<PAGE>
PROSPECTUS
Filed Pursuant to Rule 424(b)(1)
Reg. No # 333-07643
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------
All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered are being sold by Patient Infosystems, Inc. (the "Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "PATI."
--------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share............. $8.00 $.56 $7.44
Total(3).............. $16,000,000 $1,120,000 $14,880,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $600,000.
(3) The Company has granted to 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 $18,400,000, $1,288,000 and
$17,112,000, respectively. See "Underwriting."
--------------
The Common Stock is offered by the several Underwriters named herein when,
as and if accepted by them and subject to certain 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 December 26, 1996.
--------------
COWEN & COMPANY VECTOR SECURITIES INTERNATIONAL, INC.
December 19, 1996
<PAGE>
[GRAPHICS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY 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.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Patient Infosystems, Inc. designs and develops health care information
systems and services to manage, collect and analyze patient-related information
to improve patient compliance with prescribed treatment protocols. The Company's
technology platform integrates treatment algorithms, live telephone operators,
an advanced voice recognition telephone system, high speed data processing and
analysis capability and demand publishing and information distribution
capabilities. The system permits the Company to communicate via telephone
directly with the patient at home in order to gather relevant data about a
patient and his condition. This data is subsequently evaluated and computer
generated reports which are tailored to the specific needs of each recipient are
automatically transmitted to health care payors, providers and patients.
The Company markets its services to pharmaceutical manufacturers, pharmacy
benefit managers ("PBMs") and health care payors and providers to collect data
outside of the physician office and institutional setting. The information can
be used to enhance compliance by patients with prescribed treatment protocols.
The Company's disease state management programs are designed to provide the
following benefits: (i) for patients, improved communication with health care
providers, enhanced self-care skills, increased treatment compliance, resulting
in improved quality of care and reduced expense associated with unscheduled
visits to the doctor; (ii) for health care providers, more information on
patient progress, quicker identification of hard-to-manage patients, enhanced
ability to make timely treatment modifications, triage capability and expanded
information for development of improved treatment protocols; and (iii) for
payors and program sponsors, cost-effective management of diseases, improved
outcomes and enhanced patient and provider satisfaction.
According to the Federal government, national health expenditures have
increased from $540 billion in 1988 (11.1% of gross national product ("GNP")) to
a projected $1 trillion in 1995 (15.7% of projected GNP). One way to achieve
significant savings in health care costs is to change the way that health care
is delivered to patients by focusing on quality and cost efficient clinical
outcomes. Since a substantial portion of most treatment regimens is
self-administered, patient compliance is critical to achieving quality outcomes.
Estimates vary from disease to disease, but generally indicate that between 30%
and 60% of all patients fail to take medications as prescribed. The consequences
of patient non-compliance with prescribed treatment plans represent a
significant portion of health care expenditures. One third-party study indicated
that patient non-compliance results in $100 billion in health care and lost
productivity costs annually. Costs associated with treating patients with
chronic diseases who fail to adhere to prescribed regimens have been
particularly difficult to control. When long-term treatments for chronic disease
have been prescribed, as many as 80% of all patients fail to carry out correctly
at least one element of the disease treatment regimen. Most health care
information systems in use today gather information in the hospital or at the
clinician's office and do not monitor adequately patient condition away from the
point of care. The Company believes that by coupling effective treatment
protocols with the ability to monitor patient condition and treatment regimen
compliance between physician interventions, health care providers and payors can
significantly enhance clinical outcomes while reducing costs.
The Company's strategy is to capitalize on its information technology
platform to become the leading provider of patient-centered health care
information programs. The key elements of this strategy are to: (i) introduce
information system programs for specific diseases on a customized basis for
client-specified disease targets and on a standardized basis for diseases
selected by the Company and marketed to multiple clients; (ii) implement
marketing and awareness programs to establish and demonstrate the expected
clinical benefits and cost-effectiveness of the Company's systems through
clinical studies, protocol development and research publications; (iii) analyze
collected outcomes data with advanced computational intelligence, including
neural networks, fuzzy logic and genetic algorithms, to develop improved
clinical protocols; (iv) develop or acquire additional technologies that enhance
its ability to gather information and interact with patients while the patient
is away from the health care provider; and (v) leverage the Company's technology
platform to develop additional applications, such as clinical trial data
compilation and analysis, patient surveys, clinical outcomes evaluation, demand
management and case management.
The Company was founded in February 1995, signed its first customer contract
in September 1995 and enrolled its first patients in a disease state management
program in October 1996. Bristol-Myers Squibb Company, U.S. Pharmaceuticals
Division and Oncology/Immunology Division (collectively, "Bristol-Myers") has
retained the Company to provide customized disease state management systems for
congestive heart failure, cardiovascular disease, chronic pain and weight
management. The Bristol-Myers agreements call for development fees and per
patient operational fees. The Company has also entered into services agreements
for standardized programs with American HomePatient, Inc. ("American
HomePatient"), Harris Methodist Health Plan ("Harris Methodist"), Equifax
Healthcare Administrative Services, a division of Equifax, Inc. ("Equifax"), and
Health Resources, Inc. ("Health Resources") for patients suffering from asthma
and with Equifax and Health Resources for patients suffering from diabetes. Each
of the Company's agreements for its standardized programs provides for the
Company to receive a per patient fee for services provided to enrolled patients
over the duration of the program.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................................... 2,000,000 shares (1)
Common Stock outstanding after this offering................... 7,653,202 shares (1)(2)
Use of proceeds................................................ For expansion of systems capabilities, for sales and
marketing activities and for working capital and
other general corporate purposes
Nasdaq National Market symbol.................................. PATI
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FROM FROM FROM FEBRUARY 22,
FEBRUARY 22, 1995 FEBRUARY 22, 1995 NINE MONTH PERIOD 1995
(INCEPTION) TO (INCEPTION) TO ENDED (INCEPTION) TO
DECEMBER 31, 1995 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 113,000 7,500 $ 644,146 $ 757,146
Total operating expenses............................. 1,255,661 614,995 2,677,089 3,932,750
----------------- ------------------ ------------------ ------------------
Operating loss....................................... (1,142,661) (607,495) (2,032,943) (3,175,604)
Interest income...................................... 26,009 483 53,333 79,342
----------------- ------------------ ------------------ ------------------
Net loss............................................. $ (1,116,652) $ (607,012) $ (1,979,610) $ (3,096,262)
----------------- ------------------ ------------------ ------------------
----------------- ------------------ ------------------ ------------------
Net loss per common and
common share equivalents(3)......................... $ (.18) $ (.10) $ (.32) $ (.50)
----------------- ------------------ ------------------ ------------------
----------------- ------------------ ------------------ ------------------
Weighted average common and common share
equivalents(3)...................................... 5,954,299 5,932,475 6,215,220 6,215,220
----------------- ------------------ ------------------ ------------------
----------------- ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(4)
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................ $ 2,022,628 $ 16,302,628
Working capital...................................................................................... 1,470,088 15,750,088
Total assets......................................................................................... 2,986,652 17,266,652
Total liabilities.................................................................................... 788,137 788,137
Deficit accumulated during the development stage..................................................... (3,096,262) (3,096,262)
Total stockholders' equity........................................................................... 2,198,515 16,478,515
</TABLE>
- ---------------
(1) Does not include 300,000 shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of November 15,
1996. Includes 2,046,000 shares of Common Stock issuable upon conversion in
connection with this offering of all outstanding shares of the Company's
Series A Convertible Preferred Stock (the "Series A Preferred Stock") and
Series B Convertible Preferred Stock (the "Series B Preferred Stock")
(collectively with the Series A Preferred Stock, the "Convertible Preferred
Stock"). Excludes (i) 892,320 shares of Common Stock issuable upon the
exercise of outstanding options under the Company's stock option plan (the
"Plan") at a weighted average exercise price of $2.34 per share (and up to
187,680 shares of Common Stock issuable pursuant to additional options that
may be granted under the Plan) and (ii) 100,440 shares of Common Stock
issuable upon the exercise of outstanding stock purchase warrants at a
weighted average exercise price of $.83 per share. See "Management--Stock
Option Plan," "Description of Capital Stock" and Note 5 of Notes to
Financial Statements.
(3) See Note 1 of Notes to Financial Statements for a description of the
calculation of net loss per share.
(4) Gives effect to the conversion of all outstanding shares of Convertible
Preferred Stock into 2,046,000 shares of Common Stock in connection with
this offering and the sale of the shares of Common Stock offered hereby
(after deducting underwriting discounts and commissions and estimated
offering expenses) and receipt of the estimated net proceeds therefrom.
------------------
UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE FROM THE COMPANY UP TO 300,000
ADDITIONAL SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY, (II) GIVES
EFFECT TO A .72-FOR-ONE REVERSE STOCK SPLIT WITH RESPECT TO THE COMMON STOCK TO
BE EFFECTED PRIOR TO THE CLOSING OF THIS OFFERING, (III) REFLECTS, UPON THE
CLOSING OF THIS OFFERING, THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF
CONVERTIBLE PREFERRED STOCK INTO AN AGGREGATE OF 2,046,000 SHARES OF COMMON
STOCK AND (IV) DOES NOT GIVE EFFECT TO THE ISSUANCE OF 992,760 SHARES OF COMMON
STOCK ISSUABLE UPON THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS (AND UP TO
187,680 SHARES OF COMMON STOCK ISSUABLE PURSUANT TO ADDITIONAL OPTIONS THAT MAY
BE GRANTED UNDER THE PLAN). SEE "CAPITALIZATION," "DILUTION," "MANAGEMENT--STOCK
OPTION PLAN," "DESCRIPTION OF CAPITAL STOCK," "UNDERWRITING" AND NOTES 4 AND 5
OF NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING ANY OF THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
DEVELOPMENT STAGE COMPANY WITH LIMITED OPERATING HISTORY; OPERATING LOSSES IN
EACH PERIOD OF OPERATION
The Company was formed on February 22, 1995, is in the development stage and
has a limited operating history from which to evaluate its performance. To date,
the Company has generated limited revenues and through September 30, 1996 had
incurred cumulative losses of $3,096,262, which losses are continuing at an
increasing rate. Although the Company has completed the development of its
integrated information capture and delivery system, and the Company is
developing several disease state management programs for specific diseases,
further development activities may be necessary to implement these programs. No
patients had been enrolled in any disease state management program of the
Company until October 1996, when a limited number of patients were enrolled in
the Company's secondary cardiovascular disease program. The Company anticipates
that its losses will continue at least until it has completed the development of
programs for several customers and has begun providing services to a substantial
number of patients for such customers. The Company may encounter problems and
delays in its research and development or sales and marketing efforts, and the
failure to address these problems and delays successfully could have a material
adverse effect on the Company's business prospects. The Company's prospects must
be considered in light of the numerous risks, expenses, delays and difficulties
frequently encountered in the establishment of a new business in an industry
characterized by intense competition, as well as the risks inherent in the
development of new programs and the commercialization of new services. There can
be no assurance that the Company's development efforts will result in an ability
to provide any services that can be marketed or operated in a commercially
successful manner, or that any such services will be able to compete with other
services that might be in the market at the time that the Company's services are
made available. There can be no assurance that the Company will achieve
recurring revenue or profitability on a consistent basis or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements.
RELIANCE ON COMMERCIALLY UNTESTED TECHNOLOGY; UNCERTAINTY OF SYSTEM DEVELOPMENT
AND COMMERCIALIZATION
The Company has only engaged in limited use of its integrated information
capture and delivery system, and no assurance can be given that substantial
additional programming and development efforts will not be necessary to allow
the Company to contact patients and to publish and process information with the
required speed and accuracy for commercial use. The Company may be required to
devote considerable additional efforts and resources to enhance and refine its
software and hardware, and such efforts will remain subject to all of the risks
inherent in the development and commercialization of new products and services,
including unanticipated delays, expenses, additional technical problems or
difficulties, changes in customer preferences or needs, as well as the possible
insufficiency of funds which could result in abandonment or substantial change
in the development or commercialization of the Company's services. There can be
no assurance that the Company will be able to complete the development of its
disease management programs or that it will be able to develop the additional
program enhancements needed to keep pace with anticipated changes in customer
preferences and needs. See "Business--Information Capture, Delivery and Analysis
Technologies."
TERMINABILITY OF AGREEMENTS; EXCLUSIVITY PROVISIONS
The Company's current services agreements with its customers generally may
be terminated by those customers without cause upon notice of between 30 and 180
days. In addition, the Company has agreed not
5
<PAGE>
to engage or participate in any project other than those under development for
Bristol-Myers that involve the development or implementation of a program
similar to those developed for Bristol-Myers for specified time periods (the
"Exclusivity Periods"). In general, at the completion of the Exclusivity
Periods, Bristol-Myers has the right to negotiate an exclusive arrangement for
these disease state management programs provided that a specified minimum number
of patients have enrolled in the programs or that it agrees to pay an
exclusivity fee. Bristol-Myers has the further right, in the event exclusive
arrangements cannot be negotiated, to match any bona fide offers made to the
Company for disease state management programs for these categories of patients
for a period of time from the conclusion of the Exclusivity Periods. These
exclusivity provisions could restrict the Company's ability to market its
services to other customers. The Company will charge its customers a per patient
program fee; however, while Bristol-Myers is required to enroll a minimum number
of patients in the congestive heart failure and weight enhancement programs,
there are no such requirements for any of the Company's other programs. In
general, customer contracts may include significant performance criteria and
implementation schedules for the Company. Failure to satisfy such criteria or
meet such schedules could result in termination of the agreements. See
"Business-- Customer Agreements."
SIGNIFICANT CUSTOMER CONCENTRATION
The Company's current contracts are concentrated in a small number of
customers, with five of the Company's most significant contracts being with
Bristol-Myers. The Company expects that its sales of services will be
concentrated in a small number of customers for the foreseeable future.
Consequently, the loss of any one of its customers could have a material adverse
effect on the Company and its operations. There can be no assurance that
customers will enroll a sufficient number of patients in the programs developed
by the Company for the Company to achieve or maintain profitability, or that
customers will renew their contracts upon expiration or on terms favorable to
the Company. See "Business--Customer Agreements."
NEW CONCEPT; UNCERTAINTY OF MARKET ACCEPTANCE; LIMITATIONS OF COMMERCIALIZATION
STRATEGY
In connection with the commercialization of the Company's health information
system, the Company is marketing a new service designed to link patients, health
care providers and payors in order to provide specialized disease state
management for targeted chronic diseases. This is a new business concept in an
industry characterized by an increasing number of market entrants who have
introduced or are developing an array of new services. As is typical in the case
of a new business concept, demand and market acceptance for newly introduced
services are subject to a high level of uncertainty, and there can be no
assurance as to the ultimate level of market acceptance for the Company's
system, especially in the health care industry, in which the containment of
costs is emphasized. The Company has entered into contracts with a very limited
number of customers and has just recently enrolled a limited number of patients
in only one disease state management program. No conclusions can be made with
respect to market acceptance of the Company's services based on this customer
base. Because of the subjective nature of patient compliance, the Company may be
unable, for an extensive period of time, to develop a significant amount of data
to demonstrate to potential customers the effectiveness of its services. Even
after such time, no assurance can be given that the Company's data and results
will be convincing or determinative as to the success of its system. There can
be no assurance that increased marketing efforts and the implementation of the
Company's strategies will result in market acceptance for its services or that a
market for the Company's services will develop or not be limited. See
"Business--Sales and Marketing."
DEPENDENCE ON CUSTOMERS FOR MARKETING AND PATIENT ENROLLMENT
The Company has limited marketing experience and limited financial,
personnel and other resources to undertake extensive marketing activities. One
element of the Company's marketing strategy involves marketing specialized
disease state management programs to pharmaceutical companies and health care
providers, with the intent that those customers will market the program to
parties responsible for the payment of health care costs, who will enroll
patients in the programs. Accordingly, the Company will to a degree be dependent
upon its customers, over whom it has no control, for the marketing and
implementation of its
6
<PAGE>
initial programs. The timing and extent of patient enrollment is completely
within the control of the Company's customers. To the extent that an adequate
number of patients are not enrolled in the program, or enrollment of initial
patients by a customer is delayed for any reason, the Company's revenue may be
insufficient to support its activities. See "Business--Customer Agreements."
UNPREDICTABILITY OF PATIENT BEHAVIOR MAY AFFECT SUCCESS OF PROGRAMS
The ability of the Company to monitor and modify patient behavior and to
provide information to health care providers and payors, and consequently the
success of the Company's disease state management system, will be dependent upon
the accuracy of information received from patients. The Company does not expect
that it will take specific measures to determine the accuracy of information
provided to the Company by patients regarding their medical histories. No
assurance can be given that the information provided to the Company by patients
will be accurate. To the extent that patients have chosen not to comply with
prescribed treatments, such patients might provide inaccurate information to
avoid detection. Because of the subjective nature of medical treatment, it will
be difficult for the Company to validate or confirm any such information. In the
event that patients enrolled in the Company's programs provide inaccurate
information to a significant degree, the Company would be materially and
adversely affected. Furthermore, there can be no assurance that patient
interventions by the Company will be successful in modifying patient behavior,
improving patient health or reducing costs. Many potential customers may seek
data from the Company with respect to the results of its programs prior to
retaining it to develop new disease state management or other health information
programs. The Company's ability to market its system to new customers may be
limited if it is unable to demonstrate successful results for its programs. See
"Business--Sales and Marketing."
UNCERTAINTIES REGARDING ABILITY TO MANAGE RAPID GROWTH AND EXPANSION
The Company is retaining a program development and operating staff
sufficient to handle its current and anticipated business commitments, and
consequently is experiencing a period of rapid growth and expansion. Such growth
and expansion has placed and will continue to place a significant strain on the
Company's development, administrative personnel and other resources. The
Company's ability to manage such growth effectively will require the Company to
continue improving its operational, management and financial systems and
controls and to train, motivate and manage its employees. As a result, the
Company is subject to certain risks of expansion, including the risk that it
will be unable to retain the necessary personnel and acquire other resources
necessary to manage such growth adequately. In addition, to the extent that the
Company commences its expansion activities in anticipation of growth, it may
undertake significant financial commitments for which it will have
responsibility whether or not it enters into any additional services agreements
and regardless of the timing of payment for services. Accordingly, the Company
will likely have significant financial commitments without necessarily having
the revenues to offset such expenses. See "Use of Proceeds."
SIGNIFICANT AND EXTENSIVE CHANGES IN THE HEALTH CARE INDUSTRY
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. Several lawmakers have announced that they
intend to propose programs to reform the U.S. health care system. These programs
may contain proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change the operating environment for the
Company and its targeted customers. Health care industry participants may react
to these proposals and the uncertainty surrounding such proposals by curtailing
or deferring certain expenditures, including those for the Company's programs.
The Company cannot predict what impact, if any, such changes in the health care
industry might have on its business, financial condition and results of
operations. In addition, many health care providers are consolidating to create
larger health care delivery enterprises with greater regional market power. As a
result, the remaining enterprises could have greater bargaining power, which may
lead to price erosion of the Company's programs. The failure of the Company to
maintain adequate price levels could have a material adverse effect on the
Company. See "Business--Industry Overview."
7
<PAGE>
RAPID TECHNOLOGICAL CHANGE AND OBSOLESCENCE
The development and maintenance of the telecommunications and computer
publishing systems through which the Company operates its integrated information
capture and delivery system is a major component of its business. The
communications and information technology industries are subject to rapid and
significant technological change, and the ability of the Company to operate and
compete is dependent in significant part on its ability to update and enhance
its system continuously. In order to do so, the Company must be able to utilize
effectively its research and development capabilities and implement new
technology in order to enhance its systems. At the same time, the Company must
not jeopardize its ability to contact patients and to process and publish
patient information or adapt to customer preferences or needs. There can be no
assurance that the Company will be able to develop and implement technological
changes to its system. In addition, following this offering the Company will
maintain a significant investment in its technology, and therefore is subject to
the risk of technological obsolescence. If the Company's technology were
rendered obsolete, the Company's business and operating results would be
materially adversely affected. See "Business--Information Capture, Delivery and
Analysis Technologies."
EXTENSIVE GOVERNMENT REGULATION
The health care industry, including the current and proposed business of the
Company, is subject to extensive regulation by both the Federal and state
governments. A number of states have extensive licensing and other regulatory
requirements applicable to companies that provide health care services.
Additionally, services provided to health benefit plans in certain cases are
subject to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA") and may be affected by other state and Federal statutes.
Generally, state laws prohibit the practice of medicine and nursing without
a license. Many states interpret the practice of nursing to include health
teaching, health counseling, the provision of care supportive to or restorative
of life and well being and the execution of medical regimens prescribed by a
physician. Accordingly, to the extent that the Company assists providers in
improving patient compliance by publishing educational materials or providing
behavior modification training to patients, such activities could be deemed by a
state to be the practice of medicine or nursing. Although the Company has not
conducted a survey of the applicable law in all 50 states, it believes that it
is not engaged in the practice of medicine or nursing. There can be no
assurance, however, that the Company's operations will not be challenged as
constituting the unlicensed practice of medicine or nursing. If such a challenge
were made successfully in any state, the Company could be subject to civil and
criminal penalties under such state's law and could be required to restructure
its contractual arrangements in that state. Such results or the inability to
successfully restructure its contractual arrangements could have a material
adverse effect on the Company.
The Company is subject to Federal and state laws governing the
confidentiality of patient information. In addition, recent Federal legislation
will result in new national standards for the protection of patient information
in electronic health information transactions. Although the Company intends to
comply with all applicable laws and regulations regarding medical information
privacy, failure to do so could have an adverse effect on the Company's
business.
The Company and its customers may be subject to Federal and state laws and
regulations which govern financial and other arrangements between health care
providers. These laws prohibit certain fee splitting arrangements between health
care providers, as well as direct and indirect payments, referrals or other
financial arrangements that are designed to induce or encourage the referral of
patients to, or the recommendation of a particular provider for, medical
products and services. Possible sanctions for violation of these restrictions
include civil and criminal penalties. Further, criminal violations may result in
mandatory exclusions of up to five years and additional permissive exclusions
from participation in Medicare and Medicaid programs. See "Business--Government
Regulation."
Regulation in the health care field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's
8
<PAGE>
business could be adversely affected by the failure to obtain required licenses
and governmental approvals, comply with applicable regulations or comply with
existing or future laws, rules or regulations or their interpretations.
POTENTIAL LIABILITY AND INSURANCE
The Company will provide information to health care providers and payors
upon which determinations affecting medical care will be made, and it could
share in potential liabilities for resulting adverse medical consequences to
patients. In addition, the Company could have potential legal liability in the
event it fails to record or disseminate correctly patient information. The
Company maintains an errors and omissions insurance policy with coverage of $3
million in the aggregate and per occurrence. Although the Company does not
believe that it will directly engage in the practice of medicine or direct
delivery of medical services and has not been a party to any such litigation, it
maintains a medical liability policy with coverage of $3 million in the
aggregate and per occurrence. There can be no assurance that the Company's
procedures for limiting liability have been or will be effective, that the
Company will not be subject to litigation that may adversely affect the
Company's results of operations, that appropriate insurance will be available to
it in the future at acceptable cost or at all or that any insurance maintained
by the Company will cover, as to scope or amount, any claims that may be made
against the Company.
DEPENDENCE ON DATA PROCESSING AND TELEPHONE EQUIPMENT
The business of the Company is dependent upon its ability to store,
retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. In addition, as the Company expands its commercial
activities and patient contacts increase, an increased burden will be placed
upon the Company's telecommunications equipment to process the large number of
incoming and outgoing telephone calls that will be placed every day.
Interruption of data processing capabilities for any extended length of time,
loss of stored data, programming errors, other computer problems or
interruptions of telephone service could have a material adverse effect on the
business of the Company. See "Business--Information Capture, Delivery and
Analysis Technologies."
SUBSTANTIAL FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations may fluctuate significantly from quarter
to quarter as a result of a number of factors, including the volume and timing
of sales and the rate at which customers implement disease state management and
other health information programs within their patient populations. Accordingly,
the Company's future operating results are likely to be subject to variability
from quarter to quarter and could be adversely affected in any particular
quarter. Due to the foregoing factors, it is possible that the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Common Stock could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company has been substantially dependent upon private placements of its
equity securities, through which the Company has raised $5.3 million to date, to
fund its research and development activities and working capital requirements.
In order to implement programs using the Company's integrated information
capture and delivery system, the Company will be required to devote substantial
additional assets to the development of technology, the construction of physical
facilities and the acquisition of telephone and computer equipment. The Company
will also be required to retain the services of employees in advance of
obtaining contracts to provide services. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations (including
with respect to the timing of research and product development and the costs
associated with marketing and promotion of its system), that the proceeds of
this offering, together with available resources, will be sufficient to satisfy
the Company's contemplated cash requirements for at least 24 months following
the consummation of this offering. In the event that the Company's plans change,
or its assumptions change or prove to be inaccurate, the Company could be
required to seek additional financing or curtail its activities. The Company has
no current arrangements with respect to, or sources of, additional financing.
Any additional equity financing may involve substantial dilution to the
9
<PAGE>
interest of the Company's stockholders, and any debt financing could result in
operational or financial restrictions on the Company. There can be no assurance
that any additional financing will be available to the Company on acceptable
terms or at all. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
INTENSE COMPETITION
The market for health care information products and services is intensely
competitive. Competitors vary in size and in scope and breadth of products and
services offered. Many of the Company's competitors have significantly greater
financial, technical, product development and marketing resources than the
Company. Furthermore, other major information, pharmaceutical and health care
companies not presently offering disease state management or other health
information services may enter into the market in which the Company intends to
compete. With sufficient financial and other resources, many of these
competitors may provide services similar to those of the Company without
substantial barriers. The Company's potential competitors include specialty
health care information companies, health care information system and software
vendors, health care management organizations, pharmaceutical companies and
other service companies within the health care industry that have publicly
stated that they intend to be involved in providing comprehensive disease state
management or other health information services. The Company will also compete
against other companies that provide statistical and data management services,
including clinical trial services to pharmaceutical companies. Many potential
competitors have substantial installed customer bases in the health care
industry and the ability to fund significant product development and acquisition
efforts. There can be no assurance that competitive pressures will not have a
material adverse effect on the Company. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success will depend upon its ability to retain
Donald A. Carlberg, its President and Chief Executive Officer, and a core group
of key officers and employees. The Company has entered into an employment
contract with Mr. Carlberg, expiring on March 1, 1997, but does not have
employment agreements or non-competition agreements with any other employees.
The Company maintains key man life insurance in the amount of $2 million on the
life of Mr. Carlberg and in the amount of $1 million on the life of Gregory D.
Brown, its Senior Vice President and Chief Financial Officer. The loss of
certain key employees or the Company's inability to attract and retain other
qualified employees could have an adverse impact on the Company's business.
Also, the Company's ability to transition from development stage to commercial
operations will depend upon, among other things, the successful recruiting of
highly skilled managerial and marketing personnel with experience in business
activities such as those contemplated by the Company. Competition for the type
of highly skilled individuals sought by the Company is intense. There can be no
assurance that the Company will be able to retain existing employees or that it
will be able to find, attract and retain skilled personnel on acceptable terms.
See "Management."
CONTROL OF THE COMPANY
Following this offering, the Company will be controlled by the executive
officers, directors and certain stockholders of the Company who will
beneficially own in the aggregate approximately 55% of the outstanding Common
Stock. As a result of such ownership, these stockholders, in the event they act
in concert, will have control over the management policies of the Company and
all matters requiring approval by the stockholders of the Company, including the
election of directors. See "Principal Stockholders."
MANAGEMENT'S DISCRETION WITH RESPECT TO USE OF PROCEEDS
The Company intends to use approximately $9 million of the net proceeds of
this offering for capital improvements and to expand telephone and computer
capabilities and approximately $4 million of the net proceeds for sales and
marketing. The balance of the net proceeds have not been designated for any
specific use. Rather, the Company intends to use the net proceeds primarily for
general corporate purposes, including working capital and potential acquisitions
of companies or technologies that complement or expand the Company's business.
Accordingly, management will have significant flexibility in applying the net
proceeds of this offering. See "Use of Proceeds."
10
<PAGE>
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering or that the market price of the Common Stock
will not decline below the public offering price. The initial public offering
price of the Common Stock has been determined by negotiations between the
Company and the Representatives of the Underwriters. For a description of the
factors considered in determining the initial public offering price, see
"Underwriting." The market price of the Common Stock following this offering may
be highly volatile, as has been the case with the securities of other start-up
companies. In recent years, the stock market has experienced a high level of
price and volume volatility, and market prices for the stock of many companies
(particularly of small and emerging growth companies) have experienced wide
price fluctuations which have not necessarily been related to the operating
performance of such companies. These broad market fluctuations could have a
material adverse effect on the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
The initial public offering price per share of the Common Stock will exceed
the net tangible book value per share of the Common Stock. Accordingly, the
purchasers of shares of Common Stock in this offering will experience immediate
dilution in net tangible book value per share of $5.85 after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company has not paid any dividends on its Common Stock and does not anticipate
paying any dividends on such stock in the foreseeable future. See "Dividend
Policy" and "Dilution."
EFFECT ON SHARE PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
7,653,202 shares of Common Stock (based on the number of shares of Common Stock
outstanding as of November 15, 1996). Of these shares, the 2,000,000 shares
offered hereby (2,300,000 shares if the Underwriters' over-allotment option is
exercised in full) will be eligible for immediate sale in the public market
without restriction unless they are held by affiliates of the Company. The
5,653,202 outstanding shares not sold in this offering will be "restricted
securities" within the meaning of Rule 144 ("Rule 144") promulgated under the
Securities Act and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available. Under current
law, none of these shares will be eligible for sale under Rule 144 until at
least February 22, 1997, when 3,600,000 of these shares will be eligible for
sale pursuant to Rule 144, subject to the volume, manner of sale and other
limitations thereof and to the lock-up agreements with the Underwriters
described below. The holders of the 2,046,000 shares of Common Stock issuable
upon conversion of the Convertible Preferred Stock have demand and piggy-back
registration rights with respect to their shares commencing one year after the
completion of this offering. The holders of substantially all of the 5,653,202
shares of Common Stock outstanding prior to this offering have agreed not to
sell or otherwise dispose of any such shares for at least 180 days after the
date of this Prospectus without the prior written consent of Cowen & Company. No
predictions can be made as to the effect, if any, that public sale of shares of
Common Stock, or the availability for sale of such shares, will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market, particularly by directors and
officers of the Company, or the perception that such sales could occur, could
have an adverse impact on the market price of the Common Stock and the Company's
ability to raise additional capital in the future. See "Shares Eligible for
Future Sale."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's certificate of incorporation and bylaws
may inhibit changes in control of the Company not approved by the Company's
board of directors. The Company will also be afforded the protection of Section
203 of the Delaware General Corporation Law ("Delaware Law"), which could have
similar effects. These provisions could limit the price that investors might be
willing to pay in the future for shares of Common Stock, and consequently could
adversely affect the market for the Common Stock. See "Description of Capital
Stock."
11
<PAGE>
THE COMPANY
The Company was incorporated in the State of Delaware on February 22, 1995
under the name DSMI Corp., changed its name to Disease State Management, Inc. on
October 13, 1995 and then changed its name to Patient Infosystems, Inc. on June
28, 1996. The Company's principal executive offices are located at 46 Prince
Street, Rochester, New York 14607, and its telephone number is 716-242-7200.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting underwriting discounts and commissions and
estimated expenses payable by the Company in connection with this offering, are
approximately $14,280,000 ($16,512,000 if the Underwriters' over-allotment
option is exercised in full).
The Company intends to use approximately $9 million of the net proceeds of
this offering for capital improvements for expansion of telephone and computer
capabilities, approximately $4 million for sales and marketing and the balance
of the net proceeds for working capital and general corporate purposes, which
may include acquisition of companies or technologies that complement the
Company's business. The Company is not a party to any purchase agreement or
letter of intent with respect to any acquisitions.
The Company anticipates that the net proceeds of this offering, together
with the Company's cash and expected interest income thereon, should be
sufficient to finance the Company's contemplated cash requirements for at least
24 months. The actual amount of the net proceeds of this offering expended for
each purpose may vary significantly depending upon many factors, including the
progress of the Company's commercialization efforts, the success of the
Company's marketing efforts and the timing of the development of specific
programs for potential customers. Pending application of the net proceeds as
described above, the Company intends to invest the net proceeds of the offering
in short-term, interest bearing securities of investment grade or in short-term
bank deposits. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain all future earnings, if any, to fund the development
and growth of its business. Any future determination to pay cash dividends will
be at the discretion of the Board of Directors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 on (i) an actual basis and (ii) an as adjusted basis to
reflect the conversion of the Convertible Preferred Stock into 2,046,000 shares
of Common Stock upon the closing of this offering and receipt of the estimated
net proceeds from the Company's sale of 2,000,000 shares of Common Stock
pursuant to this offering, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Stockholders' equity:
Series A Convertible Preferred Stock, $0.01 par value; 1,800,000 shares
designated, issued and outstanding, actual; and none issued or outstanding,
as adjusted................................................................ $ 18,000 $ --
Series B Convertible Preferred Stock, $0.01 par value, 600,000 shares
designated, issued and outstanding, actual; and none issued or outstanding,
as adjusted................................................................ 6,000 --
Common Stock, $0.01 par value; 20,000,000 shares authorized; 3,607,202
shares issued and outstanding, actual; and 7,653,202 shares issued and
outstanding, as adjusted(1)................................................ 36,072 76,532
Additional paid-in capital.................................................... 5,234,705 19,498,245
Deficit accumulated during the development stage.............................. (3,096,262) (3,096,262)
------------- -------------
Total stockholders' equity.................................................... $ 2,198,515 $ 16,478,515
------------- -------------
------------- -------------
</TABLE>
- ------------
(1) Excludes (i) 892,320 shares of Common Stock issuable upon the exercise of
options outstanding under the Company's stock option plan at a weighted
average exercise price of $2.34 per share (and up to 187,680 shares of
Common Stock issuable pursuant to additional options that may be granted
under such Plan) and (ii) 100,440 shares of Common Stock issuable upon the
exercise of outstanding stock purchase warrants at a weighted average
exercise price of $.83 per share. See "Management--Stock Option Plan,"
"Description of Capital Stock" and Note 5 of Notes to Financial Statements."
13
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1996 was $2,198,515, or $.39 per share. Pro forma net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total assets less intangible assets and total liabilities) by the number of
shares outstanding, after giving effect to the conversion of all outstanding
shares of Convertible Preferred Stock into 2,046,000 shares of Common Stock.
Without taking into account any changes in pro forma net tangible book value
after September 30, 1996, other than to give effect to the sale of the shares of
Common Stock offered by the Company hereby (after deducting underwriting
discounts and commissions and estimated offering expenses), the net tangible
book value of the Company as of September 30, 1996 would have been approximately
$16,478,515, or $2.15 per share. This represents an immediate increase in net
tangible book value of $1.76 per share to existing stockholders and an immediate
dilution of $5.85 per share to new stockholders. The following table illustrates
this per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $ 8.00
Pro forma net tangible book value per share
as of September 30, 1996......................................... $ .39
Increase per share attributable to new investors.................. 1.76
---------
Pro forma net tangible book value per share
after this offering................................................ 2.15
---------
Dilution per share to new investors................................. $ 5.85
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996 (giving effect to the conversion of all outstanding shares of Convertible
Preferred Stock into 2,046,000 shares of Common Stock), the number of shares
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and new investors (before deduction of
estimated underwriting discounts and commissions and offering expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------------- ---------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 5,653,202 73.9% $ 5,303,402 24.9% $ 0.94
New investors................................ 2,000,000 26.1% 16,000,000 75.1% 8.00
------------ ----- ------------- -----
Total.................................... 7,653,202 100.0% $ 21,303,402 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The foregoing tables assume no exercise of options or warrants outstanding
as of September 30, 1996. At such date, there were outstanding (i) options to
purchase 892,320 shares of Common Stock at a weighted average exercise price of
$2.34 per share and (ii) warrants to purchase 100,440 shares of Common Stock at
a weighted average exercise price of $.83 per share. Had the exercise of options
and warrants outstanding at September 30, 1996 been reflected in the
computation, the pro forma net tangible book value per share before the offering
would have been $.66, the net tangible book value per share after the offering
would have been $2.16, and the dilution per share to new investors would have
been $5.84. See "Management--Stock Option Plan," "Description of Capital Stock"
and Note 5 of Notes to Financial Statements.
14
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1995 and for
the period from February 22, 1995 (Inception) to December 31, 1995 have been
derived from the Company's financial statements, which have been audited by
Deloitte & Touche LLP, independent auditors, and are included elsewhere in this
Prospectus. The selected financial data set forth below as of September 30,
1996, for the nine months then ended, for the period from Inception to September
30, 1995 and for the period from Inception to September 30, 1996 have been
derived from the Company's unaudited financial statements, have been prepared by
the Company on a basis consistent with the Company's audited financial
statements and in the opinion of management of the Company reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information. The results of operations for the nine
month period ended September 30, 1996 and for the period from Inception to
September 30, 1995 are not necessarily indicative of results that may be
expected for the full fiscal year or any future period. The financial data for
the Company should be read in conjunction with the Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FROM FROM FROM FEBRUARY 22,
FEBRUARY 22, 1995 FEBRUARY 22, 1995 NINE MONTH 1995 (INCEPTION)
(INCEPTION) TO (INCEPTION) TO PERIOD ENDED TO
DECEMBER 31, 1995 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 113,000 $ 7,500 $ 644,146 $ 757,146
Operating expenses:
Cost of sales.................... 111,870 7,621 601,124 712,994
Sales and marketing.............. 375,384 228,466 616,545 991,929
General and administrative....... 678,498 298,998 1,298,801 1,977,299
Research and development......... 89,909 79,910 160,619 250,528
----------------- ------------------ ------------------ ------------------
Total operating expenses....... 1,255,661 614,995 2,677,089 3,932,750
----------------- ------------------ ------------------ ------------------
Operating loss..................... (1,142,661) (607,495) (2,032,943) (3,175,604)
Interest income.................... 26,009 483 53,333 79,342
----------------- ------------------ ------------------ ------------------
Net loss........................... $ (1,116,652) $ (607,012) $ (1,979,610) $ (3,096,262)
----------------- ------------------ ------------------ ------------------
----------------- ------------------ ------------------ ------------------
Net loss per common and common
share equivalents(1).............. $ (.18) $ (.10) $ (.32) $ (.50)
----------------- ------------------ ------------------ ------------------
----------------- ------------------ ------------------ ------------------
Weighted average common and common
share equivalents(1).............. 5,954,299 5,932,475 6,215,220 6,215,220
----------------- ------------------ ------------------ ------------------
----------------- ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 1,182,080 $ 2,022,628
Working capital.......................................................... 611,655 1,470,088
Total assets............................................................. 1,763,629 2,986,652
Total liabilities........................................................ 598,464 788,137
Deficit accumulated during the development stage......................... (1,116,652) (3,096,262)
Total stockholders' equity............................................... 1,165,165 2,198,515
</TABLE>
- ------------
(1) See Note 1 of Notes to Financial Statements for a description of the
calculation of net loss per share.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company and Notes thereto appearing elsewhere in
this Prospectus.
OVERVIEW
The Company was formed on February 22, 1995, is in the development stage and
has a limited operating history from which to evaluate its performance. Although
the Company has completed the development of its integrated information capture
and delivery system and is developing several disease state management programs
for specific diseases, further development activities may be necessary to
implement these programs. In October 1996, the Company began enrolling patients
in its first disease state management program. This program was developed for
the treatment of patients suffering from secondary cardiovascular disease.
The Company has generated limited revenues to date and has recorded losses
since inception, totalling $3,096,262 through September 30, 1996, which losses
are continuing to date at an increasing rate. The Company anticipates that its
losses will continue at least until it has completed the development of programs
for several customers and has begun providing services to a substantial number
of patients for such customers.
The Company has entered into services agreements with Bristol-Myers to
develop, implement and operate programs for: (i) patients who have recently
experienced certain cardiovascular events; (ii) patients who have been diagnosed
with primary congestive heart failure; (iii) patients suffering from anorexia or
cachexia secondary to diagnosis of cancer or AIDS; and (iv) patients suffering
from chronic pain. In addition, the Company has entered into services agreements
with American HomePatient, Equifax, Health Resources and Harris Methodist to
operate a program for patients suffering from asthma and with Equifax and Health
Resources to operate a program for patients suffering from diabetes. These
contracts provide for, and the Company anticipates future contracts will provide
for, fees paid by its customers based upon the number of patients participating
in each of its programs, as well as initial program development fees from
customers for the development of a disease-specific program. The Company's
program development contracts typically require payment from the customer at the
time that the contract is executed, with additional payments made as certain
development milestones are met. Development contract revenue is recognized on a
percentage of completion basis, in accordance with the ratio of total
development cost incurred to the estimated total development costs for the
entire project. Losses, if any, related to program development will be
recognized in full as identified. The Company's program operation contracts call
for a fixed fee to be paid by the customer for each patient enrolled for a
series of program services as defined in the contract. The timing of customer
payments varies by contract, but will typically occur in advance of the Company
providing associated services. Revenues from program operations will be
recognized ratably as the program services are delivered. The amount of the per
patient fee is expected to vary from program to program depending upon the
number of patient contacts required, the complexity of the interventions and the
detail of the reports generated. The Company has not capitalized any costs
related to the development of software for use in its disease state management
programs since all of such software has been developed for internal use.
The sales cycle for the Company's programs is expected to extend for periods
of six to nine months from initial contact to contract execution. During these
periods, the Company may expend substantial time, effort and funds to prepare a
contract proposal and negotiate the contract. The Company may be unable to
consummate a commercial relationship after the expenditure of such time, effort
and financial resources.
RESULTS OF OPERATIONS
The Company generated revenue of $113,000 during the period from inception
on February 22, 1995 to December 31, 1995, and $644,146 during the nine months
ended September 30, 1996. During the period from inception to December 31, 1995,
$84,000 of revenue was derived from development fees with respect to
16
<PAGE>
disease state management programs and $29,000 of revenue was derived from fees
with respect to the development and conduct of a patient satisfaction survey and
a patient focus group. During the nine months ended September 30, 1996, $616,697
of revenue was derived from development fees with respect to disease state
management programs, $23,056 of revenue was derived from the licensing fees with
respect to disease state management programs, and $4,393 of revenue was derived
from fees with respect to the development and conduct of a patient satisfaction
survey and a patient focus group. The increase in program development fees
reflects the increase in the level of development activities for the Company's
customized programs. The increase in program licensing fees reflects the
initiation of licensing of the Company's standardized programs. The decrease in
revenues from the development and conduct of a patient satisfaction survey and a
patient focus group is a result of the completion of that project.
Cost of sales include salaries and related benefits, services provided by
third parties, and other expenses associated with the development of disease
state management programs and a patient satisfaction survey and assembly of a
patient focus group. Cost of sales was $111,870 from inception to December 31,
1995, and $601,124 for the nine months ended September 30, 1996. The increase in
these costs reflects an increased level of program development activities.
Sales and marketing expenses from inception to December 31, 1995 were
$375,384, and were $616,545 for the nine months ended September 30, 1996. These
costs consisted primarily of salaries, related benefits and travel costs. These
expenditures allowed the Company to undertake initial marketing efforts to
pharmaceutical companies, payors and other health care services organizations.
The increase in these costs from 1995 to 1996 reflects an increase in the size
of the Company's sales and marketing staff.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of the Company. General and administrative expenses from inception to
December 31, 1995 were $678,498, and were $1,298,801 for the nine months ended
September 30, 1996. These expenditures were incurred to develop the corporate
infrastructure necessary to support anticipated program development and
operations. The increase in these costs from 1995 to 1996 was caused by an
increase in the Company's level of business activity, and the addition of
required administrative personnel.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to the Company's research and
development personnel for development of certain components of the integrated
information capture and delivery system, as well as development of the Company's
standardized disease state management programs. Research and development
expenses from inception to December 31, 1995 were $89,909, and were $160,619 for
the nine months ended September 30, 1996. The increase in these costs from 1995
to 1996 reflects initiation of development of the Company's standardized disease
state management programs for patients suffering from asthma and diabetes.
The Company had a net loss of $1,116,652 from inception to December 31,
1995, representing a loss of $.18 per share, and a net loss of $1,979,610 for
the nine months ended September 30, 1996, representing a loss of $.32 per share.
See Note 1 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $1,470,088. Since
its inception the Company has funded its operations, working capital needs and
capital expenditures from private placements of equity securities. The Company's
initial capitalization of $500,000 was completed in February 1995. The Company
received $1,800,000 from the sale of additional equity securities in a private
placement during the third quarter of 1995, $1,600,000 of which was received in
August 1995, and $200,000 of which was received in September 1995, and
$3,000,000 from the sale of additional equity securities in a private placement
during the second quarter of 1996, $2,825,000 of which was received in May 1996
and $175,000 of which was received in June 1996.
17
<PAGE>
The Company's development contracts generally require that payments be made
by the customer at the time of contract execution and at the achievment of
certain milestones in the development process. These payments are normally
received in advance of the Company's recognition of the associated revenue. The
timing of customer payments for program operation services varies by contract,
but typically occurs prior to the associated services being provided. The
Company recognizes deferred revenue for amounts billed for these services in
advance of the rendering of the services. The advance payments have been a
source of liquidity for the Company. The Company anticipates that its billing
practices are likely to continue in this manner in the forseeable future.
The Company has been substantially dependent upon private placements of
equity securities to fund its research and development activities and working
capital requirements. In order to implement programs using the Company's
integrated information capture and delivery system, the Company will be required
to devote substantial additional assets to the development of technology, the
construction of physical facilities and the acquisition of telephone and
computer equipment. The Company will also be required to retain the services of
employees in advance of obtaining contracts to provide services. The Company
anticipates, based on currently proposed plans and assumptions relating to its
operations, including the timing of research and product development and the
costs associated with marketing and promotion of its system, that the proceeds
of this offering, together with available resources, will be sufficient to
satisfy the Company's contemplated cash requirements for at least twenty-four
months following the consummation of this offering. In the event that the
Company's plans change or its assumptions change or prove to be inaccurate, the
Company could be required to seek additional financing or curtail its
activities. The Company has no current arrangements with respect to, or sources
of, additional financing. The Company may also deem it desirable to acquire
assets, technologies or other entities in complementary or related fields, or
for other projects which management believes to be in the Company's best
interest, and therefore may reapportion proceeds of this offering to such
acquisition or project.
18
<PAGE>
BUSINESS
GENERAL
Patient Infosystems, Inc. provides patient-centered health care information
systems and services to proactively manage, collect and analyze information to
improve patient compliance with prescribed treatment protocols. The Company's
technology platform integrates treatment compliance algorithms with an advanced
voice recognition telephone system, high speed data processing and analysis
capability and demand publishing and information distribution capabilities. The
system utilizes trained telephone operators and computerized interactive voice
response technology to communicate via telephone directly with the patient at
home in order to gather relevant patient data. This data is subsequently
evaluated and automatically transmitted via computer generated reports to health
care payors, providers and patients tailored to the specific needs of each
recipient.
The Company markets its services to pharmaceutical manufacturers, PBMs and
health care payors and providers to collect data outside of the physician office
and institutional setting to enhance compliance by patients with prescribed
treatment protocols. The Company's disease state management programs are
designed to provide the following benefits: (i) for patients, improved
communication with health care resources, enhanced self-care skills, increased
treatment adherence resulting in improved quality of care and reduced
inconvenience, risk and expense associated with unscheduled physician
interventions; (ii) for health care providers, more information on patient
progress, quicker identification of hard-to-manage patients, enhanced ability to
make timely treatment modifications, triage capability and expanded information
for development of improved treatment protocols; and (iii) for payors and
program sponsors, cost-effective management of the disease risk, improved
patient compliance and outcomes and enhanced patient and provider satisfaction.
INDUSTRY OVERVIEW
Health care costs have increased significantly in the United States in
recent years despite substantial attempts to control costs by the government and
private payors. According to the Federal government, national health
expenditures have increased from $540 billion in 1988 (11.1% of GNP) to a
projected $1 trillion in 1995 (15.7% of projected GNP). Faced with rapidly
rising health benefit costs, employers are aggressively seeking methods through
managed care techniques to reduce the volume and unit cost of health care
services. The Company believes that payors have achieved substantial health care
cost savings to date through reducing the unit pricing for and utilization of
products and services.
One way to achieve significant additional savings is to change the way that
health care is delivered to patients by focusing on quality and cost efficient
clinical outcomes. In an effort to lower costs, payors and providers have
encouraged the shifting of patient care away from the physician office and
institutional setting. As a result, more and more patients administer their own
medications without direct provider oversight. However, the Company believes
that to date only limited progress has been made in implementing cost-effective
methods to monitor patient compliance with prescribed treatment protocols. The
failure to comply with treatment regimens results in significant unnecessary
costs to the health care system. The Company believes that as cost containment
strategies move the point of care out of the institutional setting, payors will
require information systems that gather data and facilitate behavior
modification outside of the physician office and institutional setting.
Once clinical treatment decisions are made, patients must comply with the
prescribed treatment regimen to achieve the desired outcome. Estimates vary from
disease to disease, but generally indicate that between 30% and 60% of all
patients fail to take medications as prescribed. The consequences of patient
non-compliance with prescribed treatment plans represent a significant portion
of health care expenditures. One industry study indicated that patient
non-compliance results in $100 billion in health care and lost productivity
costs annually. Costs associated with chronic disease patients who fail to
adhere to prescribed treatment regimens have been particularly difficult to
control. When long-term treatments for chronic disease have been prescribed, as
many as 80% of all patients fail to carry out correctly at least one element of
the disease treatment regimen. In addition, a 1990 study indicated that over 5%
of hospital admissions were
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caused by outpatient noncompliance. The Company believes that by coupling
effective treatment protocols with the ability to monitor patient condition and
treatment regimen compliance between physician interventions, health care
providers and payors can significantly enhance clinical outcomes while reducing
costs.
Monitoring patients by telephone can be a cost effective strategy for
improving the treatment of chronic diseases. One industry study, which involved
patient contact by nurses to determine treatment compliance and disease
progress, indicated that the use of telephone follow-up saved an estimated 28%
in health care delivery costs for elderly, ambulatory patients with chronic
diseases. In addition, patients who received follow-up telephone care had 19%
fewer clinic visits, 14% overall less medication utilization, 20% fewer hospital
days and 41% fewer intensive care unit days. Telephone patient monitoring
systems may be used with a broad range of chronic patient treatment programs for
disease state management and outcome evaluation and other health care
applications.
The Company believes that there is a large and growing need among health
care providers, payors and patients for improved, cost-effective treatment and
management of chronic diseases through the use of patient compliance information
systems.
STRATEGY
The Company's strategy is to capitalize on its advanced information
technology platform to become the leading provider of patient-centered health
care information programs. The key elements of this strategy are to:
INTRODUCE DISEASE SPECIFIC INFORMATION SYSTEMS. The Company develops
software systems and identifies treatment protocols to assist in the
management of specific chronic diseases such as secondary cardiovascular
disease, congestive heart failure, diabetes and asthma. The Company designs
and markets these systems for certain clients on a customized basis pursuant
to which the client funds development and implementation of the system for a
specific disease. Alternatively, the Company internally develops
standardized systems for targeted diseases and subsequently markets the
system to multiple end-users. The Company markets its customized systems to
pharmaceutical companies and PBMs interested in sponsoring disease state
management programs to provide their managed care customers with a
value-added service. These programs are designed to modify patient behavior
in order to improve treatment and outcomes and reduce costs associated with
non-compliance.
DEMONSTRATE CLINICAL BENEFITS AND COST-EFFECTIVENESS. The Company
markets its services based on the expected reduction of overall health care
costs that it believes will result from improved treatment compliance. The
Company intends to complement its marketing efforts by conducting or
sponsoring clinical studies and implementing other measures designed to
establish and document the clinical and cost benefits it believes will
result from the application of its integrated information capture and
delivery system. The Company intends to promote the benefits of its system
through publication in clinical journals and presentations at scientific
conferences of the results of these studies.
ANALYZE OUTCOMES DATA USING ARTIFICIAL INTELLIGENCE SYSTEMS TO IMPROVE
CLINICAL PROTOCOLS. As the Company's network of patients expands, so will
its database of relevant information with respect to patient behavior and
disease progression. The Company has designed its system to enable analysis
of data using a variety of technologies, including neural networks, fuzzy
logic and genetic algorithms. The Company intends to use this information to
improve treatment algorithms and compliance behavior in an effort to improve
treatment, and thereby maximize positive patient outcomes and reduce costs.
DEVELOP OR ACQUIRE ADDITIONAL INFORMATION CAPTURE AND DELIVERY
TECHNOLOGIES. The Company plans to develop or acquire additional
technologies that enhance its ability to gather information and interact
with patients. The Company is developing a wireless two-way communication
system to permit the flow of constant, uninterrupted information between the
patient and the Company. Additionally, the Company is developing a
CD-ROM-based educational information system for patient use and an approach
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to using on-line information systems such as e-mail to interact directly
with patients. The Company believes that these additional technologies will
allow the Company to provide and obtain more detailed information as a
supplement to or as a substitute for telephone interactions and printed
materials.
LEVERAGE TECHNOLOGY PLATFORM TO DEVELOP ADDITIONAL APPLICATIONS. The
Company intends to use its expertise in information management and database
technologies to develop additional programs and services, such as clinical
trial data compilation and analysis, patient surveys, clinical outcomes
evaluation, demand management and case management. By gaining access to
certain customers through the provision of one type of information service,
the Company will be well positioned to provide additional services. For
example, the Company believes that as it provides clinical trial information
for pharmaceutical companies in connection with specific products, it will
also be in a position to provide disease state management services in
connection with the use of such drugs.
There can be no assurance that the Company will be able to implement its
business strategy effectively or economically, if at all.
INFORMATION CAPTURE, DELIVERY AND ANALYSIS TECHNOLOGIES
The Company's technology platform integrates treatment algorithms with an
advanced voice recognition telephone system, high speed data processing and
analysis capability and demand publishing and information distribution
capabilities. The system utilizes trained telephone operators and computerized
interactive voice response technology to communicate via telephone directly with
the patient at home in order to gather relevant patient data. In order to
minimize costly live operator interaction, a computer initiates each call to the
patient, which call is automatically transferred to an operator and finally
routed to an automated speech application. Patients respond to the recorded
speech application by speaking normally. This approach is designed to ensure a
more accurate and reliable response than is achievable via telephone key pad.
Depending on the patient's response, situation-specific algorithms are applied
to modify future questions and thus help customize the collection of data.
The Company's system analyzes and prepares the captured data for automatic
delivery to the payor, provider and patient using demand publishing. Demand
publishing technology enables the creation of highly individualized reports by
inserting stored graphic images customized for race, gender and age. These
reports are also customized to the patient's specific situation, and the system
utilizes the information received during contacts with the patient to further
customize the content of the report. The data relevant to the separate report
for health care providers is formatted in a customized report to be
automatically transmitted via mail, fax or on-line.
Each contact with a patient contributes to the establishment of a
longitudinal data base which can be analyzed to provide information about
treatment modalities for patients, providers and payors. The Company's system is
designed to analyze patient compliance to prescribed treatment regimens and
gather additional clinical information so that improvements in such regimens can
be developed.
INTEGRATED DISEASE STATE MANAGEMENT SYSTEM
The Company's first application of its integrated information capture and
delivery technology is its integrated disease state management system. This
system is designed to provide care givers with the ability to monitor, on a
cost-effective basis, patient condition and behavior while the patient is
between physician consultations. The Company believes that this will permit care
givers to improve patient compliance and, as a consequence, improve patient
outcomes.
Each of the Company's integrated disease state management programs is
designed to provide one or more of the following benefits. For patients, these
intended benefits include: (i) improved access to and communication with health
care resources beyond existing hospital care and office and in-home provider
visits; (ii) enhanced self-care skills and knowledge of the disease covered by
the program; (iii) increased treatment compliance, motivation and confidence in
disease self-management resulting in improved quality of life; and (iv) reduced
inconvenience, risk and expense associated with unscheduled office visits,
emergency room interventions and hospitalizations.
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For health care providers, these intended benefits include: (i) more
comprehensive information on patient progress; (ii) earlier identification of
hard-to-manage patients; (iii) enhanced ability to make timely treatment
modifications; (iv) better utilization of health care resources appropriate to
patient needs; and (v) expanded information for development of improved
treatment methods.
For payors and program sponsors, these intended benefits include: (i)
cost-effective management of disease risk; (ii) improved patient compliance;
(iii) improved treatment outcomes; and (iv) enhanced patient and provider
satisfaction.
The Company only recently enrolled its first patients in a disease state
management program, and there can be no assurance that the benefits described
above will be achieved.
The Company's disease state management system has three primary components.
First, using a panel of recognized medical and clinical experts, the Company
develops a disease-specific patient intervention and compliance program that
includes a template for the integration of each patient's history, current
medical status and treatment protocol. If the program is being developed on a
custom basis for a particular customer, the program is developed in consultation
with the customer's clinical staff and consultants. Second, the Company
establishes periodic telephone contacts with each patient to monitor the
patient's compliance with prescribed therapies as well as the patient's
treatment progress. Third, using the information obtained from patient contacts
and other available information regarding the patient and his or her treatment,
such as physician records and pharmacy information, personalized reports are
prepared, typically following each patient contact, for evaluation by the
patient, the patient's health care provider and, on a periodic basis, payors.
DEVELOPMENT OF DISEASE SPECIFIC PROTOCOLS
The Company's disease-specific compliance programs are developed for
targeted diseases either on a customized or standardized basis. The Company
retains an internal clinical staff and panels of independent medical and
clinical experts to identify guidelines of generally accepted treatment
protocols and diagnostic interventions for particular diseases. These guidelines
serve as a template for information to be gathered from each patient. If the
program is being developed on a custom basis for a particular customer, the
program is developed in consultation with the customer's clinical staff and
consultants. In addition, the Company's internal clinical staff conducts
research of available databases and gathers information provided by medical
experts, insurance providers, governmental agencies, Medicare and Medicaid and
other sources to develop with the medical experts the disease-specific program
structure. The resulting compliance protocols are designed to enable the Company
to gather the necessary patient information to determine the extent of a
patient's compliance with his or her prescribed treatment, the effectiveness of
treatment and the progress of the patient's disease. As the Company's database
of disease-specific treatments expands, the Company intends to use that data to
modify, update and enhance its own disease state management compliance programs
and assist health care providers in improving treatment protocols.
PATIENT ENROLLMENT
When a patient is enrolled in one of the Company's disease state management
programs a patient history is obtained, including the histories of the chronic
illness, medications, and surgical procedures as well as other information
deemed relevant by the disease-specific compliance program. This information is
included in the Company's database for each patient and is used to create
customized reports for distribution to each of the patient's health care
provider and payor as well as the patient. The patient report can include
information on the prescribed treatment of the patient's disease as well as the
use of the program and social support services to improve compliance with the
patient's treatment regimen. In addition, the Company's on-demand publishing
technology provides personalized behavior modification and educational materials
for the patient. The health care provider report contains the relevant clinical
and behavioral information gathered from the patient.
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PATIENT CONTACTS
In accordance with a designated patient contact schedule, a patient will
periodically receive telephone calls from a live operator who, after confirming
the identity of the patient, will transfer the patient to an automated system
that will ask specific questions determined in accordance with the
disease-specific compliance program and provide information and motivational
feedback. Patient contact schedules are established for each disease state
management program, with the frequency of patient contact varying with the
disease under management and the goal of the applicable treatment and occurring
as often as daily or as infrequently as on a quarterly basis. The data gathered
from the patient during each contact is processed and stored in the Company's
database.
The compliance program takes into account patient responses to treatment
follow-up questions and initiates specific courses of action which can include
positive reinforcement messages, confirmation of prescription instructions and
scheduled callbacks to remind the patient of the need to take prescribed
medication. In addition, questions to be asked in future calls are modified
based upon the patient's responses during previous calls.
The Company's disease state management system captures and processes the
information obtained from the patient during the contact and integrates this
information with the other data maintained by the Company, including prior
patient responses, patient medical history, treatments administered to date and
the mandated treatment protocols for the disease. This system automatically
prepares distinct reports using the Company's demand publishing technologies for
the patient and for the physician or other care-giver. Each report is tailored
for the particular requirements of each recipient. The patient's report, for
example, may include pictures, diagrams and informative discussions relating to
the treatment course intended to modify or reinforce certain behaviors. The
physician's report would likely be more factual and direct and summarize the
clinical and behavioral information that has been gathered.
On a periodic basis, the Company will provide data to the patient's health
care payor with respect to that patient's progress. The Company will be able to
include information from various data sources in these reports for the purpose
of providing additional information with respect to a patient. For example, the
Company may be able to interact with the pharmacy services division of a payor
to determine the renewal frequency of prescriptions, which provides an
indication of whether a patient is taking his or her medication. In addition,
the system provides the flexibility to allow other information from physicians'
reports and hospital tests to be included in the periodic reports.
COMPLIANCE ASSISTANCE
The Company assists payors and health care providers in monitoring patient
compliance and works with health care providers to develop compliance and
education programs that can be implemented through the Company's system. The
Company's publishing technology enables production of patient-specific
compliance and education literature that is customized for an individual
patient. Once this literature is prepared it may
be delivered to a patient by mail, facsimile or on-line. In addition, the
Company can implement a variety of procedures including medication reminders via
wireless two-way communication and more frequent telephone communications for
non-compliant patients or patients with more difficult treatment regimens. The
Company can provide additional support services, such as an 800 number that will
provide recorded information with respect to a variety of patient education
topics or other support messages.
PATIENT INFOSYSTEMS PROGRAMS
SECONDARY CARDIOVASCULAR DISEASE
It is estimated by the American Heart Association that in 1996, $129 billion
will be spent in the United States for the treatment of cardiovascular disease.
Cardiovascular disease may be treated with a combination of medications, as well
as dietary, lifestyle and behavior modifications. The treatment is on-going and
requires a high level of patient discipline. The Company has entered into a
services agreement with Bristol-Myers to develop, implement and operate a
disease state management program relating to the prevention of
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cardiovascular sequelae in patients who have recently experienced certain
cardiovascular illnesses or treatments such as angina, cardiac bypass surgery or
myocardial infarction. A limited number of patients were enrolled in the
Company's secondary cardiovascular disease program in October 1996.
CONGESTIVE HEART FAILURE
The American Heart Association estimated in 1996 that approximately 4.7
million Americans currently suffer from Congestive Heart Failure. Elderly
patients with heart failure are at increased risk for rehospitalization after
discharge. Behavioral factors such as noncompliance with medications and poor
diet may contribute to hospital admissions. The Company has entered into a
services agreement with Bristol-Myers to develop, implement and operate a
disease state management program to aid in the treatment of patients suffering
from congestive heart failure. A limited number of patients were enrolled in a
Company-funded disease state management program for congestive heart failure in
October 1996.
DIABETES
Diabetes is an incurable disease characterized by elevated blood glucose
levels. The American Diabetes Association estimates that there are over 16
million diabetics in the United States, at least 700,000 of whom are undergoing
insulin therapy. Insulin therapy involves daily sampling of blood and, in many
cases, regular injections of insulin. Currently, it is estimated that $45
billion is spent annually on the treatment of all diabetics and diabetes-related
conditions within the United States. With proper treatment, diabetes should not
be life threatening; however, untreated or improperly treated diabetes can lead
to such complications as blindness, kidney disease, nervous system disorders,
vascular disease and death. The Company is developing a disease state management
program for diabetic patients that it is marketing to payors and other
participants in the health care industry. Equifax and Health Resources have
retained the Company to provide this disease state management program for
patients who are suffering from diabetes and are enrolled in health care
programs for which these companies provide services.
ASTHMA
Asthma affects 12 million people in the United States, with direct costs
related to the disease estimated at $3 billion annually. Noncompliance with
pharmacological therapy is the leading cause of hospitalization among
asthmatics. However, with proper treatment, including high patient compliance,
most asthmatics can control their disease effectively. The Company is developing
a disease state management program for asthmatic patients that is being marketed
to payors. American HomePatient, Equifax, Health Resources and Harris Methodist
have retained the Company to provide disease state management programs for
patients who are suffering from asthma and are enrolled in health care programs
for which these companies provide services. A limited number of patients were
enrolled in a Company-funded disease state management program for asthmatic
patients in November 1996.
CHRONIC PAIN MANAGEMENT
Persons suffering from cancer are often treated with medication to alleviate
constant, severe pain. Bristol-Myers has retained the Company to develop,
implement and update a program to manage patients who are experiencing intense
levels of chronic pain. The Company is developing a disease state management
program for chronic pain management and expects the program to be available for
patient enrollment during the fourth quarter of 1996.
WEIGHT MANAGEMENT
The inability to maintain adequate weight is a serious problem for
individuals afflicted with cancer or AIDS. Bristol-Myers has retained the
Company to develop and implement a program to manage patients suffering from
anorexia or cachexia secondary to a diagnosis of cancer or AIDS. The Company is
developing a disease state management program for weight management and expects
the program to be available for patient enrollment during the fourth quarter of
1996.
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ADDITIONAL DISEASE TARGETS
The Company has identified additional opportunities in large chronic disease
markets, including in the treatment of hypertension, chronic obstructive
pulmonary disease, depression, cancer, osteoporosis, arthritis, HIV infection
and high risk pregnancy. Each of these targets has been identifed as having
characteristics which make them attractive candidates for the Company's
programs. The Company is currently involved in discussions with customers for
the development of programs in connection with the development of programs in a
variety of these areas.
Patient enrollment in each of the Company's programs will depend upon the
identification and referral by the Company's customers of patients to the
Company's system which will vary from program to program.
OTHER APPLICATIONS OF THE INTEGRATED INFORMATION CAPTURE AND DELIVERY TECHNOLOGY
OUTCOMES ANALYSIS
The Company intends to utilize information gathered from patients enrolled
in its programs to serve two purposes. First, information regarding treatment
results, success of the compliance program and patient reaction to differing
treatments or compliance protocols may be used by the Company to further improve
each disease-specific compliance program. Second, this information may be used
by payors, pharmaceutical companies and health care providers to assist in the
development of improved treatment modalities. The Company has developed
analytical methodologies using database management and information technologies,
including neural network systems, fuzzy logic and genetic algorithms. The
Company intends to use these data analysis technologies to predict the best
treatment methodologies for patients.
CLINICAL STUDIES
Many pharmaceutical companies and contract research organizations are
seeking more economical, efficient and reliable methods for compiling and
analyzing clinical data in conducting clinical trials. Furthermore, many drug
development protocols have begun to emphasize upon subjective criteria and
outcomes information. The Company believes that its system will allow it to
develop programs tailored to the measurement of outcomes data relating to the
conduct of later stage clinical trials. The Company believes that its system can
also assist pharmaceutical companies in studying and documenting the efficacy of
approved products in order to provide ongoing information to FDA or for
marketing purposes.
PATIENT SURVEYS
Organizations in many different areas of the health care industry survey
users regarding their products and services for a variety of reasons including
regulatory, marketing and research purposes. The Company's information systems,
with its ability to proactively contact patients in a cost-efficient manner, may
be used for this type of application.
DEMAND MANAGEMENT
Demand management involves assisting providers in evaluating patient
treatment needs to identify those patients who may not require immediate or
intensive services. The goal of demand management is to reduce the need for and
use of costly, often clinically unnecessary, medical services and arbitrary
managed-care interventions while improving the overall quality of life of
patients. The Company believes that its system can be used to provide automated
or semi-automated demand management services.
CASE MANAGEMENT
Patients who are prescribed complex or high cost treatment regimens may
require a higher level of monitoring, interaction, care planning and
reassessment than patients with less complicated treatment regimens. The Company
believes that its system is capable of providing these enhanced services to such
patients to eliminate or minimize the unnecessary costs and medical attention
that result from a patient's lack of compliance with a prescribed treatment
regimen.
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CUSTOMER AGREEMENTS
At November 30, 1996, the Company was developing disease state management
and other programs in conjunction with the following customers:
BRISTOL-MYERS
The Company has entered into four service agreements (the "Service
Agreements") with Bristol-Myers relating to the development, implementation and
operation by the Company of disease state management programs for certain
specified diseases. The Service Agreements provide for development fees to be
paid by Bristol-Myers to the Company upon the achievement of certain milestones.
Bristol-Myers has also agreed to pay the Company operational fees per enrolled
patient, which fees for certain programs vary with the length, complexity and
frequency of patient contact dictated by the respective program protocols.
Each of the Service Agreements provides for an exclusivity period (the
"Exclusivity Period"), during which time the Company is prohibited from engaging
or participating in any other projects involving the specific disease target
that is the subject of the Service Agreements. The Exclusivity Periods extend
from the effective dates of the Service Agreements until, in general, a certain
date or a certain period (ranging from eight to 12 months) following the
achievement of a specified milestone in the development or implementation of the
program (such as the completion of the pilot program). Three of the four Service
Agreements provide that upon conclusion of the Exclusivity Period, Bristol-Myers
has the right to negotiate with the Company for an exclusive arrangement for the
administration of the disease state management program, provided that
Bristol-Myers has enrolled a certain number of patients in the program to date.
In the event that such negotiations prove unsuccessful, Bristol-Myers retains a
right of first refusal with respect to any other offers made to the Company for
such arrangements for a period of nine or 12 months following the Exclusivity
Period.
The Service Agreements generally provide that Bristol-Myers retains
ownership rights to certain materials and other work product created by the
Company pursuant to the Service Agreements and that the Company is entitled to
use other materials and data. The extent of these rights varies by agreement.
The Company and Bristol-Myers have agreed to indemnify each other with respect
to losses arising from willful or negligent acts or omissions or breaches of the
Service Agreements by the indemnifying party pursuant to the Service Agreement.
The Service Agreements are terminable without cause by either party with either
30 or 90 days' notice. The Company has entered into Service Agreements with
Bristol-Myers in the following disease areas:
CONGESTIVE HEART FAILURE. The Company is a party to a service agreement
with Bristol-Myers dated February 1, 1996, to develop, implement and update a
program for patients suffering from congestive heart failure.
SECONDARY CARDIOVASCULAR DISEASE. The Company is party to a service
agreement dated September 18, 1995 with Bristol-Myers to develop, implement and
update a program for patients with cardiovascular disease who have recently
experienced moderate to severe angina or myocardial infarction, or who recently
had cardiac bypass surgery or percutaneous transluminal coronary angioplasty.
CHRONIC PAIN. The Company is a party to a service agreement dated March 30,
1996 with Bristol-Myers to develop, implement and update a program for patients
who are experiencing intense levels of chronic pain. The initial phase of this
program is expected to be a thirty day trial monitoring cancer patients. A
second phase of this program is expected to consist of a twelve week trial
monitoring cancer patients at numerous sites. The final phase of this program
will be the implementation of a program for use in conjunction with products
that Bristol-Myers may market in this area. Upon the earlier of the commencement
of the development of the final phase of the program or December 31, 1996,
Bristol-Myers may extend the Exclusivity Period relating to the chronic pain
management program for successive one-year periods by agreeing to pay the
Company a fee in the event that the program operational fees paid to the Company
by Bristol-Myers during the year fall below certain levels.
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WEIGHT MANAGEMENT. The ability to prevent loss of body weight in certain
diseases is a significant quality of life concern. The Company is a party to a
service agreement, dated April 24, 1996, with Bristol-Myers to develop,
implement and update a program for patients suffering from anorexia or cachexia
secondary to a diagnosis of cancer or AIDS.
PATIENT SATISFACTION SURVEY. The Company is also developing a patient
satisfaction survey and a general medication compliance program pursuant to a
services agreement with Bristol-Myers dated October 16, 1995. The patient
satisfaction survey is designed to measure a patient's satisfaction with the
services rendered by their provider. The goal of this program is to improve
compliance with guidelines for using prescribed pharmaceutical products. The
services agreement calls for the payment to the Company of program development
fees as well as fees related to its providing services to enrolled patients
throughout the terms of the program protocols as set forth in the agreement. The
Company and Bristol-Myers have agreed to indemnify each other for losses arising
from willful or negligent acts, omissions or breaches of the services agreement
by the indemnifying party. The services agreement is terminable without cause by
either party with 30 days' notice.
EQUIFAX
The Company is a party to a service agreement dated June 21, 1996 with
Equifax to implement and update a program for patients suffering from asthma.
The agreement provides for the Company to receive a per patient fee for services
provided to enrolled patients over the duration of the program. The agreement
may be terminated by either party without cause upon 30 days' notice.
The Company is also a party to a service agreement dated July 28, 1996 with
Equifax to implement and update a program for patients suffering from diabetes.
The agreement provides for the Company to receive a per patient fee for services
provided to enrolled patients over the duration of the program. The agreement
may be terminated by either party without cause upon 30 days' notice.
AMERICAN HOMEPATIENT
The Company is a party to a services agreement dated June 24, 1996 with
American HomePatient to implement and update a program for patients suffering
from asthma. The agreement provides for the Company to receive a per patient fee
for services provided to enrolled patients over the duration of the program. In
addition, the Company is entitled to receive a joint marketing fee from American
HomePatient payable in stages over a 24 month period if American HomePatient is
successful in marketing the program with three health care payors. The agreement
may be terminated by either party without cause upon 30 days' prior written
notice.
HEALTH RESOURCES, INC.
The Company is a party to a services agreement dated September 13, 1996 with
Health Resources to implement and update a program for patients suffering from
asthma. The agreement provides for the Company to receive a per patient fee for
services provided to enrolled patients over the duration of the program. This
agreement may be terminated by either party without cause upon 180 days' notice.
The Company is also a party to a services agreement dated September 13, 1996
with Health Resources to implement and update a program for patients suffering
from diabetes. The agreement provides for the Company to receive a per patient
fee for services provided to enrolled patients during the duration of the
program. This agreement may be terminated by either party without cause upon 180
days' notice.
HARRIS METHODIST
The Company is a party to a services agreement dated September 24, 1996 with
Harris Methodist Health Plan to implement and update a program for a limited
number of patients suffering from asthma. The agreement provides for the Company
to receive a per patient fee for services provided to enrolled patients over the
duration of the program. The contract has a term of one year. The Company is
negotiating with Harris Methodist to enter into a broader agreement to enable
the introduction of services to a broader group of patients.
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SALES AND MARKETING
The Company markets its integrated disease state management system to
organizations within the health care industry that are involved in the treatment
of disease or payment of medical services for patients who require complex or
long-term medical therapies. These industry organizations include five distinct
groups: pharmaceutical companies, medical service companies, PBMs, health care
payors, such as managed care organizations and insurance companies, and employer
groups. The Company employs a sales and marketing staff of six persons to market
the Company's systems and has entered into a consulting agreement for sales and
marketing services with one additional person not employed by the Company. In
addition, the senior members of the Company's management are actively engaged in
marketing the Company's programs.
The Company intends to complement its marketing efforts by conducting
clinical studies and implementing other measures designed to document the
clinical and cost benefits it believes will result from the application of its
integrated information capture and delivery system. In collaboration with the
members of its expert panels who are retained to develop program protocols and
other research and clinical technicians, the Company intends to promote the
benefits of its system through publication in clinical journals and
presentations at scientific conferences of the results of these studies. The
Company is pursuing opportunities to develop programs specifically designed to
produce significant short-term data, such as its chronic pain management
program.
COMPETITION
The market for health care information products and services is intensely
competitive. Competitors vary in size and in scope and breadth of products and
services offered, and the Company will compete with various companies in each of
its disease target markets. Many of the Company's competitors have significantly
greater financial, technical, product development and marketing resources than
the Company. Furthermore, other major information, pharmaceutical and health
care companies not presently offering disease state management or other health
care information services may enter the markets in which the Company intends to
compete. In addition, with sufficient financial and other resources, many of
these competitors may provide services similar to those of the Company without
substantial barriers. The Company does not possess any patents with respect to
its integrated information capture and delivery system, and although it has
filed a provisional patent application with respect to certain aspects of its
integrated information capture and delivery system and its integrated disease
state management system, there can be no assurance that this application will
result in the issuance of a patent, or if issued, that a patent would provide
the Company with any competitive advantage.
The Company's potential competitors include specialty health care companies,
health care information system and software vendors, health care management
organizations, pharmaceutical companies and other service companies within the
health care industry. Many of these competitors have substantial installed
customer bases in the health care industry and the ability to fund significant
product development and acquisition efforts. The Company will also compete
against other companies that provide statistical and data management services,
including clinical trial services to pharmaceutical companies.
The Company is aware of several large pharmaceutical and medical service
companies that have publicly stated that they intend to be involved in providing
comprehensive disease state management services. The Company believes that the
principal competitive factors in its market are the ability to link patients,
health care providers and payors, and provide the relevant health care
information at an acceptable cost. In addition, the Company believes that the
ability to anticipate changes in the health care industry and identify current
needs are important competitive factors.
QUALITY CONTROL
The Company has developed quality control measures designed to insure that
information obtained from patients is accurately transcribed, that reports
covering each patient contact are delivered to health
28
<PAGE>
care providers and patients and that the Company's personnel and technologies
are interacting appropriately with patients and health care providers. Quality
control systems will include random monitoring of telephone calls, patient
surveys to confirm patient participation and effectiveness of the particular
program, and supervisory reviews of telephone agents.
GOVERNMENT REGULATION
The health care industry, including the current and proposed business of the
Company, is subject to extensive regulation by both the Federal and state
governments. A number of states have extensive licensing and other regulatory
requirements applicable to companies that provide health care services.
Additionally, services provided to health benefit plans in certain cases are
subject to the provisions of the Employee Retirement Income Security Act
("ERISA") and may be affected by other state and Federal statutes. Generally,
state laws prohibit the practice of medicine and nursing without a license. Many
states interpret the practice of nursing to include health teaching, health
counseling, the provision of care supportive to or restorative of life and well
being and the execution of medical regimens prescribed by a physician.
Accordingly, to the extent that the Company assists providers in improving
patient compliance by publishing educational materials or providing behavior
modification training to patients, such activities could be deemed by a state to
be the practice of medicine or nursing. Although the Company has not conducted a
survey of the applicable law in all 50 states, it believes that it is not
engaged in the practice of medicine or nursing. There can be no assurance,
however, that the Company's operations will not be challenged as constituting
the unlicensed practice of medicine or nursing. If such a challenge were made
successfully in any state, the Company could be subject to civil and criminal
penalties under such state's law and could be required to restructure its
contractual arrangements in that state. Such results or the inability to
successfully restructure its contractual arrangements could have a material
adverse effect on the Company.
The confidentiality of patient information is subject to regulation by state
law. A variety of statutes and regulations exist safeguarding privacy and
regulating the disclosure and use of medical information. State constitutions
may provide privacy rights and states may provide private causes of action for
violations of an individual's "expectation of privacy." Tort liability may
result from unauthorized access and breaches of patient confidence. The Company
intends to comply with state law and regulations governing medical information
privacy.
In addition, on August 21, 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996, P.L. 104-191. This legislation
requires the Secretary of Health and Human Services to adopt national standards
for electronic health transactions and the data elements used in such
transactions. The Secretary is required to adopt safeguards to ensure the
integrity and confidentiality of such health information. Violation of the
standards is punishable by fines and, in the case of wrongful disclosure of
individually identifiable health information, imprisonment. The Secretary is
required to issue the standards not later than February 21, 1998. The Company
cannot predict what requirements will ultimately be adopted by the Secretary,
however, such requirements could have an adverse effect on the Company's
business.
The Company and its customers may be subject to Federal and state laws and
regulations which govern financial and other arrangements between health care
providers. These laws prohibit certain fee splitting arrangements between health
care providers, as well as direct and indirect payments, referrals or other
financial arrangements that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. Possible sanctions for violation of these restrictions
include civil and criminal penalties. Further, criminal violations may result in
mandatory exclusions of up to five years and additional permissive exclusions
from participation in Medicare and Medicaid programs.
Regulation in the health care field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental approvals,
comply with applicable regulations or comply with existing or future laws, rules
or regulations or their interpretations.
29
<PAGE>
INTELLECTUAL PROPERTY
The Company considers its methodologies, processes and know-how to be
proprietary. The Company seeks to protect its proprietary information through
confidentiality agreements with its employees. The Company's policy is to have
employees enter into confidentiality agreements containing provisions
prohibiting the disclosure of confidential information to anyone outside the
Company, requiring employees to acknowledge, and, if requested, assist in
confirming the Company's ownership of any new ideas, developments, discoveries
or inventions conceived during employment, and requiring assignment to the
Company of proprietary rights to such matters that are related to the Company's
business.
The Company has filed a provisional patent application with respect to
certain aspects of its integrated information capture and delivery and
integrated disease state management systems. No assurance can be given that a
patent will issue or that if issued such patent will provide the Company with a
competitive advantage.
EMPLOYEES
As of October 31, 1996, the Company had 40 employees.
PROPERTIES
The Company's executive and corporate offices are located in Rochester, New
York in approximately 13,100 square feet of leased office space, under a lease
that expires on November 30, 1999.
LEGAL MATTERS
The Company is not a party to any material legal proceedings.
30
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Derace Schaffer, M.D................................. 48 Chairman of the Board
Donald A. Carlberg................................... 44 Director, President and Chief Executive Officer
Gregory D. Brown..................................... 35 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
James D. Turner...................................... 36 Senior Vice President, Sales and Marketing
Kent A. Tapper....................................... 40 Vice President, Systems Engineering
Giancarla C. Miele................................... 52 Vice President, Operations
David B. Nash, M.D., M.B.A........................... 41 Executive Vice President, Medical Affairs
Alvin I. Mushlin, M.D................................ 54 Senior Medical Advisor
John Pappajohn....................................... 68 Director
Barbara J. McNeil, M.D., Ph.D........................ 55 Director
Carl F. Kohrt, Ph.D.................................. 53 Director
</TABLE>
DERACE SCHAFFER, M.D. has been Chairman of the Board and a Director of the
Company since its inception in February 1995. Since 1980, Dr. Schaffer has been
the President of The Ide Group, P.C., a group of physicians providing
radiological services at multiple locations in New York State, and since 1990 he
has also been President of The Lan Group, a venture capital firm specializing in
health care investments. He serves as a Clinical Professor at the University of
Rochester School of Medicine and a Director of NeuralTech, Inc., NeuralMed,
Inc., Preferred Oncology Networks of America, Inc., American Physican Partners,
Inc., The Care Group, Inc., and Medifax, Inc. as well as several not-for-profit
corporations.
DONALD A. CARLBERG has been President, Chief Executive Officer and a
Director of the Company since its inception. From February 1993 to December
1994, Mr. Carlberg served as Chief Executive Officer of Patient Management
Technologies, Inc., a medical services consulting company, which he founded.
From 1992 to 1994, Mr. Carlberg served as Senior Vice President--Sales and
Marketing for Neurocare, Inc./Paradigm Health Corp. From 1990 to 1992, Mr.
Carlberg served as Director of Managed Care for Baxter Healthcare International
where he started managed care initiatives for its Caremark Division. From 1985
to 1990, Mr. Carlberg held several senior level positions in managed care at
Blue Cross/Blue Shield of Rochester, New York and Independence Blue Cross in
Philadelphia, Pennsylvania.
GREGORY D. BROWN has been Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since May 1995. From 1989 to 1995, Mr.
Brown was Chief Financial Officer of Pappajohn Capital Resources, a venture
capital firm specializing in health care investments, and Equity Dynamics, Inc.,
a financial consulting firm, both located in Des Moines, Iowa. From 1984 to
1989, Mr. Brown was a Senior Accountant with Vroman, McGowen, Hurst, Clark &
Smith, P.C., a certified public accounting firm.
JAMES D. TURNER has been Senior Vice President, Sales and Marketing of the
Company since September 1996. Mr. Turner served as Director of Business
Development for Preferred Oncology Networks of America, Inc. from January 1996
to September 1996. From 1987 to 1995, Mr. Turner held various sales, marketing
and business development positions with divisions of Coram Healthcare, Inc. and
Baxter Healthcare International, most recently as Director of Business
Development.
KENT A. TAPPER has been Vice President, Systems Engineering of the Company
since July 1995. Prior to joining the Company and since 1992, Mr. Tapper was
Product Manager, Audio Response and Call Center Platforms for Northern Telecom,
Inc. From 1983 to 1992, Mr. Tapper held Product Manager, Systems Engineering
Manager and various engineering management positions with Northern Telecom.
31
<PAGE>
GIANCARLA C. MIELE has been Vice President, Operations, of the Company since
October 1995. From 1994 to 1995, Ms. Miele was Director of Operations for
Integrated Medical Delivery Corporation, a medical management firm. From 1992 to
1994, Ms. Miele was the Administrator of Cancer Care, Inc., an MSO in the
metropolitan Washington, D.C. region. From 1989 to 1992, Ms. Miele served as
Senior Consultant to CMA, a medical services consulting firm.
DAVID B. NASH, M.D., M.B.A. has been Executive Vice President, Medical
Affairs of the Company since April 1996. Dr. Nash is Director of Health Policy
and Clinical Outcomes at Thomas Jefferson University Hospital and Associate
Professor of Medicine at Jefferson Medical College. Dr. Nash is the recipient of
the 1995 Clifton Latiolias Prize in Managed Care from the American Managed Care
Pharmacy Association. He also serves as a scientific advisory board member of
iSTAT Corp. Dr. Nash provides his services to the Company on a part-time
consulting basis.
ALVIN I. MUSHLIN, M.D. has been Senior Medical Advisor of the Company since
April 1996. Dr. Mushlin is a Professor of Community and Preventative Medicine at
the University of Rochester, where he has served in various capacities since
1976. He is a member of the National Councils of the Society for General
Internal Medicine and the Society for Medical Decision Making and has served on
the Health Care Technology Study Section of the Agency for Health Care Policy
and Research. Dr. Mushlin provides his services to the Company on a part-time
consulting basis.
JOHN PAPPAJOHN has been a Director of the Company since its inception, and
served as its Secretary and Treasurer from inception through May 1995. Since
1969, Mr. Pappajohn has been the sole owner of Pappajohn Capital Resources, a
venture capital firm specializing in health care investments, and President of
Equity Dynamics, Inc., a financial consulting firm, both located in Des Moines,
Iowa. He serves as a Director for the following public companies: CORE, Inc.,
Drug Screening Systems, Inc., Fuisz Technologies, Ltd., GalaGen, Inc., OncorMed,
Inc., The Care Group, Inc., United Systems Technology, Inc. and Pace Health
Management Systems, Inc.
BARBARA J. MCNEIL, M.D., PH.D. has been a Director of the Company since May
1995. Dr. McNeil is Head of the Department of Health Care Policy and a Professor
of Radiology at Harvard Medical School where she has served in various
capacities since 1971. For four years she has served as Chair of the Blue
Cross-- Massachusetts Hospital Association Fund for Cooperative Innovation and
currently she is a member of the National Council on Radiation Protection, the
American College of Radiology and its Board of Chancellors, the Society of
Nuclear Medicine, the Advisory Council for the Agency for Health Care Policy and
Research, and the National Academy of Sciences' Institute of Medicine where she
is a Council member. She also serves as a Director of CV Therapeutics, Inc.
CARL F. KOHRT, PH.D. has been a Director of the Company since April 1996.
Dr. Kohrt is Executive Vice President and Assistant Chief Operating Officer of
the Eastman Kodak Company, where he has served in various capacities since 1971.
Dr. Kohrt is a recipient of a Sloan Fellowship for study at Massachusetts
Institute of Technology. Dr. Kohrt also serves on the board of governors of The
Genesee Hospital.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has appointed two committees: the
Audit Committee and the Compensation Committee. The members of the Audit
Committee are John Pappajohn, Dr. Barbara McNeil and Dr. Carl Kohrt. The Audit
Committee periodically reviews the Company's auditing practices and procedures,
makes recommendations to management or to the Board of Directors as to any
changes to such practices and procedures deemed necessary from time to time to
comply with applicable auditing rules, regulations and practices, and recommends
independent auditors for the Company to be elected by the stockholders. The
members of the Compensation Committee are Dr. Derace Schaffer, Dr. McNeil and
Dr. Kohrt. The Compensation Committee meets periodically to make recommendations
to the Board of Directors concerning the compensation and benefits payable to
the Company's executive officers and other senior executives. The Company
reimburses directors for their out-of-pocket expenses incurred in attending
Board and Committee meetings.
32
<PAGE>
DIRECTOR COMPENSATION
At present no separate cash compensation or fees are payable to directors of
the Company, other than reimbursement of expenses incurred in connection with
attending meetings. The Company expects, however, that new non-employee
directors not otherwise affiliated with the Company or its stockholders will be
paid in a manner and at a level consistent with industry practice.
On May 20, 1995, the Company granted options to acquire 36,000 shares of
Common Stock at an exercise price of $0.14 per share to Dr. Barbara McNeil, a
director of the Company. On August 25, 1995, the Company granted options to
acquire 36,000 shares of Common Stock to John Pappajohn, a director of the
Company, and options to acquire 36,000 shares of Common Stock to Dr. Derace
Schaffer, Chairman of the Board of Directors of the Company, with both of these
issuances having an exercise price of $0.69 per share. On April 8, 1996, the
Company granted options to acquire 36,000 shares of Common Stock at an exercise
price of $2.08 per share to Dr. Carl Kohrt, a director of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered in all capacities for executive officers of the
Company who received compensation in excess of $100,000 during the period from
inception on February 22, 1995 to December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------ AWARDS SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) UNDERLYING OPTIONS (#)
- -------------------------------------------------------- --------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C>
Donald A. Carlberg, President and Chief Executive
Officer................................................ 1995(1) $ 96,417 $ 15,000 216,000
</TABLE>
- ------------
(1) Reflects compensation paid from February 22, 1995 (inception) through
December 31, 1995.
Messrs. Carlberg, Brown, Turner, Tapper and Ms. Miele are currently
compensated at annual rates of $150,000, $110,000, $110,000, $100,000 and
$100,000, respectively.
The following table sets forth certain information regarding options granted
to the Chief Executive Officer and other executive officers of the Company
during the period from inception on February 22, 1995 through December 31, 1995.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM (2)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED (#)(1) FISCAL YEAR $/SHARE DATE 5% ($) 10% ($)
- -------------------------------------- -------------- ---------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Donald A. Carlberg.................... 180,000 27.3% $ .14 3/1/05 $ 15,722 $ 39,844
Donald A. Carlberg.................... 36,000 5.5 .69 8/25/05 15,722 39,844
Gregory D. Brown...................... 72,000 10.9 .14 5/1/05 6,289 15,937
Gregory D. Brown...................... 18,000 2.7 .69 8/25/05 7,861 19,922
Kent A. Tapper........................ 36,000 5.5 .14 7/24/05 3,144 7,969
Giancarla C. Miele.................... 36,000 5.5 1.04 10/9/05 23,583 59,766
</TABLE>
- -------------
(1) 36,000 of Mr. Carlberg's options vested as of the date of the option grant.
The remainder of his options and all other options will become exercisable
at the rate of 20% per year from the date of grant and have ten- year terms
as long as the optionee's employment with the Company continues. The
exercise price of each option is equal to the fair market value of the
underlying Common Stock on the date of the grant, as determined by the Board
of Directors.
(2) Future value of current year grants assumes appreciation in the market value
of the Common Stock of 5% and 10% per year over the ten-year option period
as required by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of actual values. The
actual value realized may be greater than or less than the potential
realizable values set forth in the table.
33
<PAGE>
No stock options were exercised by the Chief Executive Officer or other
executive officers of the Company during the period from inception on February
22, 1995 through December 31, 1995. The following table sets forth certain
information regarding unexercised options held by the Chief Executive Officer
and other executive officers of the Company at December 31, 1995.
AGGREGATED OPTION EXERCISES THROUGH DECEMBER 31, 1995 AND
DECEMBER 31, 1995 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1995
AT DECEMBER 31, 1995 (#) ($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Donald A. Carlberg................................ 36,000 180,000 $ 57,500 $ 267,500
Gregory D. Brown.................................. 0 90,000 0 133,750
Kent A. Tapper.................................... 0 36,000 0 57,500
Giancarla C. Miele................................ 0 36,000 0 25,000
</TABLE>
- ------------
(1) Calculated based upon $1.74 estimated fair market value of the underlying
securities as of December 31, 1995.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Plan") was originally adopted by the
Board of Directors and stockholders in June 1995. Up to 1,080,000 shares of
Common Stock have been authorized and reserved for issuance under the Plan.
Under the Plan, options may be granted in the form of incentive stock options
("ISOs") or non-qualified stock options ("NQOs") from time to time to salaried
employees, officers, directors and consultants of the Company, as determined by
the Compensation Committee of the Board of Directors. The Compensation Committee
determines the terms and conditions of options granted under the Plan, including
the exercise price. The Plan provides that the Committee must establish an
exercise price for ISOs that is not less than the fair market value per share at
the date of the grant. However, if ISOs are granted to persons owning more than
10% of the voting stock of the Company, the Plan provides that the exercise
price must not be less than 110% of the fair market value per share at the date
of the grant. The Plan also provides for a non-employee director to be entitled
to receive a one-time grant of a NQO to purchase 36,000 shares at an exercise
price equal to fair market value per share on the date of their initial election
to the Company's Board of Directors. Such NQO is exercisable only during the
non-employee director's term and automatically expires on the date such
director's service terminates. Each option, whether an ISO or NQO, must expire
within ten years of the date of the grant.
There are currently outstanding 892,320 options outstanding which have been
granted under the Plan, 379,260 of which have an exercise price of $.14 per
share, 126,000 of which have an exercise price of $.69 per share, 46,800 of
which have an exercise price of $1.04 per share, 57,240 of which have an
exercise price of $1.74 per share, 130,740 of which have an exercise price of
$2.08 per share, and 152,280 of which have an exercise price of $10.00 per
share. Of these options, 36,000 were granted as of March 1, 1995 to Mr. Carlberg
and vested immediately. The remainder of Mr. Carlberg's options and all other
options granted under the plan vest as to 20% of the option grant on the first
anniversary of the grant, and 20% on each subsequent anniversary.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Mr. Carlberg as
its President and Chief Executive Officer dated March 1, 1995, which has a term
of one year and is automatically renewed for successive one-year periods unless
either party receives written notice from the other party of such party's
intention not to renew within 60 days of the agreement's expiration date. The
agreement calls for Mr. Carlberg to receive a base salary of $125,000 per year,
which was increased to $150,000 per year in September 1996. Upon execution of
the agreement, Mr. Carlberg received a $15,000 signing bonus and an
34
<PAGE>
option to purchase up to 180,000 shares of Common Stock of the Company at an
exercise price of $.14 per share, and on March 1, 1996, he received a $25,000
bonus. The option has a ten-year term, vests over five years and was 20% vested
upon grant. The remainder of the option vests at a rate of 20% per year, and the
option is therefore fully exercisable after the first five years of employment.
Mr. Carlberg is eligible for any discretionary bonuses and additional option
grants in amounts to be determined by the Company's Board of Directors based
upon the performance of the Company and Mr. Carlberg. The agreement prohibits
Mr. Carlberg from engaging in any business activity involving the measurement of
clinical outcomes for patients with acute or chronic diseases, or the
measurement of patient compliance with prescribed treatments for acute or
chronic diseases within one year of the termination of his employment with the
Company.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Bylaws provide for mandatory indemnification rights, subject
to limited exceptions, to any officer or director of the Company who, by reason
of the fact that he or she is or was an officer or director of the Company, is
involved in a legal proceeding of any nature. In addition, the Restated
Certificate of Incorporation contains provisions limiting the personal liability
of directors to the Company or its shareholders for monetary damages arising
from certain acts or omissions in the director's capacity as a director.
CERTAIN TRANSACTIONS
The Company was initially capitalized on February 22, 1995 through the sale
of 3,600,000 shares of its Common Stock for $.14 per share. Included among the
participants in that transaction were Dr. Derace Schaffer, Chairman of the
Board, who purchased 1,656,000 shares, Dr. Schaffer's spouse who purchased
144,000 shares, John Pappajohn, a director, who purchased 541,800 shares, a sole
proprietorship owned by Mr. Pappajohn which purchased 360,000 shares. Mr.
Pappajohn's spouse, who purchased 360,000 shares, and a sole proprietorship
owned by Mr. Pappajohn's spouse which purchased 360,000 shares.
In August and September of 1995 the Company sold 1,800,000 shares of its
Series A Preferred Stock in a private placement for $1.00 per share. Included
among the participants in that transaction were Gregory D. Brown, Sr. Vice
President, Chief Financial Officer, Secretary and Treasurer, who purchased
10,000 shares, and Mr. Pappajohn who purchased 10,000 shares. In addition,
Edgewater Private Equity Fund II, L.P., ("Edgewater"), a five percent owner of
the Common Stock of the Company, acquired 1,000,000 shares of Series A Preferred
Stock in the Series A Preferred Stock offering.
In May and June of 1996, the Company sold 600,000 shares of its Series B
Preferred Stock in a private placement for $5.00 per share. Included among the
participants in that transaction were Dr. Schaffer, who purchased 20,000 shares,
Mr. Pappajohn, who purchased 40,000 shares, and Edgewater which purchased
200,000 shares. See "Description of Securities".
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of November 15, 1996,
and as adjusted to give effect to the sale of 2,000,000 shares of Common Stock
in this offering assuming (a) conversion of all outstanding shares of
convertible Preferred Stock into 2,046,000 shares of Common Stock and (b) no
exercise of the Underwriters' over-allotment option (i) by each person the
Company knows to be the beneficial owner of 5% or more of the outstanding shares
of Common Stock, (ii) each named executive officer listed in the Summary
Compensation Table, (iii) each director of the Company and (iv) all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
SHARES -----------------------------
BENEFICIALLY BEFORE THE AFTER
BENEFICIAL OWNER (1) OWNED OFFERING THE OFFERING
- ---------------------------------------------------------------------------- ----------- ------------- --------------
<S> <C> <C> <C>
Derace L. Schaffer (2)...................................................... 1,711,700 30.2% 22.3%
John Pappajohn (3).......................................................... 1,449,680 25.6% 18.9%
Edgewater Private Equity Fund II, L.P., (4) ................................ 970,000 17.2% 12.7%
666 Grand Avenue, Suite 200
Des Moines, IA 50309
Donald A. Carlberg (5)...................................................... 72,000 1.3% 1.0%
Gregory D. Brown (6)........................................................ 23,760 * *
James D. Turner (7)......................................................... -- -- --
Kent A. Tapper (8).......................................................... 7,200 * *
Giancarla C. Miele (9)...................................................... 7,200 * *
David B. Nash (10).......................................................... -- -- --
Alvin I. Mushlin (11)....................................................... -- -- --
Barbara J. McNeil (8)....................................................... 7,200 * *
Carl F. Kohrt (12).......................................................... -- -- --
All directors and executive officers as a
group (11 persons) (13).................................................... 3,278,740 56.7% 42.1%
</TABLE>
- ------------
* Less than one percent.
(1) Unless otherwise noted, the address of each of the listed persons is c/o
the Company at 46 Prince Street, Rochester, New York 14607.
(2) Includes 288,000 shares held by Dr. Schaffer's minor children. Also
includes 12,500 shares which are issuable upon the conversion of 10,000
shares of Series B Preferred Stock into Common Stock upon the closing of
this offering and 7,200 shares which are issuable upon the exercise of
options that are either currently exercisable or which become exercisable
within 60 days of the date of this Prospectus. Does not include 28,800
shares subject to outstanding options which are not exercisable within 60
days of the date of this Prospectus.
(3) Includes 360,000 shares held by Halkis, Ltd., a sole proprietorship owned
by Mr. Pappajohn, 360,000 shares held by Thebes, Ltd., a sole
proprietorship owned by Mr. Pappajohn's spouse, 360,000 shares held
directly by Mr. Pappajohn's spouse and 50,000 shares which are issuable
upon the conversion of 40,000 shares of Series B Preferred Stock into
Common Stock upon the closing of this offering. Mr. Pappajohn disclaims
beneficial ownership of the shares owned by Thebes, Ltd. and by his spouse.
Includes options to purchase 7,200 shares which are either currently
exercisable or which become exercisable within 60 days of the date of this
Prospectus. Does not include 28,800 shares subject to outstanding options
which are not exercisable within 60 days of the date of this Prospectus.
36
<PAGE>
(4) The included shares are all issuable upon the conversion of shares of
Preferred Stock into Common Stock upon the closing of this offering.
(5) Represents options to purchase 72,000 shares which are either currently
exercisable or which become exercisable within 60 days of the date of this
Prospectus. Does not include 162,000 shares subject to outstanding options
which are not exercisable within 60 days of the date of this Prospectus.
(6) Includes options to purchase 18,000 shares which are either currently
exercisable or which become exercisable within 60 days of the date of this
Prospectus and 5,760 shares which are issuable upon the conversion of 8,000
shares of Series A Preferred Stock into Common Stock upon the closing of
this offering. Does not include 82,800 shares subject to outstanding
options which are not exercisable within 60 days of the date of this
Prospectus.
(7) Does not include 72,000 shares subject to outstanding options which are not
exercisable within 60 days of the date of this Prospectus.
(8) Represents options to purchase 7,200 shares which are either currently
exercisable or which become exercisable within 60 days of the date of this
Prospectus. Does not include 28,800 shares subject to outstanding options
which are not exercisable within 60 days of the date of this Prospectus.
(9) Represents options to purchase 7,200 shares which are either currently
exercisable or which become exercisable within 60 days of the date of this
Prospectus. Does not include 64,800 shares subject to outstanding options
which are not exercisable within 60 days of the date of this Prospectus.
(10) Does not include 14,400 shares subject to outstanding warrants which are
not exercisable within 60 days of the date of this Prospectus.
(11) Does not include 7,200 shares subject to outstanding warrants which are
not exercisable within 60 days of the date of this Prospectus.
(12) Does not include 36,000 shares subject to outstanding options which are
not exercisable within 60 days of the date of this Prospectus.
(13) Includes options to purchase 126,000 shares which are either currently
exercisable or which become exercisable within 60 days of the date of this
Prospectus and 55,760 shares which are issuable upon the conversion of
58,000 shares of Preferred Stock into Common Stock upon the closing of
this offering. Does not include 554,400 shares subject to outstanding
options and warrants which are not exercisable within 60 days of the date
of this Prospectus.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the issuance of
25,000,000 shares of capital stock, which includes 20,000,000 shares of Common
Stock, $0.01 par value per share, and 5,000,000 shares of Preferred Stock, $0.01
par value per share, in one or more series with such terms as the Board of
Directors may determine. As of the date hereof, there are 3,607,202 shares of
outstanding Common Stock held by sixty record holders, 1,800,000 shares of
Series A Preferred Stock outstanding held by twenty record holders and 600,000
shares of Series B Preferred Stock outstanding held by twenty-six record
holders. All outstanding shares of Convertible Preferred Stock will
automatically convert into an aggregate of 2,046,000 shares of Common Stock as
of the closing of this offering. The Series A Preferred Stock converts into
Common Stock on a .72-for-one basis. The Series B Preferred Stock converts into
Common Stock at a conversion rate of 1.25 shares of Common Stock for each share
of Series B Preferred Stock. This conversion rate provides for a conversion rate
such that the aggregate market value of the Common Stock into which the Series B
Preferred Stock is converted will equal $10.00 multiplied by the number of
shares of Series B Preferred Stock converted.
37
<PAGE>
The following is a brief summary of the terms of the various classifications
of capital stock giving pro forma effect to the automatic conversion of Series A
Preferred Stock and Series B Preferred Stock into shares of Common Stock at the
closing of this offering.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share held of record at
each meeting of stockholders. Subject to the preferences that may be applicable
to any outstanding Preferred Stock, the holders of the Common Stock are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In any distribution of capital assets, whether voluntary or
involuntary, holders of Common Stock are entitled to receive pro rata the assets
remaining after creditors have been paid in full and holders of Preferred Stock
have received their preferential distribution. No shares of Common Stock are
entitled to preference over any other share, and each share is equal to any
other share in all respects. Holders of the Common Stock have no pre-emptive or
conversion rights or other subscription rights. The outstanding shares of Common
Stock and those issuable upon conversion of the Series A Preferred Stock and the
Series B Preferred Stock will be, when issued, duly authorized, validly issued,
fully paid and non assessable.
PREFERRED STOCK
The Board of Directors is authorized to issue without stockholder approval
5,000,000 shares of Preferred Stock in one or more series and to determine and
alter all rights, preferences and privileges and qualifications, limitations and
restrictions thereof, including with respect to the rate and nature of
dividends, the price and terms and conditions on which shares may be redeemed,
the amount payable in the event of voluntary or involuntary liquidation, the
terms and conditions for conversion or exchange into any other class or series
of stock, voting rights and other terms.
REGISTRATION RIGHTS
Holders owning 50% or more of the aggregate of the shares of Common Stock
into which any shares of the Series A Preferred Stock have been or can be
converted or the Series B Preferred Stock have been or can be converted have the
right on one occasion at any time commencing twelve months from the date of the
initial public offering of the Common Stock of the Company, but not later than
October 31, 2000 or May 31, 2001, respectively, to require the Company to
prepare and file a Registration Statement under the Securities Act covering such
shares of Common Stock, and the Company, at its expense, will use its best
efforts to cause such registration statement to become effective as soon as
possible.
In addition, the holders of Series A Preferred Stock and Series B Preferred
Stock are each entitled, subject to the approval of the underwriter, to two
"piggyback" registrations at the Company's expense as part of a registration by
the Company of its shares of Common Stock at any time commencing twelve months
from the date of the Initial Public Stock Offering, but not later than October
31, 2000 and May 31, 2001, respectively. Holders of Series A Preferred Stock and
Series B Preferred Stock are each granted the right on up to two occasions at
the participating holder's expense, and prior to October 31, 2000 and May 31,
2001, respectively, to have their shares registered on Form S-3 if such is
available for use by the Company and such holder or holders. The registration
rights are subject to a number of terms and conditions, including but not
limited to requirements as to minimum offering size and reaching satisfactory
underwriting terms.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law or (iv) any transaction from which the director derived an
improper personal benefit.
38
<PAGE>
The Company's Bylaws provide that the Company shall indemnify its officers,
directors, employees and other agents to the extent permitted by Delaware law.
The Company's Bylaws also permit it to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether the Bylaws would permit
indemnification.
TRANSFER AGENT AND REGISTRAR
The Company has appointed Continental Stock Transfer and Trust Company as
its transfer agent and registrar for the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 7,653,202 shares of
Common Stock outstanding (based upon the number of shares outstanding as of
November 15, 1996). The 2,000,000 shares sold in this offering (2,300,000 shares
if the Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction under the Securities Act, except for any such
shares held at any time by an "affiliate" of the Company, as such term is
defined under Rule 144 promulgated under the Securities Act.
The remaining 5,653,202 shares (the "Restricted Shares") were issued and
sold by the Company in private transactions and may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144. In general, under Rule 144, as
currently in effect, a person, including an "affiliate" as that term is defined
in Rule 144, who has held "restricted" shares for a period of at least two years
from the later of the date such shares were acquired from the Company or the
date such shares were acquired from an affiliate, is entitled to sell, within
any three-month period, a number of restricted shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of Common Stock or
the average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are subject to certain manner of sale limitations,
notice requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has held restricted shares for a period of at least three years from the
later of the date such shares were acquired from the Company and the date they
were acquired from an affiliate is entitled to sell such shares at any time
under Rule 144 without regard to the limitations described above.
The holders of substantially all of the outstanding shares of Common Stock
have agreed pursuant to certain agreements (the "Lock-up Agreements") that they
will not sell or otherwise dispose of any shares of Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
Cowen & Company.
Of the 5,653,202 Restricted Shares, 3,600,000 Restricted Shares will become
eligible for sale in February 1997, subject to compliance with the volume and
other limitations of Rule 144. In addition, 1,296,000 Restricted Shares will
become eligible for sale in August and September 1997 and 757,202 Restricted
Shares will become eligible for sale during or after May 1998, all subject to
compliance with the volume and other limitations of Rule 144.
Rule 701 ("Rule 701") under the Securities Act provides an exemption from
the registration requirements of the Securities Act for offers and sales of
securities issued pursuant to certain compensatory benefit plans or written
contracts of a company not subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act (the "Exchange Act"). Securities issued
pursuant to Rule 701 are defined as restricted securities for purposes of Rule
144. However, 90 days after the issuer becomes subject to the reporting
provisions of the Exchange Act, the Rule 144 resale restrictions, except for the
broker's transaction requirement, do not apply to shares acquired pursuant to
Rule 701 by non-Affiliates. Affiliates are subject to all Rule 144 restrictions
after this 90-day period, but without the Rule 144 holding period requirement.
If all the requirements of Rule 701 are met, upon expiration of the Lock-up
Agreements, an aggregate of 825,480 shares of Common Stock issued upon the
exercise of options granted and issuable on exercise of currently outstanding
options will become eligible for sale pursuant to such rule (subject to
applicable Rule 144 restrictions), substantially all of which shares are subject
to the Lock-up Agreements.
39
<PAGE>
The Securities and Exchange Commission has proposed amendments to Rule 144
and Rule 144(k) that would permit resales of Restricted Shares under Rule 144
after a one-year, rather than a two-year holding period, subject to compliance
with the other provisions of Rule 144, and would permit resale of Restricted
Shares by non-Affiliates under Rule 144(k) after a two-year, rather than a
three-year, holding period. Assuming adoption of such amendments, approximately
4,896,000 of the Restricted Shares will be eligible for sale in the public
market immediately after this offering pursuant to Rule 144 (subject to
compliance with the volume and other limitations of Rule 144), substantially all
of which shares are subject to the Lock-up Agreements.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing stockholders could adversely affect prevailing market prices and the
Company's ability to raise additional capital in the future.
40
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Cowen & Company...................................................................................... 637,500
Vector Securities International, Inc. ............................................................... 637,500
Bear, Stearns & Co. Inc. ............................................................................ 50,000
Deutsche Morgan Grenfell Inc. ....................................................................... 50,000
A.G. Edwards & Sons, Inc. ........................................................................... 50,000
Hambrecht & Quist LLC................................................................................ 50,000
Lehman Brothers Inc. ................................................................................ 50,000
Montgomery Securities................................................................................ 50,000
Prudential Securities Incorporated................................................................... 50,000
Schroder Wertheim & Co. Incorporated................................................................. 50,000
Smith Barney Inc. ................................................................................... 50,000
UBS Securities LLC................................................................................... 50,000
J.C. Bradford & Co. ................................................................................. 25,000
Crowell, Weedon & Co. ............................................................................... 25,000
Dain Bosworth Incorporated........................................................................... 25,000
Interstate/Johnson Lane Corporation.................................................................. 25,000
McDonald & Company Securities, Inc. ................................................................. 25,000
Nutmeg Securities, Ltd. ............................................................................. 25,000
Pennsylvania Merchant Group Ltd...................................................................... 25,000
Punk, Ziegel & Knoell................................................................................ 25,000
Raymond James & Associates, Inc. .................................................................... 25,000
----------
Total............................................................................................ 2,000,000
----------
----------
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Cowen & Company and Vector Securities
International, Inc. are acting as Representatives, propose initially to offer
part of the shares of Common Stock directly to the public at the public offering
price set forth on the cover page hereof and part to certain dealers at a price
that represents a concession not in excess of $.31 per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to other Underwriters or to certain
other dealers. After the initial public offering, the public offering price and
such concessions may be changed by the Underwriters. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 300,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option
41
<PAGE>
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The Company, its officers and directors and certain other stockholders,
holding in the aggregate substantially all of the Company's currently
outstanding equity securities, have agreed that, for a period of 180 days after
the date of this Prospectus, they will not, without the prior written consent of
Cowen & Company, offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock except, in the case of the Company, in certain
limited circumstances.
At the Company's request, the Representatives have agreed to reserve up to
100,000 shares of Common Stock for sale at the public offering price to Company
employees and other persons having certain business relationships with the
Company. The number of shares available for sale to the general public will be
reduced to the extent these persons purchase such reserved shares. Any reserved
shares not purchased will be offered by the Underwriters to the general public
on the same basis as the other shares offered hereby.
A senior vice president with Smith Barney Inc. ("Smith Barney"), which has
been invited by the Representatives to participate in this offering as an
Underwriter, purchased 10,000 shares of Series B Preferred Stock in May, 1996
for $5.00 per share for an aggregate purchase price of $50,000. In addition, an
individual whose father and brother are registered representatives with Smith
Barney purchased 5,000 shares of Series B Preferred Stock in May, 1996 for $5.00
per share for an aggregate purchase price of $25,000.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives of
the Underwriters. The factors considered in determining the initial public
offering price were the history of, and the prospects for, the Company's
business and the industry in which it competes, an assessment of the Company's
management, its past and present operations, its past and present earnings and
the trend of such earnings, the prospects for earnings of the Company, the
present state of the Company's development, the general condition of the
securities market at the time of the offering and the market prices and earnings
of similar securities of comparable companies at the time of the offering.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Crummy, Del Deo, Dolan, Griffinger &
Vecchione, Newark, New Jersey. Certain legal matters will be passed upon for the
Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1995 and June 30,
1996 and for the period from February 22, 1995 (Inception) to December 31, 1995,
for the six month period ended June 30, 1996 and for the period from February
22, 1995 (Inception) to June 30, 1996 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
42
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act a Registration Statement with respect to
the Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference, but such statements are complete in all material
respects for the purposes herein made. The Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; at its Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and at its New York Regional Office, Seven World
Trade Center, New York, New York 10048. Copies of such material can be obtained
from the public reference section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. For further information pertaining
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as it determines.
43
<PAGE>
PATIENT INFOSYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Balance Sheets as of December 31, 1995, June 30, 1996, September 30, 1996 (unaudited) and September 30,
1996 pro forma (unaudited).............................................................................. F-3
Statements of Operations for the period from February 22, 1995 (Inception) to December 31, 1995, for the
six month period ended June 30, 1996, for the period from February 22, 1995 (Inception) to June 30,
1996, for the period from February 22, 1995 (Inception) to September 30, 1995 (unaudited), for the nine
month period ended September 30, 1996 (unaudited) and for the period from February 22, 1995 (Inception)
to September 30, 1996 (unaudited)....................................................................... F-4
Statements of Stockholders' Equity for the period from February 22, 1995 (Inception) to June 30, 1996 and
the unaudited period from July 1, 1996 to September 30, 1996............................................ F-5
Statements of Cash Flows for the period from February 22, 1995 (Inception) to December 31, 1995, for the
six month period ended June 30, 1996, for the period from February 22, 1995 (Inception) to June 30,
1996, for the period from February 22, 1995 (Inception) to September 30, 1995 (unaudited), for the nine
month period ended September 30, 1996 (unaudited) and for the period from February 22, 1995 (Inception)
to September 30, 1996 (unaudited)....................................................................... F-6
Notes to Financial Statements............................................................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Patient Infosystems, Inc.:
We have audited the accompanying balance sheets of Patient Infosystems, Inc.
(formerly Disease State Management, Inc.) (a development stage enterprise) as of
December 31, 1995 and June 30, 1996 and the related statements of operations,
stockholders' equity, and cash flows for the period from February 22, 1995
(Inception) to December 31, 1995, for the six month period ended June 30, 1996
and for the period from February 22, 1995 (Inception) to June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Patient Infosystems, Inc. as of December 31,
1995 and June 30, 1996, and the results of its operations and its cash flows for
the period from February 22, 1995 (Inception) to December 31, 1995, for the six
month period ended June 30, 1996 and for the period from February 22, 1995
(Inception) to June 30, 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Rochester, New York
July 16, 1996
(November 22, 1996 as to Note 7)
F-2
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
SEPTEMBER 30, 1996
DECEMBER 31, 1995 JUNE 30, 1996 1996 PRO FORMA
----------------- -------------- -------------- --------------
(UNAUDITED)
(UNAUDITED) (NOTE 1)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 1,182,080 $ 2,904,799 $ 2,022,628 $ 2,022,628
Accounts receivable............................. 4,055 72,262 37,496 37,496
Prepaid expenses and other current assets....... 23,984 105,173 198,101 198,101
----------------- -------------- -------------- --------------
Total current assets........................ 1,210,119 3,082,234 2,258,225 2,258,225
Property and Equipment, net....................... 553,510 710,251 728,427 728,427
----------------- -------------- -------------- --------------
Total Assets...................................... $ 1,763,629 $ 3,792,485 $ 2,986,652 $ 2,986,652
----------------- -------------- -------------- --------------
----------------- -------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................ $ 362,769 $ 148,668 $ 219,557 $ 219,557
Accrued salaries and wages...................... 48,259 176,157 117,086 117,086
Accrued expenses................................ 19,381 74,170 121,657 121,657
Accrued loss on development contracts........... -- 46,923 47,911 47,911
Deferred revenue................................ 168,055 454,426 281,926 281,926
----------------- -------------- -------------- --------------
Total current liabilities................... 598,464 900,344 788,137 788,137
----------------- -------------- -------------- --------------
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Preferred stock--$.01 par value; authorized
5,000,000 shares:
Series A Convertible Preferred Stock;
1,800,000 shares designated, issued and
outstanding (liquidation preference
$1,800,000).................................. 18,000 18,000 18,000 --
Series B Convertible Preferred Stock; 600,000
shares designated, issued and outstanding
(liquidation preference $3,000,000).......... -- 6,000 6,000 --
Common stock--$.01 par value; authorized
20,000,000 shares; 3,602,880 issued and
outstanding at December 31, 1995 and June 30,
1996 and 3,607,202 shares issued and
outstanding at September 30, 1996 (5,653,202
shares pro forma).............................. 36,029 36,029 36,072 56,532
Additional paid-in capital...................... 2,227,788 5,228,671 5,234,705 5,238,245
Deficit accumulated during the development
stage.......................................... (1,116,652) (2,396,559) (3,096,262) (3,096,262)
----------------- -------------- -------------- --------------
Total stockholders' equity.................. 1,165,165 2,892,141 2,198,515 2,198,515
----------------- -------------- -------------- --------------
Total Liabilities and Stockholders' Equity........ $ 1,763,629 $ 3,792,485 $ 2,986,652 $ 2,986,652
----------------- -------------- -------------- --------------
----------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 22, 1995 SIX MONTH
(INCEPTION) PERIOD ENDED
TO DECEMBER 31, JUNE 30,
1995 1996
------------------------------ -------------
Revenues................................ $ 113,000 $ 465,416
<S> <C> <C> <C>
----------- -----------
Costs and Expenses:
Cost of sales......................... 111,870 447,312
Sales and marketing................... 375,384 389,756
General and administrative............ 678,498 902,188
Research and development.............. 89,909 26,736
----------- -----------
Total costs and expenses............ 1,255,661 1,765,992
----------- -----------
Operating Loss.......................... (1,142,661) (1,300,576)
Interest Income......................... 26,009 20,669
----------- -----------
Net Loss................................ $(1,116,652) $(1,279,907)
----------- -----------
----------- -----------
Net Loss Per Common and Common Share
Equivalents............................ $ (.18) $ (.21)
----------- -----------
----------- -----------
Weighted Average Common and Common Share
Equivalents............................ 5,954,299 6,118,749
----------- -----------
----------- -----------
<CAPTION>
PERIOD FROM
FEBRUARY 22, 1995
(INCEPTION)
TO JUNE 30,
1996
------------------------------
PERIOD FROM NINE MONTH
FEBRUARY 22, 1995 PERIOD ENDED
(INCEPTION) SEPTEMBER 30,
TO SEPTEMBER 30, 1996
1995 -------------------
------------------------------
(UNAUDITED)
(UNAUDITED)
Revenues................................ $ 578,416 $ 7,500 $ 644,146
<S> <C>
----------- ----------- -------------------
Costs and Expenses:
Cost of sales......................... 559,182 7,621 601,124
Sales and marketing................... 765,140 228,466 616,545
General and administrative............ 1,580,686 298,998 1,298,801
Research and development.............. 116,645 79,910 160,619
----------- ----------- -------------------
Total costs and expenses............ 3,021,653 614,995 2,677,089
----------- ----------- -------------------
Operating Loss.......................... (2,443,237) (607,495) (2,032,943)
Interest Income......................... 46,678 483 53,333
----------- ----------- -------------------
Net Loss................................ $(2,396,559) $ (607,012) ($1,979,610)
----------- ----------- -------------------
----------- ----------- -------------------
Net Loss Per Common and Common Share
Equivalents............................ $ (.39) $ (.10) $ (.32)
----------- ----------- -------------------
----------- ----------- -------------------
Weighted Average Common and Common Share
Equivalents............................ 6,118,749 5,932,475 6,215,220
----------- ----------- -------------------
----------- ----------- -------------------
<CAPTION>
PERIOD FROM
FEBRUARY 22, 1995
(INCEPTION)
TO SEPTEMBER 30,
1996
------------------------------
(UNAUDITED)
Revenues................................ $ 757,146
-----------
Costs and Expenses:
Cost of sales......................... 712,994
Sales and marketing................... 991,929
General and administrative............ 1,977,299
Research and development.............. 250,528
-----------
Total costs and expenses............ 3,932,750
-----------
Operating Loss.......................... (3,175,604)
Interest Income......................... 79,342
-----------
Net Loss................................ $(3,096,262)
-----------
-----------
Net Loss Per Common and Common Share
Equivalents............................ $ (.50)
-----------
-----------
Weighted Average Common and Common Share
Equivalents............................ 6,215,220
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION)
TO JUNE 30, 1996 AND THE UNAUDITED PERIOD FROM JULY 1, 1996 TO
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
------------------- ------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE
--------- -------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock, substantially all of
which was issued on February 22, 1995 at
$0.14 per share............................. -- $ -- 3,602,880 $36,029 $ 464,371 $ --
Sale of Series A convertible preferred stock
at $1.00 per share in August and September
1995 (net of issuance costs of $18,583)..... 1,800,000 18,000 -- -- 1,763,417 --
Net loss for the period from Inception to
December 31, 1995........................... -- -- -- -- -- (1,116,652)
--------- -------- --------- -------- ----------- ------------
Balances, December 31, 1995.................. 1,800,000 18,000 3,602,880 36,029 2,227,788 (1,116,652)
Sale of Series B convertible preferred stock
at $5.00 per share in May and June 1996 (net
of issuance costs of $3,250)................ 600,000 6,000 -- -- 2,990,750 --
Compensation expense related to issuance of
stock warrants.............................. -- -- -- -- 10,133 --
Net loss for the period from January 1, 1996
to June 30, 1996............................ -- -- -- -- -- (1,279,907)
--------- -------- --------- -------- ----------- ------------
Balances, June 30, 1996...................... 2,400,000 24,000 3,602,880 36,029 5,228,671 (2,396,559)
Compensation expense related to issuance of
stock warrants*............................. -- -- -- -- 3,075 --
Exercise of stock warrants*.................. -- -- 4,322 43 2,959 --
Net loss for the period from July 1, 1996 to
September 30, 1996*......................... -- -- -- -- -- (699,703)
--------- -------- --------- -------- ----------- ------------
Balances, September 30, 1996 (unaudited)..... 2,400,000 24,000 3,607,202 36,072 5,234,705 (3,096,262)
Conversion of Series A and B convertible
preferred stock to common stock -- Pro
Forma*...................................... (2,400,000) (24,000) 2,046,000 20,460 3,540 --
--------- -------- --------- -------- ----------- ------------
Balances, September 30, 1996 -- Pro Forma
(unaudited)................................. -- $ -- 5,653,202 $56,532 $5,238,245 $(3,096,262)
--------- -------- --------- -------- ----------- ------------
--------- -------- --------- -------- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Sale of common stock, substantially all of
which was issued on February 22, 1995 at
$0.14 per share............................. $ 500,400
Sale of Series A convertible preferred stock
at $1.00 per share in August and September
1995 (net of issuance costs of $18,583)..... 1,781,417
Net loss for the period from Inception to
December 31, 1995........................... (1,116,652)
-------------
Balances, December 31, 1995.................. 1,165,165
Sale of Series B convertible preferred stock
at $5.00 per share in May and June 1996 (net
of issuance costs of $3,250)................ 2,996,750
Compensation expense related to issuance of
stock warrants.............................. 10,133
Net loss for the period from January 1, 1996
to June 30, 1996............................ (1,279,907)
-------------
Balances, June 30, 1996...................... 2,892,141
Compensation expense related to issuance of
stock warrants*............................. 3,075
Exercise of stock warrants*.................. 3,002
Net loss for the period from July 1, 1996 to
September 30, 1996*......................... (699,703)
-------------
Balances, September 30, 1996 (unaudited)..... 2,198,515
Conversion of Series A and B convertible
preferred stock to common stock -- Pro
Forma*...................................... --
-------------
Balances, September 30, 1996 -- Pro Forma
(unaudited)................................. $ 2,198,515
-------------
-------------
</TABLE>
* Unaudited
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 22, 1995 SIX MONTH
(INCEPTION) PERIOD ENDED
TO DECEMBER 31, JUNE 30,
1995 1996
------------------------------ -------------
Operating Activities:
<S> <C> <C> <C>
Net loss.............................. $(1,116,652) $(1,279,907)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 26,473 82,437
Compensation expense related to
issuance of stock warrants......... -- 10,133
Increase in accounts receivable..... (4,055) (68,207)
Increase in prepaid expenses and
other current assets............... (23,984) (81,189)
Increase (decrease) in accounts
payable............................ 362,769 (214,101)
Increase in accrued salaries and
wages.............................. 48,259 127,898
Increase in accrued expenses........ 19,381 54,789
Increase in deferred revenue........ 168,055 286,371
Increase in accrued loss on
development contracts.............. -- 46,923
----------- -----------
Net cash used in operating
activities....................... (519,754) (1,034,853)
----------- -----------
Investing Activity:
Property and equipment additions...... (579,983) (239,178)
----------- -----------
Financing Activity:
Proceeds from issuance of common and
preferred stock, net................. 2,281,817 2,996,750
----------- -----------
Increase in Cash and Cash Equivalents... 1,182,080 1,722,719
Cash and Cash Equivalents at Beginning
of Period.............................. -- 1,182,080
----------- -----------
Cash and Cash Equivalents at End of
Period................................. $ 1,182,080 $ 2,904,799
----------- -----------
----------- -----------
<CAPTION>
PERIOD FROM
FEBRUARY 22, 1995
(INCEPTION)
TO JUNE 30,
1996
------------------------------
PERIOD FROM NINE MONTH
FEBRUARY 22, 1995 PERIOD ENDED
(INCEPTION) SEPTEMBER 30,
TO SEPTEMBER 30, 1996
1995 -------------------
------------------------------
(UNAUDITED)
(UNAUDITED)
Operating Activities:
<S> <C>
Net loss.............................. $(2,396,559) $ (607,012) $(1,979,610)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 108,910 10,069 129,087
Compensation expense related to
issuance of stock warrants......... 10,133 -- 13,208
Increase in accounts receivable..... (72,262) (55,000) (33,441)
Increase in prepaid expenses and
other current assets............... (105,173) (43,161) (174,117)
Increase (decrease) in accounts
payable............................ 148,668 66,052 (143,212)
Increase in accrued salaries and
wages.............................. 176,157 16,642 68,827
Increase in accrued expenses........ 74,170 30,000 102,276
Increase in deferred revenue........ 454,426 47,500 113,871
Increase in accrued loss on
development contracts.............. 46,923 -- 47,911
----------- ----------- -------------------
Net cash used in operating
activities....................... (1,554,607) (534,910) (1,855,200)
----------- ----------- -------------------
Investing Activity:
Property and equipment additions...... (819,161) (114,737) (304,004)
----------- ----------- -------------------
Financing Activity:
Proceeds from issuance of common and
preferred stock, net................. 5,278,567 2,281,417 2,999,752
----------- ----------- -------------------
Increase in Cash and Cash Equivalents... 2,904,799 1,631,770 840,548
Cash and Cash Equivalents at Beginning
of Period.............................. -- -- 1,182,080
----------- ----------- -------------------
Cash and Cash Equivalents at End of
Period................................. $ 2,904,799 $ 1,631,770 $2,022,628
----------- ----------- -------------------
----------- ----------- -------------------
<CAPTION>
PERIOD FROM
FEBRUARY 22, 1995
(INCEPTION)
TO SEPTEMBER 30,
1996
------------------------------
(UNAUDITED)
Operating Activities:
Net loss.............................. $(3,096,262)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 155,560
Compensation expense related to
issuance of stock warrants......... 13,208
Increase in accounts receivable..... (37,496)
Increase in prepaid expenses and
other current assets............... (198,101)
Increase (decrease) in accounts
payable............................ 219,557
Increase in accrued salaries and
wages.............................. 117,086
Increase in accrued expenses........ 121,657
Increase in deferred revenue........ 281,926
Increase in accrued loss on
development contracts.............. 47,911
-----------
Net cash used in operating
activities....................... (2,374,954)
-----------
Investing Activity:
Property and equipment additions...... (883,987)
-----------
Financing Activity:
Proceeds from issuance of common and
preferred stock, net................. 5,281,569
-----------
Increase in Cash and Cash Equivalents... 2,022,628
Cash and Cash Equivalents at Beginning
of Period.............................. --
-----------
Cash and Cash Equivalents at End of
Period................................. $ 2,022,628
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
PERIOD ENDED DECEMBER 31, 1995,
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR
THE UNAUDITED NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DEVELOPMENT STAGE ACTIVITIES
The Company was incorporated in Delaware on February 22, 1995 under the name
DSMI Corp., changed its name to Disease State Management, Inc. on October 13,
1995, and on June 28, 1996 changed its name to Patient Infosystems, Inc. The
Company has selected December 31 as the close of its fiscal year.
Through June 30, 1996 the Company's development activities have consisted
primarily of efforts to raise funds, develop the first application of its
information capture and delivery system (which is a system that proactively
collects and analyzes information relevant to patients in specific disease
categories to improve patient compliance with prescribed regimens), and market
its disease management programs for specific diseases. Successful completion of
the Company's program development, and ultimately the attainment of profitable
operations, is dependent upon future events, including obtaining adequate
financing to fund its research and development activities and achieving market
acceptance of its products.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 amounts could differ from those estimates.
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to fairly present the Company's
financial position as of September 30, 1996 and results of operations and cash
flows for the nine months ended September 30, 1996, the period from February 22,
1995 (Inception) to September 30, 1995 and the period from February 22, 1995
(Inception) to September 30, 1996. All such adjustments are of a normal
recurring nature. The results of operations for the nine month period ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the entire year of 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of current assets and current
liabilities which are carried at cost, which approximates fair market value.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's principal source of revenue to date has been from contracts
with a pharmaceutical company for the development and operation of disease
management programs for chronic diseases. Deferred revenue represents amounts
billed in advance under these contracts. Future revenue sources are expected to
include disease management programs and other health care information system
applications.
Development Contracts
The Company's program development contracts typically require payment from
the customer at the time that the contract is executed, with additional payments
made as certain development milestones are
F-7
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED DECEMBER 31, 1995,
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR
THE UNAUDITED NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
met. Development contract revenue is recognized on a percentage of completion
basis, in accordance with the ratio of total development cost incurred to the
estimated total development costs for the entire project. Losses, if any, are
recognized in full as identified.
Program Operations
The Company's program operation contracts call for a per enrolled patient
fee to be paid by the customer for a series of program services as defined in
the contract. The timing of customer payments varies by contract, but typically
occurs in advance of the associated services being provided. Revenues from
program operations are recognized ratably as the program services are delivered.
CASH EQUIVALENTS
Cash equivalents include all highly liquid debt instruments with original
maturities of three months or less.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and accounts receivable. The Company
places its cash with high credit-quality institutions. At times such amounts may
be in excess of FDIC insurance limits.
The Company's current contracts are concentrated in a small number of
customers, with five of the Company's eleven contracts being with one customer.
Consequently, the loss of any one of its customers could have a material adverse
effect on the Company and its operations.
During the unaudited nine month period ended September 30, 1996, the six
month period ended June 30, 1996 and the period from February 22, 1995
(Inception) to December 31, 1995, approximately $616,200 (96%), $455,000 (98%)
and $84,000 (74%), respectively, of the Company's revenues arose from contracts
with one customer. At September 30, 1996 (unaudited), June 30, 1996 and December
31, 1995, accounts receivable included balances of $17,496, $52,000 and $-0-,
respectively, from contracts with that customer.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 10 years.
In 1996, the Company adopted 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. SFAS No. 121 requires that long-lived
assets and certain indentifiable intangibles to be held and used be reported at
the lower of carrying amount or fair value. Assets to be disposed of and assets
not expected to provide any future service potential to the Company are recorded
at the lower of carrying amount or fair value less cost to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
RESEARCH AND DEVELOPMENT
Research and development costs consist principally of compensation and
benefits paid to Company employees. All research and development costs are
expensed as incurred.
F-8
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED DECEMBER 31, 1995,
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR
THE UNAUDITED NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes". Under the asset and liability method, deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and net operating
loss and tax credit carryforwards.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common and
common share equivalents outstanding during the period using the Treasury Stock
method. Common share equivalents include Series A and B Convertible Preferred
Stock, common stock options and common stock warrants. For purposes of this
calculation, all common shares issued and stock options and warrants granted by
the Company at a price less than the initial public offering price during at
least the twelve months preceding the offering date (using the treasury stock
method until shares are issued and an initial public offering price of $8.00 per
share) have been included in the calculation of common and common share
equivalents outstanding. (See Note 7 for a description of additional issuances
of common stock options and common stock warrants subsequent to June 30, 1996.)
UNAUDITED PRO FORMA INFORMATION
The Company is preparing for an initial public offering of its common stock
which, upon completion, would result in the conversion of the outstanding shares
of the Company's preferred stock into shares of its common stock (see Note 4).
The unaudited pro forma balance sheet information is presented as if such
conversion had occurred as of September 30, 1996. The pro forma unaudited
information assumes the initial public offering price of $8.00. Completion of
the offering at this price will result in the issuance of an additional 318,000
shares of common stock to the holders of Series B Convertible Preferred Stock
(see Note 4).
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Computer software................................. $137,153 $181,927
Computer equipment................................ 242,393 371,240
Telephone equipment............................... 120,233 124,996
Leasehold improvements............................ 12,200 23,454
Office furniture and equipment.................... 68,004 117,544
----------- -----------
579,983 819,161
Less accumulated depreciation and amortization.... 26,473 108,910
----------- -----------
Property and equipment, net....................... $553,510 $710,251
----------- -----------
----------- -----------
</TABLE>
3. INCOME TAXES
The Company has not recorded any income tax expense during the period from
Inception to June 30, 1996 because of operating losses incurred since Inception.
F-9
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED DECEMBER 31, 1995,
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR
THE UNAUDITED NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
3. INCOME TAXES (CONTINUED)
As of June 30, 1996, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $2,400,000 which are available to
offset future Federal taxable income. These carryforwards expire in 2010. No tax
benefit relating to the net operating loss carryforwards has been reflected in
the financial statements due to the uncertainty regarding the utilization of any
such benefit, and a valuation allowance has been recognized to offset any
deferred tax asset related to this item. Future benefit may occur to the extent
taxable income is earned prior to the expiration of the carryforward period.
Section 382 of the Internal Revenue Code imposes certain limitations on the
use of net operating loss carryforwards in cases of a change in ownership of a
corporation, as defined in the Code. These provisions place an annual limitation
on the amount of pre-change losses that can be used to offset post-change
taxable income, with any unused limitation amounts and losses carrying forward.
The limitation is computed by multiplying the Federal long-term tax exempt rate
(currently approximately 5.8%) by the fair value of the corporation immediately
prior to the change in control. It is not anticipated that a change in control,
as defined, will occur as a result of the current proposed offering.
4. PREFERRED STOCK
The Company has 5,000,000 shares of authorized preferred stock and has the
ability to issue different series with different rights and preferences. A
summary of the rights and preferences related to the Series A and B Convertible
Preferred Stock is as follows:
The holders of Series A and B Convertible Preferred Stock have the right to
convert their shares into shares of Common Stock at the rate of .72 shares
of Common Stock for each share of Series A and B Convertible Preferred
Stock. The conversion ratio for the holders of Series A Convertible
Preferred Stock will be adjusted in the event that the Company, in the
future, sells shares of its Common Stock for less than $1.39 per share. In
addition, the conversion ratio for the holders of Series B Convertible
Preferred Stock will be adjusted in the event that the Company sells shares
of its common stock for less than $13.89 per share in an initial public
offering. At the price of the current offering the holders of Series B
Convertible Preferred Stock will receive an additional 318,000 shares of
Common Stock as a result of this provision.
Each share of Series A and B Convertible Preferred Stock will be
automatically converted into shares of Common Stock at the then effective
conversion rate immediately upon the closing of an underwritten public stock
offering which meets certain requirements. Under the current offering these
requirements will be met and the automatic conversion will occur.
The holders of Series A and B Convertible Preferred Stock and the holders of
Common Stock vote together as a single class, with each share of Series A
and B Convertible Preferred Stock entitled to the number of votes equal to
the number of shares of Common Stock into which it is convertible. They also
have certain liquidation preferences in the event of a liquidation,
dissolution or winding up of the Company, and the right to participate in
dividends to the extent that they are declared on the Company's Common
Stock.
5. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Stock Option Plan") for
the benefit of certain employees, non-employee directors, and key advisors. The
Company has adopted the disclosures-only
F-10
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED DECEMBER 31, 1995,
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR
THE UNAUDITED NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
provision of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plan, as it relates to employees. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the date of grant for awards consistent with the provisions of
SFAS No. 123, the Company's net loss and net loss per common and common share
equivalent would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 22, PERIOD FROM
1995 FEBRUARY 22,
(INCEPTION) SIX MONTH 1995
TO DECEMBER 31, PERIOD ENDED (INCEPTION)
1995 JUNE 30, 1996 TO JUNE 30, 1996
---------------- ------------- ----------------
<S> <C> <C> <C>
Net loss--as reported......................................... $ (1,116,652) $ (1,279,907) $ (2,396,559)
Net loss--pro forma........................................... $ (1,125,428) $ (1,296,878) $ (2,422,306)
Net loss per common and common share equivalent-- as
reported..................................................... $ (.18) $ (.21) $ (.39)
Net loss per common and common share equivalent-- pro forma... $ (.18) $ (.21) $ (.39)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using an assumed risk-free interest rate
of 7% and expected lives of 7 years. The Stock Option Plan authorizes 1,080,000
shares of common stock to be issued.
Stock options granted under the Stock Option Plan may be of two types: (1)
incentive stock options and (2) nonqualified stock options. The option price of
such grants shall be determined by a Committee of the Board of Directors (the
"Committee"), but shall not be less than the estimated fair market value of the
common stock at the date the option is granted. The terms of the grants shall be
fixed by the Committee, with no term lasting longer than ten years. The ability
to exercise such options shall be determined by the Committee when the options
are granted. All of the outstanding options vest at the rate of 20% per year
with the exception of 36,000 options which were vested as of the date of grant.
F-11
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED DECEMBER 31, 1995,
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR
THE UNAUDITED NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
OPTION
OUTSTANDING PRICE PER
OPTIONS SHARE
------------ ---------------
<S> <C> <C>
Options granted during the period from Inception to December 31, 1995
(weighted average fair value of $.13)................................... 658,800 $.14 - 1.04
Options forfeited by holders during the period from Inception to December
31, 1995................................................................ (65,520) $.14 - 1.04
Options exercised during the period from Inception to December 31,
1995.................................................................... (2,880) $.14
------------
Options outstanding at December 31, 1995................................. 590,400 $.14 - 1.04
Options granted during the six month period ended June 30, 1996 (weighted
average fair value of $.75)............................................. 213,120 $1.74 - 2.08
Options forfeited by holders during the six month period ended June 30,
1996.................................................................... (8,640) $1.74 - 2.08
------------
Options outstanding at June 30, 1996..................................... 794,880 $.14 - 2.08
------------
------------
Options exercisable at June 30, 1996..................................... 104,760
Options available for grant at June 30, 1996............................. 285,120
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at June 30, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------- ----------- --------------- ----------- ----------- -----------
$.14 - $.69 543,600 8.84 $ .26 104,760 $ .14
$.70 - $1.39 46,800 9.24 1.04 -- --
$1.40 - $2.08 204,480 9.68 1.99 -- --
----------- -----------
794,880 104,760
----------- -----------
----------- -----------
</TABLE>
The Company also has outstanding stock purchase warrants entitling the
holders to purchase a total of 111,962 shares of common stock at $.14 - 2.08 per
share (weighted average exercise price of $.78). At June 30, 1996, 30,242 of
these warrants are currently vested, with the remaining 81,720 warrants vesting
at 20% per year. The Company has recorded compensation cost of $10,133 for the
six month period ended June 30, 1996 in connection with the issuance of these
warrants.
F-12
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED DECEMBER 31, 1995,
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR
THE UNAUDITED NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space for its main operating facility under an
operating lease agreement expiring in September 1999, which is cancelable in
September 1998 at the option of the Company. Rental expense from this lease for
the six month period ended June 30, 1996 and the period from Inception to
December 31, 1995 was $30,119 and $40,375, respectively.
At June 30, 1996, future minimum lease payments under this lease, assuming
the cancellation option is exercised, are summarized as follows (See Note 7):
<TABLE>
<S> <C>
1996.............................................................. $ 46,096
1997.............................................................. 95,202
1998.............................................................. 84,460
---------
$ 225,758
---------
---------
</TABLE>
7. SUBSEQUENT EVENTS
On November 22, 1996, the Company effected a .72-for-1 reverse stock split
of all outstanding shares of common stock. Accordingly, all shares and per share
amounts have been adjusted to reflect the reverse stock split as though it had
occurred at the beginning of the initial period presented.
In October 1996 the Company entered into an amended lease agreement for its
main operating facility which increased its monthly rental payments to
approximately $12,000 and which expires in November 1999.
During the three months ended September 30, 1996, 4,322 stock purchase
warrants were exercised. In addition, the Company recorded compensation cost of
$3,075 related to warrants issued prior to June 30, 1996.
In October 1996, the Company issued incentive stock options to purchase
152,280 shares of its common stock at an exercise price of $10.00 per share, and
stock purchase warrants to purchase 1,800 shares of its common stock at an
exercise price of $10.00 per share.
F-13
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES 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 OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
The Company.................................... 12
Use of Proceeds................................ 12
Dividend Policy................................ 12
Capitalization................................. 13
Dilution....................................... 14
Selected Financial Data........................ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 16
Business....................................... 19
Management..................................... 31
Certain Transactions........................... 35
Principal Stockholders......................... 36
Description of Capital Stock................... 37
Shares Eligible for Future Sale................ 39
Underwriting................................... 41
Legal Matters.................................. 42
Experts........................................ 42
Additional Information......................... 43
Index to Financial Statements.................. F-1
</TABLE>
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UNTIL JANUARY 14, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
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COWEN & COMPANY
VECTOR SECURITIES INTERNATIONAL,
INC.
DECEMBER 19, 1996
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