dated October 31, 1995, between American Software, USA, Inc. and the Registrant ***10.19 Chicago Office Lease Agreement dated December 8, 1995, between Adams Family, L.L.C. and the Registrant **10.20 Form of Director Indemnification Agreement ***10.21 Employment Agreement between the Registrant and Jonathan Edelson, M.D. ***10.22 Employment Agreement between the Registrant and Steven Hochberg ***10.23 Employment Agreement between the Registrant and Alan B. Masarek **10.24 Amended and Restated Advanced Health Corporation 1995 Stock Option Plan, as amended **10.25 Employee Stock Purchase Plan **11.1 Supplemental Net Loss Per Common Share Computation ***21 List of Subsidiaries **23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its opinion filed as Exhibit 5 hereto) **23.2 Consent of Arthur Andersen LLP ***24 Powers of Attorney ***27 Financial Data Schedule
- ------------ * To be filed by amendment. ** Filed herewith. *** Previously filed. + Portions of such exhibit have been deleted therefrom pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended, and confidential treatment has been requested therefor. EX-3.1 2 EXHIBIT 3.1 [Draft 8/26/96] CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF ADVANCED HEALTH CORPORATION Advanced Health Corporation, a Delaware corporation (the "Corporation"), hereby certifies as follows: The current name of the Corporation is Advanced Health Corporation. The Corporation's original Certificate of Incorporation was originally filed with the Secretary of State of the State of Delaware on June 20, 1995. Upon the filing of this Certificate of Amendment of Restated Certificate of Incorporation with the Secretary of State of the State of Delaware: (a) each share of the Corporation's Common Stock, $.01 par value, theretofore outstanding shall, without any action on the part of the holder thereof, be automatically reclassified, changed and converted into .59581 shares of Common Stock, $.01 par value, of the Corporation; provided, however, that (i) such calculation shall be made with respect to - -------- ------- each holder on an aggregate basis for all shares of Common Stock held by such holder and (ii) the Corporation shall not issue any fractional shares of Common Stock resulting from such calculation (each holder shall be entitled to receive an amount in cash equal to the current market value of a share of Common Stock (as determined in good faith by the Board of Directors multiplied by any fractional share of Common Stock otherwise resulting therefrom) ; and (b) each holder of the outstanding shares of stock so reclassified, changed and converted pursuant to the immediately preceding clause (a) shall be entitled to receive, in exchange for the certificate or certificates representing the outstanding shares so reclassified, changed and converted registered in such holder's name, a new certificate or certificates representing such shares as so converted registered in such holder's name; provided, however, that the failure of any such holder to so -------- ------- exchange such holder's certificate or certificates shall in no way affect the reclassification, change and conversion of such holder's shares as aforesaid. The Amendment was duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware and the written consent of the stockholders of the Corporation to the Amendment was given in accordance with, and written notice of such stockholder action was given as provided in, Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation had caused this Certificate of Amendment of Certificate of Incorporation to be signed as of the ______ day of ___________, 1996, by its President, and attested by its Secretary, who hereby affirm and acknowledge, under penalties of perjury, that this Certificate is the act and deed of the Corporation and that the facts stated herein are true. By:___________________________ Name: Title: ATTESTED: By:________________________ Name: Title: -2- State of Delaware Office of the Secretary of State ________________________________________ I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF "MAJEAN, INC.", FILED IN THIS OFFICE ON THE TWENTY-FOURTH DAY OF AUGUST, A.D. 1995, AT 9 O'CLOCK A.M. /s/ Edward J. Freel ---------------------------------------- Edward J. Freel, Secretary of State (SIGNATURE, SEAL, AUTHENTICATION) RESTATED CERTIFICATE OF INCORPORATION OF MAJEAN, INC. a Delaware Corporation Majean, Inc., (the "Corporation") a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "General Corporation Law"), hereby certifies as follows: A. The name of the Corporation is Majean, Inc. The Certificate of Incorporation of the Corporation was originally filed with the Secretary of State of Delaware on June 20, 1995. B. This Restated Certificate of Incorporation which restates and integrates and further amends the Certificate of Incorporation of the Corporation, was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law, and was approved by written consent of the stockholders of the Corporation in accordance with the provisions of Section 228 of the General Corporation Law. C. The Certificate of Incorporation of the Corporation is hereby amended and restated to read in its entirety as follows: ARTICLE I The name of the Corporation is Majean, Inc. ARTICLE II The registered office of the Corporation is to be located at 32 Loockerman Square, Suite L-100 in the City of Dover, in the County of Kent, in the State of Delaware. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE III The nature of the Corporation's business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV A. Classes of Stock. The Corporation is authorized to issue ---------------- two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is 13,000,000 shares. 10,000,000 shares shall be Common Stock, par value $.01 per share, and 3,000,000 shares shall be Preferred Stock, par value F$.01 per share, of which 971,800 shares shall be designate Series A. Convertible Preferred Stock (the "Series A Preferred Stock"), 282,900 shall be designated Series B Convertible Preferred Stock (the Series B Preferred Stock") and 200,000 shall be designated Series C Convertible Preferred Stock (the "Series C Preferred Stock"). B. Rights, Preferences and Restrictions of Preferred Stock. -------------------------------------------------------- The Preferred Stock authorized by this Restated Certificate of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges, and restrictions granted to an imposed on the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock are as set forth below in this Article IV (B). The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. The Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series A Preferred Stock, the Series B Preferred Stock, or the Series C Preferred Stock), prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the share constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. Subject to the rights of any series of ------------------- preferred stock of the Corporation the terms of which specifically provide that such series ranks senior to the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, or the terms of which specifically provide that such series ranks pari passu with the Series A ---------- Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, the holders of shares of Series A Preferred Stock. Series B Preferred Stock and Series C Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common stock of the Corporation (the "Common Stock") or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock) on the Common Stock, when, as and if declared by the Board of Directors. No dividends shall be payable upon any Junior Securities (as defined below) of the Corporation unless equivalent dividends, on an as-converted basis, are declared and paid concurrently on the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. A "Junior Security" shall include the Common Stock and any series of preferred stock the terms of which specifically provide that such series ranks junior and subordinate to the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock with respect to dividends and as to the distribution of assets upon any liquidation or deemed liquidation and that such shares are not subject to mandatory redemption or repurchase prior to the date on which no shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are outstanding. For purposes of this Section 1, the Series A Preferred Stock and Series B Preferred Stock shall be treated as pari passu ---- ----- with the Series C Preferred Stock. 2. Liquidation Preference ---------------------- (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series C Preferred Stock shall be entitled to receive, in pari passu ---- ----- with the holders of shares of the Series A Preferred Stock and the holders of shares of the Series B Preferred Stock, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of any Junior Securities by -2- reason of their ownership thereof, an amount per share equal to the sum of $7.50 (as adjusted for stock splits, combinations or similar events) for each outstanding share of Series C Preferred Stock (the "Series C Liquidation Preference") plus any declared but unpaid dividends, the holders of shares of the Series B Preferred Stock shall be entitled to receive, in pari passu with the holders of shares of the Series A Preferred ---- ----- Stock and the holders of shares of the Series C Preferred Stock, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of any Junior Securities by reason of their ownership thereof, an amount per share equal to the sum of $7.07 (as adjusted for stock splits, combinations or similar events) for each outstanding share of Series B Preferred Stock (the "Series B Liquidation Preference") plus any declared but unpaid dividends, and the holders of shares of the Series A Preferred Stock shall be entitled to receive, in pari passu with the holders of shares of the Series B Preferred Stock and - ---- ----- the holders of shares of the Series C Preferred Stock, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of any Junior Securities by reason of their ownership thereof, an amount per share equal to the sum of $0.10 (as adjusted for stock splits, combinations or similar events) for each outstanding share of Series A Preferred Stock (the "Series A Liquidation Preference") plus any declared but unpaid dividends. If, upon the occurrence of such an event, the assets and funds thus distributed among the holders of the Series A Preferred Stock, the holders of the Series B Preferred Stock and the holders of the Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock, the holders of the Series B Preferred Stock and the holders of the Series C Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. (b) Upon the completion of the distributions required by subsection (a) of this Section 2 and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the holders of Common Stock shall be entitled to receive an aggregate amount equal to the sum of stated capital plus additional paid-in capital attributable to the Common Stock, as reflected on the Corporation's audited consolidated balance sheet as of the end of the fiscal year next preceding the date of such distribution, which aggregate amount shall be distributed ratably among the holders of Common Stock in proportion to the number of shares of Common Stock held by each such holder. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Common Stock shall be insufficient to permit the payment to such holders of the full aforesaid aggregate amount, then the entire remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Common Stock in proportion to the number of shares of Common Stock held by each such holder. (c) Upon the completion of the distributions required by subsection (b) of this Section 2 the remaining assets of the corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and the Common Stock pro rata based on the number of share --- ---- of Common Stock held by each and issuable upon conversion of all such Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. (d) For purposes of this Section 2, a liquidation, dissolution or winding up of -3- the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); or (B) a sale of all or substantially all of the assets of the Corporation; unless the Corporation's stockholders of record as constituted immediately prior to such acquisitions or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. 3. Redemption. The Series A Preferred Stock, the Series B ---------- Preferred Stock and the Series C Preferred Stock are not redeemable. 4. Conversion. The holders of the Series A Preferred ---------- Stock, the Series B Preferred Stock and the Series C Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Preferred Stock shall ---------------- be convertible, at the option of the holder thereof at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for such stock. Each share of Preferred Stock shall be convertible into the number of fully paid and nonassessable shares of Common Stock which results from dividing the "Conversion Price" per share in effect for such series of Preferred Stock at the time of conversion into the "Conversion Value" per share of such series of Preferred Stock. The number of shares of Common Stock into which each share of each series of Preferred Stock is convertible is hereinafter collectively referred to as the "Conversion Rate" for such series. The initial Conversion Price of each of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be subject to adjustment as set forth in subsection 4(d). The initial Conversion Price per share of (1) Series A Preferred Stock shall be $0.10, (2) Series B Preferred Stock shall be $7.07 and (3) Series C Preferred Stock shall be $7.50. The Conversion Value per share of (A) Series Preferred Stock shall be $0.10, (B) Series B Preferred Stock shall be $7.07 and (C) Series C Preferred Stock shall be $7.50. (b) Automatic Conversion. Each share of Preferred Stock -------------------- shall automatically be converted into shares of Common Stock at the then effective Conversion Rate for such series immediately upon the closing of the Corporation's sale of its Common Rate for such series immediately upon the closing of the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 (or any equivalent successor form) under the Securities Act of 1933, as amended, the public offering price of which is not less than $12.00 per share (subject to adjustment for stock splits, combinations or similar events) and results in gross proceeds of not less than $10,000,000 in the aggregate. In addition each share of Preferred Stock shall automatically be so converted on the date specified by written consent or agreement of the holders of sixty-six and two-thirds percent (66 2/3%) of the then outstanding shares of such series of Preferred Stock, Notwithstanding the foregoing, the provisions of this subsection (b) shall not cause the automatic conversion of shares of Preferred Stock held by an investment company registered under the Investment Company Act of 1940 (the "1940 Act") to the extent such conversion would, in the opinion of such holder's counsel, cause a violation of the 1940 Act or the regulations promulgated thereunder. -4- (c) Mechanics of Conversion. Before any holder of ----------------------- Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Preferred Stock. The ----------------------------------------------- Conversion Price of the Preferred Stock shall be subject to adjustment from time to time as set forth below. (i) (A) If the Corporation shall issue, after the date upon which any shares of Series C Preferred Stock were first issued (the "Purchase Date" with respect to such series), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such Series C Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such Series c Preferred Stock in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i) be reduced to the price per share at which the Corporation issued or sold such shares of Additional Stock; provided, however, that no such adjustment shall be made upon the issuance, if any, of Common Stock Purchase Warrants to 21st Century Communications Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st Century Communications Foreign Partners, L.P. (collectively, the "21st Century Warrants"); and provided, further, that upon the exercise, if any, of the 21st Century Warrants, the Conversion Price for such Series C Preferred Stock shall be adjusted only in the manner applicable to the Series A Preferred Stock and Series B Preferred Stock as set forth in subsection 4(d)(i)(B). (B) If the Corporation shall issue, after the date upon which any shares of Series A Preferred Stock or Series B Preferred Stock were first issued (the "Purchase Date" with respect to such series), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such Series A Preferred Stock, or Series B Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such Series A Preferred Stock or Series B Preferred Stock, as the case may be, in effect immediately prior ro each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying -5- such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior ro such issuance plus the number of shares of such Additional Stock; provided, however, that no such adjustment shall be made upon the issuance, if any, of the 21st Century Warrants (although adjustments, if required, may be made upon the exercise of such warrants). (C) No adjustment in the Conversion Price for the Preferred Stock shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that any adjustments which by reason of this subsection (C) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this section 4(d)(i) shall be made to the nearest one cent ($0.01). Except to the limited extent provided for in subsections (F)(3) and (F)(4), no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (D) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (E) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors. (F) In the case of the issuance (whether before, on or after the Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or tights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration determined in the manner provided in subsections 4(d)(i)(D) and (d)(i)(E)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any -6- conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(D) and (d)(i)(E)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, (excluding a change resulting solely form the antidilution provisions thereof if such change results from an event which gives rise to an antidilution adjustment under this subsection 4(d), the Conversion Price of the Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(F)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of he type describe in either subsection 4(d)(i)(F)(3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(F)) by the Corporation after the Purchase Date other than. (A) Common Stock issued pursuant to a transaction described in subsection 4(d)(iii) hereof. -7- (B) shares of Common Stock issuable or issued to employees, advisors, consultants or outside directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation so long as the cumulative total number of shares of Common Stock so issuable and issued for a consideration per share less than the Conversion Price in effect immediately prior to such issuance (and not repurchased at cost by the Corporation in connection with the termination of employment) does not exceed 940,000 shares of Common Stock )of which there are options outstanding on the effective date of this Restated Certificate of Incorporation for the purchase of 436,000 shares of Common Stock); (C) Common Stock issued in connection with the acquisition of management service organizations, physician groups or any business complementary with the business of the Corporation, provided, that the cumulative, aggregate number of shares issued in connection with such acquisitions does not exceed 456,333 shares, excluding shares issued to (i) the founders of Majean, Inc., a Delaware corporation, (ii) Richard Ventimiglia and Steven Peltz in connection with the acquisition of Peltz Ventimiglia, Inc. and (iii) the owners of U.S. Health Connections, Inc. in connection with the acquisition of such business; (D) Common Stock issued or issuable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and any other series of Preferred Stock the issuance of which is consented to by the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock pursuant to that certain Amended and Restated Investors' Rights Agreement dated as of January 27, 1995 among Med-E-Systems Corporation and the parties named therein, as further amended by that certain Amendment dated as of August 23, 1995; (E) Common Stock issued or issuable in connection with a merger or consolidation as a result of which the holders of the Corporation's outstanding securities immediately prior to the consummation of such transaction hold securities in excess of fifty percent (50%) of the voting power of the surviving or resulting entity; or (F) Common Stock issued in connection with equipment lease financings, or upon exercise or warrants issued to institutional lenders in connection with non-convertible debt financings, in each case approved by the Board of Directors of the Corporation, provided that such issuances are for other than primarily equity financing purposes, and provided, further, that the cumulative, aggregate number of shares issued in connection with such equipment lease financings and debt financings does not exceed five percent (5%) of the number of shares of Common Stock then outstanding (assuming full conversion of the then outstanding Preferred Stock and exercise or conversion into Common Stock of all other securities then outstanding that are exercisable for or convertible into Common Stock). (iii) In the event the Corporation should at any time or form time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock -8- Equivalents") without payments of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such Preferred Stock shall be increased in proportion to such increase in the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (iv) If the number of shares of common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of each series shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event the Corporation shall ------------------- declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or tights not referred to in subsection 4(d)(i), then, in each such case for the purpose of this subsection 4(e), the holders of the Preferred Stock shall ve entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or form time to time ----------------- there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion to the Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. The Corporation will not, by amendment of ------------- its Restated Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. -9- (h) No Fractional Shares and Certificates as to Adjustments. ------------------------------------------------------- (i) No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of any series of Preferred Stock pursuant to this Section 4, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of such Preferred Stock. (i) Notices of Record Date. In the event of any taking by the ---------------------- Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Preferred Stock at least twenty (2) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. The --------------------------------------------- Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to these provisions. (k) Notices. Any notice required by the provisions of this ------- Section 4 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at this address appearing on -10- the books of the Corporation. 6. Voting Rights. The Series A Preferred Stock and Series ------------- B Preferred Stock shall have no right o vote with respect to any questions upon which holders of the Corporation's capital stock have the right to vote; provided, however, that upon the filing , if any, of a Certificate of Designations, Powers, preferences and Rights of a new series of preferred stock, designated Series D Preferred Stock, and the issuance of at least 650,000 shares of such Series D Preferred Stock, the Series B Preferred Stock shall be entitled to vote on all matters submitted to the stockholders and shall have that number of votes equal to the number of shares of Common Stock into which it is then convertible. The Series C Preferred Stock shall be entitled to vote on all matters submitted to the stockholders. Each share of Series C Preferred Stock shall have that number of votes equal to the number of shares of Common Stock into which it is then convertible. 7. Status of Converted Stock. In the event any shares of ------------------------- Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by the Corporation, and all accrued and unpaid dividends (whether or not declared) with respect to such converted shares shall be cancelled. The Restated Certificate of Incorporation of the Corporation may be appropriately amended from time to time to effect the corresponding reduction in the Corporation's authorized capital stock. C. Common Stock. ------------ 1. Dividend Rights. Subject to the prior rights of --------------- holders of all classes of stock at the time outstanding having prior rights as to the dividends, and the rights of series of Preferred Stock which may from time to time come into existence, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation. Upon the liquidation, dissolution or ----------- winding up of the Corporation, the assets of the Corporation shall be distributed as provided in Section B2 of this Article IV hereof. 3. Voting Rights. The holder of each share of Common ------------- Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE V Except as otherwise provided in the Restated Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the bylaws of the Corporation. -11- ARTICLE VI The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE VII Elections of the directors need not be by written ballot unless the bylaws of the Corporation shall so provide. ARTICLE VIII Meeting of stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the Corporation. ARTICLE IX A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation law is amended or after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation law as so amended. Any repeal or modification of the foregoing provisions of this Article IX by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at any time of such repeal or modification. ARTICLE X The Corporation shall, to the fullest extent permitted by Delaware law as in effect from time to time, indemnify any person against all liability and expense (including attorneys' fees) incurred by reason of the fact that he is or was a director or officer of the Corporation or, while serving as a director or officer of the Corporation, he is or was serving at the request of the Corporation as a director, officer, partner or trustee of, or in any similar managerial or fiduciary position of, or as an employee or agent of, another corporation, partnership, joint venture, trust, association, or other entity. Expenses (including attorneys fees) incurred in defending an action, suit, or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding to the full extent and under the circumstances permitted by Delaware law. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the Corporation against any liability -12- asserted against and incurred by such person in any such capacity or arising out of such person's position, whether or not the Corporation would have the power to indemnify against such liability under the provisions of this Article X. The indemnification provided by this Article X shall not be deemed exclusive of any other rights to which those indemnified may be entitled under this certificate of incorporation, any bylaw, agreement, vote of stockholders or disinterested directors, statute, or otherwise, and shall inure to the benefit of their heirs, executors, and administrators. The provisions of this Article X shall not be deemed to preclude the Corporation from indemnifying other persons from similar or other expenses and liabilities as the Board of Directors or the stockholders may determine in a specific instance or by resolution of general application. ARTICLE XI Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. ARTICLE XII The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -13- IN WITNESS WHEREOF, the undersigned have hereunto signed this amendment and affirm that the statements made herein are true under the penalties of perjury, this 23rd day of August, 1995. ATTEST: MAJEAN, INC. By: /s/ Angelo Acquista By: /s/ Valavanur A. Subramanian --------------------- ------------------------------- Angelo Acquista Valavanur A. Subramanian Secretary President -14- State of Delaware Office of the Secretary of State I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "MAJEAN, INC.", FILED IN THIS OFFICE ON THE TWENTY-FOURTH DAY OF AUGUST, A.D. 1995, AT 9:01 O'CLOCK A.M. /s/ Edward J. Freel ---------------------------------------- Edward J. Freel, Secretary of State (SIGNATURE, SEAL, AUTHENTICATION) CERTIFICATE OF THE DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS OF THE SERIES D CONVERTIBLE PREFERRED STOCK (par value $.01 per share) of MAJEAN, INC. a Delaware Corporation ----------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ----------------- The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors (the "Board of Directors") of Majean, Inc., a Delaware corporation (the "Corporation"), by unanimous written consent in lieu of a meeting effective August 22, 1995. RESOLVED, that one series of the class of authorized preferred stock, $.01 par value, of the Corporation is hereby created and that the designations, powers, preferences and relative, participating, optional or other special rights of the shares of such series, and qualifications, limitations or restrictions thereof, are hereby fixed as follows: 1. Number of Shares and Designations. 666,360 shares of the --------------------------------- preferred stock, $.01 par value, of the Corporation are hereby constituted as a series of preferred stock of the Corporation designated as Series D Convertible Preferred Stock ( the "Series D Preferred Stock"). 2. Dividend Provisions. The holders of shares of Series D ------------------- Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payments of any dividend (payable other than in Common Stock of the Corporation (the "Common Stock") or other securities or rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock) on (i) the Common Stock, (ii) the Series A Convertible Preferred Stock of the Corporation (the "Series A Preferred Stock"), (iii) the Series B Convertible Preferred Stock of the Corporation (the "Series B Preferred Stock") and (iv) the Series C Convertible Preferred Stock of the Corporation (the "Series C Preferred Stock"), when, as and if declared by the Board of Directors provided, however, that in the event that the Board of Directors shall declare a dividend on shares of the Series D Preferred Stock ,the Board of Directors shall concurrently declare a dividend of equivalent yield on shares of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. No dividends shall be payable upon any Junior Securities (as defined below) of the Corporation unless equivalent dividends, on an as- converted basis, are declared and paid concurrently on the Series D Preferred Stock. A "Junior Security" shall include the (i) Common Stock, (ii) the Series A Preferred Stock, (iii) the Series B Preferred Stock and (iv) the Series C Preferred Stock. 3. Liquidation Preference ---------------------- (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of any Junior Securities by reason of their ownership thereof, an amount per share equal to the greater of (a) $7.50 (as adjusted for stock splits, combinations or similar events) for each outstanding share of Series D Preferred Stock plus any declared but unpaid dividends or (b) the amount the holders of shares of Series D Preferred Stock would have received had such holders converted the shares of Series D Preferred Stock into Common Stock as provided in Section 4 immediately prior to any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, plus any declared but unpaid dividends (the "Series D Liquidation Preference"). If, upon the occurrence of such an event, the assets and funds thus distributed among the holders of the Series D Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, hen the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series D Preferred Stock, in proportion to the preferential amount each such holder is otherwise entitled to receive. (b) Upon the completion of the distributions required by subsection (a) of this Section 3 and any other distribution that may be required with respect to the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and any other series of Preferred Stock that may from time to time come into existence, the holders of Common Stock shall be entitled to receive an aggregate amount equal to the sum of stated capital plus additional paid-in capital attributable to the Common Stock, as reflected on the Corporation's audited consolidated balance sheet as of the end of the fiscal year next preceding the date of such distribution, which aggregate amount shall be distributed ratably among the holders of Common Stock in proportion to the number of shares of Common Stock held by each such holder. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Common Stock shall be insufficient to permit the payment to such holders of the full aforesaid aggregate amount, then the entire remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Common Stock in proportion to the number of shares of Common Stock held by each such holder. -2- (c) Upon the completion of the distributions required by subsection (b) of this Section 3 the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the Common Stock pro rata --- ---- based on the number of shares of Common Stock held by each and issuable upon conversion of all such Preferred Stock. (d) For purposes of this Section 3, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); or (B) a sale of all or substantially all of the assets of the Corporation; unless the Corporation's stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. 4. Conversion. The holders of the Series D Preferred Stock ---------- shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series D Preferred Stock ---------------- shall be convertible, at the option of the holder thereof at any time after the Purchase Date at the office of the Corporation or any transfer agent for such stock. Each share of Series D Preferred Stock shall be convertible into the number of fully paid and nonassessable shares of Common Stock which results from dividing the "Conversion Price" per share in effect for the Series D Preferred Stock at the time of conversion into the "Conversion Value" per share of Series D Preferred Stock. The number of shares of Common Stock into which each share of Series D Preferred Stock is convertible is hereinafter collectively referred to as the "Conversion Rate" for such series. The initial Conversion Price per hare of he Series D Preferred Stock shall be $7.50, and the Conversion Value per share of series D Preferred Stock shall be $7.50. (b) Automatic Conversion. Each share of Series D Preferred -------------------- Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Rate for such series immediately upon the closing of the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which was not less than $13.125 per share (subject to adjustment for stock splits, combinations or similar events) and resulted in gross proceeds of not less than $15,000,000 in the aggregate (a "Qualified IPO"). Notwithstanding the foregoing, the provisions of this subsection (b) shall not cause the automatic conversion of shares of Series D Preferred Stock held by an investment company registered under the Investment Company Act of 1940 (the "1940 Act") to the extent such conversion would, in the opinion of such holder's counsel, cause a violation of the 1940 Act or the regulations promulgated thereunder. -3- (c) Mechanics of Conversion. Before any holder of Series D ----------------------- Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series D Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series D Preferred Stock, or to the nominee or nominees off such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such Conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series D Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Acto of 1933, as amended, the conversion may, at the option of any holder tendering Series D Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series D Preferred Stock shall not be deemed to have converted such Series D Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Series D Preferred Stock. -------------------------------------------------------- The Conversion Price of the Series D Preferred Stock shall be subject to adjustment from time to time as set forth below. (i) (A) If the Corporation shall issue, after the Purchase Date, any additional Stock (as defined below) without consideration or for a consideration per share less than he Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be reduced to the price determined by dividing (i) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issuance multiplied by the then existing Conversion Price and (A) the consideration, if any, received by the Corporation upon such issuance, by (ii) the total number of shares of Common Stock outstanding immediately after such issuance. (B) Except to the limited extent provided for in this subsection (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) No adjustment in the Conversion Price for the Preferred Stock shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that nay adjustments which by reason of this Subsection (C) are not required to be made shall be carried forward and taken into account in any -4- subsequent adjustments required to be made hereunder. All calculations under this Section 4(d) shall be made to the nearest one cent ($0.01). In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or other wise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors. (E) In the case of the issuance (whether before, on or after the Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provision shall apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustment(s) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustment(s) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)). -5- (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities (excluding a change resulting solely from the antidilution provisions thereof if such change results from an event which gives rise to an antidilution adjustment under this subsection 4(d)), the Conversion Price of the Series D Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, he Conversion Price of the Series D Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) and (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E)) by the Corporation after the Purchase Date other than ----- ---- (A) Common Stock issued pursuant to a transaction described in subsection 4(d)(iii) hereof; (B) shares of Common Stock issuable or issued to employees, advisors, consultants or outside directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation so long as the cumulative total number of shares of Common Stock so issuable and issued for a consideration per share less than the Conversion Price in effect immediately prior to such issuance (and not repurchased at cost by the Corporation in connection with the termination of employment) does not exceed 940,000 shares of Common Stock (of which there are options outstanding on the effective date of this Certificate of Designations for the purchase of 436,000 shares of Common Stock); -6- (C) Common Stock issued in connection with the acquisition of management service organizations, physician groups or any business complementary with the business of the Corporation, provided, that the cumulative, aggregate number of shares issued in connection with such acquisitions does not exceed 456,333 shares, excluding shares issued to the (i) founders of Majean, Inc., a Delaware corporation, (ii) Richard Ventimiglia and Steven Peltz in connection with the acquisition of Peltz Ventimiglia, INC.. and (iii) the owners of U.S. Health Connections, Inc. in connection with the acquisition of such business. (D) Common Stock issued or issuable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and any other series of Preferred Stock the issuance of which is consented to by the holders of the Series D Preferred Stock pursuant to that certain Investors' Rights Agreement dated as of August 23, 1995 among the Corporation and the parties named therein; (E) Common Stock issued or issuable in connection with a merger or consolidation s a result of which the holders of the Corporation's outstanding securities immediately prior to the consummation of such transaction hold securities in excess of fifty percent (50%) of the voting power of the surviving or resulting entity; or (F) Common Stock issued in connection with equipment lease financings, or upon exercise of warrants issued to institutional lenders in connection with non-convertible debt financings, in each case approved by the Board of Directors of the Corporation, provided that such issuances are for other than primarily equity financing purposes, and provided, further, that the cumulative, aggregate number of shares issued in connection with such equipment lease financings and debt financings does not exceed five percent (5%) of the number of shares of Common Stock then outstanding (assuming full conversion of the then outstanding Preferred Stock and exercise or conversion into Common Stock of all other securities then outstanding than are exercisable for or convertible into Common Stock). (G) Common Stock issuable upon exercise of Common Stock Purchase Warrants, dated as of even date herewith, issued to 21st Century Communications Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st Century Communications Foreign Partners, L.P. (iii) In the event the Corporation should at any time or from time to time after the Purchase date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series D -7- Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such Series D Preferred Stock shall be increased in proportion to such increase in the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series D Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of each series shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event the Corporation ------------------- shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(d)(i), then, in each such case for the purpose of this subsection 49c), the holders of the Series D Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series D Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time ----------------- there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Series D Preferred Stock shall thereafter be entitled to receive upon conversion of the Series D Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of holders of the Series D Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of the Series D Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. The Corporation will not, by amendment ------------- of its Restated Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series D Preferred Stock against impairment. -8- (h) No Fractional Shares and Certificate as to Adjustments. ------------------------------------------------------ (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series D Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series D Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series D Preferred Stock pursuant to this Section 4, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series D Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series D Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such Series D Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of such Series D Preferred Stock. (i) Notices of Record Date. In the event of any taking by ---------------------- the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series D Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. The --------------------------------------------- Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series D Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series D Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series D Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series D Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to these provisions. -9- (k) Notices. Any notice required by the provisions of this ------- Section 4 to be given to the holders of shares of Series D Preferred Stock shall be deemed given if deposited in the United Stated mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. 5. Voting Rights. The Series D Preferred Stock shall be ------------- entitled to vote on all matters submitted to the stockholders. Each share shall have that number of votes equal to the number of shares of Common Stock into which it is then convertible. 6. Status of Converted Stock. In the event any shares of ------------------------- Series D Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by the Corporation, and all accrued and unpaid dividends (whether or not declared) with respect to such converted shares shall be cancelled. The Restated Certificate of Incorporation of the Corporation may be appropriately amended from time to time to effect the corresponding reduction in the Corporation's authorized capital stock. (THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK) -10- IN WITNESS WHEREOF, Majean, Inc. has caused this Certificate of Designations to be executed this 22nd day of August, 1995. Attest: Majean, Inc. By: /s/ Angelo Acquista By: /s/ Valavanur A. Subranaanian ---------------------- ------------------------------ Title: Secretary Title: President ----------------------- -------------------------- -11- State of Delaware Office of the Secretary of State ___________________________________ I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER, WHICH MERGES: "ADVANCED HEALTH CORPORATION", A DELAWARE CORPORATION, WITH AND INTO "MAJEAN, INC." UNDER THE NAME OF "MAJEAN, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE TWENTY-FOURTH DAY OF AUGUST, A.D. 1995, AT 1 O'CLOCK P.M. /s/ Edward J. Freel ---------------------------------------- Edward J. Freel, Secretary of State (SIGNATURE, SEAL, AUTHENTICATION) State of Delaware Secretary of State Division of Corporations Filed 01:00 pm 08/24/1995 CERTIFICATE OF MERGER OF ADVANCED HEALTH CORPORATION INTO MAJEAN, INC. The undersigned corporation does hereby certify: FIRST: The name and ------ state of incorporation of each of the constituent corporations of the merger are as follows: NAME STATE OF INCORPORATION - ---- ---------------------- Advanced Health Corporation Delaware Majean, Inc. Delaware SECOND: The Agreement and Plan of Merger between the parties to ------ the merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of Section 251 of the General Corporation Law of the State of Delaware. THIRD: The name of the surviving corporation of the merger is ----- Majean, Inc., a Delaware corporation. FOURTH: The Certificate of Incorporation of Majean, Inc., a ------ Delaware corporation which is surviving the merger, as amended herein, shall be the Certificate of Incorporation, as amended and restated of the surviving corporation. FIFTH: The executed Agreement and Plan of Merger is on file at ----- the principal place of business of the surviving corporation. -13- The address of said principal place of business is 560 White Plains Road, Tarrytown, New York 10501. SIXTH: A copy of the Agreement and Plan of Merger will be ----- furnished on request and without cost to any stockholder of any constituent corporation. SEVENTH: That the holders of all of the outstanding shares of ------- the Corporation have adopted a resolution authorizing the amendment to the Certificate of Incorporation herein above set forth. MAJEAN, INC. By: /s/ ----------------------- Name: Its: ATTEST: By: /s/ ------------------------ Name: Its: Secretary IN WITNESS WHEREOF, the undersigned have hereunto signed this certificate and affirm that the statements made herein are true under the penalties of perjury, this 24th day of August, 1995. ---------- ATTEST: MAJEAN, INC. By: /s/ Angelo Acquista By: /s/ Valavanur A. Subramanian --------------------- ------------------------------- Angelo Acquista Valavanur A. Subramanian Secretary President State of Delaware Office of the Secretary of State I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "MAJEAN, INC.", CHANGING ITS NAME FROM "MAJEAN, INC." TO "ADVANCED HEALTH CORPORATION", FILED IN THIS OFFICE ON THE NINETEENTH DAY OF SEPTEMBER, A.D. 1995, AT 9 O'CLOCK A.M. /s/ Edward J. Freel ---------------------------------------- Edward J. Freel, Secretary of State (SIGNATURE, SEAL, AUTHENTICATION) CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF MAJEAN, INC. Majean, Inc., a Delaware corporation (the "Corporation"), hereby certifies as follows: The current name of the Corporation is Majean, Inc. The Corporation's original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 20, 1995. The Restated Certificate of Incorporation of the Corporation is hereby amended (the "Amendment") by deleting, in its entirety, the current Article FIRST thereof and inserting in place thereof a new Article FIRST to read as follows: "The name of the Corporation (the "Corporation") is ADVANCED HEALTH CORPORATION." The Amendment was duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware and the written consent of the stockholders of the Corporation to the Amendment was given in accordance with, and written notice of such stockholder action was given as provided in, Section 228 of the General Corporate Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of Certificate of Incorporation to be signed as of the 22nd day of April, 1996, by its President, and attested by its Secretary, who hereby affirm and acknowledge, under penalties of perjury, that this Certificate is the act and deed of the Corporation and that the facts stated herein are true. By: /s/ Steven Hochberg ------------------------ Name: Steven Hochberg Title: President ATTESTED: By: /s/ Richard W. Kaplan -------------------------- Name: Richard W. Kaplan Title: Secretary State of Delaware Secretary of State Division of Corporations Filed 09:00 AM 09/19/1995 State of Delaware Office of the Secretary of State I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "ADVANCED HEALTH CORPORATION", FILED IN THIS OFFICE ON THE TWENTY-FIFTH DAY OF APRIL, A.D. 1996, AT 9 O'CLOK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. /s/ Edward J. Freel ---------------------------------------- Edward J. Freel, Secretary of State (SIGNATURE, SEAL, AUTHENTICATION) CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF ADVANCED HEALTH CORPORATION Advanced Health Corporation, a Delaware corporation (the "Corporation"), hereby certifies as follows: The current name of the Corporation is Advanced Health Corporation. The Corporation's original Certificate of Incorporation was originally filed with the Secretary of State of the State of Delaware on June 20, 1995. The Restated Certificate of Incorporation of the Corporation is hereby amended (the "Amendment") by deleting, in its entirety, the first paragraph A of the current ARTICLE IV thereof and inserting in place thereof a new paragraph A to ARTICLE IV to read as follows: "Classes of Stock. The Corporation is authorized to issue two ---------------- classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is 14,500,000 shares. 11,500,000 shares shall be Common Stock, par value $.01 per share, and 3,000,000 shares shall be Preferred Stock, par value $.01 per share, of which 971,800 shares shall be designated Series A Convertible Preferred Stock (the "Series A Preferred Stock"), 282,900 shall be designated Series B Convertible Preferred Stock (the "Series B Preferred Stock"), 210,000 shall be designated Series C Convertible Preferred Stock (the "Series C Preferred Stock") and 666,360 shall be designated Series D Convertible Preferred Stock (the "Series D Preferred Stock")." The Amendment was duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware and the written consent of the stockholders of the Corporation to the Amendment was given in accordance with, and written notice of such stockholder action was given as provided in, Section 228 of the General Corporate Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of Certificate of Incorporation to be signed as of the 22nd day of April, 1996, by its President, and attested by its Secretary, who hereby affirm and acknowledge, under penalties of perjury, that this Certificate is the act and deed of the Corporation and that the facts stated herein are true. By: /s/ Steven Hochberg ------------------------ Name: Steven Hochberg Title: President ATTESTED: By: /s/ Richard W. Kaplan ---------------------------- Name: Richard W. Kaplan Title: Secretary EX-3.2 3 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ADVANCED HEALTH CORPORATION The undersigned, Steven Hochberg and Geoffrey Smith, being the President and Secretary, respectively, of Advanced Health Corporation, a corporation organized and existing under the laws of the State of Delaware, on behalf of said corporation, hereby certify as follows: FIRST: The name of the corporation (hereinafter, the "Corporation") is Advanced Health Corporation. The Corporation's original Certificate of Incorporation was filed with the Secretary of State on June 20, 1995. SECOND: The Certificate of Incorporation of the Corporation as in effect on the date hereof is hereby amended and restated to read in its entirety as set forth on Exhibit A hereto. THIRD: Said amendment and restatement was duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the undersigned have executed this Certificate this ____ day of _____________, 1996. By:_____________________________ Steven Hochberg President Attest: _______________________ Geoffrey Smith Secretary EXHIBIT A --------- AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ADVANCED HEALTH CORPORATION ______________________________ ARTICLE I The name of the Corporation (herein called the "Corporation") is ADVANCED HEALTH CORPORATION. ARTICLE II The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware 19805. The name of the registered agent of the Corporation at such address is The Prentice-Hall Corporation System. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the "Delaware Statute"). ARTICLE IV The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 20,000,000 shares, consisting of (A) 15,000,000 shares of Common Stock, $.01 par value (the "Common Stock"), and (B) 5,000,000 shares of Preferred Stock, $.01 par value (the "Preferred Stock"). The designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof with respect to the Preferred Stock and the Common Stock are as follows: (a) Preferred Stock. --------------- Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated in the resolution or resolutions providing for the establishment of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Except as otherwise expressly stated in the resolution or resolutions providing for the establishment of a series of Preferred Stock, any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise expressly provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of stock for the purpose of voting by classes unless expressly provided in the resolution or resolutions providing for the establishment thereof. The Board of Directors of the Corporation is hereby expressly authorized to issue, from time to time, shares of Preferred Stock in one or more series, and, in connection with the establishment of any such series by resolution or resolutions, to determine and fix such voting powers, full or limited, or no voting powers, and such other powers, designations, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions thereof, including, without limitation, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated in such resolution or resolutions, all to the fullest extent permitted by the Delaware Statute. Without limiting the generality of the foregoing, the resolution or resolutions providing for the establishment of any series of Preferred Stock may, to the extent permitted by law, provide that such series shall be superior to, rank equally with or be junior to the Preferred Stock of any other series. Except as otherwise expressly provided in the resolution or resolutions providing for the establishment of any series of Preferred Stock, no vote of the holders of shares of Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Amended and Restated Certificate. (b) Common Stock. ------------ Each holder of the Common Stock of the Corporation shall be entitled to one vote for every share of Common Stock outstanding in his name on the books of the Corporation. Except for and subject to those rights expressly granted to the holders of the Preferred Stock or except as may be provided by the laws of the State of Delaware, the holders of Common Stock shall have exclusively all other rights of stockholders including, but not by way of limitation, (i) the right to receive dividends, when and as declared by the Board of Directors out of assets legally available therefor, and (ii) in the event of any distribution of assets upon liquidation, dissolution or winding up of the Corporation or otherwise, the right to receive ratably and -3- equally with all holders of all Common Stock all the assets and funds of the Corporation remaining after the payment to the holders of the Preferred Stock of the specific amounts that they are entitled to receive upon such liquidation, dissolution or winding up of the Corporation, if any. ARTICLE V (a) Subject to the rights of the holders of any series of Preferred Stock, from and after the date on which the Common Stock of the Corporation is registered pursuant to the Securities Exchange Act of 1934, as amended, (A) any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected in lieu thereof by any consent in writing by such stockholders, and (B) special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, the President or the Board of Directors pursuant to a resolution adopted by the affirmative vote of the majority of the total number of directors then in office. (b) The number of directors which shall constitute the whole board shall be such as from time to time shall be fixed by resolution adopted by affirmative vote of a majority of the Board of Directors except that such number shall not be less than one or more than nine, the exact number to be determined by resolution adopted by affirmative vote of a majority of the Board of Directors. Commencing with the filing of this Amended and Restated Certificate of Incorporation, the directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Membership in such classes shall be as nearly equal in number as possible. The term of office of the initial Class I directors shall expire at the annual election of directors by the stockholders of the Corporation in 1997, the term of office of the initial Class II directors shall expire at the annual election of directors by the stockholders of the Corporation in 1998, and the term of office of the initial Class III directors shall expire at the annual election of directors by the stockholders of the Corporation in 1999, or thereafter when their respective successors in each case are elected by the stockholders and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office for cause. At each succeeding annual election of directors by the stockholders of the Corporation beginning in 1997, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed and shall be elected for a term expiring at the third succeeding annual election of directors by the stockholders of the Corporation, or thereafter when their respective successors in each case are elected by the stockholders and qualified. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the -4- number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Vacancies and newly created directorships resulting from any increase in the number of directors may be filled only by the affirmative vote of the majority of the Board of Directors then in office, although less than quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. If the directors fail to fill any vacancy resulting from a newly created directorship, the stockholders may do so at the next annual or special meeting of stockholders called for that purpose. No director may be removed from office without cause and without the affirmative vote of the holders of a majority of the voting power of the then outstanding shares of capital stock entitled to vote generally in the election of directors voting together as a single class. Election of directors need not be by written ballot unless the By-laws of the Corporation so provide. ARTICLE VI For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders, it is further provided: (a) In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized and empowered: (i) to make, alter, amend or repeal the By-laws in any manner not inconsistent with the laws of the State of Delaware or this Restated Certificate of Incorporation; (ii) without the assent or vote of the stockholders, to authorize and issue securities and obligations of the Corporation, secured or unsecured, and to include therein such provisions as to redemption, conversion or other terms thereof as the Board of Directors in its sole discretion may determine, and to authorize the -5- mortgaging or pledging, as security therefor, of any property of the Corporation, real, personal or mixed, including after-acquired property; (iii) to determine whether any, and if any, what part, of the net profits of the Corporation or of its surplus shall be declared in dividends and paid to the stockholders, and to direct and determine the use and disposition of any such net profits or such surplus; and (iv) to fix from time to time the amount of net profits of the Corporation or of its surplus to be reserved as working capital or for any other lawful purpose. In addition to the powers and authorities herein or by statute expressly conferred upon it, the Board of Directors may exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the laws of the State of Delaware, this Restated Certificate of Incorporation and the By-laws of the Corporation. (b) Any director or any officer elected or appointed by the stockholders or by the Board of Directors may be removed at any time in such manner as shall be provided herein and in the By-laws of the Corporation. (c) From time to time any of the provisions of this Restated Certificate of Incorporation may be altered, amended or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Restated Certificate of Incorporation are granted subject to the provisions of this paragraph (c). ARTICLE VII Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them, and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the applica- -6- tion of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. ARTICLE VIII The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE IX A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Statute or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware Statute is amended after the date of filing of this Restated Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware Statute, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. -7- EX-3.3 4 EXHIBIT 3.3 ================================================================= ADVANCED HEALTH CORPORATION Incorporated under the laws of the State of Delaware _____________________________ AMENDED AND RESTATED BY-LAWS _____________________________ ================================================================= TABLE OF CONTENTS Page ---- ARTICLE I Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1. Registered Office . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. Other Offices . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II Meeting of Stockholders . . . . . . . . . . . . . . . . . . . 1 SECTION 1. Annual Meetings . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. Special Meetings . . . . . . . . . . . . . . . . . . . . 1 SECTION 3. Notice of Meetings . . . . . . . . . . . . . . . . . . . 1 SECTION 4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 5. Organization . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 6. Order of Business . . . . . . . . . . . . . . . . . . . . 2 SECTION 7. Voting . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 8. Inspection . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 9. List of Stockholders . . . . . . . . . . . . . . . . . . 4 SECTION 10. No Stockholders' Consent in Lieu of Meeting . . . . . . . 4 SECTION 11. Business Brought Before a Meeting. . . . . . . . . . . . 4 ARTICLE III Board of Directors . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 1. General Powers . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2. Number and Term of Office . . . . . . . . . . . . . . . . 5 SECTION 3. Election of Directors . . . . . . . . . . . . . . . . . . 6 SECTION 4. Resignation, Removal and Vacancies . . . . . . . . . . . 6 SECTION 5. Meetings . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 6. Directors' Consent in Lieu of Meeting . . . . . . . . . . 7 SECTION 7. Action by Means of Conference Telephone or Similar Communications Equipment . . . . . . . . . . . . . . 7 SECTION 8. Committees . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 1. Executive Officers . . . . . . . . . . . . . . . . . . . 8 SECTION 2. Authority and Duties . . . . . . . . . . . . . . . . . . 8 SECTION 3. Other Officers . . . . . . . . . . . . . . . . . . . . . 8 SECTION 4. Term of Office, Resignation and Removal . . . . . . . . . 9 SECTION 5. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 6. The Chairman . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 7. The President . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 8. The Secretary . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 9. The Treasurer . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc. . . . . . . . 10 SECTION 1. Execution of Documents . . . . . . . . . . . . . . . . 10 SECTION 2. Deposits . . . . . . . . . . . . . . . . . . . . . . . 11 -i- SECTION 3. Proxies with Respect to Stock or Other Securities of Other Corporations . . . . . . . . . . . . . . . . 11 ARTICLE VI Shares and Their Transfer; Fixing Record Date . . . . . . . 11 SECTION 1. Certificates for Shares . . . . . . . . . . . . . . . . 11 SECTION 2. Record . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 3. Transfer and Registration of Stock . . . . . . . . . . 12 SECTION 4. Addresses of Stockholders . . . . . . . . . . . . . . . 12 SECTION 5. Lost, Destroyed and Mutilated Certificates . . . . . . 12 SECTION 6. Regulations . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 7. Fixing Date for Determination of Stockholders of Record . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE VII Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE VIII Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE IX Indemnification and Insurance . . . . . . . . . . . . . . . 14 SECTION 1. Indemnification . . . . . . . . . . . . . . . . . . . . 14 SECTION 2. Insurance . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE X Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 16 -ii- ARTICLE I Offices ------- SECTION 1. Registered Office. The registered office of ADVANCED ----------------- HEALTH CORPORATION (the "Corporation") in the State of Delaware shall be at 1013 Centre Road, City of Wilmington, County of New Castle, Delaware 19805, and the registered agent in charge thereof shall be The Prentice-Hall Corporation System. SECTION 2. Other Offices. The Corporation may also have an office or ------------- offices at any other place or places within or outside the State of Delaware. ARTICLE II Meeting of Stockholders ----------------------- SECTION 1. Annual Meetings. The annual meeting of the stockholders --------------- for the election of directors, and for the transaction of such other business as may properly come before the meeting, shall be held at such place, date and hour as shall be fixed by the Board of Directors (the "Board") and designated in the notice or waiver of notice thereof. SECTION 2. Special Meetings. A special meeting of the stockholders ---------------- for any purpose or purposes may be called by the Board, the Chairman or the President to be held at such place, date and hour as shall be designated in the notice thereof. SECTION 3. Notice of Meetings. Except as otherwise required by ------------------ statute, the Certificate of Incorporation of the Corporation (the "Certificate") or these By-laws, notice of each annual or special meeting of the stockholders shall be given to each stockholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the day on which the meeting is to be held, by delivering written notice thereof to him personally, or by mailing a copy of such notice, postage prepaid, directly to him at his address as it appears in the records of the Corporation, or by transmitting such notice thereof to him at such address by telegraph, cable or other telephonic transmission. Every such notice shall state the place, the date and hour of the meeting, and, in case of a special meeting, the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy, or who shall, in person or by attorney thereunto authorized, waive such notice in writing, either before or after such meeting. Except as otherwise provided in these By-laws, neither the business to be transacted at, nor the purpose of, any meeting of the stockholders need be specified in any such notice or waiver of notice. Notice of any adjourned meeting of stockholders shall not be required to be given, except when expressly required by law. SECTION 4. Quorum. At each meeting of the stockholders, except where ------ otherwise provided by the Certificate or these By-laws, the holders of a majority of the issued and outstanding shares of Common Stock of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. In the absence of a quorum, a majority in interest of the stockholders present in person or represented by proxy and entitled to vote, or, in the absence of all the stockholders entitled to vote, any officer entitled to preside at, or act as secretary of, such meeting, shall have the power to adjourn the meeting from time to time, until stockholders holding the requisite amount of stock to constitute a quorum shall be present or represented. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 5. Organization. ------------ (a) Unless otherwise determined by the Board, at each meeting of the stockholders, one of the following shall act as chairman of the meeting and preside thereat, in the following order of precedence: (i) the Chairman; (ii) the President; (iii) any director, officer or stockholder of the Corporation designated by the Board to act as chairman of such meeting and to preside thereat if the Chairman or the President shall be absent from such meeting; or (iv) a stockholder of record who shall be chosen chairman of such meeting by a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat. (b) The Secretary or, if he shall be presiding over such meeting in accordance with the provisions of this Section 5 or if he shall be absent from such meeting, the person (who shall be an Assistant Secretary, if an Assistant Secretary has been appointed and is present) whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. SECTION 6. Order of Business. The order of business at each meeting ----------------- of the stockholders shall be determined by the chairman of such meeting, but such order of business may be changed by a majority in voting interest of those present in person or by proxy at such meeting and entitled to vote thereat. -2- SECTION 7. Voting. Except as otherwise provided by law, the ------ Certificate or these By-laws, at each meeting of the stockholders, every stockholder of the Corporation shall be entitled to one vote in person or by proxy for each share of Common Stock of the Corporation held by him and registered in his name on the books of the Corporation on the date fixed pursuant to Section 7 of Article VI as the record date for the determination of stockholders entitled to vote at such meeting. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. A person whose stock is pledged shall be entitled to vote, unless, in the transfer by the pledgor on the books of the Corporation, he has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent such stock and vote thereon. If shares or other securities having voting power stand in the record of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary shall be given written notice to the contrary and furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one votes, his act binds all; (b) if more than one votes, the act of the majority so voting binds all; and (c) if more than one votes, but the vote is evenly split on any particular matter, such shares shall be voted in the manner provided by law. If the instrument so filed shows that any such tenancy is held in unequal interests, a majority or even-split for the purposes of this Section 7 shall be a majority or even-split in interest. The Corporation shall not vote directly or indirectly any share of its own capital stock. Any vote of stock may be given by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized, delivered to the secretary of the meeting; provided, -------- however, that no proxy shall be voted after three years from its date, unless - ------- said proxy provides for a longer period. At all meetings of the stockholders, all matters (except where other provision is made by law, the Certificate or these By-laws) shall be decided by the vote of a majority in interest of the stockholders present in person or by proxy at such meeting and entitled to vote thereon, a quorum being present. Unless demanded by a stockholder present in person or by proxy at any meeting and entitled to vote thereon, the vote on any question need not be by ballot. Upon a demand by any such stockholder for a vote by ballot upon any question, such vote by ballot shall be taken. On a vote by ballot, each ballot shall be -3- signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. SECTION 8. Inspection. The chairman of the meeting may at any time ---------- appoint one or more inspectors to serve at any meeting of the stockholders. Any inspector may be removed, and a new inspector or inspectors appointed, by the Board at any time. Such inspectors shall decide upon the qualifications of voters, accept and count votes, declare the results of such vote, and subscribe and deliver to the secretary of the meeting a certificate stating the number of shares of stock issued and outstanding and entitled to vote thereon and the number of shares voted for and against the question, respectively. The inspectors need not be stockholders of the Corporation, and any director or officer of the Corporation may be an inspector on any question other than a vote for or against his election to any position with the Corporation or on any other matter in which he may be directly interested. Before acting as herein provided, each inspector shall subscribe an oath faithfully to execute the duties of an inspector with strict impartiality and according to the best of his ability. SECTION 9. List of Stockholders. It shall be the duty of the -------------------- Secretary or other officer of the Corporation who shall have charge of its stock ledger to prepare and make, at least 10 days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to any such meeting, during ordinary business hours, for a period of at least 10 days prior to such meeting, either at a place within the city where such meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 10. No Stockholders' Consent in Lieu of Meeting. ------------------------------------------- Stockholders may act only at an annual or special meeting and stockholders may not act by written consent. SECTION 11. Business Brought Before a Meeting. At an annual meeting --------------------------------- of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) brought before the meeting by or at the direction of the Board of Directors or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder (including any -4- nomination of a candidate for election as a director), the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 130 days prior to the meeting; provided, however, that in the event that less than 70 days' -------- ------- notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the date on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting or, if applicable, the name, address and principal occupation of, and other information required by Item 401 of Regulation S-K with respect to, any candidate for election as a director, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything herein to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 11. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 11; and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. ARTICLE III Board of Directors ------------------ SECTION 1. General Powers. The business, property and affairs of the -------------- Corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate directed or required to be exercised or done by the stockholders. SECTION 2. Number and Term of Office. The number of directors shall ------------------------- be fixed from time to time by the Board. Directors need not be stockholders. Each director shall hold office until his successor is elected and qualified, or until his earlier death or resignation or removal in the manner hereinafter provided. -5- SECTION 3. Election of Directors. At each meeting of the --------------------- stockholders for the election of directors at which a quorum is present, the persons receiving the greatest number of votes, up to the number of directors to be elected, of the stockholders present in person or by proxy and entitled to vote thereon shall be the directors; provided, however, that for purposes of -------- ------- such vote no stockholder shall be allowed to cumulate his votes. Unless an election by ballot shall be demanded as provided in Section 7 of Article II, election of directors may be conducted in any manner approved at such meeting. SECTION 4. Resignation, Removal and Vacancies. ---------------------------------- (a) Any director may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the time specified therein or, if no time shall be specified therein, upon receipt thereof; unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. (b) Any director or the entire Board may be removed, with or without cause, at any time by vote of the holders of a majority of the shares then entitled to vote at an election of directors. (c) Vacancies occurring on the Board for any reason may be filled by vote of the stockholders, or by vote of the Board or by the directors' written consent pursuant to Section 6 of this Article III. If the number of directors then in office is less than a quorum, such vacancies may be filled by a vote of a majority of the directors then in office. SECTION 5. Meetings. -------- (a) Annual Meetings. As soon as practicable after each annual --------------- election of directors, the Board shall meet for the purpose of organization and the transaction of other business, unless it shall have transacted all such business by written consent pursuant to Section 6 of this Article III. (b) Other Meetings. Other meetings of the Board shall be held -------------- at such times and places as the Board, the Chairman, the President or any director shall from time to time determine. (c) Notice of Meetings. Notice shall be given to each director ------------------ of each meeting, including the time, place and purpose of such meeting. Notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least two days before the date on which such meeting is to be held, or shall be sent to him at such place by telegraph, cable, wireless or other form of recorded -6- communication, or be delivered personally or by telephone not later than the day before the day on which such meeting is to be held, but notice need not be given to any director who shall attend such meeting. A written waiver of notice, signed by the person entitled thereto, whether before or after the time of the meeting stated therein, shall be deemed equivalent to notice. (d) Place of Meetings. The Board may hold its meetings at such ----------------- place or places within or outside the State of Delaware as the Board may from time to time determine, or as shall be designated in the respective notices or waivers of notice thereof. (e) Quorum and Manner of Acting. A majority of the total number --------------------------- of directors then in office shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and the vote of a majority of those directors present at any such meeting at which a quorum is present shall be necessary for the passage of any resolution or act of the Board, except as otherwise expressly required by law or these By-laws. In the absence of a quorum for any such meeting, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present. (f) Organization. At each meeting of the Board, one of the ------------ following shall act as chairman of the meeting and preside thereat, in the following order of precedence: (i) the Chairman; (ii) the President (if a director); or (iii) any director designated by a majority of the directors present. The Secretary or, in the case of his absence, an Assistant Secretary, if an Assistant Secretary has been appointed and is present, or any person whom the chairman of the meeting shall appoint shall act as secretary of such meeting and keep the minutes thereof. SECTION 6. Directors' Consent in Lieu of Meeting. Any action ------------------------------------- required or permitted to be taken at any meeting of the Board may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all the directors then in office and such consent is filed with the minutes of the proceedings of the Board. SECTION 7. Action by Means of Conference Telephone or Similar -------------------------------------------------- Communications Equipment. Any one or more members of the Board may participate - ------------------------ in a meeting of the Board by means of -7- conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. SECTION 8. Committees. The Board may, by resolution or resolutions ---------- passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more directors of the Corporation, which to the extent provided in said resolution or resolutions shall have and may exercise the powers of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it, such committee or committees to have such name or names as may be determined from time to time by resolution adopted by the Board. A majority of all the members of any such committee may determine its action and fix the time and place of its meetings, unless the Board shall otherwise provide. The Board shall have power to change the members of any such committee at any time, to fill vacancies and to discharge any such committee, either with or without cause, at any time. ARTICLE IV Officers -------- SECTION 1. Executive Officers. The principal officers of the ------------------ Corporation shall be a Chairman, if one is appointed (and any references to the Chairman shall not apply if a Chairman has not been appointed), a President, a Secretary and a Treasurer, and may include such other officers as the Board may appoint pursuant to Section 3 of this Article IV. Any two or more offices may be held by the same person. SECTION 2. Authority and Duties. All officers, as between themselves -------------------- and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these By-laws or, to the extent so provided, by the Board. SECTION 3. Other Officers. The Corporation may have such other -------------- officers, agents and employees as the Board may deem necessary, including one or more Assistant Secretaries, one or more Assistant Treasurers and one or more Vice Presidents, each of whom shall hold office for such period, have such authority, and perform such duties as the Board, the Chairman or the President may from time to time determine. The Board may delegate to any principal officer the power to appoint and define the authority and duties of, or remove, any such officers, agents or employees. -8- SECTION 4. Term of Office, Resignation and Removal. --------------------------------------- (a) All officers shall be elected or appointed by the Board and shall hold office for such term as may be prescribed by the Board. Each officer shall hold office until his successor has been elected or appointed and qualified or until his earlier death or resignation or removal in the manner hereinafter provided. The Board may require any officer to give security for the faithful performance of his duties. (b) Any officer may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the time specified therein or, if no time shall be specified therein, at the time it is accepted by action of the Board. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. (c) All officers and agents elected or appointed by the Board shall be subject to removal at any time by the Board or by the stockholders of the Corporation with or without cause. SECTION 5. Vacancies. If the office of Chairman, President, --------- Secretary or Treasurer becomes vacant for any reason, the Board shall fill such vacancy, and if any other office becomes vacant, the Board may fill such vacancy. Any officer so appointed or elected by the Board shall serve only until such time as the unexpired term of his predecessor shall have expired, unless reelected or reappointed by the Board. SECTION 6. The Chairman. The Chairman shall give counsel and advice ------------ to the Board and the officers of the Corporation on all subjects concerning the welfare of the Corporation and the conduct of its business and shall perform such other duties as the Board may from time to time determine. Unless otherwise determined by the Board, he shall preside at meetings of the Board and of the stockholders at which he is present. The Chairman shall be the chief executive officer of the Corporation. SECTION 7. The President. The President shall be the chief operating ------------- officer of the Corporation. The President shall have general and active management and control of the business and affairs of the Corporation subject to the control of the Board and shall see that all orders and resolutions of the Board are carried into effect. The President shall from time to time make such reports of the affairs of the Corporation as the Board may require and shall perform such other duties as the Board may from time to time determine. SECTION 8. The Secretary. The Secretary shall, to the extent ------------- practicable, attend all meetings of the Board and all meetings of the stockholders and shall record all votes and the -9- minutes of all proceedings in a book to be kept for that purpose. He may give, or cause to be given, notice of all meetings of the stockholders and of the Board, and shall perform such other duties as may be prescribed by the Board, the Chairman or the President, under whose supervision he shall act. He shall keep in safe custody the seal of the Corporation and affix the same to any duly authorized instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or, if appointed, an Assistant Secretary or an Assistant Treasurer. He shall keep in safe custody the certificate books and stockholder records and such other books and records as the Board may direct, and shall perform all other duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board, the Chairman or the President. SECTION 9. The Treasurer. The Treasurer shall have the care and ------------- custody of the corporate funds and other valuable effects, including securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, shall render to the Chairman, President and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation and shall perform all other duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board, the Chairman or the President. ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc. ---------------------------------------------- SECTION 1. Execution of Documents. The Board shall designate, by ---------------------- either specific or general resolution, the officers, employees and agents of the Corporation who shall have the power to execute and deliver deeds, contracts, mortgages, bonds, debentures, checks, drafts and other orders for the payment of money and other documents for and in the name of the Corporation, and may authorize such officers, employees and agents to delegate such power (including authority to redelegate) by written instrument to other officers, employees or agents of the Corporation; unless so designated or expressly authorized by these By-laws, no officer, employee or agent shall have any power or authority to bind the Corporation by any contract or engagement, to pledge its credit or to render it liable pecuniarily for any purpose or amount. -10- SECTION 2. Deposits. All funds of the Corporation not otherwise -------- employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board or Treasurer, or any other officer of the Corporation to whom power in this respect shall have been given by the Board, shall select. SECTION 3. Proxies with Respect to Stock or Other Securities of Other ---------------------------------------------------------- Corporations. The Board shall designate the officers of the Corporation who - ------------ shall have authority from time to time to appoint an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation, and to vote or consent with respect to such stock or securities. Such designated officers may instruct the person or persons so appointed as to the manner of exercising such powers and rights, and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, such written proxies, powers of attorney or other instruments as they may deem necessary or proper in order that the Corporation may exercise its powers and rights. ARTICLE VI Shares and Their Transfer; Fixing Record Date --------------------------------------------- SECTION 1. Certificates for Shares. Every owner of stock of the ----------------------- Corporation shall be entitled to have a certificate certifying the number and class of shares owned by him in the Corporation, which shall be in such form as shall be prescribed by the Board. Certificates shall be numbered and issued in consecutive order and shall be signed by, or in the name of, the Corporation by the Chairman, the President or any Vice President, and by the Treasurer (or an Assistant Treasurer, if appointed) or the Secretary (or an Assistant Secretary, if appointed). In case any officer or officers who shall have signed any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate had not ceased to be such officer or officers of the Corporation. SECTION 2. Record. A record in one or more counterparts shall be ------ kept of the name of the person, firm or corporation owning the shares represented by each certificate for stock of the Corporation issued, the number of shares represented by each such certificate, the date thereof and, in the case of cancellation, the date of cancellation. Except as otherwise expressly required by law, the person in whose name shares of -11- stock stand on the stock record books of the Corporation shall be deemed the owner thereof for all purposes regarding the Corporation. SECTION 3. Transfer and Registration of Stock. ---------------------------------- (a) The transfer of stock and certificates which represent the stock of the Corporation shall be governed by Article 8 of Subtitle 1 of Title 6 of the Delaware Code (the Uniform Commercial Code), as amended from time to time. (b) Registration of transfers of shares of the Corporation shall be made only on the books of the Corporation upon request of the registered holder thereof, or of his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and upon the surrender of the certificate or certificates for such shares properly endorsed or accompanied by a stock power duly executed. SECTION 4. Addresses of Stockholders. Each stockholder shall ------------------------- designate to the Secretary an address at which notices of meetings and all other corporate notices may be served or mailed to him, and, if any stockholder shall fail to designate such address, corporate notices may be served upon him by mail directed to him at his post-office address, if any, as the same appears on the stock record books of the Corporation or at his last known post-office address. SECTION 5. Lost, Destroyed and Mutilated Certificates. The holder of ------------------------------------------ any shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Board may, in its discretion, cause to be issued to him a new certificate or certificates for such shares, upon the surrender of the mutilated certificate or, in the case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction, and the Board may, in its discretion, require the owner of the lost or destroyed certificate or his legal representative to give the Corporation a bond in such sum and with such surety or sureties as it may direct to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate. SECTION 6. Regulations. The Board may make such rules and ----------- regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of certificates for stock of the Corporation. SECTION 7. Fixing Date for Determination of Stockholders of Record. ------------------------------------------------------- (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting -12- of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall be not more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new -------- ------- record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. ARTICLE VII Seal ---- The Board may provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation, the year of incorporation of the Corporation and the words and figures "Corporate Seal - Delaware". ARTICLE VIII Fiscal Year ----------- The fiscal year of the Corporation shall be the calendar year unless otherwise determined by the Board. -13- ARTICLE IX Indemnification and Insurance ----------------------------- SECTION 1. Indemnification. --------------- (a) As provided in the Certificate, to the fullest extent permitted by the General Corporation Law of the State of Delaware (the "Delaware Statute") as the same exists or may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its stockholders for breach of fiduciary duty as a director. (b) Without limitation of any right conferred by paragraph (a) of this Section 1, each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity while serving as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware Statute, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer or employee and shall inure to the benefit of the indemnitee's heirs, testators, intestates, executors and administrators; provided, however, -------- ------- that such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and with respect to a criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; provided further, however, that no indemnification -------- ------- ------- shall be made in the case of an action, suit or proceeding by or in the right of the Corporation in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such director, officer, employee or agent is liable to the Corporation, unless a court having jurisdiction shall determine that, despite such adjudication, such person is fairly and reasonably entitled to indemnification; provided further, however, that, except as provided in -------- ------- ------- Section -14- 1(c) of this Article IX with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) initiated by such indemnitee was authorized by the Board. The right to indemnification conferred in this Article IX shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, -------- ------- if the Delaware Statute requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. (c) If a claim under Section (b) of this Article IX is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of any undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware Statute. Neither the failure of the Corporation (including the Board, independent legal counsel or the stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware Statute, nor an actual determination by the Corporation (including the Board, independent legal counsel, or the stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a -15- defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section or otherwise shall be on the Corporation. (d) The rights to indemnification and to the advancement of expenses conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Certificate, agreement, vote of stockholders or disinterested directors or otherwise. SECTION 2. Insurance. The Corporation may purchase and maintain --------- insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corporation or any person who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware Statute. ARTICLE X Amendment --------- Any by-law (including these By-laws) may be adopted, amended or repealed by the vote of the holders of a majority of the shares then entitled to vote, or by the vote of the Board or by the directors' written consent pursuant to Section 6 of Article III. * * * * * * * * * -16- EX-5 5 EXHIBIT 5 [O'SULLIVAN GRAEV & KARABELL, LLP] September 9, 1996 VIA EDGAR Advanced Health Corporation 560 White Plains Road Tarrytown, New York 10591 Advanced Health Corporation 2,300,000 Shares of Common Stock, $.01 par value Dear Sirs: We have acted as counsel for Advanced Health Corporation, a Delaware corporation (the "Company") in connection with the preparation and filing of the Registration Statement of the Company on Form S-1 (File No. 333-06283) (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), relating to 2,300,000 shares of its Common Stock, $.01 par value (the "Common Stock") (including 300,000 shares reserved for issuance pursuant to the Underwriters' over- allotment option) (such shares of Common Stock are referred to as the "Shares"), of the Company. Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Registration Statement. You have requested that we furnish our opinion as to the matters hereinafter set forth. In that connection, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary for the purposes of rendering the opinions set forth below. As to certain questions of fact material to the opinions contained herein, we have relied upon certificates or statements of officers of the Company and certificates of public officials. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and conformity to authentic originals of all documents submitted to us as certified or photostatic copies. Based upon the foregoing, we are of the opinion as follows: 1. The Company is a validly existing corporation under the laws of the State of Delaware. 2. Assuming that the Certificate of Amendment to the Restated Certificate of Incorporation of the Company, as amended (filed as part of Exhibit 3.1 to the Registration Statement) is filed with the Secretary of State of the State of Advanced Health Corporation September 9, 1996 Page 2 Delaware on or before the date on which the Registration Statement becomes effective, as contemplated by the Registration Statement, the Shares will have been duly authorized and, when issued and sold as contemplated by the Registration Statement and the Underwriting Agreement to be entered into among the Company and Cowen & Company and Volpe, Welty & Company, as representatives of the Underwriters, will be validly issued, fully paid and nonassessable. We are admitted to the Bar of the State of New York and we express no opinion as to the laws of the any other jurisdiction other than the Delaware General Corporation Law. We know that we are referred to under the heading "Legal Matters" in the Prospectus forming a part of the Registration Statement, and we hereby consent to such use of our name in said Registration Statement and to the use of this opinion for filing with said Registration Statement as Exhibit 5 thereto. Very truly yours, /s/ O'Sullivan Graev & Karabell, LLP EX-10.20 6 EXHIBIT 10.20 [FORM] INDEMNIFICATION AGREEMENT dated as of _______ __, 1996, between ADVANCED HEALTH CORPORATION, a Delaware corporation (the "Company"), and ________________ (the "Director"). Section 145 of the Delaware General Corporation Law (the "DGCL") empowers corporations to indemnify persons serving as a director, officer, employee or agent of such corporation or persons who serve at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and Section 145(f) of the DGCL further specifies that the indemnification set forth in said Section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise. The Company desires to have the Director serve or continue to serve as an officer and/or director of the Company free from undue concern for unpredictable, inappropriate or unreasonable claims for damages by reason of his being an officer and/or director of the Company or by reason of his decisions or actions on its behalf; and the Director desires to serve, or to continue to serve, in such capacity. Accordingly, in consideration of the Director's serving or continuing to serve as an officer and/or director of the Company, the parties agree as follows: 1. Indemnification. (a) The Company shall indemnify, defend and --------------- hold harmless the Director against all expenses, losses, claims, damages and liabilities, including, without limitation, attorneys' fees, judgments, fines and amounts paid in settlement (all such expenses, collectively, "Costs"), actually and reasonably incurred by him in connection with the investigation, defense or appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to which the Director is a party or threatened to be made a party (all such actions, collectively, "Proceedings") (i) by reason of the fact that the Director is or was a director, officer, employee or agent of the Company or of any other corpo- ration, partnership, joint venture, trust or other enterprise (collectively, "Affiliates") of which he has been or is serving at the request of, for the convenience of or to represent the interest of the Company or (ii) by reason of anything done or not done by the Director in any such capacity referred to in the foregoing clause (i). 2. Culpable Action. (a) Notwithstanding the provisions of Section --------------- l, the Director shall not be entitled to indemnification if (i) the Company is prohibited from paying such indemnification under applicable law, (ii) the Director breached his duty of loyalty to the Company or its stockholders or any Affiliate or its stockholders, (iii) the Director's actions or omissions were not in good faith or involved intentional misconduct or a knowing violation of law or (iv) the Director derived an improper personal benefit from any transaction which is a subject of the applicable Proceeding (any existence or occurrence described in the foregoing clauses (i)-(iv), individually, a "Culpable Action"). (b) The existence or occurrence of a Culpable Action shall be conclusively determined by (i) a non-appealable, final decision of the court having jurisdiction over the applicable Proceeding or (ii) a non-appealable, final decision of the Court of Chancery of the State of Delaware (or if such a decision is appealable, by the court in such State which has jurisdiction to render a non-appealable, final decision). Such determination shall be final and binding upon the parties hereto. (c) The existence or occurrence of a Culpable Action may also be determined by (i) the Board of Directors of the Company, by a majority vote of a quorum consisting of directors who were not parties to the applicable Proceeding (the "Disinterested Directors"), (ii) the stockholders of the Company, by a majority vote of a quorum consisting of stockholders who were not parties to the applicable Proceeding (the "Disinterested Stockholders"), or (iii) any other entity to which the Disinterested Directors or the Disinterested Stockholders shall have delegated the authority to make such a determination; provided, -------- however, that such determination shall be binding upon the parties hereto only - ------- if a determination shall not have been made or shall not be subsequently made pursuant to Subsection (b) above. (d) If a Proceeding involves more than one claim, issue or matter, the determination as to whether there exists or has occurred a Culpable Action shall be severable as to each and every claim, issue and matter. (e) The termination of any Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, does not ---- ----------- change the presumption of Section l that the Director is entitled to indemnifi- cation hereunder and does not create a presumption that there exists a Culpable Action. 3. Payment of Costs. The Costs incurred by the Director in ---------------- connection with any Proceeding, including any Proceeding brought pursuant to Section (2)(b), shall be paid by the Company on an "as incurred" basis; provided, however, that if it - -------- ------- -2- shall ultimately be determined that there exists or has occurred a Culpable Action with respect to such Proceeding, the Director shall repay to the Company the amount (or the appropriate portion thereof as contemplated by Section 2(d)) so advanced, including the costs of obtaining a determination pursuant to Section 2(b). 4. Severability. If any provision of this Agreement shall be ------------ determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 5. No Right to Employment or Directorship. This Agreement shall not -------------------------------------- entitle the Director to any right or claim to be retained as an employee and/or director of the Company or limit the right of the Company to terminate the employment and/or directorship of the Director or to change the terms of such employment and/or directorship. 6. Other Rights and Remedies. This Agreement shall not be deemed ------------------------- exclusive as to any other non-contractual rights to indemnification to which the Director may be entitled under any provision of law, the Restated Certificate of Incorporation of the Company, any By-law of the Company or otherwise. 7. Counterparts. This Agreement may be executed in any number of ------------ counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 8. Descriptive Headings. Descriptive headings are for convenience -------------------- only and shall not control or affect the meaning or construction of any provision of this Agreement. 9. Modification. This Agreement shall not be altered or otherwise ------------ amended except pursuant to an instrument in writing signed by each of the parties. 10. Notice to the Company by the Director. The Director, as a ------------------------------------- condition precedent to his right to be indemnified under this Agreement, shall give to the Company notice in writing as soon as practicable of any Proceeding for which indemnity will or could be sought under this Agreement. 11. Notices. All notices, requests, consents and other ------- communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or by facsimile transmission with electronic confirmation of receipt or if sent by nationally- recognized overnight courier or first class certified mail, postage prepaid, return receipt requested, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by notice given pursuant to this Section 11: -3- (i) if to the Company, to: Advanced Health Corporation 560 White Plains Road Tarrytown, New York 10591 Attention: Chairman of the Board; and (ii) if to the Director, to: the Director's name and address as it appears in the records of the Company. 12. Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Delaware applicable to contracts made and performed wholly therein. 13. Successors and Assigns. This Agreement shall be binding upon the ---------------------- Company and its successors and assigns and shall inure to the benefit of the Director and his spouse, heirs, executors and administrators. -4- IN WITNESS WHEREOF, each of the undersigned have duly executed this Indemnification Agreement as of the date first above written. ADVANCED HEALTH CORPORATION By:________________________________ Name: Jonathan Edelson, M.D. Title: Chairman of the Board ___________________________________ DIRECTOR EX-10.24 7 EXHIBIT 10.24 ADVANCED HEALTH CORPORATION AMENDED AND RESTATED 1995 STOCK OPTION PLAN 1. Purpose. ------- The purpose of this amended and restated plan (the "Plan") is to secure for ADVANCED HEALTH CORPORATION (the "Company") and its shareholders the benefits arising from capital stock ownership by employees, officers and directors of, and consultants or advisors to, the Company and its subsidiary corporations who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include all present and future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time (the "Code"). Those provisions of the Plan which make express reference to Section 422 shall apply only to Incentive Stock Options (as that term is defined in the Plan). 2. Type of Options and Administration. ---------------------------------- (a) Types of Options. Options granted pursuant to the Plan shall be ---------------- authorized by action of the Board of Directors of the Company (or a Committee designated by the Board of Directors) and may be either incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code or non-statutory options which are not intended to meet the requirements of Section 422 of the Code. (b) Administrative. The Plan will be administered by the Board of -------------- Directors of the Company, whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The Board of Directors may in its sole discretion grant options to purchase shares of the Company's Common Stock, $.01 par value per share ("Common Stock") and issue shares upon exercise of such options as provided in the Plan. The Board shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director or person acting pursuant to authority delegated by the Board of Directors shall be liable for any action or determination under the Plan made in good faith. The Board of Directors may, to the full extent permitted by or consistent with applicable laws or regulations (including, without limitation, applicable state law and Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3")), delegate any or all of its powers under the Plan to a committee (the "Committee") appointed by the Board of Directors, and if the Committee is so appointed all references to the Board of Directors in the Plan shall mean and relate to such Committee with respect to the powers so delegated. (c) Applicability of Rule 16b-3. Those provisions of the Plan which --------------------------- make express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, subject to the last sentence of Section 3(b), and then only to such persons as are required to file reports under Section 16(a) of the Exchange Act (a "Reporting Person"). 3. Eligibility. ----------- (a) General. Options may be granted to persons who are, at the time ------- of the grant, employees, officers or directors of, or consultants or advisors to, the Company; provided, that Incentive Stock Options may only be granted to -------- individuals who are employees of the Company (within the meaning of Section 3401(c) of the Code). A person who has been granted an option may, if he or she is otherwise eligible, be granted additional options if the Board of Directors shall so determine. (b) Grant of Options to Reporting Persons. From and after the ------------------------------------- registration of the Common Stock of the Company under the Exchange Act, the selection of a director or an officer who is a Reporting Person (as the terms "director" and "officer" are defined for purposes of Rule 16b-3) as a recipient of an option, the timing of the option grant, the exercise price of the option and the number of shares subject to the option shall be determined either (i) by the Board of Directors or (ii) by a committee consisting of two or more directors having full authority to act in the matter, each of whom shall be a "non-employee director" (as hereinafter defined). For the purposes of the Plan, a director shall be deemed to be a "non-employee director" only if such person qualifies as a "non-employee director" within the meaning of Rule 16b-3, as such term is interpreted from time to time. 4. Stock Subject to Plan. --------------------- The stock subject to options granted under the Plan shall be shares of authorized but unissued or reacquired Common Stock. Subject to adjustment as provided in Section 15 below, the maximum number of shares of Common Stock of the Company which may be issued and sold under the Plan is 1,500,000 shares (after giving effect to the reverse stock split to be effected in connection with the Company's initial public offering). If an option granted under the Plan shall expire, terminate or be cancelled for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. -2- 5. Forms of Option Agreements. -------------------------- As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients. 6. Purchase Price. -------------- (a) General. The purchase price per share of stock deliverable upon ------- the exercise of an option shall be determined by the Board of Directors at the time of grant of such option; provided, however, that in the case of an -------- ------- Incentive Stock Option, the exercise price shall not be less than 100% of the Fair Market Value (as hereinafter defined) of such stock, at the time of grant of such option, or shall not be less than 110% of such Fair Market Value in the case of options described in Section 11(b). "Fair Market Value" of a share of Common Stock of the Company as of a specified date for the purposes of the Plan shall mean the closing price of a share of the Common Stock on the principal securities exchange or the Nasdaq National Market on which such shares are traded on the day immediately preceding the date as of which Fair Market Value is being determined, or on the next preceding date on which such shares are traded if no shares were traded on such immediately preceding day, or if the shares are not traded on a securities exchange or the Nasdaq National Market, Fair Market Value shall be deemed to be the average of the high bid and low asked prices of the shares in the over-the-counter market on the day immediately preceding the date as of which Fair Market Value is being determined or on the next preceding date on which such high bid and low asked prices were recorded. If the shares are not publicly traded, Fair Market Value of a share of Common Stock (including, in the case of any repurchase of shares, any distributions which respect thereto which would be repurchased with the shares) shall be determined in good faith by the Board of Directors. (b) Payment of Purchase Price. Options granted under the Plan may ------------------------- provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or, to the extent provided in the applicable option agreement, (i) by delivery to the Company of shares of Common Stock of the Company having Fair Market Value on the date of exercise equal in amount to the exercise price of the options being exercised, (ii) by any other means which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board) or (iii) by any combination of such methods of payment. 7. Option Period. ------------- Subject to earlier termination as provided in the Plan, each option and all rights thereunder shall expire on such date as determined by the Board of Directors and -3- set forth in the applicable option agreement, provided, that such date shall not -------- be later than ten (10) years after the date on which the option is granted. 8. Exercise of Options. ------------------- Each option granted under the Plan shall be exercisable either in full or in installments at such time or times and during such period as shall be set forth in the option agreement evidencing such option, subject to the provisions of the Plan. Subject to the requirements in the immediately preceding sentence, if an option is not at the time of grant immediately exercisable, the Board of Directors may (i) in the agreement evidencing such option, provide for the acceleration of the exercise date or dates of the subject option upon the occurrence of specified events and/or (ii) at any time prior to the complete termination of an option, accelerate the exercise date or dates of such option. 9. Nontransferability of Options. ----------------------------- No option granted under this Plan shall be assignable or otherwise transferable by the optionee except by will or by the laws of descent and distribution or, other than in the case of Incentive Stock Options, pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. An option may be exercised during the lifetime of the optionee only by the optionee. In the event an optionee dies during his employment by the Company or any of its subsidiaries, or during any exercise period following the date of termination of such employment, his option shall thereafter be exercisable, during the period specified in the option agreement, by his executors or administrators to the full extent to which such option was exercisable by the optionee at the time of his death during the periods set forth in Section 10 or 11(d). 10. Effect of Termination of Employment or Other Relationship. --------------------------------------------------------- Except as provided in Section 11(d) with respect to Incentive Stock Options, and subject to the provisions of the option agreement, an optionee may exercise an option at such times following the termination of the optionee's employment or other relationship with the Company as shall be set forth in the option agreement with such optionee, but, except in the case of the optionee's death, in no event later than the expiration date of the Option. If the termination of the optionee's employment is for cause or is otherwise attributable to a breach by the optionee of an employment or confidentiality or non-disclosure agreement, the option shall expire immediately upon such termination. The Board of Directors shall have the power to determine what constitutes a termination for cause or a breach of an employment or confidentiality or non-disclosure agreement, whether an optionee has been terminated for cause or has breached such an agreement, and the date upon which such termination for cause or breach occurs. Any such determinations shall be final and conclusive and binding upon the optionee. -4- 11. Incentive Stock Options. ----------------------- Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) Express Designation. All Incentive Stock Options granted under ------------------- the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. (b) 10% Shareholder. If any employee to whom an Incentive Stock --------------- Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (after taking into account the attribution of stock ownership rules of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of one share of Common Stock at the time of grant; and (ii) the option exercise period shall not exceed five years from the date of grant. (c) Dollar Limitation. For so long as the Code shall so provide, ----------------- options granted to any employee under the Plan (and any other incentive stock option plans of the Company) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value, as of the respective date or dates of grant, of more than $100,000. (d) Termination of Employment, Death or Disability. No Incentive ---------------------------------------------- Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement), provided, that the -------- agreement with respect to such option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan; -5- (ii) if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of one year after the date of death (or within such lesser period as may be specified in the applicable option agreement); and (iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provisions thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement). For all purposes of the Plan and any option granted hereunder "employment" shall be defined in accordance with the provisions of Section 1.42I-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 12. Additional Provisions. --------------------- (a) Additional Option Provisions. The Board of Directors may, in its ---------------------------- sole discretion, include additional provisions in option agreements covering options granted under the Plan, including without limitation restrictions on transfer, repurchase rights, rights of first refusal, commitments to pay cash bonuses, to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Board of Directors; provided, that such additional provisions -------- shall not be inconsistent with any other term or condition of the Plan and such additional provisions shall not cause any Incentive Stock Option granted under the Plan to fail to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. (b) Acceleration, Extension, Etc. The Board of Directors may, in its ----------------------------- sole discretion, (i) accelerate the date or dates on which all or any particular option or options granted under the Plan may be exercised or (ii) extend the dates during which all, or any particular, option or options granted under the Plan may be exercised; provided, however, that no such extension shall be -------- ------- permitted if it would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 (if applicable). 13. General Restrictions. -------------------- (a) Investment Representations. The Company may require any person -------------------------- to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account -6- for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock. (b) Compliance with Securities Law. Each option shall be subject to ------------------------------ the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of, or in connection with the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification, or to satisfy such condition. 14. Rights as a Shareholder. ----------------------- The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation, any rights to receive dividends or non-cash distributions with respect to such shares) until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 15. Adjustment Provisions for Recapitalizations, Reorganizations and ---------------------------------------------------------------- Related Transactions. -------------------- (a) Recapitalizations and Related Transactions. If, through or as a ------------------------------------------- result of any recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, (i) the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment shall be made in (x) the maximum number and kind of shares reserved for issuance under the Plan, (y) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (z) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 15 if such adjustment (i) would cause the Plan to fail to comply -7- with Section 422 of the Code or with Rule 16b-3 or (ii) would be considered as the adoption of a new plan requiring stockholder approval. (b) Reorganization, Merger and Related Transactions. If the Company ----------------------------------------------- shall be the surviving corporation in any reorganization, merger or consolidation of the Company with one or more other corporations, any then outstanding option granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Common Stock subject to such options would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the purchase price as to which such options may be exercised so that the aggregate purchase price as to which such options may be exercised shall be the same as the aggregate purchase price as to which such options may be exercised for the shares remaining subject to the options immediately prior to such reorganization, merger, or consolidation. (c) Board Authority to Make Adjustments. Any adjustments under this ----------------------------------- Section 15 will be made by the Board of Directors, whose determination as to what adjustments, in any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 16. Merger, Consolidation, Asset Sale, Liquidation, etc. ---------------------------------------------------- (a) General. In the event of a consolidation or merger in which the ------- Company is not the surviving corporation, or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity or in the event of a liquidation of the Company (collectively, a "Corporate Transaction"), the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any such options substituted for Incentive -------- Stock Options shall meet the requirements of Section 424(a) of the Code, (ii) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, (iii) in the event of a Corporate Transaction under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Corporate Transaction (the "Transaction Price"), make or provide for a cash payment to the optionees equal to the difference between (A) the Transaction Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Transaction Price) and (B) the aggregate exercise price of all such outstanding options in exchange for the -8- termination of such options, and (iv) provide that all or any outstanding options shall become exercisable in full immediately prior to such event. (b) Substitute Options. The Company may grant options under the Plan ------------------ in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 17. No Special Employment Rights. ---------------------------- Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of the optionee. 18. Other Employee Benefits. ----------------------- Except as to plans which by their terms include such amounts as compensation, the amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 19. Amendment of the Plan. --------------------- (a) The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, except that if at any time the approval of the shareholders of the Company is required under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, or under Rule 16b-3, the Board of Directors may not effect such modification or amendment without such approval. (b) The modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify (i) the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive -9- stock options under Section 422 of the Code and (ii) the terms and provisions of the Plan and any outstanding option to the extent necessary to ensure the qualification of the Plan and any options granted hereunder under Rule 16b-3. 20. Withholding. ----------- (a) The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (ii) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a Fair Market Value equal to such withholding obligation as of the date that the amount of tax to be withheld is to be determined. An optionee who has made an election pursuant to this Section 20(a) may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. (b) The acceptance of shares of Common Stock upon exercise of an Incentive Stock Option shall constitute an agreement by the optionee (i) to notify the Company if any or all of such shares are disposed of by the optionee within two years from the date the option was granted or within one year from the date the shares were issued to the optionee pursuant to the exercise of the option, and (ii) if required by law, to remit to the Company, at the time of an in the case of any such disposition, an amount sufficient to satisfy the Company's federal, state and local withholding tax obligations with respect to such disposition, whether or not, as to both (i) and (ii), the optionee is in the employ of the Company at the time of such disposition. (c) Notwithstanding the foregoing, in the case of a Reporting Person whose options have been granted in accordance with the provisions of Section 3(b) herein, no election to use shares for the payment of withholding taxes shall be effective unless made in compliance with any applicable requirements of Rule 16b-3. 21. Cancellation and New Grant of Options, Etc. ------------------------------------------- The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the price per share of the cancelled options or (ii) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share -10- which is higher or lower than the then-current exercise price per share of such outstanding options. 22. Effective Date and Duration of the Plan. --------------------------------------- (a) Effective Date. The Plan shall become effective when adopted by -------------- the Board of Directors, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, no options previously granted under the Plan shall be deemed to be Incentive Stock Options and no Incentive Stock Options shall be granted thereafter. Amendments to the Plan not requiring shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 19) shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. (b) Termination. Unless sooner terminated in accordance with Section ----------- 16, the Plan shall terminate upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of its adoption by the Board of Directors, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted under the Plan. If the date of termination is determined under (i) above, then options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 23. Provision for Foreign Participants. ---------------------------------- The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. -11- 24. Governing Law. ------------- The provisions of this Plan shall be governed and construed in accordance with the laws of the State of Delaware without regard to the principles of conflicts of laws. -12- EX-10.25 8 EXHIBIT 10.25 ADVANCED HEALTH CORPORATION Employee Stock Purchase Plan ---------------------------- 1. NATURE OF THE PLAN The Advanced Health Corporation Employee Stock Purchase Plan (the "Plan") is intended to provide a method whereby employees of Advanced Health Corporation, a Delaware corporation (the "Company"), and its subsidiaries will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the Common Stock, $.01 par value, of the Company. It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. The Company is offering to sell shares of Common Stock to eligible employees pursuant to the terms and conditions set forth in this Plan. The maximum number of shares of Common Stock that may be issued under the Plan is 1,200,000 (after giving effect to the revenue stock split to be effected in connection with the Company's initial public offering), subject to adjustment upon changes in the capitalization of the Company as provided in Section 10(c). 2. DEFINITIONS "Board of Directors" means the Board of Directors of the Company. "Committee" means the Committee appointed by the Board of Directors to administer the Plan as contemplated by Section 9. "Common Stock" means the Common Stock, $.01 par value, issued by the Company. "Employee" means any person who is customarily employed on a full-time or part-time basis by the Company or any of its subsidiaries and is regularly scheduled to work more than 20 hours per week and five months or more in a calendar year. "Option Period" means each semi-annual period, commencing on January 1 and ending on June 30 and commencing on July 1 and ending on December 31; provided, however, that the first Option Period under the Plan (the "Initial - -------- ------- Option Period") shall commence on the date of the execution of the Underwriting Agreement among the Company and the underwriters named therein with respect to the initial public offering of the Common Stock (the "Underwriting Agreement") and end on December 31, 1996. Each Option Period includes only regular pay days falling within it. "Purchase Price" has the meaning set forth in Section 5 (b). 3. ELIGIBILITY AND PARTICIPATION (a) Initial Eligibility. Each Employee shall be eligible to ------------------- participate in the Plan on the first day of the first Option Period after the date of hire as an Employee with either the Company or any of its subsidiaries. (b) Restrictions on Participation. Notwithstanding any provisions of ----------------------------- the Plan to the contrary, no Employee shall be granted rights or options to purchase Common Stock under the Plan if, immediately after the grant, such Employee would own stock, and/or hold outstanding options or rights to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company. For purposes of this paragraph, the rules of Section 424(d) of the Code shall apply in determining stock ownership of any Employee. (c) Commencement of Participation. An eligible Employee may commence ----------------------------- participation in the Plan by completing a payroll deduction authorization form provided by the Company and filing it with the Company's payroll administrator 10 working days before the start of an Option Period. Payroll deductions for an Employee shall commence for the applicable Option Period when his or her authorization for a payroll deduction becomes effective and shall remain effective until all shares of Common Stock authorized for the Plan under Section 1 have been issued, unless sooner terminated by the Employee as provided in Section 6. Payroll deductions nay not be increased or decreased during any Option Period, except to reflect changes in base pay during such Option Period. Anything contained herein to the contrary notwithstanding, with respect to the Initial Option Period only, all eligible Employees shall be deemed to have elected to participate in the Plan as of the first day of such Option Period; provided, however, that in order to continue such participation for any other - -------- ------- Option Period, each such Employee must complete and file a payroll deduction authorization form as required by this Section 3(c). 4. PAYMENT OF PURCHASE PRICE (a) Payroll Deductions. At the time an Employee files his or her ------------------ payroll deduction authorization form, he or she shall elect to have deductions made from his or her pay on each payday during the time he or she participates in the Plan at a fixed dollar amount chosen by such Employee, except that such amount may not be less then 2% nor more than 10% of the amount of such Employee's regular pay. An Employee may discontinue his or her participation in the Plan as provided in Section 6, but no other change can be made during an Option Period. (b) Initial Option Period. With respect to the Initial Option Period --------------------- only, an Employee may pay for shares of Common Stock purchased pursuant to the Plan by check or payroll -2- deduction or a combination thereof or such other method as shall be permitted by the Committee; provided, however, that the purchase price for such shares for -------- ------- such Initial Option Period shall not be less than 2% nor more than 10% of the amount of such Employee's regular pay during such Initial Option Period. 5. GRANTING OF RIGHT TO PURCHASE (a) Number of Shares. On the first day of each Option Period, each ---------------- Employee participating in the Plan shall be deemed to be granted options to purchase, and on the last day of each Option Period, each such Employee shall be deemed to have exercised such options to purchase, that number of shares of Common Stock equal to the quotient obtained by dividing (i) the aggregate dollar amount that he or she has elected to have withheld for the Option Period by (ii) the Purchase Price. Anything contained herein to the contrary notwithstanding, but subject to the limitations set forth in Section 5(f) hereof, in the case of the Initial Option Period only, on the first day of such Initial Option Period, each eligible Employee shall be granted options to purchase that number of shares of Common Stock equal to the quotient obtained by dividing (A) 10% of such Employee's regular pay during such Initial Option Period by (B) the Purchase Price, and on the last day of such Initial Option Period, each such Employee shall be deemed to have exercised such options to purchase such number of such shares of Common Stock for which such Employee shall have paid the Purchase Price no later than the last day of such Initial Option Period. (b) Purchase Price. The purchase price (the "Purchase Price") of -------------- Common Stock for an Employee for any Option Period shall be equal to eighty-five percent (85%) of the lower of (x) the closing price of the Common Stock on the first day of such Option Period and (y) the closing price of the Common Stock on the last day of such Option Period (or, in each case, if such day shall not be a trading day, on the next preceding business day on which trading occurred on the Nasdaq Stock Market); provided, however, that in the case of the Initial Option -------- ------- Period only, the Purchase Price shall be equal to eighty-five percent (85%) of the lower of (A) the initial public offering price per share of the Common Stock and (B) the closing price of the Common Stock on the last day of such Initial Option Period (or if such day shall not be a trading day, on the next preceding business day on which trading occurred on the Nasdaq Stock Market). (c) Purchase of Shares. Unless an Employee has given written notice ------------------ to the Company under Section 6(a), amounts withheld for or otherwise paid by him or her shall be used on the last day of such Option Period to purchase the number of whole shares of Common Stock that his or her accumulated payroll deductions and other payments, if any, at that time will purchase at the Purchase Price and any excess amount at that time will be -3- retained by the Company for him or her until the next purchase of shares under the Plan. (d) Transferability of Rights. During an Employee's lifetime, rights ------------------------- held by the Employee to purchase Common Stock under the Plan shall be exercisable only by that Employee. (e) Delivery of Stock. Following the end of each Option Period, the ----------------- Company will deliver, or cause the Company's transfer agent to deliver, to each Employee certificates representing the Common Stock purchased by the Employee hereunder during such Option Period. (f) Annual Purchase Limit. No Employee shall be granted rights to --------------------- purchase Common Stock under the Plan that permit his or her rights to purchase Common Stock under all plans of the Company intended to qualify under Section 423 of the Code to accrue at a rate which exceeds $25,000 in fair market value of Common Stock (determined at the time such right is granted) for each calendar year in which such right is outstanding. Any amounts received from an Employee which cannot be used to purchase Common Stock as a result of this limitation will be returned as soon as practicable to the Employee without interest. 6. WITHDRAWAL (a) In General. An Employee may revoke his or her payroll deduction ---------- election under the Plan for an Option Period by giving written notice to the Company (on any form prescribed by the Committee) at any time after the commencement of such Option Period. Any of the Employee's payroll deductions credited to him or her (attributable to unused amounts from the prior Option Period related to fractional shares) will be paid to him or her without interest promptly after receipt of his or her notice of withdrawal, and no further payroll deductions will be made from his or her pay during such Option Period. Anything contained herein to the contrary notwithstanding, an Employee may revoke his or her participation in the Plan for the Initial Option Period by giving written notice to the Company (on any form prescribed by the Committee) at any time after the commencement of such Option Period. (b) Effective on Subsequent Participation. An Employee's withdrawal ------------------------------------- under Section 6(a) will have no effect upon his or her eligibility to participate in the Plan for any succeeding Option Period or any similar plan which may hereafter be adopted by the Company; provided, however, that pursuant -------- ------- to Section 3(c), an Employee who withdraws from participation under Section 6(a) may not again participate in the Plan until the next succeeding Option Period. (c) Termination of Employment. Upon termination of the Employee's ------------------------- employment with the Company and its subsidiaries, -4- any outstanding rights of the Employee to purchase Common Stock during the Option Period in which his or her employment terminates shall be deemed to be terminated and any accumulated payroll deductions or other payments at such time will be returned to the Employee, without interest. 7. INTEREST No interest will be paid or allowed on any money withheld or received by the Company under Section 4 of the Plan. 8. STOCK (a) Maximum Shares. If the total number of shares of Common Stock -------------- for which rights are exercised on the last day of any Option Period in accordance with Section 5(c) causes the aggregate number of shares of Common Stock issued under the Plan since its effective date (as set forth in Section 10(d)) to exceed the maximum number of shares of Common Stock authorized under Section 1, the Committee shall make a pro rata allocation of the shares available for delivery and distribution in as uniform a manner as shall be practicable and as it shall determine to be equitable, and the balance of payroll deductions or other payments of each Employee under the Plan shall be returned to him or her without interest as promptly as possible. (b) Participant's Interest in Stock. An Employee will have no ------------------------------- interest in shares of Common Stock hereunder until such shares are purchased under Section 5(c). Such shares shall not be transferable by the Employee until certificates are delivered to him or her pursuant to Section 5(e). (c) Registration of Stock. Stock to be delivered to an Employee --------------------- under the Plan will be registered in the name of the Employee. (d) Restrictions on Purchase. The Committee may, in its discretion, ------------------------ require as a condition to the exercise of any rights to purchase hereunder, that the shares of Common Stock reserved for issuance under the Plan shall have been duly listed, upon official notice of issuance, on the Nasdaq Stock Market and registered pursuant to a Registration Statement under the Securities Act of 1933, as amended, which with respect to said shares shall be effective. 9. ADMINISTRATION (a) Appointment of Committee. The Board of Directors shall appoint a ------------------------ committee (the "Committee") to administer the Plan, which shall consist of two or more non-employee members of the Board of Directors. Members of the Committee shall serve at the pleasure of the Board of Directors and will be subject to removal by the Board of Directors at any time. No member of the -5- Committee shall be eligible to purchase Common Stock under the Plan. (b) Authority of Committee. Subject to the express provisions of the ---------------------- Plan, the Committee shall have the authority, in its discretion, to interpret and construe any and all provisions of the Plan, to adopt rules and regulations for administering the Plan and to make all other determinations deemed necessary or advisable for administering the Plan. The Committee's determination on such matters shall be conclusive. (c) Rules Governing the Administration of the Committee. The --------------------------------------------------- Committee may select one of its members as its Chairman and shall hold its meetings at such times and places at it shall deem advisable and may hold telephonic meetings. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan, in the manner and to the extent it shall deem desirable. Any decision or determination reduced to writing and signed by a majority of the members of the Committee shall be as fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary and shall make such rules and regulations for the conduct of its business as it shall dean advisable. 10. MISCELLANEOUS (a) Transferability. Neither the payroll deductions or other --------------- payments of an Employee nor any rights with regard to the purchase of stock under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the Employee other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect. (b) Use of Funds. All amounts withheld or received by the Company ------------ under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such amounts. (c) Adjustment Upon Changes in Capitalization. (i) If, while any ----------------------------------------- rights to purchase shares are outstanding, the outstanding shares of Common Stock of the Company have increased, decreased, changed into or been exchanged for a different number or kind of shares or securities of the Company or another entity through reorganization, merger, recapitalization, reclassification, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments may be made by the Committee in the number and/or kind of shares which are subject to purchase under outstanding rights and in the purchase price or prices applicable thereto. In addition, in any -6- such event, the number and/or kind of shares which may be offered hereunder shall also be proportionately adjusted. (ii) Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or stock of the Company to another corporation, no further shares will be available for purchase by Participants under the Plan, except that any payroll deductions or other payments collected in that Option Period will be immediately applied to purchase whole shares of Common Stock. The Board of Directors shall take such steps in connection with such transactions as it shall deem necessary to assure that the provisions of this Section 10(c)(ii) shall thereafter be applicable, as nearly as reasonably may be determined. (d) Amendment and Terminations. The Board of Directors shall have --------------------------- complete power and authority to terminate or amend the Plan; provided, however, -------- ------- that the approval of the holders of a majority of the votes that may be cast by all of the holders of shares of Common Stock and preferred stock of the Company, if any, entitled to vote (voting as a single class) shall be obtained prior to any such amendment becoming effective if such approval is required by law or is necessary to comply with the regulations promulgated by the Securities and Exchange Commission under Section 16(b) of the Securities Exchange Act of 1934, as amended, or with the Code or the regulations promulgated by the Treasury Department thereunder. No termination, modification or amendment of the Plan may, without the consent of an Employee then having an outstanding right under the Plan to purchase stock, adversely affect such right. (e) Effective Date. The Plan shall become effective on the later to -------------- occur of (i) the date on which the Plan is approved by the stockholders of the Company entitled to vote thereon and (ii) the date on which the Underwriting Agreement is executed; provided, however, that the Plan will not be effective if -------- ------- the stockholder vote occurs more than 12 months before or after the Plan is adopted by the Board of Directors of the Company. The Plan will terminate on the earlier of (A) the tenth anniversary of the effective date of the Plan and (B) the date on which all shares of Common Stock available for issuance under the Plan have been sold. (f) No Employment Rights. The Plan does not, directly or indirectly, -------------------- create in any Employee or class of Employees any right with respect to continuation of employment by the Company or any of its subsidiaries, and it shall not be deemed to interfere in any way with the right of the Company or of any of its subsidiaries to terminate, or otherwise modify, an Employee's employment at any time. -7- (g) Effect of Plan. The provisions of the Plan shall, in accordance -------------- with its terms, be binding upon, and inure to the benefit of, all successors of each Employee participating in the Plan, including, without limitation, such Employee's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Employee. (h) Governing Law. The laws of the State of Delaware will govern all ------------- matters relating to this Plan except to the extent superseded by the laws of the United States. -8- EX-11.1 9 EXHIBIT 11.1 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES (FORMERLY MED-E SYSTEMS CORPORATION) SUPPLEMENTAL NET LOSS PER COMMON SHARE COMPUTATION
FOR THE SIX MONTHS ENDED JUNE 30, 1996 -------------------- (UNAUDITED) CALCULATION OF SUPPLEMENTAL SHARES OUTSTANDING: Debt to be repaid by offering proceeds................................... $ 4,000,000 Proceeds per share....................................................... 12.00 -------------------- Additional shares assumed outstanding.................................... 333,333 -------------------- Additional weighted average common shares outstanding.................... 226,519 Weighted average common shares outstanding............................... 4,991,135 -------------------- Supplemental weighted average common shares outstanding.................. 5,217,654 -------------------- -------------------- SUPPLEMENTAL NET LOSS PER SHARE: Net loss................................................................. $ (1,856,841) Pro forma impact of use of proceeds on interest expense.................. 46,440 -------------------- Supplemental net income loss............................................. (1,810,401) Supplemental weighted average common shares outstanding.................. 5,217,654 -------------------- Supplemental net income loss per common share............................ $ (0.35) -------------------- --------------------
EX-23.2 10 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports dated June 19, 1996 (except for the matters described in Note 14, as to which the date is August 14, 1996), June 4, 1996 and June 5, 1996 and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP New York, New York September 5, 1996 -----END PRIVACY-ENHANCED MESSAGE-----