<PAGE>
As filed with the Securities and Exchange Commission on August 4, 1997
Registration Statement No. 333-14519
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST EFFECTIVE AMENDEMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HEALTHDESK CORPORATION
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
California 7372 94-3165144
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
2560 Ninth Street, Suite 220
Berkeley, California 94710
(510) 883-2160
(Address, including Zip Code and
telephone number, including Area Code,
of Registrant's executive offices)
Peter S. O'Donnell
President and Chief Executive Officer
HealthDesk Corporation
2560 Ninth Street, Suite 220
Berkeley, California 94710
(510)883-2160
(Name, address, including Zip Code and telephone number,
including Area Code, of agent for service)
Copies to:
PETER M. ASTIZ, ESQ.
GRAY CARY WARE & FREIDENRICH,
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301
Tel: (415) 328-6561
Fax: (415) 327-3699
Approximate date of proposed sale to the public: As promptly as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
<PAGE>
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered Per Share Offering Price (1) Fee
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock issuable upon
exercise of Warrants 1,955,000 $5.00 $9,775,000 $2,962.12*
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of Underwriter's 170,000 $6.00 $1,020,000 309.09
Warrants 170,000 $8.25 $1,402,500 425.00
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Common Stock (2) 400,000 $3.25 (3) $1,300,000 $393.94*
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Total $13,497,500 $4,090.15*
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</TABLE>
* All of the fees have been previously paid except the fees relating to the
Common Stock issuable upon exercise of Underwriter's Warrants
(1) Estimated solely for the purposes of calculating the amount of the
registrations fee pursuant to Rule 457(a)
(2) Held by existing security holders and to be offered on a delayed basis
pursuant to Rule 415 under the Securities Act of 1933, as amended
(3) Based on closing trading price as of July 29, 1997
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED AUGUST 4, 1997
PROSPECTUS
HEALTHDESK CORPORATION
1,955,000 Shares of Common Stock
Issuable on Exercise of Redeemable Warrants
340,000 Shares of Common Stock Issuable on Exercise of Underwriter Warrants
400,000 Shares of Common Stock
1,955,000 shares of Common Stock offered by HealthDesk Corporation
("HealthDesk" or the "Company") are issuable upon exercise of 1,955,000
outstanding redeemable warrants (the "Warrants"). Each Warrant entitles the
registered holder thereof to purchase one share of Common Stock at a price of
$5.00, subject to adjustment in certain circumstances, at any time through and
including January 16, 2002. The Warrants are redeemable by the Company, upon the
consent of Whale Securities Co., L.P. ("Whale"), at any time, upon notice of not
less than 30 days, at a price of $.10 per Warrant, provided that the closing bid
quotation of the Common Stock on all 30 of the trading days ending on the third
day prior to the day on which the Company gives notice has been at least 150%
(currently $7.50, subject to adjustment) of the then effective exercise price of
the Warrants. Only holders of Warrants residing in states where the issuance of
the Common Stock underlying such Warrants has been registered or qualified, or
is exempt from registration or qualification, under the securities laws of such
states may exercise the Warrants. See "Description of Securities."
340,000 shares of Common Stock offered by the Company are issuable upon
exercise of 340,000 outstanding Underwriter and its designees warrants (the
"Underwriter's Warrants"). The Underwriter's Warrant entitles the Underwriter
and its designees thereof to purchase up to 170,000 shares of Common Stock at a
price of $6.00 and/or up to 170,000 Warrants (each to purchase one share of
Common Stock at an exercise price of $8.25 per share) at a purchase price of
$.12 per Warrant. The Underwriter's Warrants may not be sold, transferred,
assigned or hypothecated for one year from January 16, 1997 (the "Prospectus
Date"), except to the officers and partners of the Underwriter and members of
the selling group, and are exercisable during the five-year period commencing on
the Prospectus Date. Only the holders of Underwriter's Warrants residing in the
states where the issuance of the Common Stock underlying such Underwriter's
Warrants have been registered or qualified, or is exempt from registration or
qualification under the securities laws of such states, may exercise the
Underwriter's Warrants. See "Description of Securities."
The Company's Common Stock and Warrants are traded on the Nasdaq SmallCap
Market under the symbols "HDSK" and "HDSKW," respectively. On July 29, 1997, the
last reported sales prices of the Common Stock and Warrants as reported on the
Nasdaq SmallCap Market were $3.25 and $0.88, respectively.
This Prospectus also relates to the offer and sale by certain
shareholders of the Company (the "Selling Shareholders") of 400,000 shares of
Common Stock issued pursuant to a bridge financing (the "Bridge Financing") in
October 1996. The shares offered by the Selling Shareholders may not be sold
prior to January 16, 1998 and, without the consent of Whale, may not be sold
prior to July 16, 1998. See "Selling Shareholders and Plan of Distribution."
-------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED
BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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============================================================================================================================
Price to Solicitation Agent Proceeds to
Public Fee Company (1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock issuable on exercise of Warrants.......... $5.00 $.25 $4.75
===========================================================================================================================
</TABLE>
(1) Before deducting estimated expenses of $342,250 payable by the Company,
including the nonaccountable expense allowance of $293,250.
----------------------
The date of this Prospectus is August 4, 1997
<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. Each prospective investor is urged to read this
Prospectus in its entirety. The statements which are not historical facts
contained in this Prospectus are forward looking statements that involve risks
and uncertainties, including those described under "Risk Factors."
The Company
HealthDesk Corporation (the "Company), a development stage company, is
engaged in designing, developing and marketing HealthDesk(R) OnLine, a
healthcare management and information system which enables consumers to take a
more active role in their personal and family health. HealthDesk OnLine features
easy-to-use Windows-based software designed to develop personal medical records
and health management programs and access educational, health related
information from the Company's private Website and over the Internet. The
Company's proposed system is intended to lower the cost and improve the quality
and accessibility of healthcare by promoting preventive maintenance and patient
compliance and permitting electronic mail communications between consumers and
healthcare providers and payers. HealthDesk OnLine is being developed in
response to perceived market opportunities arising from increasing efforts of
industry participants to stem the escalating cost of healthcare.
In July 1996, the Company commenced preliminary market testing of
HealthDesk OnLine pursuant to a license agreement with Blue Cross/Blue Shield of
Massachusetts ("BCMA"). The Company has modified HealthDesk OnLine to satisfy
BCMA's requirements and BCMA is currently testing such product. In the event of
successful initial acceptance testing, the proposed market test contemplates
that BCMA will distribute HealthDesk OnLine to up to 50 of its employees and
thereafter BCMA will have an opportunity to determine whether to distribute
HealthDesk OnLine to up to 500 of its members. The Company extended the BCMA
pilot for an additional six (6) months beginning in March 1997. The market test
is intended to provide information on the product's usability and acceptance by
consumers and to test the technical aspects and functionality of the Company's
software system. The Company had an agreement with Blue Cross/Blue Shield of
Iowa ("BCI"), which was completed in March 1997, to conduct similar market
testing to up to 150 of BCI employee households. BCI has completed the pilot and
the Company is currently engaged in discussions regarding an extension of the
pilot. There can be no assurance that such market testing will be conducted on a
timely basis or that such testing will be successful.
The Company's primary marketing strategy is to license HealthDesk OnLine
to sponsoring organizations (including pharmaceutical companies, managed care
organizations, disease management companies, employers and affinity groups) with
access to significant numbers of potential subscribers. The Company intends to
focus its efforts on healthcare organizations primarily responsible for bearing
the financial risk of patients with chronic diseases. The Company entered into a
development contract in January 1997 with Medical Inter-Insurance Exchange
("MIIX"), a medical malpractice insurance carrier, pursuant to which the Company
will design, develop and test a software module for diabetic patients. In July
1997, the Company completed the first version release of the product for
HealthDesk OnLine for Diabetes which was delivered to MIIX for evaluation. The
Company is currently evaluating various other commercialization strategies,
including the license of HealthDesk OnLine to manufacturers of medical devices,
pursuant to arrangements by which such manufacturers would bundle HealthDesk
Online with their products. The Company is also seeking to establish strategic
relationships with third parties relating to product development and marketing.
The Company currently offers HealthDesk OnLine with no license fee or a
reduced fee to potential sponsoring organizations willing to participate in
market testing activities. In the event of successful completion of market
testing activities, the Company anticipates that its principal sources of
revenues will be derived from license fees from sponsoring organizations and
subscription and online content and usage fees from consumers. The Company will
seek to expand its sources of revenues to include development fees for specific
disease management software modules or features. In addition, the Company may
seek revenues by including advertising in the system or sale of product. The
Company believes that the broad range of capabilities combined in HealthDesk
OnLine, including the system's desktop and online functionality, and the systems
ability to link consumers with healthcare payers and providers, differentiate
HealthDesk OnLine from competitive products and make it attractive to potential
sponsoring organizations seeking to contain healthcare costs.
2
<PAGE>
The Company has been using a portion of the proceeds from its initial
public offering in January 1997 (the "IPO") to refine and enhance the
capabilities of HealthDesk OnLine and expand system capacity. In addition to the
proposed development and commercialization of specific disease management
modules designed to monitor chronic conditions, the Company will seek to license
or develop the following: personalized electronic newsletters designed to
automatically search content databases and websites by topic on a periodic
basis; an online "chat" capability. The Company may also seek to develop
features which will facilitate the input of data from medical devices, such as
blood pressure cuffs, blood glucose monitors and peak flow meters, directly into
HealthDesk OnLine which data may then be monitored by healthcare providers.
Since its inception, the Company has engaged primarily in research and
development and has generated limited revenues. The Company expects to incur
significant up-front expenses in connection with product development and
commercialization (including the payment of salaries for management, technical,
marketing and other personnel), which will result in significant losses for the
foreseeable future. There can be no assurance that the Company's product
development efforts will be successfully completed or that HealthDesk OnLine
will prove to be commercially viable. See "Risk Factors."
The Company was incorporated under the laws of the State of California in
August 1992. The Company's executive offices are located at 2560 Ninth Street,
Suite 220, Berkeley, California 94710, and its telephone number is (510)
883-2160. The Company's home page is located on the World Wide Web at
http://www.healthdesk.com.
3
<PAGE>
The Offering
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<CAPTION>
<S> <C>
Securities offered...................... 1,955,000 shares of Common Stock issuable upon exercise of the
Warrants.
340,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants.
Common Stock Outstanding
Prior to exercise of Warrants and
Underwriter's Warrants............... 5,392,845 (1)
After exercise of Warrants and
Underwriter's Warrants............... 7,687,845 (2)
Warrants Outstanding.................... 1,955,000 Warrants
340,000 Underwriter's Warrants
Use of Proceeds......................... Sales and marketing; product development; expansion of system
capacity; and the balance for working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors............................ The securities offered hereby are speculative and involve a high
degree of risk and immediate substantial dilution and should not be
purchased by investors who cannot afford the loss of their entire
investment. See "Risk Factors."
Nasdaq Symbols.......................... Common Stock - HDSK
Warrants - HDSKW
</TABLE>
- ------------------
(1) Does not include (i) 1,955,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) 340,000 shares of Common Stock reserved
for issuance upon exercise of the Underwriter's Warrants; (iii) 802,588
shares of Common Stock reserved for issuance upon exercise of options
granted under the Company's 1994 Founder's Stock Option Plan (the "Stock
Option Plan"); (iv) 42,166 shares reserved for issuance upon exercise of
options available for future grant under the Stock Option Plan; and (v) up
to a maximum of 100,000 shares of Common Stock reserved for issuance in the
event the Company fails to maintain an effective registration statement
with respect to the shares held by the Selling Shareholders. See
"Management - 1994 Stock Option Plan," "Principal Shareholders,"
"Description of Securities" and "Underwriting."
(2) Does not include (iii) through (v) above.
Notice to California Investors. Each purchaser of Common Stock or Warrants
in California must be an "accredited investor," as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), or satisfy one of the following suitability standards:
(i) minimum annual gross income of $65,000 and a net worth (exclusive of home,
home furnishings and automobiles) of $250,000; or (ii) minimum net worth
(exclusive of home, home furnishings and automobiles) of $500,000.
4
<PAGE>
Summary Financial Data
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
-------------------------------- ----------------------------------
1995 1996 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenue.................... $ 224,011 $ 52,225 $ 858 $ 200,485
Net loss......................... (1,436,473) (4,391,454) (807,854) (1,201,642)
Net loss per share............... (.46) (1.12) (.21) (.26)
Weighted average number of shares
outstanding.................... 3,152,081 3,913,433 3,824,866 4,659,663
Balance Sheet Data:
At March 31, 1997
--------------------------------
Actual
------
Working capital................ $ 3,507,139
Total assets................... 4,764,620
Total liabilities.............. 661,512
Shareholders' equity........... 4,103,108
</TABLE>
- --------------
----------------------------
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of options granted or eligible for grant under the Stock Option Plan.
As of the date of this Prospectus, the price at which the Company's Common Stock
is trading is below the exercise price of the Warrants.
5
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk. Each prospective investor should carefully consider the following risk
factors before making an investment decision.
1. Development Stage Company. The Company was organized in August 1992
and is still in the development stage. Since its inception, the Company has been
engaged primarily in product development activities. The Company's initial
product was introduced in early 1993 and has not yet proven to be commercially
viable. As a result, the Company has no relevant operating history upon which an
evaluation of its performance and prospects can be made. The Company will be
subject to all of the risks, uncertainties, expenses, delays, problems and
difficulties typically encountered in the establishment of a new business and
the development and commercialization of new products. The Company has limited
experience in developing and commercializing new products based on innovative
technologies and there is limited information available concerning the potential
performance of the Company's software or market acceptance of the Company's
proposed products. There can be no assurance that unanticipated expenses,
problems or technical difficulties will not occur which would result in material
delays in product commercialization or that the Company's efforts will result in
successful product commercialization. See "Business."
2. Limited Revenues; Significant and Continuing Losses; Modified Report
of Independent Auditors. The Company has not yet generated any meaningful
revenues, and will not generate any meaningful revenues until after the Company
successfully completes development and market testing of HealthDesk OnLine and
attracts and retains a significant number of subscribers. For the period August
28, 1992 (inception) to March 31, 1997, the Company incurred a cumulative net
loss of approximately $7,550,000. Since March 31, 1997, the Company has
continued to incur increasing and significant losses, and the Company
anticipates that it will continue to incur significant losses until, at the
earliest, it generates sufficient revenues to offset the substantial up-front
expenditures and operating costs associated with developing and commercializing
its proposed products. The Company also recorded non-recurring charges, relating
to a bridge financing completed in October 1996 (the Bridge Financing), of
approximately, $884,000 through the end of the year December 31, 1996 and
$145,000 for the three months ended March 31, 1997. There can be no assurance
that the Company will be able to attract and retain a sufficient number of
subscribers to generate meaningful revenues or achieve profitable operations or
that HealthDesk OnLine will prove to be commercially viable. See Financial
Statements.
3. Working Capital Deficit; Negative Cash Flow; Possible Need for
Additional Financing. The Company's capital requirements relating to the
development and commercialization of HealthDesk OnLine have been and will
continue to be significant. Based on currently proposed plans and assumptions
relating to its operations (including the timetable of, and costs associated
with, product development and commercialization), the Company believes that its
existing capital resources will be sufficient to satisfy its contemplated cash
requirements through the end of fiscal 1997. As of the date of this Prospectus,
the price at which the Company's Common Stock is trading is below the exercise
price of the Warrants. Accordingly, there can be no assurance that any of the
Warrants will be exercised. In the event that significant funds are not received
from the exercise of the Warrants, the Company will be required to seek
additional capital to continue its operations beyond that time which may result
in dilution to current shareholders. In the event that the Company's plans
change, its assumptions prove to be inaccurate or if its existing capital
resources prove to be insufficient to fund operations (due to unanticipated
expenses, technical difficulties, problems or otherwise), the Company would be
required to seek additional financing sooner than currently anticipated. There
can be no assurance that the Company's existing capital resources are sufficient
to permit the Company to successfully develop and commercialize HealthDesk
OnLine or that any assumptions relating to the Company's operations will prove
to be accurate. To the extent that its existing capital resources are not
sufficient to enable the Company to generate meaningful revenues or achieve
profitable operations, the inability to obtain additional financing will have a
material adverse effect on the Company, including possibly requiring the Company
to significantly curtail or cease its operations. In addition, any
implementation of the Company's business plans subsequent to fiscal 1997 may
require capital resources greater than those currently available to the Company.
The Company may determine, depending upon the opportunities available to it, to
seek additional debt or equity financing to fund operations. The Company has no
commitments for any future funding, and there can be no assurance that the
Company will be able to obtain additional capital in the future. To the extent
that the Company finances operations through the issuance of additional equity
securities, any such issuance would result in dilution to the interests of the
Company's shareholders. Additionally, to the extent that the Company incurs
indebtedness or
6
<PAGE>
issues debt securities in connection with funding operations, the Company will
be subject to all of the risks associated with incurring substantial
indebtedness, including the risks that interest rates may fluctuate and cash
flow may be insufficient to pay principal and interest on any such indebtedness.
There can be no assurance that any additional financing will be available to the
Company on commercially reasonable terms, or at all. See "Use of Proceeds."
4. Uncertainty of Product Development. Although the Company believes that
the development efforts relating to the technological aspects of the basic
HealthDesk OnLine platform are substantially completed, the Company has not yet
completed third-party testing of the basic platform or the development or
testing of any system enhancements or specific disease management modules. The
Company will be required to commit considerable time, effort and resources to
finalize such development and adapt its software to satisfy specific
requirements of potential customers. Continued system refinement, enhancement
and development efforts are subject to all of the risks inherent in the
development of new products and technologies, including unanticipated delays,
expenses, technical problems or difficulties, as well as the possible
insufficiency of funds to satisfactorily complete development, which could
result in abandonment or substantial change in product commercialization. There
can be no assurance that product development efforts will be successfully
completed on a timely basis, or at all, that the Company will be able to
successfully adapt its software to satisfy specific requirements of potential
customers, or that unanticipated events will not occur which would result in
increased costs or material delays in product development or commercialization.
In addition, while the Company believes that its software performs the principal
functions for which it has been designed, the Company has only conducted limited
tests of its software in connection with preliminary market testing activities.
Consequently, there can be no assurance that such software will perform all of
the function for which it has been designed or prove to be sufficiently reliable
in widespread commercial use. Technologies as complex as those incorporated into
the Company's software may contain errors which become apparent subsequent to
commercial use. Remedying such errors could delay the Company's plans and cause
it to incur substantial additional costs. See "Business - Product Development."
5. New Concept; Uncertainty of Market Acceptance and Commercialization
Strategy. HealthDesk OnLine represents a new business concept. As is typical in
the case of a new business concept, demand and market acceptance for HealthDesk
OnLine as a newly introduced product is subject to a high level of uncertainty.
Achieving market acceptance for HealthDesk OnLine will require significant
efforts and expenditures by the Company to create awareness and demand by
healthcare payers, providers and consumers. The Company's prospects will be
significantly affected by its ability to successfully develop and maintain
relationships with sponsoring organizations, which will promote their services
using HealthDesk OnLine and, at the same time, attract significant numbers of
subscribers. Because demand by payers, providers and consumers are substantially
inter-related, any lack or lessening of demand by any of these would have an
adverse effect on market acceptance for HealthDesk OnLine. The Company has not
yet commenced significant marketing activities and has limited experience and
limited financial, technical, personnel and other resources to independently
undertake extensive marketing activities. Although the Company is currently
evaluating a number of possible product marketing and distribution strategies,
the Company initially intends to offer HealthDesk OnLine with no or reduced
license fee to potential sponsoring organizations willing to participate in
market testing in order to closely monitor performance and provide support for
the users of such product. Such activities are expected to allow the Company to
adjust and revise its proposed products in light of market needs and user
feedback, to develop pricing strategies relative to cost structure, to test new
products and to correct software or product defects which may arise. Thereafter,
although the Company will seek to develop and commercialize specific disease
management modules, the Company's primary marketing strategy is to license and
sell HealthDesk OnLine to sponsoring organizations with access to significant
numbers of potential subscribers. The Company's marketing strategy and
preliminary and future marketing plans may be unsuccessful and are subject to
change as a result of a number of factors, including progress or delays in the
Company's marketing efforts, changes in market conditions (including the
emergence of potentially significant related market segments for applications of
the Company's technology), the nature of possible license and distribution
arrangements which may become available to it in the future and economic,
political, regulatory and competitive factors. To the extent that the Company is
able to enter into satisfactory third-party marketing and distribution
arrangements in the future, it will be largely dependent on the efforts of such
third parties and on the marketability and sales of their products. There can be
no assurance that the Company's strategy will result in successful product
commercialization or that the Company's efforts will result in initial or
continued market acceptance for the Company's proposed products. See "Business -
Potential Markets and Marketing."
7
<PAGE>
6. Uncertainty of Market Testing Result. The Company has been conducting
market testing of HealthDesk OnLine with BCMA and proposes to conduct similar
tests with other potential sponsoring organizations. The Company's success may
be highly dependent upon the results of these tests and there can no assurance
that such tests will be successful. If such tests are not successful, the
Company will be required to attempt to enhance or modify HealthDesk OnLine so
that it will meet with sponsoring organization and consumer acceptance. There
can be no assurance that the Company will be able to modify HealthDesk OnLine so
that positive test results can be demonstrated. Even if test results are
positive, there can be no assurance that sponsoring organizations will be
sufficiently encouraged by the results to commit to use HealthDesk OnLine on a
non-market test basis. They may elect to utilize other products, services or
technologies which they believe to be more efficient or have other cost
advantages over the Company's system. In addition, there can be no assurance
that positive test results will translate into consumer acceptance over a longer
period of time or that sponsoring organizations or consumers will be satisfied
with operational results or that the results of market testing will be
indicative of the ultimate success of product commercialization, particularly if
installed in geographic areas with demographic characteristics different from
those of test markets. See "Business - Market Testing."
7. Competition; Technological Obsolescence. The markets that the Company
intends to enter are characterized by intense competition and an increasing
number of new market entrants who have developed or are developing potentially
competitive products. The Company will face competition from numerous sources,
including prospective customers which may develop and market their own
competitive products and services, health information system vendors, software
companies, online and Internet service providers and others with the technical
capabilities and expertise which would encourage them to develop and
commercialize competitive products or services. Several companies, including
Healtheon Corp. ("Healtheon"), IBM Global Health Village, Med Access
Corporation, CareSoft, Inc., Access Health, Inc., America's Housecalls Network
and Softwatch, have announced plans to develop and commercialize competitive
product and service offerings. Certain of such competitors have substantially
greater financial, technical, marketing, distribution, personnel and other
resources than the Company, permitting such companies to implement extensive
marketing campaigns, both generally and in response to efforts by additional
competitors to enter into new markets and market new products and services.
Healtheon has announced that it has entered into an agreement with BCMA relating
primarily to the electronic exchange of health plan benefit information between
consumers and health plans. There can be no assurance that Healtheon's
relationship with BCMA will not adversely affect the Company's ability to
successfully market HealthDesk OnLine to BCMA. In addition, the markets for the
Company's proposed products are characterized by rapidly changing technology and
evolving industry standards which could result in product obsolescence or short
product life cycles. Accordingly, the ability of the Company to compete will be
dependent upon the Company's ability to complete development of, and introduce
HealthDesk OnLine into, the marketplace in a timely manner, to continually
enhance and improve its software and to successfully develop and market new
products. There can be no assurance that the Company will be able to compete
successfully, that competitors will not develop technologies or products that
render the Company's products obsolete or less marketable or that the Company
will be able to successfully enhance its products or develop new products. See
"Business - Competition."
8. Capacity Constraints; System Failure and Security Risks. The Company's
operations will depend upon the capacity, reliability and security of its system
infrastructure. The Company currently has limited system capacity and will be
required to continually expand its system infrastructure to accommodate
significant numbers of users and increasing amounts of healthcare information
they may wish to access. Expansion of the Company's system infrastructure will
require substantial financial, operational and management resources. The Company
intends to use a portion of its capital resources to purchase computer equipment
to expand system capacity. There can be no assurance that the Company will be
able to expand its system infrastructure to meet potential demand on a timely
basis, at a commercially reasonable cost, or at all. Failure by the Company to
expand its system infrastructure on a timely basis would have a material adverse
effect on the Company. In addition, the Company will be dependent upon Web
browsers and third-party Internet and online service providers for access to the
Company's services, hardware suppliers for prompt delivery, installation and
service of computer equipment used to deliver the Company" services and on
content providers to provide current healthcare information for use by
consumers.
The Company's operations will also be dependent on the Company's ability
to protect its computer equipment against damage from fire, earthquakes, power
loss, telecommunications failure and similar events. The Company does not have
earthquake insurance or redundant, multiple site capacity in the event of any
such occurrence. The Company does maintain fire insurance with an aggregate
limitation of $1 million and business
8
<PAGE>
interruption insurance with an aggregate limitation of $4 million. The Company's
system infrastructure will be also vulnerable to computer viruses, break-ins and
similar disruptions from unauthorized tampering with the Company's computer
systems. Computer viruses or problems caused by third parties could lead to
material interruptions, delays or cessation in service to consumers.
Inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of consumers. Security and privacy concerns of consumers may limit the
Company's ability to develop a significant subscriber base. See "Use of
Proceeds" and "Business - Infrastructure, Operations and Technology."
9. Potential Liability and Insurance. In recent years, participants in
the healthcare industry have been subject to an increasing number of lawsuits
alleging malpractice, product liability and related legal theories, many of
which involve large claims and significant defense costs. Due to the nature of
its business, the Company could become involved in litigation regarding the
healthcare information transmitted over the system with the risk of adverse
publicity, significant defense costs and substantial damage awards. The Company
has adopted policies and procedures intended to reduce the risk of claims, which
include the provision of disclaimers in connection with its services. The
Company does not currently maintain malpractice liability insurance. In
addition, because healthcare information and materials may be downloaded and may
be subsequently distributed to others, there is a potential that claims will be
made against the Company for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of such
materials. The Company also could be exposed to liability in connection with the
selection of materials that may be accessible over its system. Claims could be
made against the Company if material deemed inappropriate for viewing by
children could be accessed. The Company carries an umbrella insurance policy
with a limit $4 million in the aggregate, general liability insurance with a
limitation of $2 million in the aggregate and $1 million per occurrence and
errors and omissions insurance with a limitation of $1 million. Nevertheless,
the Company's insurance may not cover potential claims of this type or may not
be adequate to cover liability that may be imposed or related defense costs.
There can be no assurance that the Company will not face claims resulting in
substantial liability for which the Company is partially or completely
uninsured. Any partially or completely uninsured claim against the Company, if
successful and of sufficient magnitude, would have a material adverse effect on
the Company. See "Business - Potential Liability and Insurance."
10. Government Regulation. The healthcare industry is subject to
extensive, stringent and frequently changing federal and state regulation which
is interpreted and enforced by regulatory authorities with broad discretion.
Among other things, these regulations govern the provision of healthcare
services and the marketing of medical devices. These regulations generally
predate the development of products and services such as those offered and
proposed to be offered by the Company and the application and enforcement of
such regulations to the Company and its products and services is uncertain.
However, certain of the statutes governing the provision of healthcare services
could be construed by regulatory authorities to apply to the Company's proposed
business activities. There can be no assurance that regulatory authorities do
not or will not deem the Company's business activities to constitute the
unlicensed practice of medicine. Furthermore, in the event the Company develops
features which facilitate the input of data from medical devices directly into
HealthDesk OnLine, it is possible that the United States Food and Drug
Administration would require the Company and/or an equipment manufacturer to
obtain pre-marketing clearance with respect to any such product. The process of
obtaining and maintaining required regulatory approvals can be lengthy,
expensive and uncertain. Even if regulatory approvals are obtained, a marketed
product and its manufacturer are subject to continuing regulatory review, and
discovery of previously unknown problems could result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
Amendments to or interpretation and enforcement of existing statutes or
regulations, the adoption of new statutes or regulations or the development of
new enhancements and features to HealthDesk OnLine could subject the Company to
increased regulation and require the Company to alter methods of operation at
costs which could be substantial. Failure to comply with applicable laws and
regulations could subject the Company to civil remedies, including substantial
fines, penalties and injunctions, as well as possible criminal sanctions.
Although there are currently few laws or regulations directly applicable
to access to or commerce on the Internet, due to the increasing popularity and
use of the Internet, it is possible that laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The Telecommunications
Reform Act of 1996, imposes criminal penalties on anyone who distributes
obscene, lascivious or indecent communications on the Internet. While the
enforcement of such statute has been enjoined the adoption of any similar laws
or regulations may limit the growth of the Internet, which could in turn
decrease the demand for the Company's proposed products and services and
increase the Company's cost of
9
<PAGE>
doing business. Inasmuch as the applicability to the Internet of the existing
laws governing issues such as property ownership, libel and personal privacy is
uncertain, any such new legislation or regulation or the application of existing
laws and regulations to the Internet could have an adverse effect on the
Company's business and prospects. See "Business - Government Regulation."
11. Dependence on Third-Party Licenses. Substantially all of the
information content currently included in HealthDesk OnLine has been licensed by
the Company from unaffiliated third parties. The licenses granted to the Company
are subject to termination on relatively short notice. Although the Company
believes that similar healthcare information is available from multiple sources,
in the event of any termination of such licenses, the Company may be required to
independently develop information content or license such information content
from other providers. There can be no assurance that the Company would be able
to do so in a timely manner, upon acceptable terms and conditions, or at all.
The failure to obtain current healthcare information for use by consumers on a
timely and competitive basis could have a material adverse effect on the
Company. See "Business - Infrastructure, Operations and Technology."
12. Dependence on Limited Customer Base. To date, the Company's revenues
have been derived from a limited number of customers. Two customers accounted
for approximately 40% and 56%, respectively, of revenues in 1995. One customer
accounted for approximately 96% of revenues for the year ended December 31,
1996. Additionally, one customer accounted for approximately 96% of revenues for
the three months ended March 31, 1997. Although the Company is not currently
generating meaningful revenues, in the event that the Company is able to
successfully commercialize HealthDesk OnLine or obtain third party funding of
the costs of developing new software modules, there can be no assurance that the
Company will not continue to be dependent on a limited customer base for all or
a substantial portion of its revenues. The Company's agreement with MIIX
requires that the Company grant to MIIX a right of first offer to fund the
development of additional software modules. See "Business - Potential Markets
and Marketing."
13. Industry Factors; Lengthy Sales Cycle. The healthcare industry has
experienced significant changes in recent years, primarily due to rising
healthcare costs. Healthcare payers are increasingly challenging the price of
medical services and products, which have had and could continue to have a
significant effect on the procurement practices of healthcare providers,
generally causing them to be more selective in the purchase of new technologies.
Several proposals have been made by federal and state government officials that
may lead to substantial healthcare reform, including the implementation of
government-directed national healthcare system and stringent healthcare cost
containment measures. Adoption of such proposed measures could result in
reduction or deferral of capital expenditures by potential customers. Also,
there has been substantial consolidation in the healthcare industry in recent
years, which could make it more difficult for the Company to achieve market
acceptance by larger potential customers. Moreover, a sponsoring organization's
decision to purchase new products and technology is often lengthy and requires
the approval of a significant number of administrators. The period in which a
sponsoring organization distributes the Company's software to its members may
also be lengthy, depending upon the level of acceptance and usage by its
members, which could delay the Company's plans in particular markets. See
"Business."
14. Proprietary Information. Although the Company intends to evaluate the
feasibility to obtaining patent protection for certain aspects of HealthDesk
OnLine, the Company does not hold any patents or registered copyrights. The
Company regards certain computer software it has developed for HealthDesk OnLine
as proprietary and attempts to protect it with copyrights, trade secret laws,
proprietary rights agreements and internal nondisclosure agreements and
safeguards. However, such methods may not afford complete protection and there
can be no assurance that others will not independently develop know-how or
obtain access to the Company's know-how or software codes, concepts, ideas and
documentation. Furthermore, there can be no assurance that nondisclosure
agreements with the Company's employees will adequately protect the Company's
trade secrets. Although the Company believes that its proposed products do not
and will not infringe patents or violate proprietary rights of others, it is
possible that infringement of existing or future patents or proprietary rights
of others have occurred or may occur. In the event the Company's proposed
products infringe patents or proprietary rights of others, the Company may be
required to modify the design of its proposed products or obtain a license.
There can be no assurance that the Company will be able to do so in a timely
manner, upon acceptable terms and conditions or at all. The failure to do any of
the foregoing could have a material adverse effect upon the Company. In
addition, there can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend
10
<PAGE>
a patent infringement action and the Company could, under certain circumstances,
become liable for damages, which also could have a material adverse effect on
the Company. See "Business - Proprietary Information and Trademarks."
15. Dependence on Key Personnel. The success of the Company will be
dependent on the personal efforts of Peter O'Donnell, its President and Chief
Executive Officer, Dr. Molly Coye, its Executive Vice President, Timothy S.
Yamauchi, its Chief Financial Officer, and other key personnel. The loss of the
services of such individuals could have a material adverse effect on the
Company's business and prospects. The Company has obtained "key-person"
insurance on the life of each of Mr. O'Donnell, Dr. Coye and Mr. Yamauchi in the
amounts of $2 million, $2 million and $1 million, respectively. The success of
the Company is also dependent upon its ability to hire and retain additional
qualified management, marketing, technical, financial and other personnel.
Competition for qualified personnel is intense and there can be no assurance
that the Company will be able to hire or retain qualified personnel. Any
inability to attract and retain qualified management and other personnel could
have a material adverse effect on the Company. See "Management."
16. Control by Management. As of May 31, 1997, the officers and directors
of the Company beneficially own, in the aggregate, approximately 45.4% of the
outstanding shares of Common Stock (assuming no exercise of the Warrants).
Accordingly, such persons, acting together, will be in a position to exercise
significant influence over the Company's affairs. See "Management" and
"Principal Shareholders."
17. Potential Conflicts of Interest. The Company has entered into various
transactions with certain of its directors and principal shareholders and their
affiliates, which could result in potential conflicts of interest. Mr. John
Pappajohn and Edgewater, principal shareholders of the Company, have from time
to time made loans to the Company, and the Company has entered into a marketing
agreement with an entity of which Mr. Pappajohn is a director and principal
shareholder. The Company believes that all of such transactions or arrangements
were fair and reasonable to the Company and were on terms no less favorable than
could have been obtained from unaffiliated third parties. There can be no
assurance, however, that future transactions or arrangements between the Company
and its affiliates will continue to be advantageous to the Company, that
conflicts of interest will not arise with respect thereto, or that if conflicts
do arise, they will be resolved in a manner favorable to the Company. Any such
future transactions will be on terms no less favorable to the Company than could
be obtained from unaffiliated parties and will be approved by a majority of the
independent and disinterested members of the Board of Directors, outside the
presence of any interested directors and, to the extent deemed appropriate by
the Board of Directors, the Company will obtain shareholder approval or fairness
opinions in connection with any such transactions. See "Certain Transactions."
18. Outstanding Options, Warrants and Underwriter's Warrants. As of May
31, 1997, the Company had outstanding options to purchase an aggregate of
802,588 shares of Common Stock at exercise prices ranging from $1.04 to $5.00.
The Company also had outstanding Warrants, Underwriter's Warrants and
Underwriter's Warrants to purchase an aggregate of 1,955,000, 170,000 and
170,000 shares of Common Stock at exercise prices of $5.00, $6.00 and $8.25
respectively. Exercise of any of the foregoing options will have a dilutive
effect on the Company's shareholders. Furthermore, the terms upon which the
Company may be able to obtain additional equity financing may be adversely
affected, since the holders of the options can be expected to exercise them, if
at all, at a time when the Company would, in all likelihood, be able to obtain
any needed capital on terms more favorable to the Company than those provided in
the options. See "Management - 1994 Stock Option Plan."
19. No Dividends. To date, the Company has not paid any cash dividends
and does not expect to declare or pay dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
20. Authorized Preferred Stock. The Company's Restated Articles of
Incorporation authorizes the Company's Board of Directors to issue 1,800,000
shares of "blank check" Preferred Stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares, without
further shareholder approval. The rights of the holders of the Company's Common
Stock will be subject to and may be adversely affected by the rights of holders
of any Preferred Stock that may be issued in the future. The ability to issue
Preferred Stock without shareholder approval could have the effect of making it
more difficult for a third party to acquire a majority of the voting stock of
the Company thereby delaying, deferring or preventing a change in control of the
Company. See "Description of Securities."
11
<PAGE>
21. Shares Eligible for Future Sale, Registration Rights. There are
currently 5,392,845 shares of Common Stock outstanding as of April 29, 1997. Of
such shares, 2,100,000 shares, including the 400,000 shares being offered by the
Selling Shareholders, will be freely tradable without restriction or further
registration under the Securities Act. All of the remaining 3,292,845 shares of
Common Stock outstanding are "restricted securities," as that term is defined in
Rule 144 promulgated under the Securities Act, and in the future may be sold
only pursuant to an effective registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Of the 3,292,845 restricted shares, an
aggregate of 654,000 shares are eligible for sale, without registration, under
Rule 144 (subject to certain volume limitations and the contractual restrictions
described below). All of the Company's officers, directors and security holders
(except for the holders of 42,000 shares of Common Stock) have agreed not to
sell or dispose of any of their securities of the Company until July 16, 1998
without the Underwriter's prior written consent. There are currently 1,955,000
Warrants which are freely tradable without restriction in the public market.
Provided that the Company satisfies certain securities registration and
qualification requirements with respect to the securities underlying the
Warrants, any and all securities purchased upon exercise of the Warrants will be
freely tradable. Assuming the exercise of all outstanding Warrants upon payment
of the exercise price of $5.00 per Warrant, an additional 1,955,000 shares of
Common Stock will be freely tradable in the public market.
The Company has also granted certain demand and "piggyback" registration
rights to the holders of an aggregate of 1,741,600 shares of Common Stock
(including 400,000 shares issued in connection with the Bridge Financing). No
prediction can be made as to the effect, if any, that sales of such securities
or the availability of such securities for sale will have on the market prices
prevailing from time to time. However, even the possibility that a substantial
number of the Company's securities may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and Warrants and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Description for Securities," "Shares Eligible for Future
Sale," and "Selling Shareholders and Plan of Distribution."
22. Possible Volatility of Market Price of Common Stock and Warrants. The
Company believes factors such as its operating results, announcements of
developments related to the Company's business and the introduction of new
products or product enhancements by the Company or its competitors may have a
significant impact in the market price of the Common Stock and Warrants. In
addition, in recent years the stock market in general, and the market for shares
of small capitalization stocks in particular, have experienced wide price
fluctuations which have often been unrelated to the operating performance of
such companies.
23. Possible Delisting of Securities from NASDAQ System; Disclosure
Relating to Low-Priced Stocks. The Common Stock and Warrants are currently
quoted on NASDAQ SmallCap Market ("NASDAQ"). However, in order to continue to be
included in NASDAQ, a company must maintain $2,000,000 in total assets, a
$200,000 market value of the public float and $1,000,000 in total capital and
surplus. In addition, continued inclusion requires two market makers and a
minimum bid price of $1.00 per share; provided, however, that if a company falls
below such minimum bid price, it will remain eligible for continued inclusion in
NASDAQ if the market value of the public float is at least $1,000,000 and the
Company has $2,000,000 in capital and surplus. NASDAQ has proposed new
maintenance criteria which, if implemented, would eliminate the exception to the
$1.00 per share minimum bid price and require, among other things, $2,000,000 in
net tangible assets, $1,000,000 market value of the public float and adherence
to certain corporate governance provisions. Failure to meet these maintenance
criteria in the future may result in the delisting of the Company's securities
from NASDAQ and trading, if any, in the Company's securities would thereafter be
conducted in the non-NASDAQ over-the-counter market. As a result of such
delisting, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, if the Common Stock were delisted from trading on NASDAQ and the
trading price of the Common Stock was less than $5.00 per share, trading in the
Common Stock would also be subject to certain rules promulgated under the
Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-NASDAQ equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have
12
<PAGE>
received the purchaser's written consent to the transactions prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Common Stock, which
could severely limit the market liquidity of the Common Stock and the ability of
purchasers in the offering to sell the Common Stock in the secondary market.
24. Forward Looking Statements. The statements which are not historical
facts contained in this Prospectus are forward looking statements that involve
risks and uncertainties, including the risks discussed above. The Company's
actual results may differ materially from the results discussed in such forward
looking statements.
25. Potential Adverse Effect of Warrant Redemption. The 1,955,000
Warrants are subject to redemption by the Company, upon the consent of the
Underwriter, at any time, upon notice of not less than 30 days, at a price of
$.10 per Warrant, provided that the closing bid quotation of the Common Stock on
all 30 trading days ending on the third day prior to the day on which the
Company gives notice has been at least 150% (currently $7.50, subject to
adjustment) of the then effective exercise price of the Warrants. Redemption of
the Warrants could force the holders to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holders to do
so, to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants, or to accept the redemption price, which is
likely to be substantially less than the market value of the Warrants at the
time of redemption. See "Description of Securities - Redeemable Warrants."
26. Volatility of Stock and Warrants Prices. The Company's common stock
and warrants had experienced substantial price fluctuations since the IPO on
January 16, 1997. In addition, the stock market has experienced significant
price and volume fluctuations that have especially affected the market prices of
equity securities of many high technology companies, particularly
Internet-related companies, and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's common stock and warrants. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, operating results and financial condition.
27. Current Prospectus and State Registration Required to Exercise
Warrants. Current Warrants holders will only be able to exercise the Warrants if
(i) a current prospectus under the Securities Act relating to the securities
underlying the Warrants is then in effect and (ii) such securities are qualified
for sale or exempt from the qualification under the applicable securities laws
of the states in which the various holders of Warrants reside. Although the
Company has undertaken to use its best efforts to maintain the effectiveness of
a current prospectus covering the securities underlying the Warrants, there can
be no assurance that the Company will be able to do so. There also can be no
assurance that exemptions from the registration on qualification requirements of
those states in which the Company's securities are not currently registered or
qualified will be available at the time a Warrant holder wishes to exercise his
or her Warrant. The value of the Warrants may be greatly reduced if a current
prospectus covering the securities issuable upon the exercise of the Warrants is
not kept effective or if such securities are not qualified, or exempt from
qualification, in the states in which the holders of Warrants reside. See
"Description of Securities - Redeemable Warrants."
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<PAGE>
USE OF PROCEEDS
The potential net proceeds to the Company from the exercise of the
1,955,000 Warrants and the 340,000 Underwriter's Warrants outstanding are
estimated to be approximately $11,366,500 after deducting estimated expenses
payable by the Company. The Company expects that the net proceeds will be
utilized for sales and marketing, product development, refining and enhancing
its products and acquiring computer hardware for servers and related
telecommunications equipment used to support the Company's system
infrastructure. Any remaining proceeds will be used to fund general working
capital requirements.
A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complimentary
technologies. While from time to time the Company evaluates potential
acquisitions of such businesses, products or technologies, there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies. Pending utilization, the net
proceeds of the exercise of the Warrants will be invested in short-term,
interest bearing investments.
<PAGE>
CAPITALIZATION
The following table set forth the capitalization of the Company as of
March 31, 1997:
March 31, 1997
----------------
Actual (1)
Shareholders' equity:
Common Stock, no par value; 17,000,000 shares authorized;
Issued and outstanding 5,392,845 shares................... $ 11,457,505
Warrants..................................................... 195,687
Accumulated deficit.......................................... (7,550,084)
--------------
Total shareholders' equity............................... 4,103,108
--------------
Total capitalization.................................... $ 4,103,108
==============
- --------------
(1) Does not include: (i) 1,955,000 shares of Common Stock reserved for
issuance upon the exercise of the Warrants, (ii) 340,000 shares of Common
Stock reserved for issuance upon the exercise of the Underwriter's
Warrants; (iii) 802,588 shares reserved for issuance upon the exercise of
outstanding stock options; (iv) 42,166 shares received for future grant
under the Stock Option Plan; and (v) 100,000 shares of Common Stock
reserved for issuance in the event the Company fails to maintain an
effective registration statement with respect to the shares held by the
Selling Shareholders. See "Description of Securities."
DIVIDEND POLICY
The Company has paid no cash dividends on its Common Stock since its
incorporation. The Company intends to retain any earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future.
PRICE RANGE OF COMMON STOCK
Since January 16, 1997, the Company's Common Stock has traded on the
Nasdaq SmallCap Market under the symbol "HDSK." The following table sets forth
for the periods indicated the high and low sale prices of the Common Stock as
reported by the Nasdaq SmallCap Market. These figures reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not represent
actual transactions.
1997 High Low
---- ---
1st Quarter (commencing January 16, 1997)..... 5 1/2 3 3/4
2nd Quarter (through June 30, 1997)........... 4 1/4 3
On July 29, 1997, the last reported sale price of the Common Stock on the
Nasdaq SmallCap Market, was $3.25 per share. As of June 30, 1997, there were 83
holders of record of the Common Stock, three (3) holders of record of the
Warrants and one (1) holder of record of the Underwriter's Warrants.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1992, 1993,
1994, 1995 and 1996 and March 31, 1997 and for the years ended December 31,
1992, 1993, 1994 1995 and 1996 and for the three months ended March 31, 1996 and
1997 should be read in conjunction with the financial statements, including
notes thereto appearing elsewhere in this Prospectus. The balance sheet data as
of December 31, 1995 and 1996 and the statements of operations data for the
years ended December 31, 1995 and 1996, are derived from audited financial
statements included in this Prospectus. The statements of operations data for
the years ended December 31, 1993 and 1994 and the balance sheet data as of
December 31, 1993 and 1994 are derived from audited financial statements not
included in this Prospectus. The statement of operations data for the period
from August 28, 1992 to December 31, 1992 and the balance sheet data as of
December 31, 1992 are derived from unaudited financial statements not included
in this Prospectus. The selected financial data as of March 31, 1997 and for the
three months ended March 31, 1996 and 1997 is derived from unaudited financial
statements that have been prepared on the same basis as the audited financial
statements. In the opinion of management, the unaudited financial statements
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the information included therein. Results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the full year or any future
period.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------ ------------------
1992(1) 1993 1994 1995 1996 1996 1997
-------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues............. $ ---- $ 80,221 $ 397,240 $ 224,011 $ 52,225 $ 858 $ 200,485
Operating expenses:
Product development..... 45,789 118,467 231,243 680,886 1,622,601 316,107 697,217
Sales and marketing..... 10,231 120,907 220,243 349,133 1,222,183 86,590 438,718
General and
administrative....... 35,924 30,796 170,598 581,043 681,993 410,103 143,917
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 91,944 270,170 622,084 1,611,062 3,526,777 812,800 1,279,852
Loss from operations....... (91,944) (189,949) (224,844) (1,387,051) (3,474,552) (811,942) (1,079,367)
Other (income) expense, net ---- ---- 11,378 48,622 916,102 (5,088) 122,075
---------- ---------- ---------- ---------- ---------- ----------- ----------
Loss before income taxes... (91,944) (189,949) (236,222) (1,435,673) (4,390,654) (806,854) (1,201,442)
Provision for incomes taxes 800 800 800 800 800 1,000 200
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................... $ (92,744) $ (190,749) $ (237,022) $(1,436,473) $(4,391,454) $ (807,854) $(1,201,642)
=========== =========== =========== ============ ============ =========== ============
Net loss per share......... $ (0.05) $ (0.07) $ (0.08) $ (0.46) $ (1.12) $ (0.21) $ (0.26)
============ ============ ============ ============ ============ ============ ============
Weighted average number of
shares outstanding...... 1,889,550 2,614,523 2,964,581 3,152,081 3,913,433 3,824,866 4,659,663
========== ========== ========== ========== ========== ========== ==========
Balance Sheet Data:
December 31, March 31,
------------ ---------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Working capital (deficit).. $ (91,364) $ (47,969) $ 239,822 $ 870,436 $(2,804,411) $ 3,507,139
Total assets............... 2,893 19,880 451,739 2,003,356 1,448,237 4,764,620
Total liabilities.......... 91,364 50,893 657,274 803,307 3,667,091 661,512
Long-term obligations...... ---- ---- 519,834 ---- ---- ----
Total shareholders' equity
(deficit)............... (90,264) (31,013) (205,535) 1,200,049 (2,218,854) 4,103,108
</TABLE>
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(1) Inception of the Company was August 28, 1992.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Overview
The Company was organized in August 1992 and is still in the development
stage. Since its inception, the Company has been engaged primarily in product
development activities. The Company's initial product was introduced in early
1993 and the Company has not yet proven to be commercially viable.
The Company has not yet generated any meaningful revenues, and will not
generate any meaningful revenues until after the Company successfully completes
development and market testing of HealthDesk OnLine and attracts and retains a
significant number of subscribers. For the period August 28, 1992 (inception) to
March 31, 1997, the Company incurred a cumulative net loss of approximately
$7,550,000. Since March 31, 1997, the Company has continued to incur increasing
and significant losses and anticipates that it will continue to incur
significant losses until, at the earliest, the Company generates sufficient
revenues to offset the substantial up-front expenditures and operating costs
associated with developing and commercializing its proposed products.
Contributing to the Company's losses were the non-recurring amortization charges
related to a Bridge Financing which was completed in October 1996 of $884,227
for the twelve months ended December 31, 1996 and $145,023 for the three months
ended March 31, 1997. There can be no assurance that the Company will be able to
attract and retain a sufficient number of subscribers to generate meaningful
revenues or achieve profitable operations or that HealthDesk OnLine will prove
to be commercially viable.
Software development costs (consisting primarily of salaries and related
expenses) incurred prior to establishing technological feasibility are expensed
in accordance with Financial Accounting Standards Board (FASB) Statement No. 86.
In accordance with FASB 86, the Company will capitalize software development
costs at such time as the technological feasibility of the product has been
established.
Results of Operations
Three Months Ended March 31, 1996 Compared to Three Months Ended March
31, 1997.
Revenue increased from $858 for the three months ended March 31, 1996 to
$200,485 for the three months ended March 31, 1997. This increase was primarily
attributable to an increase in development fee revenue associated with the
development of HealthDesk OnLine for diabetes. During 1996, the Company focused
its efforts on the original development of HealthDesk OnLine and reduced its
marketing and sales efforts relating to its original Desktop HealthDesk product.
Product development costs increased by 120.6% from $316,107 for the three
months ended March 31, 1996 to $697,217 for the three months ended March 31,
1997. The increase in expenditures was principally related to the expansion of
the programming staff and associated costs related to the development of
HealthDesk OnLine for diabetes during the three months ended March 31, 1997.
Sales and marketing costs increased by 406.6% from $86,590 for the three
months ended March 31, 1996 to $438,718 for the three months ended March 31,
1997. This increase resulted primarily from the hiring of additional marketing
personnel, associated collateral and travel in connection with the marketing of
HealthDesk OnLine for diabetes during the three months ended March 31, 1997.
General and administrative costs decreased by 64.9% from $410,103 for the
three months ended March 31, 1996 to $143,917 for the three months ended March
31, 1997. This decrease was primarily attributable to decreased professional
fees and a change in the allocation of resources to marketing and development
activities.
Other income (expense), net (including interest expense, interest income
and amortization of discount and issuance costs) changed from income of $5,088
for the three months ended March 31, 1996 to expense of ($122,075) for the three
months ended March 31, 1997. This change was primarily attributable to the
remaining amortization of the non-recurring bridge discount and deferred debt
issuance costs of $145,023 and increased interest expense as a result of higher
levels of borrowings in place prior to the completion of the Company's IPO.
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As a result of the foregoing, the Company incurred a net loss of
$1,201,642 for the three months ended March 31, 1997, as compared to a net loss
of $807,854 for the comparable period in 1996.
Year Ended December 31, 1995 compared to Year Ended December 31, 1996.
Revenue decreased by 76.7% from $224,011 for the year ended December 31,
1995 to $52,225 for the year ended December 31, 1996. This decrease was
primarily attributable to a decrease in development fee revenues. During 1996,
the Company focused its efforts on the original development of HealthDesk OnLine
and reduced its marketing and sales efforts relating to its original Desktop
only HealthDesk product.
Product development costs increased by 138.3% from $680,886 for the year
ended December 31, 1995 to $1,622,601 for the year ended December 31, 1996. The
increase in expenditures was principally related to the expansion of the
programming staff and associated costs related to the development of HealthDesk
OnLine during the year.
Sales and marketing costs increased by 250.1% from $349,133 for the year
ended December 31, 1995 to $1,222,183 for the year ended December 31, 1996. This
increase resulted primarily from the hiring of additional marketing personnel
and associated sales and marketing efforts in connection with HealthDesk OnLine
during the year.
General and administrative costs increased by 17.4% from $581,043 for the
year ended December 31, 1995 to $681,993 for the year ended December 31, 1996.
This increase was primarily attributable to the hiring of new management
personnel and severance cost relating to prior management and, to a lesser
extent, increased professional fees.
Other expense, net including interest expense, interest income and
amortization of discount and issuance cost)increased from $48,622 for the year
ended December 31, 1995 to $916,102 for the year ended December 31, 1996. This
increase was primarily attributable to amortization of the non-recurring bridge
discount and deferred debt issuance costs of $884,227 and increased interest
expense as a result of higher levels of borrowings in place prior to completion
of the Company's IPO.
As a result of the foregoing, the Company incurred a net loss of
$4,391,454 for the year ended December 31, 1996, as compared to a net loss of
$1,436,473 for the prior comparable year.
Liquidity and Capital Resources
In January 1997, the Company consummated its IPO of 1,700,000 shares of
Common Stock at an offering price of $5.00 per share and 1,955,000 Warrants at
an offering price of $.10 per warrant. The net proceeds to the Company were
$7,018,788 after deducting issuance costs of $1,676,712, which were charged to
equity. Each Warrant entitles the holder to purchase one share of Common Stock
at an exercise price of $5.00 per share. The Warrants will be exercisable for a
60 month period commencing January 16, 1997.
Upon the closing of the IPO, the Company repaid $2,000,000 principal amount
of bridge notes financing and converted the outstanding convertible notes into
100,000 shares of Common Stock. In addition, all outstanding shares of the
Company's Series A Preferred Stock were converted into 1,059,600 shares of
Common Stock.
At March 31, 1997, the Company had cash and cash equivalents of $4,043,546,
as compared to $1,055,751 at March 31, 1996. In the first quarter of 1996,
$573,890 of cash was used in operating activities, principally as a result of
the $807,854 loss in the first quarter of 1996. In the first quarter of 1997,
$1,104,147 of cash was used in operating activities, principally as a result of
the $1,201,642 loss in the first quarter of 1997, a $650,602 decrease in
accounts payable and accrued liabilities as offset by $145,023 in amortization
of non cash discount. Working capital at March 31, 1997 was $3,507,139, as
compared to $208,862 at March 31, 1996.
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The Company's primary capital requirements will be to fund the development
and commercialization of HealthDesk OnLine. The Company has historically
financed its operations through the issuance of debt and equity securities.
During the period from June through September 1995, the Company issued 6%
convertible promissory notes in the aggregate principal amount of $800,000 to
John Pappajohn and Edgewater, principal shareholders of the Company. The notes
were converted into an aggregate of 768,000 shares of Common Stock in September
1995. See "Certain Transactions."
In December 1995, Mr. Pappajohn exercised an option to purchase 96,000
shares of Common Stock for an aggregate exercise price of $100,000. See "Certain
Transactions."
In December 1995 and February 1996, the Company completed a private
placement of an aggregate of 1,059,600 shares of Series A Preferred Stock and
received net proceeds of approximately $2,183,000. Each share of Series A
Preferred Stock automatically converted into one share of Common Stock upon
consummation of the Company's IPO.
In July and August 1996, the Company issued an aggregate of $500,000
principal amount 8% promissory notes to Mr. Pappajohn and Edgewater. Such notes
have automatically converted into 100,000 shares of Common Stock upon
consummation of the Company's IPO. See "Certain Transactions."
In October 1996, the Company consummated the Bridge Financing pursuant to
which it issued $2,000,000 principal amount of Bridge Notes and 400,000 shares
of Common Stock and received net proceeds of $1,765,000.
The Company expects to incur significant expenses in connection with its
operations, including expenses associated with hiring additional marketing and
sales personnel and the research and development of product lines. The Company
anticipates, based on its current proposed growth plans and assumptions relating
to its growth and operations, that its existing capital resources and planned
revenues will be sufficient to satisfy the Company's contemplated cash
requirements through 1997. However, there can be no assurance that the Company's
funding requirements will not increase significantly as a result of unforeseen
circumstances or that the Company's cash used by operating activities will not
increase. If the Company is required to seek third-party sources of financing to
meet its short-term or long-term funding needs, there can be no assurance that
the Company would be able to obtain public or private third-party sources of
financing or, if obtained, that favorable terms for such financing would be
obtained. In addition, given the trading history of the Company's common stock
since the IPO, there can be no assurance that the Company would be able to raise
additional cash through the Warrants or other public and/or private offerings of
its Common Stock.
Since its inception, the Company has engaged primarily in research and
development and has generated limited revenues. The Company expects to incur
significant up-front expenses in connection with product development and
commercialization (including the payment of salaries for management, technical,
marketing and other personnel), which will result in significant losses for the
foreseeable future.
The Company's capital requirements relating to the development and
commercialization of HealthDesk OnLine have been and will continue to be
significant. Other than as described in this Prospectus, the Company has no
material commitments for capital expenditures. For the period August 28, 1992
(inception) to March 31, 1997, the Company had capital expenditures of
approximately $992,000 relating primarily to computer equipment.
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Any implementation of the Company's business plans subsequent to fiscal
1997 may require capital resources greater than those currently available to the
Company. The Company may determine, depending upon the opportunities available
to it, to seek additional debt or equity financing to fund operations. The
Company has no commitments for any future funding, and there can be no assurance
that the Company will be able to obtain additional capital in the future. To the
extent that the Company finances operations through the issuance of additional
equity securities, any such issuance could result in dilution to the interests
of the Company's shareholders. Additionally, to the extent that the Company
incurs indebtedness or issues debt securities in connection with funding
initiatives, the Company will be subject to all of the risks associated with
incurring substantial indebtedness, including the risks that interest rates may
fluctuate and cash flow may be insufficient to pay principal and interest on any
such indebtedness. There can be no assurance that any additional financing will
be available to the Company on commercially reasonable terms, or at all.
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BUSINESS
Background
The Company, a development stage company, is engaged in designing,
developing and marketing HealthDesk OnLine, a healthcare management and
information system which enables consumers to take a more active role in their
personal and family health. HealthDesk OnLine features easy-to-use Windows-based
software designed to develop personal medical records and health management
programs and access educational, health related information from the Company's
private Website and over the Internet. The Company's proposed system is intended
to lower the cost and improve the quality and accessibility of healthcare by
promoting preventive maintenance and patient compliance and permitting
electronic mail communications between consumers and healthcare providers and
payers. HealthDesk OnLine is being developed in response to perceived market
opportunities arising from increasing efforts of industry participants to stem
the escalating cost of healthcare.
Market Trends
According to the Congressional Budget Office, annual healthcare
expenditures in the United States have grown from approximately $470 billion in
1982 to more than $1 trillion in 1995, representing more than 14% of the gross
national product. It is estimated that more than $270 billion is spent on the
treatment and related costs of chronic diseases such as diabetes, HIV/AIDS,
cancer, cardio-vascular disease, obstructive pulmonary disease and asthma. In
response to escalating healthcare costs, federal and state government
authorities have increasingly emphasized stringent cost containment measures,
and healthcare payers and providers have focused on programs which reduce the
costs of providing medical products and services and managing chronic diseases.
Inasmuch as the Company is a development stage company seeking to develop and
commercialize a new product, aggregate expenditures on healthcare in general and
chronic diseases in particular, may not be directly relevant to the Company's
current prospects.
The Company believes that the broad range of capabilities combined in
HealthDesk OnLine, including the system's desktop and online functionality, and
the system's ability to link consumers with healthcare payers and providers,
differentiate HealthDesk OnLine from competitive products and make it attractive
to potential sponsoring organizations seeking to contain healthcare costs. The
Company believes that the following key trends will contribute favorably to
expected demand for HealthDesk OnLine:
* Proliferation of Managed Care and Competitive Pressures: The
healthcare industry has undergone significant transformation in recent
years. With the proliferation of managed care, employers, consumers
and other purchasers of healthcare have greater access to an
increasing number of managed care organizations which are experiencing
competitive pressures to differentiate their healthcare product and
service offerings to attract and retain members.
* Continuing Penetration of Computers and Modems in the Home: An
increasing percentage of computer owners also own modems, which are
being pre-installed in a growing number of new computers. The Software
Publishers Association estimates that approximately 33.9 million or
34% of households in the United States owned a personal computer as of
1995, of which approximately 70% also owned a modem. The Company
believes that this growth is accompanied by increasing use of
computers for communications such as facsimile transmissions and
electronic mail.
* Growth of the Informational and Commercial Applications and Resources
of the Internet: Use of the Internet has grown rapidly since it
commercialization in the early 1990s. An increasing number of servers
and Websites are being connected to the Internet, making available
educational and healthcare text, graphics and audio and video
information which may be accessed by consumers. Traditional and
emerging Internet applications, including electronic mail and the
World Wide Web, are also increasing in popularity. Internet use is
also being promoted by the development of user-friendly navigation and
search tools designed to simplify consumer access to the Internet's
resources.
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* Rapidly Changing Consumer Demands: The Company believes that demand
for healthcare information and services is increasing as the "baby
boomer" generation reaches its peak healthcare consuming years.
Consumers are assuming greater responsibility for their healthcare
decisions, seeking as much information as possible when choosing a
health plan, doctor or treatment. According to the New York Times, the
number of health related sites on the World Wide Web has grown
significantly, reflecting the growing demand from consumers for
information to help them make more informed choices about their own
care.
HealthDesk OnLine
HealthDesk OnLine software contains several modules for recording
information (Health History and Records) and several modules which also monitor
the state of the user's lifestyle and efforts at preventive maintenance (Health
Diaries). These modules allow users to create an extensive database that can be
appended, searched, reviewed and printed at any time. The Company's software
also contains modules which provide access to healthcare information from the
Company's private Website and over the Internet (Gateways and Services).
Health History and Records
Background. The background module is designed to store basic information,
such as name, age, sex, address, phone number, social security number, insurance
carrier and blood type of a user.
Personal Conditions. The personal conditions module is designed to track
doctor and hospital visits and other important health events, including
medications, vaccinations, charges, out-of-pocket expenses and insurance
reimbursements.
Family Health. The family health module is designed to track health
information relating to family members that could affect the health profile of a
user.
Medication History. The medication history module is designed to track
medication usage, including information relating to dosage, frequency, cost and
prescribing physician.
Supplies. The supplies module is designed to track health-related
supplies, such as bandages or syringes used on a regular basis, inventory and
costs.
Finances. The finances module is designed to collect and store
information from other health records modules to enable a user to organize and
track comprehensive medical costs.
Health Diaries
Exercise. The exercise module is designed to track exercise activities,
including aerobics, running, walking, weight lifting, swimming and bicycling.
Heart Health. The heart health module is designed to track serum
cholesterol levels, blood pressure and pulse.
Weight. The weight module is designed to track body fat, calorie intake,
calories burned and weight.
Vital Signs. The vital signs module is designed to track blood pressure,
weight, height, pulse and basal temperature.
Medications. The medications module is designed to track the date and
time medication is taken by the user.
Nutrition. The nutrition module is designed to track caloric intake and
calories burned, as well as fat, protein and carbohydrate consumption.
Each module includes a series of illustrated diagrams, which demonstrate
important features relating to a healthcare topic. HealthDesk OnLine software
permits a user to add other categories and variables not listed on a module.
Readings can be edited, summarized and graphed on-screen for detecting trends
and patterns in daily health activities.
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Gateways and Services
Library. The HealthDesk OnLine library module contains an extensive
database of healthcare information, consisting primarily of licensed content.
Healthcare information currently includes pamphlets addressing specific diseases
and medical issuers; a medical encyclopedia; a pharmacy reference; information
relating to self-help groups; and numerous articles from prominent healthcare
periodicals such as the New England Journal of Medicine and the Journal of the
American Medical Association. Healthcare information is stored in the Company's
private Website and is accessed through the use of a web browser incorporated
into the Company's software.
Internet Gateway. The Internet gateway module permits access to the World
Wide Web for additional healthcare information through the use of a web browser.
Access is limited to websites which the Company believes provide the most
relevant healthcare information.
Feedback. The feedback module allows users to access user surveys and
technical support forms.
Health Risk Assessment. The Company will seek to incorporate into its
software, content and algorithms designed to assist in health risk assessment by
providing feedback with respect to the likelihood of risk of certain diseases
based on health information input by the user. The Company is seeking to enter
into a third-party license agreement in connection with such enhancement.
Symptom Triage. The Company has recently incorporated into its products
software obtained from Healthwise, Inc. pursuant to a non-exclusive license.
Such software is designed to provide specific responses for treatment based on
information relating to symptoms input by the user.
Electronic Mail
HealthDesk OnLine is designed to permit secure electronic messaging
between consumers and healthcare payers and providers. Anticipated
communications between consumers, payers and providers relate to enrollment;
physician selection; test results and patient information; appointment
scheduling; reminders; provider directories; surveys; home treatment; and
explanation of benefits. The Company intends to employ RSA Data Security
encryption software on both the desktop and database server.
HealthDesk OnLine has been designed to operate on IBM compatible desktop
computers with a minimum requirement of a 80486DX central processing unit and
eight megabytes of random access memory. The system runs under Windows 95 and
Windows 3.1. Consumers may access the electronic mail system, the Company's
private Website and the Internet by dialing a local access number provided by
CompuServe. The minimum technical requirement to access the electronic
communications features is a 9600 Baud modem.
HealthDesk Online for Diabetes
In July 1997, the Company completed the first version release of the
product for HealthDesk OnLine for Diabetes which was delivered to MIIX for
evaluation. This disease management application tracks and monitors diabetes
specific care indicators. The program is designed to accept downloaded glucose
readings which automatically updates the tracking facility. The Company has
included online content for diabetes care, which it has licensed from the
American Diabetes Association.
Product Development
The Company's principal efforts to date have been devoted to the design
and development of HealthDesk OnLine. For the fiscal years ended December 31,
1995, 1996 and the three months ended March 31, 1997, the Company expended
approximately $681,000, $1,623,000 and $697,000 respectively, on product
development and disease module development products. Product development
expenses are expected to increase through 1997 in connection with market testing
activities and disease module development products. Eleven of the Company's
twenty-eight employees were engaged in product development as of March 31, 1997.
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Although the Company believes that its development efforts relating to
the technological aspects of the basic HealthDesk OnLine platform are
substantially completed, the Company is continually seeking to refine and
enhance the capabilities of its products. The Company intends to continue
research and development with regards to refining, enhancing and developing
system capabilities and features, including the following:
Electronic Newsletter. The Company has recently incorporated into its
software an electronic newsletter function which includes a search engine
technology obtained from Verity, Inc. pursuant to a three year non-exclusive
license. Such technology is designed to automatically search content databases
and websites by topic of interest on a periodic basis. The Company intends to
use this capability to create reports in the form of personalized newsletters
which may be updated on a regular basis by the Company. The Company believes
that such newsletter also presents a significant opportunity for advertising and
promotional "tie-ins" with corporate sponsors.
"Chat" Capabilities. The Company will seek to develop and incorporate
online "chat" capabilities and sponsored healthcare forums into HealthDesk
OnLine. The Company anticipates that these features will provide consumers with
an opportunity to discuss healthcare issues with other consumers and healthcare
experts.
Medical Device Integration. The Company may also seek to develop features
which will facilitate the input of data from medical devices, such as blood
pressure cuffs, blood glucose monitors and peak flow meters, directly into
HealthDesk OnLine which data may be monitored by healthcare providers. Any such
feature may require the Company and/or the medical device manufacturer to obtain
pre-marketing regulator approvals. See "Government Regulation."
Call Center. In the future, the Company may evaluate the feasibility of
offering call center services which would allow consumers to speak with a nurse
or other medical practitioner by phone. The Company believes that a call center
capability would enhance patient compliance with disease management programs. In
the event that the Company seeks to develop such capability, it will become
subject to increased government regulation. See "Government Regulation."
In addition, the Company intends to develop specific disease management
modules designed to monitor chronic conditions. The Company believes that
specific disease management modules may increase compliance with treatment
programs designed to address the lifestyle of chronically-ill patients. In
January 1997, the Company and MIIX entered into an agreement pursuant to which
the Company will design, develop and test a software module for diabetes
patients. The agreement provides for MIIX to fund up to $500,000 of the cost of
developing such module, subject to mutually agreed milestones, including target
dates and acceptance criteria. In July 1997, the Company completed the first
version release of the product for HealthDesk OnLine for Diabetes which was
delivered to MIIX for evaluation. The agreement also requires that the Company
grant to MIIX a right of first refusal to fund the development of other modules.
The markets for the Company's products are characterized by rapidly
changing technology and evolving industry standards, often resulting in product
obsolescence or short product life cycles. Accordingly, the ability of the
Company to compete will be dependent on the Company's ability to complete
development and introduce HealthDesk OnLine into the marketplace in a timely
manner, to continually enhance and improve its software and to successfully
develop and market new products. There can be no assurance that competitors will
not develop technologies or products that render the Company's products obsolete
or less marketable or that the Company will be able to successfully enhance its
products or develop new products.
Market Testing
In July 1996, the Company commenced preliminary market testing of
HealthDesk OnLine pursuant to a license agreement with Blue Cross Blue Shield of
Massachusetts ("BCMA"). The Company agreed to grant to BCMA a limited,
non-exclusive, non-transferable license to use the HealthDesk trademark and to
distribute HealthDesk OnLine to its members, subscribers and insurers. The
Company also agreed that until the end of 1997 it will not grant a license to
any health maintenance organization which includes rights to distribute
HealthDesk OnLine to members in Massachusetts.
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The agreements with BCMA and BCI require each to pay development fees in
the event they require modifications to HealthDesk OnLine. The agreements also
provide for the payment of member maintenance fees; installation fees;
transaction fees; and online service fees. The Company has waived payment of a
master license fee in connection with each agreement. The Company's agreement
with BCMA, originally scheduled to terminate on April 1, 1997, has been extended
to November 1997. Under the agreement, BCMA has the option to include in the
pilot the diabetes disease state module and the upgraded general health module.
The Company's agreement with BCI expired in March 1997. The Company is engaged
in discussions with BCI regarding extending the pilot.
The Company currently proposes to conduct market testing of HealthDesk
OnLine with BCMA and BCI and other potential sponsoring organizations. The
Company's success may be highly dependent upon the results of market testing and
there can be no assurance that such tests will be successful. If such tests are
not successful, the Company will be required to attempt to enhance or modify
HealthDesk OnLine so that it will meet with sponsoring organization and consumer
acceptance. There can be no assurance that the Company will be able to modify
HealthDesk OnLine so that positive test results can be demonstrated. Even if
test results are positive, there can be no assurance that sponsoring
organizations will be sufficiently encouraged by the results to commit to use
HealthDesk OnLine on a non-market test basis. They may elect to utilize other
products, services or technologies which they believe to be more efficient or
have other cost advantages over the Company's system. In addition, there can be
no assurance that positive test results will translate into consumer acceptance
over a longer period of time or that sponsoring organizations or consumers will
be satisfied with operational results. In 1994, Kaiser and Quantum conducted
limited consumer acceptance testing activities with respect to the Company's
initial product and a specific disease software module. While the Company
believes that the results of such testing were positive, the Company does not
have any further arrangements with either Kaiser or Quantum to test such
products.
Potential Markets and Marketing
The Company initially intends to offer HealthDesk OnLine with no or a
reduced license fee to potential sponsoring organizations willing to participate
in market testing in order to closely monitor performance and provide support
for the users of such product. Such activities are expected to allow the Company
to adapt and revise its proposed products in light of market needs and user
feedback, to develop pricing strategies relative to cost structure, and to test
new products and features to correct software or product defects which may
arise. Thereafter, although the Company will seek to develop and commercialize
specific disease management modules, the Company's primary marketing strategy is
to license HealthDesk OnLine to sponsoring organizations (including
pharmaceutical companies, managed care organizations, disease management
companies, employers and affinity groups) with access to significant numbers of
potential subscribers. The Company believes that the addition of HealthDesk
OnLine to the products and services of sponsoring organizations could enhance
the competitive position of such organizations by differentiating such
organizations' products and services from those of competitors.
The Company intends to focus its efforts on healthcare organizations
primarily responsible for bearing the financial risk of patients with chronic
disease. The Company's agreement with MIIX requires that the Company pay
royalties to MIIX ranging from 3% to 10% of revenues derived from the sale or
license of a software module designed for diabetes patients.
The Company is currently evaluating various other commercialization
strategies, including the license of HealthDesk OnLine to manufacturers of
medical devices, pursuant to arrangements by which such manufacturers would
bundle HealthDesk Online with their products. The Company does not have any
specific plans or arrangements with respect to such products and any such
arrangements could require the Company and/or a medical device manufacturer to
obtain pre-marketing regulatory approvals. See "Government Regulation."
The Company may also seek to establish strategic relationships with third
parties relating to product development and marketing. In May 1996, the Company
entered into cross-license agreements with Patient Infosystems Inc. ("PATI"),
formerly know as Disease State Management, Inc., a company engaged in providing
healthcare information systems designed to improve patient compliance. Pursuant
to such agreements, the Company granted to PATI a non-exclusive right to market
HealthDesk OnLine and PATI granted to the Company a non-exclusive right to
market PATI's advanced voice recognition telephone system capabilities. The
Company believes that such arrangement will permit the Company to offer its
services to patients who do not have access to personal computers.
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Under the PATI agreements, each party agreed to seek cost estimates
(which would be based on direct costs incurred) in developing modifications
necessary to deliver specific services requested by potential customers.
Operational fees would be based on certain assumptions contained in the
agreements (subject to the parties' standard terms and conditions). The
agreements have an initial term of six months and automatically renew for
successive terms unless either party gives 30 days' written notice prior to the
termination of any renewal term. The agreements provide for each party to pay an
initial license fee of $25,000 and $25,000 for each renewal term. John
Pappajohn, a principal shareholder of the Company, is a principal shareholder
and director of PATI. Edgewater, a principal shareholder of the Company, is also
a principal shareholder of PATI. PATI may be a competitor of the Company. See
"Note 9 to Financial Statements" and "Certain Transactions."
The Company's prospects will be substantially affected by its ability to
successfully develop and maintain relationships with key sponsoring
organizations, which will promote their services using HealthDesk OnLine and, at
the same time attract significant numbers of subscribers. The Company's revenues
from third-party marketing arrangements are generally expected to be lower than
if the Company sold its products directly to end-users, although the Company
would not incur the expense of creating a distribution network and would
anticipate a greater volume of end-user sales. To the extent that the Company is
ultimately able to enter into satisfactory third-party marketing arrangements,
the Company will be largely dependent on the efforts of such third parties. In
the case of any such arrangements, the Company's products will require
adaptation for specific customers, which could delay product commercialization.
In addition, the Company will be dependent on the marketing efforts of third
parties and on the marketability and sales of their products. There can be no
assurance that the Company will be able to enter into third-party marketing
arrangements, that it will be able to adapt its products for specific customers
on a timely basis, or at all, or that the Company will realize substantial
revenues from any such arrangements.
The Company's executive officers and marketing staff of eight persons are
currently responsible for substantially all of the Company's marketing efforts.
Because of the nature of the Company's business, the Company's executive
officers are expected to continue to devote significant time to develop personal
relationships with senior contacts at sponsoring organizations. The Company's
ability to market HealthDesk OnLine may be limited by the number of marketing
personnel and will be largely dependent upon the efforts of such individuals.
HealthDesk, the Company's initial product, is currently marketed directly to
consumers pursuant to agreements with two independent sales representatives. The
Company does not expect future revenues derived from such product to be
meaningful.
The Company's marketing strategy and preliminary and future marketing
plans may be unsuccessful and are subject to change as a result of a number of
factors, including progress or delays in the Company's marketing efforts,
changes in market conditions (including the emergence of potentially significant
related market segments for applications of the Company's technology), the
nature of possible license and distribution arrangements which may become
available to it in the future and economic, political, regulatory and
competitive factors. There can be no assurance that the Company's strategy will
result in successful product commercialization.
Competition
The markets that the Company intends to enter are characterized by
intense competition and an increasing number of new market entrants who have
developed or are developing potentially competitive products. The Company will
face competition from numerous sources, including prospective customers which
may develop and market their own competitive products and services, health
information system vendors, software companies and online and Internet service
providers. The Company believes that competition will be based primarily on ease
of use, features (including communications capabilities and content) and price.
The Company believes that the combination of desktop and online functionality of
HealthDesk OnLine may provide the Company with a competitive advantage.
In addition, certain companies have developed or may be expected to
develop technologies or products in related market segments which could compete
with certain technologies or products being developed by the Company. The
Company expects that companies which have developed or are developing such
technologies or products, as well as other companies (including established and
newly formed companies) may attempt to develop products directly competitive
with HealthDesk OnLine. In particular, several companies, including Healtheon,
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<PAGE>
IBM Global Health Village, Med Access Corporation, CareSoft, Inc., Access
Health, Inc., America's Housecalls Network and Softwatch, have announced plans
to develop and commercialize competitive product and service offerings. Among
other things, these products and services include the use of the Internet for
electronic communication between health plans and consumers regarding plan
matters, World Wide Web sites with information regarding healthcare related
matters and other Internet based products which are to offer health related
information. Certain of such competitors have substantially greater financial,
technical, marketing, distribution, personnel and other resources than the
Company, permitting such companies to implement extensive marketing campaigns,
both generally and in response to efforts by additional competitors to enter
into new markets and market new products and services.
Healtheon has announced that it has entered into an agreement with BCMA
relating primarily to the electronic exchange of health plan benefit information
between consumers and health plans. There can be no assurance that Healtheon's
relationship with BCMA will not adversely affect the Company's ability to
successfully market HealthDesk OnLine to BCMA or that the Company will be able
to compete successfully.
Infrastructure, Operations and Technology
The Company intends to make HealthDesk OnLine available to users through
a set of network servers housed in Berkeley, California. The Company anticipates
that access to the service will be provided on a 24 hour a day, seven days a
week basis through various communications line providers.
The Company's operations will depend upon the capacity, reliability and
security of its system infrastructure. The Company currently has limited system
capacity and will be required to continually expand its system infrastructure to
accommodate significant numbers of users and increasing amounts of information
they may wish to access. Expansion of the Company's system infrastructure will
require substantial financial, operational and management resources. In
addition, the Company will be dependent upon Web browsers and third-party
Internet and online service providers for access to the Company's services,
hardware suppliers for prompt delivery, installation and service of computer
equipment used to deliver the Company's services and online content providers to
provide current healthcare information for use by consumers.
The Company has entered into an Online Vendor License Agreement with
Information Access Company ("IAC") for online access to an electronic database
of proprietary content. The IAC database is currently the principal source of
content available on the Company's private Website and includes a wide range of
consumer-oriented health publications, medical journals, articles, pamphlets and
reference books. The non-exclusive, worldwide, royalty-bearing license requires
the Company to include IAC's standard terms and conditions in the Company's
standard subscriber terms and conditions, and display certain IAC legends and
copyright notices. Either party may terminate the agreement with ninety days'
notice after completion of a nine-month beta test period, which test expired in
May 1997. Thereafter, the agreement continues for a three-year period and may be
terminated by either party with ninety days' notice.
The Company has entered into a Content License Agreement with Healthwise,
Inc. ("Healthwise"), a publisher of self care health information for consumers.
The agreement provides a non-exclusive, worldwide, license to the Company for
the use of certain content published by Healthwise, including the Healthwise
Handbook and Pathways. The agreement continues indefinitely and is terminable
for cause upon two weeks' advance notice and without cause upon six months'
advance notice. In addition, the Company has entered into a Software License
Agreement with Healthwise for the use of Healthwise's KnowledgeBase Symptom
Manager and Health and Disease Manager software in the Company's products. Such
software is designed to allow the Company's customers to triage their symptoms
and locate information on specific disease states. The agreement provides for a
non-exclusive, worldwide, royalty-bearing license. The agreement has renewable
one-year terms, unless terminated by either party upon ninety-days' advance
notice prior to expiration of the then current term.
The Company has entered into a Subscription License Agreement with
Verity, Inc. ("Verity") for the use in the Company's on-line products of certain
information indexing and retrieval software. The search engine feature is used
to locate content on the IAC database through the Company's development of
search queries. The agreement provides for a non-exclusive, worldwide,
royalty-bearing license. The agreement expired in May 1997.
27
<PAGE>
The Company believes that if any of such licenses are terminated, that
there are multiple other sources from which the Company will be able to license
appropriate content or similar technology.
Potential Liability and Insurance
In recent years, participants in the healthcare industry have been
subject to an increasing number of lawsuits alleging malpractice, product
liability and related legal theories, many of which involve large claims and
significant defense costs. Due to the nature of its business, the Company could
become involved in litigation regarding the healthcare information transmitted
over its system with the risk of adverse publicity, significant defense costs
and substantial damage awards. The Company has adopted policies and procedures
intended to reduce the risk of claims, which include the provision of
disclaimers in connection with its services. The Company does not maintain
malpractice liability insurance.
In addition, because healthcare information and materials may be
downloaded and may be subsequently distributed to others, there is a potential
that claims will be made against the Company for defamation, negligence,
copyright or trademark infringement or other theories based on the nature and
content of such materials. The Company also could be exposed to liability in
connection with the selection of materials that may be accessible over its
system. Claims could be made against the Company if material deemed
inappropriate for viewing by children could be accessed. The Company carries an
umbrella insurance policy with a limit of $4 million in the aggregate, general
liability insurance with a limitation of $2 million in the aggregate and $1
million per occurrence and errors and omissions insurance with a limitation of
$1 million in the aggregate. Nevertheless, the Company's insurance may not cover
potential claims of this type or may not be adequate to cover liability that may
be imposed or related defense costs. There can be no assurance that the Company
will not face claims resulting in substantial liability for which the Company is
partially or completely uninsured. Any partially or completely uninsured claim
against the Company, if successful and of sufficient magnitude, would have a
material adverse effect on the Company.
Government Regulation
The healthcare industry is subject to extensive, stringent and frequently
changing federal and state regulation which is interpreted and enforced by
regulatory authorities with broad discretion. Among other things, these
regulations govern the provision of healthcare services and the marketing of
medical devices. These regulations generally predate the development of products
and services such as those offered by the Company and the application and
enforcement of such regulations to the Company and its products services is
uncertain. However, certain of the statutes governing the provision of
healthcare services could be construed by regulatory authorities to apply to the
Company's proposed business activities. There can be no assurance that
regulatory authorities do not or will not deem the Company's business activities
to constitute the unlicensed practice of medicine.
Furthermore, in the event the Company develops features which facilitate
the input of data from medical devices directly into HealthDesk OnLine, it is
possible that the Federal Food and Drug Administration could require the Company
and/or an equipment manufacturer to obtain pre-marketing clearance with respect
to any such product. The process of obtaining and maintaining required
regulatory approval can be lengthy, expensive and uncertain. Even if regulatory
approvals are obtained, a marketed product and its manufacturer are subject to
continuing regulatory review, and discovery of previously unknown problems could
result in restrictions on such product or manufacturer, including withdrawal of
the product from the market. Amendments to or interpretation and enforcement of
existing statutes or regulations, the adoption of new statutes or regulations or
the development of new enhancements and features to HealthDesk OnLine could
subject the Company to increased regulation and require the Company to alter
methods of operation at costs which could be substantial. Failure to comply with
applicable laws and regulations could subject the Company to civil remedies,
including substantial fines, penalties and injunctions, as well as possible
criminal sanctions.
Although there are currently few laws or regulations directly applicable
to access to or commerce on the Internet, due to the increasing popularity and
use of the Internet, it is possible that laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The Telecommunications
Reform Act of 1996, which was recently enacted, imposes criminal penalties on
anyone who distributes obscene, lascivious or indecent communications on the
28
<PAGE>
Internet. Although the enforcement of such statute has been enjoined and is
currently subject to challenge in the courts, the adoption of any such laws or
regulations may limit the growth of the Internet, which could in turn decrease
the demand for the Company's products and services and increase the Company's
cost of doing business. Inasmuch as the applicability to the Internet of
existing laws governing issues such as property ownership, libel and personal
privacy is uncertain, any such new legislation or regulation or the application
of existing laws and regulations to the Internet could have an adverse effect on
the Company's proposed business and prospects.
Proprietary Information and Trademarks
The Company does not hold any patents or registered copyrights. The
Company regards certain computer software it has developed for HealthDesk OnLine
as proprietary and attempts to protect it with copyrights, trade secret laws,
proprietary rights agreements and internal nondisclosure agreements and
safeguards. However, such methods may not afford complete protection and there
can be no assurance that others will not independently develop know-how or
obtain access to the Company's know-how or software codes, concepts, ideas and
documentation. Furthermore, there can be no assurance that nondisclosure
agreements with the Company's employees will adequately protect the Company's
trade secrets. Although the Company believes that its proposed products do not
and will not infringe patents or violate proprietary rights of others, it is
possible that infringement of existing or future patents or proprietary rights
of others have occurred or may occur. In the event the Company's proposed
products infringe patents or proprietary rights of others, the Company may be
required to modify the design of its proposed products or obtain a license.
There can be no assurance that the Company will be able to do so in a timely
manner, upon acceptable terms and conditions, or at all. The failure to do any
of the foregoing could have a material adverse effect upon the Company. In
addition, there can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend a patent infringement action and
the Company could, under certain circumstances, become liable for damages, which
also could have a material adverse effect on the Company.
The Company currently holds a United States trademark registration for
the "HealthDesk" name and related logo. The Company is not aware of any claims
or infringement or other challenges to the Company's rights to use this mark.
Employees
As of May 31, 1997, the Company had twenty nine (29) full time employees,
of which four were executive officers, twelve were engaged in product
development, eight were engaged in marketing and five were engaged in
administrative activities. The Company's employees are not represented by a
collective bargaining unit. The Company believes that its relations with its
employees are good.
Facilities
The Company's facilities are located in 5,701 square feet of leased
office space in Berkeley, California. The lease expires in January 1999 and
provides for an annual rental of $108,564.
The Company's operations will be dependent on the Company's ability to
protect its computer equipment against damage from fire, earthquakes, power
loss, telecommunications failures and similar events. The Company does not
presently have redundant, multiple site capacity in the event of any such
occurrence. Notwithstanding the implementation of system security measures by
the Company, its servers will also be vulnerable to computer viruses, break-ins
and similar disruptions from unauthorized tampering with the Company's computer
systems. Computer viruses or problems caused by third parties could lead to
material interruptions, delays or cessation in service to consumers.
Legal Proceedings
The Company is subject to a complaint filed by a former employee with the
California Department of Fair Employment & Housing and a second by a former
consultant. The first claim alleges wrongful termination as a result of alleged
denial of reasonable accommodation for a wrist and neck injury. The second
complaint alleges that a former consultant is entitled to compensation
associated with accelerated vesting of stock options.
29
<PAGE>
The Company intends to defend these matters vigorously. There can be no
assurance, however, that such matters will be resolved in a manner favorable to
the Company.
30
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Peter O'Donnell 48 President, Chief Executive Officer and Chairman of the Board
Dr. Molly J. Coye 50 Executive Vice President for Strategic Development
Gerald W. Zieg 46 Senior Vice President of Sales
Timothy S. Yamauchi 36 Chief Financial Officer, Secretary and Treasurer
John Pappajohn 68 Director
James A. Gordon 46 Director
Dr. Joseph Rudick, Jr. 40 Director
David Sengpiel 45 Director
Dr. Edward C. Geehr 47 Director
</TABLE>
Peter O'Donnell has been President, Chief Executive Officer and Chairman
of the Board of the Company since September 1995. From May 1995 to August 1995
Mr. O'Donnell was a consultant to the Company. From February 1993 to April 1995,
Mr. O'Donnell was Executive Vice President of Sales and Marketing at the
Partnership Group, a company which provides consulting services to employees
regarding child and elder care matters. From October 1991 to February 1993, Mr.
O'Donnell was Executive Vice President of Sales and Marketing for Wellmark Inc.,
a healthcare company offering electronic data interchange services that allow
hospitals and other healthcare providers to transmit files electronically to
payers. Mr. O'Donnell received an M.A. degree in government in 1972 from Rutgers
University and a B.A. degree in psychology in 1971 from Pennsylvania State
University.
Dr. Molly J. Coye has been Executive Vice President for Strategic
Development of the Company since June 1996. Dr. Coye served as Senior Vice
President of the Good Samaritan Health System, a non-profit, integrated
health care system form September 1993 to January 1996. From June 1991 to
September 1993, Dr. Coye served as Director of the California Department of
Health Services. From 1986 to 1990 Dr. Coye was the Commissioner of Health
for the State of New Jersey. Dr. Coye received a B.S. degree in political
science from the University of California at Berkeley in 1968, an M.A. degree
in Asian history from Stanford University in 1972, and an M.D. and an M.P.H.
from Johns Hopkins University in 1977. Dr. Coye completed an internship in
Family Medicine at San Francisco General Hospital and a residency in
Preventative Medicine at the Robert Wood Johnson Foundation Clinical Scholars
Program at the University of California at San Francisco.
Gerald W. Zieg has been Senior Vice President of Sales of the Company
since December 1996. Mr. Zieg was Senior Vice President of Business
Development of Ambulatory Pharmaceutical Services of America, Inc., a home
health care company, from April 1996 to November 1996. From 1991 until April
1996, Mr. Zieg was Director of Marketing, Infusion/Chronic Homecare Program
for Apria Healthcare Incorporated, a medical services company. Mr. Zieg
received a B.S. in Pharmacy from the University of Michigan in 1973 and a M.S.
in Pharmacy from Wayne State University in 1979.
Timothy S. Yamauchi has been Chief Financial Officer, Secretary and
Treasurer of the Company since September 1995. From May 1994 to June 1995,
Mr. Yamauchi served as Chief Financial Officer of Innofusion Corporation,
a private home healthcare company. From May 1991 to May 1994, Mr. Yamauchi
was employed by Total Pharmaceutical Care Inc., a public healthcare service
company, as Treasurer and Director of Planning and Analysis. Mr. Yamauchi
received a B.S. degree in Accounting from California State University, Los
Angeles in 1983, an M.B.A. from Harvard Graduate School of Business
Administration in 1991 and is a Certified Public Accountant.
John Pappajohn has been a director of the Company since 1993. Mr.
Pappajohn also serves as a director of the following companies: CareGroup,
Inc.; Core, Inc.; Drug Screening Systems, Inc.; Fuisz Technologies Ltd.;
GalaGen, Inc.; OncorMed Inc.; PACE Health Management Systems, Inc.; and,
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<PAGE>
Patient Infosystems, Inc. Mr. Pappajohn has been the sole owner of Pappajohn
Capital Resources, a venture capital firm, and has served as President of
Equity Dynamics, Inc., a financial consulting firm, since 1969. Mr. Pappajohn
received a B.S.C. degree from the University of Iowa in 1952.
James A. Gordon has been director of the Company since September 1996.
Mr. Gordon is the President of the General Partner of Edgewater II Management,
L.P., a venture capital management firm. Mr. Gordon is also the General
Partner of Edgewater Private Equity Fund II, L.P., a venture capital firm.
Mr. Gordon also serves as a director of the following companies: IMNET Systems,
Inc.; Advanced Photonix, Inc.; Dac Vision; Pride Industries; Microware
Systems; Pangea, Inc.; Ultimo, Ltd.; and Cellular World Corp. Mr. Gordon has
been President of Gordon Management, an investment management company, since
February 1992. Mr. Gordon received a B.A. degree summa cum laude from
Northwestern University.
Dr. Joseph Rudick, Jr., a founder of the Company, has been a director
of the Company since August 1992. Dr. Rudick has been employed as a physician
with Associate Ophthalmologist, P.C. since 1988. Dr. Rudick has also served
as Vice President of Castle Group/Paramount Capital, a venture capital firm,
since 1993. Dr. Rudick currently serves as a director of Headland Technologies,
Optex Ophthalmics and Channel Pharmaceuticals. Dr. Rudick received a B.A.
from Williams College in 1978 and an M.D. from University of Pennsylvania in
1983.
David Sengpiel has been a director of the Company since September 1995.
Mr. Sengpiel also serves as a director of both Image Guided Technologies and
CVE, Inc., and as a Vice President of Equity Dynamics, a venture capital firm
since March 1995. From January 1993 to March 1995, Mr. Sengpiel was employed as
an Alternative Investment Manager with Farm Bureau Insurance, a life insurance
company. From August 1990 to January 1993, Mr. Sengpiel served as President of
Vantage Cable International, a telecommunications company.
Edward C. Geehr, M.D. has been a director of the Company since
November 1996. Dr. Geehr has been principal and director for Metis,
L.L.C., a healthcare information technology company since December 1996.
From January 1996 to November 1996, Dr. Geehr was Senior Vice President,
StrategicDevelopment for UniHealth, a hospital, insurance and medical
services company. From February 1995 to November 1996, Dr. Geehr was President
of the Health Care Delivery System Division of UniHealth and from 1990 to
January 1995, Senior Vice President and Chief Medical Officer. Dr. Geehr
received a B.A. degree from Yale University in 1971, a B.M.S. degree from
Dartmouth Medical School in 1974 and a M.D. degree from Duke University School
of Medicine in 1976.
Each officer serves at the discretion of the Board of Directors.
There are no family relationships among any of the directors or officers of
the Company.
The Company has established a Compensation Committee of the Board of
Directors which is currently comprised of Messrs. Pappajohn, Sengpiel and Geehr.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's executive officers and key
personnel and administers the Company's Stock Option Plan. The Company has also
established an Audit Committee of the Board of Directors which is currently
comprised of Messrs. Pappajohn and Gordon.
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<PAGE>
Executive Compensation
The following table sets forth certain compensation paid by the Company
during the fiscal year ended December 31, 1995 and 1996 to its President and
Chief Executive Officer, and the only other executive officer (the "Named
Executive Officers") who received compensation in excess of $100,000 for either
fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Other Annual Options
Name and Principal Position Year Salary Bonus Compensation(1) Granted (#)
- --------------------------- ---- ------ ----- --------------- -----------
<S> <C> <C> <C> <C> <C>
Peter O'Donnell (2)
President & Chief Executive 1996 $ 161,067 $ 26,667 ---- ----
Officer.................. 1995 $ 53,033 $ 13,333 $79,699 (1) 180,000
Timothy S. Yamauchi (3)
Chief Financial Officer, 1996 $ 101,141 $ 20,000 ---- ----
Secretary and Treasurer.. 1995 $ 26,258 ---- ---- 60,000
- -------------
(1) Represents consulting fees of $63,699 from May to September 1995 and relocation costs.
(2) Mr. O'Donnell joined the Company in September 1995.
(3) Mr. Yamauchi joined the Company in September 1995.
</TABLE>
Options Granted in 1996
During the year ended December 31, 1996, the Company did not grant any
options to purchase the Company's Common Stock to the Named Executive Officers.
The following table provides the specified information concerning
exercise of options to purchase the Company's Common Stock in 1996, and
unexercised options held as of December 31, 1996, by the persons named in the
Summary Compensation Table:
AGGREGATE OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised In-
Number of Unexercised the-Money Options at
Options at 12/31/96 (1) 12/31/96 (2)
Shares ---------------------------- ----------------------------
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Peter S. O'Donnell ---- ---- 180,000 ---- $665,963 ----
Timothy S. Yamauchi ---- ---- 60,000 ---- $222,094 ----
</TABLE>
- ----------
(1) Options granted under the Company's 1994 Founder's Stock Option Plan
are generally immediately exercisable subject to a repurchase right in
favor of the Company which lapses as the option vests over a four year
period.
(2) Valuation based on the difference between the option exercise price and
the fair market value of the Company's Common Stock on December 31,
1996 (which was $5.00 per share, as determined by the Board of
Directors as of December 31, 1996).
33
<PAGE>
Employment Agreements
The Company has entered into employment agreements with each of Peter
O'Donnell, Molly J. Coye and Timothy S. Yamauchi which expire in December 1997
and are automatically renewable for additional one-year terms. The agreements
provide for base compensation payable to Mr. O'Donnell, Dr. Coye and Mr.
Yamauchi of $163,200, $140,000 and $110,000, respectively, and bonuses to be
determined based on annual pre-tax earnings, if any, of the Company. Dr. Coye,
who will be entitled to receive base compensation commencing in 1997, received a
bonus of $80,000 in February 1997. The agreements also provide for employment on
a full-time basis and contain a provision that the employee will not compete or
engage in a business competitive with the Company for a period of one year after
termination. In the event of termination of the employee's employment by the
Company other than for cause (including non-renewal of the agreement) or by
reason of death or disability, the Company is obligated to make payments equal
to one-half of the then applicable annual base salary plus a pro rata portion of
the bonus payable for such year.
The Company has also entered into a letter agreement with Gerald Zieg
pursuant to which Mr. Zieg is entitled to receive an annual salary of $90,000
plus commissions equal to 1% of net revenues, subject to certain exclusions. In
the event that Mr. Zieg's employment is terminated by the Company during the
first twelve months of employment, he will be entitled to severance pay equal to
three months salary.
1994 Stock Option Plan
The Company's 1994 Founder's Stock Option Plan (the "Option Plan") became
effective in June 1994 and was amended most recently in March 1996. The purpose
of the Option Plan is to attract and retain qualified personnel, to provide
additional incentives to employees, officers and consultants of the Company and
to promote the success of the Company's business. A reserve of 950,000 shares of
the Company's Common Stock has been established for issuance under the Option
Plan. The Option Plan is administered by the Compensation Committee of the Board
of Directors (the "Committee"). Subject to the Option Plan, the Committee has
complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of
any granted option as either an incentive stock option or a non-statutory
option, the vesting schedule to be in effect for the option grant and the
maximum term for which any granted option is to remain outstanding.
Each option granted under the Option Plan has a maximum term of ten
years, subject to earlier termination following the optionee's cessation of
serve with the Company. Options are generally immediately exercisable subject to
a right of repurchase in favor of the Company at the original exercise price
which expires over a four-year vesting period. The exercise price of incentive
stock options and non-statutory stock options granted under the Option Plan must
be at least 100% and 85% of the fair market value of the stock subject to the
option on the date of grant, respectively or 110% with respect to holders of
more than 10% of the voting power of the Company's outstanding stock. The
Committee determines the fair market value of the stock. The purchase price is
payable immediately upon the exercise of the option. Such payment may be made in
cash, or at the discretion of the Committee, in outstanding shares of Common
Stock held by the participant, through a full recourse promissory note payable
in installments over a period of years or any combination of the foregoing.
The Board of Directors may amend or modify the Option Plan at any time,
provided that no such amendment or modification may adversely affect the rights
and obligations of the participants with respect to their outstanding options or
unvested shares without their consent. In addition, no amendment of the Option
Plan may, without the approval of the Company's shareholders, (i) materially
modify the class of individuals eligible for participation, (ii) increase the
number of shares available for issuance, except in the event of certain changes
to the Company's capital structure, (iii) materially increase the benefits
accruing to Optionees under the Option Plan, or (iv) extend the term of the
Option Plan. The Option Plan will terminate in June 2004, unless terminated
earlier by the Board.
34
<PAGE>
As of May 31, 1997, there are options to purchase an aggregate of 802,588
shares outstanding under the Plan with an average exercise price of $2.70. Peter
O'Donnell holds 180,000 outstanding options 135,324 of which were granted at an
exercise price of $1.04 per share and 44,676 of which were granted at an
exercise price of $2.08 per share. Joseph Rudick holds 24,000 options, 12,000 of
which were granted at an exercise price of $1.04 per share, and 12,000 of which
were granted at an exercise price of $1.67 per share. Molly Coye holds 132,000
outstanding options, 96,000 of which were granted at an exercise price of $3.33
per share and 36,000 of which were granted at $5.00 per share. Timothy Yamauchi
holds 60,000 outstanding options, 45,210 of which were granted at an exercise
price of $1.04 per share, and 14,790 of which were granted at an exercise price
of $2.08 per share. Gerald Zieg holds 60,000 outstanding options, 50,000 of
which were granted at a repricing exercise price of $3.13 per share and $10,000
of which were granted at an exercise price of $3.28 per share.
All options are immediately exercisable subject to repurchase rights in
favor of the Company based upon the following vesting schedule: the optionee
shall acquire a vested interest in, and the Company's repurchase rights will
accordingly lapse with respect to, (i) twenty-five percent (25%) of the option
shares upon completion of one year of service (as a director or employee, as the
case may be) measured from the respective vesting commencement date, and (ii)
the balance of the option shares in equal successive monthly installments upon
completion of each of the next thirty-six (36) months of service measured from
and after the first anniversary of such vesting commencement date.
Other Benefit Plans
The Company maintains a 401(k) savings plan and a Section 125 medical and
dental savings plan.
Limitation of Liability and Indemnification Matters
The Company's Restated Articles of Incorporation (the "Articles") limit
the liability of directors to the maximum extent permitted by California law.
The Articles authorize the Company to indemnify agents of the Company in excess
of the indemnification otherwise permitted by Section 317 of the California
General Corporation Law, subject only to applicable limits set forth in Section
204 of the California General Corporation Law with respect to actions for breach
of duty to the corporation and its shareholders.
The Company's Bylaws provide that the Company shall indemnify its
directors, officers, employees and other agents to the fullest extent permitted
by law. The Company believes that indemnification under its Bylaws covers at
least negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit it to secure insurance on behalf of any officer,
director, employee or the other agent for any liability arising out of his or
her actions in such capacity, regardless of whether the Bylaws would permit
indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or executive
officer of the Company or any other company or enterprise to which the person
provides services at the request of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
35
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1997, and as
adjusted to reflect the exercise of the Warrants by: (i) each person or group of
affiliated persons who is known by the Company to own beneficially 5% or more of
the Company's Common Stock, (ii) each of the Company's directors and the Named
Executive Officers, and (iii) all directors and executive officers as a group.
Except as otherwise noted, the persons or entities in this table have sole
voting and investment power with respect to all the shares of Common Stock
beneficially owned by them.
<TABLE>
<CAPTION>
Percentage Ownership of All Common
Stock Outstanding (1)
-----------------------------------
After
Name and Address of Amount and Nature of Before Exercise Exercise of
Beneficial Owner (2) Beneficial Ownership (3) of Warrants Warrants (4)
- -------------------- ------------------------ --------------- ------------
<S> <C> <C> <C>
Peter S. O'Donnell (5).................. 180,000 2.9% 2.2%
John Pappajohn (6)...................... 1,115,000 18.0 13.7
Edgewater Private Equity Fund II, L.P
666 Grand Avenue, Suite 200
Des Moines, Iowa 50309.................. 1,011,000 16.3 12.4
James Gordon (7)........................ 1,011,000 16.3 12.4
Dr. Joseph Rudick
150 Broadway
New York, New York 10038 (8)............ 219,000 3.5 2.7
David Sengpiel (9)...................... 15,000 .2 .2
Dr. Edward C. Geehr (10)................ 20,000 .3 .2
Timothy S. Yamauchi (11) 60,000 1.0 .7
All officers and directors as a group
(nine persons) (12)..................... 2,812,000 45.4 34.5
- --------------
</TABLE>
(1) Assumes no sales of shares of the Company's Common Stock by the Selling
Shareholders.
(2) Except as other wise indicated, the address for each beneficial owner
identified is c/o HealthDesk Corporation, 2560 Ninth Street, Suite 220,
Berkeley, California 94710.
(3) Unless otherwise indicated, the Company believes that all persons and
entities named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them. A
person is deemed to be the beneficial owner of shares of Common Stock
that can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
convertible securities and options that are held by such person (but not
those held by any other person) and which are exercisable within such
period have been exercised.
(4) Assumes no exercise of the Underwriter's Warrants.
(5) Represents immediately exercisable options to purchase 180,000 shares.
(6) Includes immediately exercisable options to purchase 10,000 shares.
Excludes 10,000 shares owned by Ann Pappajohn, Mr. Pappajohn' daughter.
Mr.Pappajohn disclaims beneficial ownership of such shares.
(7) Includes 901,000 shares of Common Stock held by Edgewater Private Equit
Fund II, L.P. Mr. Gordon may be deemed to be the beneficial owner of such
shares. Excludes 30,000 shares of Common Stock held by Laura Gordon 1985
Trust over which Mr. Gordon has voting power but no pecuniary interest.
Mr.Gordon disclaims beneficial ownership of such 30,000 shares.
(8) Includes immediately exercisable options to purchase 24,000 shares.
(9) Includes immediately exercisable options to purchase 15,000 shares.
(10) Includes immediately exercisable options to purchase 20,000 shares.
(11) Includes immediately exercisable options to purchase 60,000 shares.
(12) Includes immediately exercisable option to purchase 491,000 shares.
36
<PAGE>
CERTAIN TRANSACTIONS
During the last two fiscal years, the Company had the following transactio
with certain of its officers, directors and holders of 5% of the outstanding
shares the Company, as described below.
In August 1995, Mr. Pappajohn and Edgewater Private Equity Fund II, L.P.
("Edgewater") purchased an aggregate of 636,000 shares of Common Stock from
David Hehman, the former Chief Executive Officer of the Company, and certain
of his family members, for an aggregate consideration of $662,500. James
Gordon, a director of the Company, is president of the General Partner of
Edgewater. In connection with such transaction, Mr. Hehman and such family
members entered into a severance agreement with the Company which provided
for their respective resignations as officers, directors and employees of the
Company, their agreement not to compete for one year with the Company and the
termination of options to purchase an aggregate of 198,000 shares of Common
Stock. Pursuant to such severance agreement, the Company paid such
individuals an aggregate of $50,000. In addition, in consideration of $5,000,
Spartina Corporation, a company controlled by Mr. Hehman, assigned to the
Company all of its right, title and interest in and to certain software
development tools previously licensed by the Company from Spartina
Corporation pursuant to a non-exclusive license agreement entered into in
April 1993. In connection with such transaction, Mr. Pappajohn and Edgewater
were granted registration rights with respect to all of such shares.
In August 1995, the Company granted to Mr. Pappajohn options to purchase
96,000 shares of Common Stock at an exercise price of $1.04 per share. Such
options were exercised in December 1995. In September 1996, the Company
granted Mr. Pappajohn and Mr. Sengpiel, a director of the Company, options to
purchase 10,000 and 15,000 shares of Common Stock, respectively, at an
exercise price of $5.00 per share.
During the period from June through September 1995, the Company borrowed an
aggregate of $800,000 from Mr. Pappajohn and Edgewater, evidenced by
convertible promissory notes bearing interest at the rate of 6% per annum.
The principal of the notes were converted into an aggregate of 768,000 shares
of Common Stock in September 1995.
In December 1995, Mr. Pappajohn and Edgewater, purchase 69,000 and 129,000
shares of the Company's Series A Preferred Stock for an aggregate purchase
price of approximately $144,000 and $268,000 respectively.
In May 1996, the Company and Patient Infosystems Inc. ("PATI") entered into
cross-license agreements in connection with possible product development
and marketing arrangements. Pursuant to such agreements, each party paid
the other an initial license fee of $25,000. Similar fees are payable
upon any renewal of such agreements. Mr. Pappajohn is a principal
shareholder and a director of PATI. Edgewater is also a principal
shareholder of PATI.
In July and August 1996, the Company borrowed an aggregate of $500,000 from
Mr. Pappajohn and Edgewater. Such indebtedness bears interest at the rate of
8% per annum. The principal of such notes converted into approximately
100,000 shares of Common Stock in January 1997 in connection with the
Company's IPO.
Mr. Pappajohn and Edgewater each purchased $100,000 of Units consisting of
20,000 shares of Common Stock at an attributed price of $2.25 per share and a
9% non-negotiable promissory note in the principal amount of $100,000 in
connection with the Bridge Financing in October 1996. The Company used a
portion of the proceeds from its IPO to repay the entire principal amount of
and accrued interest on such notes.
The Company believes that all of the foregoing transactions and arrangements
were fair and reasonable to the Company and were on terms no less favorable
than could have been obtained form unaffiliated third parties. There can be
no assurance, however, that future transactions or arrangements between the
Company and its affiliates will continue to be advantageous to the Company,
that conflicts of interest will not arise with respect thereto, or that if
conflicts do arise, they will be resolved in a manner favorable to the
Company. Any such future transactions will be on terms no less favorable to
the Company than could be obtained from unaffiliated parties and will be
approved by a majority of the independent and disinterested members of the
Board of Directors, outside the presence of any interested directors and, to
the extent deemed appropriate by the Board of Directors, the Company will
obtain shareholder approval or fairness opinions in connection with any such
transactions.
37
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 17,000,000 shares of
Common Stock, 5,392,845 of which are outstanding, and 1,800,000 shares of
Preferred Stock, none of which are outstanding. The following description of the
capital stock of the Company and certain provisions of the Company's Restated
Articles of Incorporation ("Restated Articles") and Bylaws is a summary and is
qualified in its entirety by the provisions of the Restated Articles and Bylaws,
copies of which have been previously filed.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders, including the election of
directors, and, subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, 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 therefore. See "Dividend Policy." In the event of
liquidation or dissolution of the Company, the holders of Common Stock are
entitled to receive all assets available for distribution to the shareholders,
subject to any preferential rights of any preferred stock then outstanding. The
holders of Common Stock have no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to the Commons Stock. All outstanding shares of Common Stock are, and
the shares offered hereby upon issuance and sale will be, fully paid and
non-assessable. The rights, preferences and privileges of the holders of Common
Stock are subject to, and may be adversely affected by the rights of the holders
of any shares of preferred stock which the Company may designate and issue in
the future.
The Company's shareholders currently may cumulate their votes for the
election of directors so long as at least one shareholder has given notice at
the meeting of shareholders prior to the voting of that shareholder's desire to
cumulate his or her votes. Cumulative voting may be eliminated by amendment to
the Restated Articles or the Company's Bylaws if (i) the Company's shares of
Common Stock are listed on the Nasdaq National Market and the Company has at
least 800 holders of its equity securities as of the record date of the
Company's most recent annual meeting of shareholders or (ii) the Company's
shares of Common Stock are listed on the New York Stock Exchange or the American
Stock Exchange.
Preferred Stock
The Company is authorized to issue 1,800,000 shares of preferred stock,
which shares may be issued from time to time in one or more series upon
authorization by the Company's Board of Directors. The Board of Directors,
without further approval of the shareholders, is authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges and
restrictions applicable to each series of preferred stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Company's Common Stock at a premium or
otherwise adversely affect the market price of the Common Stock. The Company has
no current plans to issue any preferred stock.
38
<PAGE>
Redeemable Warrants
Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock, at a price of $5.00, subject to adjustment in certain
circumstances, at any time until January 16, 2002.
The Warrants are redeemable by the Company, upon the consent of Whale, at
any time, upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid price of the Common Stock on all 30 of the trading
days ending on the third day prior to the day on which the Company gives notice
has been at least 150% (currently $7.50, subject to adjustment) of the then
effective exercise price of the Warrants. All warrantholders have exercise
rights until the close of business on the date fixed for redemption.
The Warrants were issued in registered form under a Warrant Agreement
between the Company and American Stock Transfer & Trust Company as Warrant
Agent. Reference is made to said Warrant Agreement for a complete description of
the terms and conditions therein (the description herein contained being
qualified in its entirety by reference thereto).
The exercise price and number of shares of Commons Stock or other
securities issuable on exercise of the Warrants are subject to adjustments in
certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, such Warrants are not subject to adjustment for issuances of Common
Stock at a price below the exercise price of the Warrants, including the
issuance of shares of Common Stock pursuant to the Option Plan.
The Warrants may be exercised upon surrender of the Warrant certificate
on or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the certificate completed and executed as
indicated, accompanied by full payment of the exercise price (by certified check
payable to the Company) to the Warrant Agent for the number of Warrants being
exercised. The warrantholders do not have the rights or privileges of holders of
Common Stock.
No Warrant is exercisable unless at the time of exercise the Company has
filed a current registration statement with the Commission covering the shares
of Common Stock issuable upon exercise of such Warrant and such shares have been
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of such Warrant. The Company will use its best
efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, subject to the terms of the Warrant Agreement. While
it is the Company's intention to do so, there is no assurance that it will be
able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a warrantholder exercises all Warrants then owned of record by him,
the Company will pay such warrantholder, in lieu of the issuance of any
fractional shares which is otherwise, issuable, an amount in cash based on the
market value of the Common Stock on the last trading day prior to the exercise
date.
Registration Rights
Pursuant to the terms of the Bridge Financing, the Company has included
the shares issued in the Bridge Financing in the Registration Statement of which
this Prospectus forms a part. The Company has agreed to use its best efforts to
keep the Registration Statement effective until the earlier of (i) the date that
all of the shares included in the Registration Statement have been sold pursuant
thereto and (ii) the date the Selling Shareholders receive an opinion of counsel
that the full amount of their shares may be freely sold by such holders. All
registration expenses related to such shares will be paid by the Company. If the
Company defaults in its obligations to maintain the Registration Statement
effective or otherwise fails to comply with certain other registration rights
obligations of the Bridge Financing, the Company may be obligated to issue up to
an additional 100,000 shares of Common Stock to the investors which participated
in the Bridge Financing.
The shares offered by the Selling Shareholders may not be sold prior to
January 16, 1998 and, without the prior written consent of Whale, may not be
sold prior to July 16, 1998.
In addition to the rights described above, the holders ("Holders") of an
aggregate of approximately 1,341,600 shares of Common Stock are entitled to
certain rights with respect to the registration of such shares for offer and
sale to the public under the Securities Act. Under these provisions, the Holders
may request that the Company file up to one registration statement under the
Securities Act with respect to at least 50% of such Common Stock. Upon receipt
of such a request, the Company is required to notify all other Holders and to
effect as soon as practicable such registration, subject to certain conditions,
including that the request must be received one year or more after the effective
date of this offering, and no later than December 31, 2000. Further, whenever
the Company proposes to register any of its securities under the Securities Act
for its own account or for the account of other security holders, the Company is
required to promptly notify each Holder of the proposed registration and
included all Common Stock which such Holder may request to be included in such
registration, subject to certain limitations. The Company has obtained a waiver
of these rights to the extent they would have applied to this offering.
39
<PAGE>
Transfer and Warrant Agent
The transfer and warrant agent for the Common Stock and Warrants is
American Stock Transfer & Trust Company, New York, New York.
40
<PAGE>
SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION
An aggregate of up to 400,000 shares may be offered and sold pursuant to
this Prospectus by the Selling Shareholders. The Company has agreed to register
the public offering of such shares under the Securities Act concurrently with
this offering and to pay all expenses in connection therewith. The shares have
been included in the Registration Statement of which this Prospectus forms a
part. None of the such shares may be sold by the Selling Shareholders prior to
January 16, 1998 and, without the prior written consent of Whale, may not be
sold prior to July 16, 1998. None of the Selling Shareholders has ever held any
position or office with the Company or had any other material relationship with
the Company except that John Pappajohn is a director and principal shareholder
of the Company and Edgewater is a principal shareholder of the Company. James
Gordon, a director of the Company, is president of the General Partner of
Edgewater. The Company will not receive any of the proceeds from the sale of the
shares by the Selling Shareholders
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation by Whale (the "Solicitation Agent"), to pay to the
Solicitation Agent a fee of 5% of the Warrant exercise price, a portion of which
may be reallowed to any dealer who is a member of the NASD who solicited the
exercise (which may also be the Solicitation Agent) for each Warrant exercised,
if (i) the market price of the Common Stock of the Company at the time of
exercise is higher than the exercise price of the Warrants; (ii) the Warrants
are not held in any discretionary account; (iii) disclosure of compensation
arrangements was made both at the time of the Company's IPO and in documents
provided to holders of the Warrants at the time of exercise; (iv) the exercise
of the Warrants is solicited by a member of the NASD as designated in writing on
the Warrant Certificate Subscription Form; and (v) the solicitation of exercise
of the Warrants was not in violation of Regulation M promulgated under the
Exchange Act. The Company has agreed not to solicit Warrant exercises other than
through the Solicitation Agent. The Company has agreed to indemnify the
Solicitation Agent against certain liabilities, including liabilities under the
Securities Act. The Solicitation Agent has the right to designate one member of
the Company's board of directors until January 2002. The Solicitation Agent has
informed the Company that it has not yet and does not currently intend to
designate a board member.
The following table sets forth certain information with respect to the
Selling Shareholders:
<TABLE>
<CAPTION>
Beneficial Beneficial Percentage
Ownership Amount of Ownership of of Beneficial
of Common Stock Common Common Stock Ownership of
Prior to Sale Stock After Common Stock
Selling Shareholders Offered Offering After Offering
(1)
- -------------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Wilensky, Allan S........................ 45,000 45,000 ---- ----
Worthington, John R...................... 30,000 30,000 ---- ----
Pappajohn, John.......................... 1,055,000 20,000 1,035,000 19.1%
Edgewater Private Equity Fund II, L.P.... 901,000 20,000 881,000 16.3%
Brown, Michael & Brown, Alana (JT)....... 20,000 20,000 ---- ----
Chafoulias, Gus.......................... 53,600 20,000 33,600 .6%
Chastek, Chester......................... 20,000 20,000 ---- ----
Toboroff, Leonard........................ 20,000 20,000 ---- ----
Shaykin, Leonard......................... 15,000 15,000 ---- ----
Atlas Capital Partners, L.P.............. 10,000 10,000 ---- ----
Catalyst Partners, L.P................... 10,000 10,000 ---- ----
David, Todd & Loewenberg, Tiffany (JT)... 10,000 10,000 ---- ----
Egge, R.D................................ 10,000 10,000 ---- ----
FGR Akel................................. 10,000 10,000 ---- ----
Gottlieb, Scott C........................ 10,000 10,000 ---- ----
IASD Health Services Corp................ 106,000 10,000 96,000 1.8%
JIBS Equities, L.P....................... 34,000 10,000 24,000 .4%
Marino, Robert R......................... 10,000 10,000 ---- ----
Natale, Steve............................ 10,000 10,000 ---- ----
Pappajohn, Ann........................... 10,000 10,000 ---- ----
Penn Footwear Retirement Invest.......... 34,000 10,000 24,000 .4%
Goldberg, Jay N.......................... 6,000 6,000 ---- ----
Howard, Lawrence......................... 6,000 6,000 ---- ----
Kier, Isaac.............................. 6,000 6,000 ---- ----
Segal, Gordon............................ 17,000 5,000 12,000 .2%
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cantor, Michael.......................... 5,000 5,000 ---- ----
Lyons, Allan R........................... 5,000 5,000 ---- ----
McGowan Corporation...................... 5,000 5,000 ---- ----
Merenstein, Lewis IRA.................... 5,000 5,000 ---- ----
Miot, Sanford B.......................... 5,000 5,000 ---- ----
Newman, Gary............................. 5,000 5,000 ---- ----
Nocciolino, Albert....................... 5,000 5,000 ---- ----
Nusbaum, Lawrence G...................... 5,000 5,000 ---- ----
Odenthal, William........................ 5,000 5,000 ---- ----
Christos, Peter N........................ 2,000 2,000 ---- ----
Whale Securities Co., L.P. 340,000 (2) 340,000 (2) ---- ----
</TABLE>
- ------------------
(1) Assumes the exercise of all Warrants.
(2) Represents securities held for the account of certain equity owners and
employees of Whale. Does not include shares held in any customer account by,
or any trading account of, Whale.
The shares may be offered and sold from time to time as market conditions permit
in the over-the-counter market, or otherwise, at prices and terms then
prevailing or at prices related to the then-current market price, or in
negotiated transactions. The shares may be sold by one or more of the following
methods, without limitation: (a) a block trade in which a broker or dealer so
engaged will attempt to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchases; and (d) face-to-face
transactions between sellers and purchasers without a broker/dealer. In
effecting sales, brokers or dealers engaged by the Selling Shareholders may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from Selling Shareholders in amounts to be
negotiated. Such broker and dealers and any other participating brokers or
dealers may be deemed to be "underwriters" within the meaning of the Securities
Act, in connection with such sales.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Gray Cary Ware & Freidenrich, a Professional Corporation, Palo Alto,
California.
EXPERTS
The balance sheets as of December 31, 1995 and 1996 and the statements of
operations, shareholders' equity (deficit) and cash flows for the years ended
December 31, 1995 and 1996 and for the period from August 28, 1992 (inception)
to December 31, 1996, included in this Prospectus, have been included herein in
reliance on the report, which includes an emphasis of a matter paragraph
regarding the Company's need for additional capital resources, of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form SB-2, including
amendments thereto, under the Securities Act with respect to the securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein 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 of which this Prospectus forms a part, each such statement being
qualified in all respects by such reference. The Registration Statement, and the
exhibits and schedules thereto, as well as such reports and other information
filed with the Commission, may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices of the Commission: 13th Floor, Seven World Trade Center, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
42
<PAGE>
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, Washington, D.C. at
prescribed rates
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: New York Regional Office, Seven
World Trade Center, New York, New York 10048, and Chicago Regional Office, 500
West Madison Street, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed fees. The Common
Stock and Warrants of the Company are quoted on the Nasdaq SmallCap Market.
Reports, proxy statements and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
43
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Accountant's Report.............................................................................. F-2
Balance Sheets as of December 31, 1995, 1996 and March 31, 1997.............................................. F-3
Statements of Operations for the years ended December 31, 1995 and 1996, and the three months ended March
31, 1996 and 1997 and the periods from August 28, 1992 (inception) to December 31, 1996 and
March 31, 1997............................................................................................ F-4
Statements of Shareholders' Equity (Deficit) for the years ended December 31,
1992, 1993, 1994, 1995, 1996 and the three months ended March 31, 1997 F-5................................ F-5
Statements of Cash Flows for the years ended December 1995 and 1996, and the three months ended March 31,
1996 and 1997 and the periods from August 28, 1992 (inception) to December 31, 1996 and March 31, 1997.... F-6
Notes to Financial Statements................................................................................ F-7
</TABLE>
F-1
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
Report of Independent Accountants
To the Shareholders and Board of Directors of HealthDesk Corporation:
We have audited the accompanying balance sheets of HealthDesk Corporation
(a development stage company) as of December 31, 1995 and 1996, and the related
statements of operations, shareholder's equity (deficit), and cash flows for the
years then ended, and for the period from August 28, 1992 (inception) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of HealthDesk
Corporation as of December 31, 1995 and 1996, and the results of its operations
and its cash flows for the years then ended, and for the period from August 28,
1992 (inception) to December 31, 1996, in conformity with generally accepted
accounting principles.
Our previous report dated February 21, 1997, was unmodified. Since that
date, as discussed in Note 1 to the financial statements, the Company has
continued to incur losses and negative cash flows from its product development
activities. Management expects that the Company will require additional capital
resources prior to achieving profitable operations.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 21, 1997, except for the second paragraph of Note 1, as to which the
date is July 18, 1997.
F-2
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1995 1996 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 1,554,034 $ 198,277 $ 4,043,546
Receivable from shareholder................ 100,000 ----
Prepaid expenses and other................. 19,709 172,294 125,105
Deferred offering and debt issuance costs. --- 492,109 ----
--------------- --------------- ---------------
Total current assets..................... 1,673,743 862,680 4,168,651
Property and equipment, net.................. 234,963 568,040 578,869
Other assets................................. 94,650 17,517 17,100
--------------- --------------- ---------------
Total assets............................. $ 2,003,356 $ 1,448,237 $ 4,764,620
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................... $ 104,759 $ 857,428 $ 434,155
Accrued liabilities........................ 143,715 441,076 227,357
Notes payable.............................. ---- 1,851,546 ----
Convertible notes payable and accrued
interest................................. 554,833 517,041 ----
--------------- --------------- ---------------
Total liabilities........................ 803,307 3,667,091 661,512
--------------- --------------- ---------------
Commitments and contingencies (Note 7)
Shareholders' equity (deficit):
Convertible preferred stock, no par value;
authorized 3,000,000 shares; issued and
outstanding 939,600 and 1,059,600 shares
at December 31, 1995 and 1996,
respectively, and none outstanding at
March 31, 1997........................... 1,935,807 2,183,036 ----
Common stock, no par value; authorized
17,000,000 shares; issued and outstanding
2,130,000, 2,530,120, and 5,392,845 at
December 31, 1995, 1996, and March 31,
1997, respectively....................... 1,221,230 1,946,552 11,457,505
Warrants................................... ---- ---- 195,687
Deficit accumulated during the development
stage.................................... (1,956,988) (6,348,442) (7,550,084)
---------------- ---------------- ----------------
Total shareholders' equity (deficit)..... 1,200,049 (2,218,854) 4,103,108
--------------- ---------------- ---------------
Total liabilities and shareholders'
equity (deficit)..................... $ 2,003,356 $ 1,448,237 $ 4,764,620
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
August 28, August 28,
1992 1992
(Inception) Three Months (Inception)
Year Ended December 31, to December Ended March 31, to March 31,
----------------------- ---------- --------------- ------------
31,
1995 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue: (unaudited) (unaudited)
Software development and licensing. $ 224,011 $ 52,225 $ 743,539 $ 858 $ 200,485 $ 944,024
Other.............................. ---- ---- 10,158 ---- ---- 10,158
----------- ----------- ----------- ----------- ----------- -----------
Total revenue..................... 224,011 52,225 753,697 858 200,485 954,182
----------- ----------- ----------- ----------- ----------- -----------
Costs and expenses:
Product development................ 680,886 1,622,601 2,710,117 316,107 697,217 3,407,334
Sales and marketing................ 349,133 1,222,183 1,926,490 86,590 438,718 2,365,208
General and administrative......... 581,043 681,993 1,485,430 410,103 143,917 1,629,347
----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses.......... 1,611,062 3,526,777 6,122,037 812,800 1,279,852 7,401,889
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations.............. (1,387,051) (3,474,552) (5,368,340) (811,942) (1,079,367) (6,447,707)
Interest expense...................... (40,300) (60,654) (112,332) (9,248) (14,900) (127,232)
Interest income....................... 6,000 28,779 34,779 14,336 37,848 72,627
Amortization of discount and issuance
costs associated with bridge
financing (Note 6)................. ---- (884,227) (884,227) ---- (145,023) (1,029,250)
Other expenses........................ (14,322) ---- (14,322) ---- ---- (14,322)
------------ ----------- ------------ ----------- ----------- ------------
Loss before income taxes........... (1,435,673) (4,390,654) (6,344,442) (806,854) (1,201,442) (7,545,884)
Provision for income taxes............ (800) (800) (4,000) (1,000) (200) (4,200)
------------ ------------ ------------ ------------ ------------ ------------
Net loss.......................... $(1,436,473) $(4,391,454) $(6,348,442) $ (807,854) $(1,201,642) $(7,550,084)
============ ============ ============ ============ ============ ============
Net loss per share.................... $ (0.46) $ (1.12) $ (.21) $ (.26)
============= ============= ============ ============
Weighted average number of shares of
common stock...................... 3,152,081 3,913,433 3,824,866 4,659,663
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Preferred Stock Common Stock During the Shareholders'
--------------- ------------ Development Equity
Shares Amount Warrants Shares Amount Stage (Deficit)
------ ------ -------- ------ ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at August 28, 1992
(inception)............... ---- ---- ---- ---- ---- ----- ----
Common stock issued for cash
on October 1, 1992 at
$0.003 per share.......... ---- ---- ---- 960,000 $ 2,480 ---- $ 2,480
Net loss..................... ---- ---- ---- ---- ---- $ (92,744) (92,744)
----------- ---------- ---------- ------------ ------------ ------------ ------------
Balances at December 31, 1992 ---- ---- ---- 960,000 2,480 (92,744) (90,264)
Common stock issued for cash
in April and May 1993 at
$1.04 per share........... ---- ---- ---- 240,000 250,000 ---- 250,000
Net loss..................... ---- ---- ---- ---- ---- (190,749) (190,749)
----------- ---------- ---------- ------------ ------------ ------------ ------------
Balances at December 31, 1993 ---- ---- ---- 1,200,000 252,480 (283,493) (31,013)
Common stock issued for cash
on May 2, 1994 at $1.04 per ---- ---- ---- 60,000 62,500 ---- 62,500
share.....................
Net loss..................... ---- ---- ---- ---- ---- (237,022) (237,022)
----------- ---------- ---------- ------------ ------------ ------------ ------------
Balances at December 31, 1994 ---- ---- ---- 1,260,000 314,980 (520,515) (205,535)
Common stock issued in
exchange for convertible
debt on September 29, 1995
at $1.04 per share........ ---- ---- ---- 768,000 800,000 ---- 800,000
Common stock issued upon
exercise of options in June
and December 1995 at $1.04 ---- ----- ----- 102,000 106,250 ---- 106,250
per share.................
Preferred stock issued for
cash in November and
December 1995 at $2.08 per
share, net of issuance 939,600 $1,935,807 ---- ---- ---- ---- 1,935,807
costs of $21,693..........
Net loss..................... ---- ---- ---- ---- ---- (1,436,473) (1,436,473)
----------- ---------- ---------- ------------ ------------ ------------ ------------
Balances on December 31, 1995 939,600 1,935,807 ---- 2,130,000 1,221,230 (1,956,988) 1,200,049
Common stock issued upon
exercise of options on
February 1, 1996 at $1.04 ---- ---- ---- 120 125 ---- 125
per share.................
Preferred stock issued for
cash in February 1996 at
$2.08 per share, net of 120,000 247,229 ---- ---- ---- ---- 247,229
issuance costs of $2,771..
Common Stock issued for cash
in October 1996 at $2.25
per share, net of issuance ---- ---- ---- 400,000 725,197 ---- 725,197
cost of $174,803..........
Net loss..................... ---- ---- ---- ---- ---- (4,391,454) (4,391,454)
----------- ---------- ---------- ------------ ------------ ------------ ------------
Balances at December 31, 1996 1,059,600 2,183,036 ---- 2,530,120 1,946,552 (6,348,442) (2,218,854)
Common Stock and Warrants
issued in connection with
the initial public offering
on January 23, 1997 ---- ---- $195,500 1,700,000 6,823,101 ---- 7,018,601
(unaudited)...............
Preferred Stock converted to
common stock (unaudited).. (1,059,600) (2,183,036) ---- 1,059,600 2,183,036 ---- ----
Convertible notes converted to
common stock (unaudited).. ---- ---- ---- 100,000 500,000 ---- 500,000
Issuance of warrants in
connection with the initial
public offering (unaudited) ---- ---- 187 ---- ---- ---- 187
Common Stock issued upon
exercise of options in
March at $1.04 and $2.08
per share (unaudited)..... ---- ---- ---- 3,125 4,816 ---- 4,816
Net loss (unaudited)......... ---- ---- ---- ---- ---- (1,201,642) (1,201,642)
----------- ---------- ---------- ------------ ------------ ------------ ------------
Balances on March 31, 1997
(unaudited)............... ---- ----- $195,687 5,392,845 $ 11,457,505 $(7,550,084) $ 4,103,108
=========== ========== ========== ============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
August 28, August 28,
1992 1992
Year Ended December 31, (inception) Three Months Ended March 31, (inception)
----------------------- to ---------------------------- to
December 31, March 31,
1995 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................ $(1,436,473) $(4,391,454) $(6,348,442) $ (807,854) $(1,201,642) $(7,550,084)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.. 50,384 203,410 294,711 42,590 63,357 358,068
Amortization of non cash discount --- 884,227 884,227 ---- 145,023 1,029,250
Other.......................... 11,556 17,244 28,800 ---- ---- 28,800
Changes in assets and liabilities:
(Increase) decrease in prepaid
expenses and deferred costs. (9,643) (636,113) (641,559) (36,132) 539,300 (102,259)
(Increase) decrease in other (50,802) 77,133 (17,517) 3,987 417 (17,100)
assets......................
Increase (decrease) in
accounts payable............ 90,049 752,669 857,428 90,577 (423,273) 434,155
Increase (decrease) in accrued
liabilities................. 43,924 259,569 458,117 132,942 (227,329) 230,788
----------- ----------- ----------- ----------- ------------ -----------
Net cash used in operating
activities............... (1,301,005) (2,833,315) (4,484,235) (573,890) (1,104,147) (5,588,382)
------------ ------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to property and
equipment...................... (252,425) (553,731) (917,826) (168,485) (74,188) (992,014)
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities.................. (252,425) (553,731) (917,826) (168,485) (74,188) (992,014)
------------ ------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Payments of short-term notes ---- (2,000,000) (2,000,000)
payable........................
Proceeds of short-term notes
payable, net accrued offering ---- 970,750 970,750 ---- ---- 970,750
costs..........................
Repayment of convertible notes ---- (500,000) (500,000) ---- ---- (500,000)
payable
Proceeds from issuance of
convertible notes payable...... 800,000 500,000 1,800,000 8,750 ---- 1,800,000
Proceeds from issuance of common
stock and warrants, net of
offering costs................. --- 725,197 1,040,177 ---- 7,018,788 8,058,965
Net proceeds from issuance of
preferred stock................ 1,947,819 235,217 2,183,036 235,217 ---- 2,183,036
Proceeds from shareholders' loans ---- ---- 118,164 ---- ---- 118,164
Repayment of loans from (22,939) ---- (118,164) ---- ---- (118,164)
shareholders...................
Proceeds from the exercise of
stock options.................. 6,250 100,125 106,375 125 4,816 111,191
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities................... 2,731,130 2,031,289 5,600,338 244,092 5,023,604 10,623,942
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents......... 1,177,700 (1,355,757) 198,277 (498,283) 3,845,269 4,043,546
Cash and cash equivalents at
beginning of period............ 376,334 1,554,034 ---- 1,554,034 198,277 ----
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of $ 1,554,034 $ 198,277 $ 198,277 $ 1,055,751 $ 4,043,546 $ 4,043,546
period......................... =========== =========== =========== =========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for :
Interest........................ $ 2,208 $ 82,753 $ 84,961 $ ---- $ 70,192 $ 155,153
=========== =========== =========== =========== =========== ===========
Income taxes.................... $ 800 $ 800 $ 3,200 $ 800 $ ---- $ 3,200
=========== =========== =========== =========== =========== ===========
</TABLE>
Non cash Financing Activities (Notes 6 and 9)
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
HealthDesk Corporation (the Company), a development stage company, is
engaged in designing, developing and marketing HealthDesk(R) OnLine, a
healthcare management and information system which enables consumers to take a
more active role in their personal and family health. HealthDesk OnLine features
easy-to-use Windows-based software designed to develop personal medical records
and health management programs and access educational, health related
information from the Company's private website and over the Internet.
The Company is still in the development stage and substantially all of
its revenues were derived from certain development contracts relating to
specific disease management modules in its initial product. Since inception, the
Company has incurred losses and negative cash flows from its product development
activities. The Company is seeking to achieve profitable operations by
commercializing its products and obtaining contracts with potential sponsoring
organizations. As discussed in Note 12, the Company received net proceeds of
$7,018,788 from its initial public offering in January 1997. Management expects
that the Company will require additional capital resources prior to achieving
profitable operations. However, there can be no assurance that the Company's
efforts to raise additional capital or achieve profitable operations will be
successful.
2. Summary of Significant Accounting Policies:
Unaudited Interim Financial Information:
The financial statements as of and for the three month periods ended March
31, 1996 and 1997 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results for such periods. The results of operations for the
three months ended March 31, 1997 are not necessarily indicative of results to
be expected for the full year.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
During 1995, the Company's revenues were generated primarily from two
software development contracts. These revenues were recognized when the Company
achieved designated milestones and received customer acceptance as specified in
the related contracts. During 1996, the Company's revenues were generated
primarily from a cross-licensing and marketing contract. These revenues are
recognized ratably over the related period under the agreement. During 1997, the
Company's revenues were generated primarily from a development contract.
Cash and Cash Equivalents:
Cash and cash equivalents include all cash balances, money market
instruments and other highly liquid investments with insignificant interest rate
risk and original maturates of three months or less.
F-7
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies: -- (Continued)
Software Development Costs:
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS 86),
requires that software development costs be capitalized once the technological
feasibility of the software product has been established. To date, such amounts
eligible for capitalization have been insignificant and have been charged to
product development expense in the period incurred.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of three years for
computer hardware and purchased computer software and five years for furniture
and fixtures, and over the remaining term of the facility lease for leasehold
improvements.
When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in operations. Maintenance and repairs are charged to operations.
Income Taxes:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under
SFAS No. 109, deferred income tax liabilities and assets are determined based on
the difference between the financial reporting amounts and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates in effect for the years in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Computation of Net Loss Per Share:
Net loss per share is computed using the weighted average number of common
shares outstanding during each period. Common equivalent shares, consisting of
stock options and convertible preferred stock are excluded from the computation,
except as required by Securities and Exchange Commission Staff Accounting
Bulletin No. 83 (SAB 83), because they would have an anti-dilutive impact.
Pursuant to SAB 83, common shares and convertible preferred shares issued by the
Company during the twelve months immediately preceding an initial public
offering date, plus the number of common equivalent shares which became issuable
during the same period pursuant to the grant of stock options (using the
treasury stock method and the public offering price of $5.00) have been included
in the calculation of common and common equivalent shares as if they were
outstanding for all periods, except for the three month period ended March 31,
1997.
Shareholders' Equity (Deficit):
On September 19, 1996, the Company's Board of Directors approved a 1.2 for
1 stock split of the Company's common and preferred stock. All share, stock
option and per share amounts included in these financial statements have been
restated to retroactively reflect the stock split.
F-8
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies: -- (Continued)
On September 19, 1996, the Company also amended its Articles of
Incorporation to increase its authorized shares of common stock and preferred
stock to 17,000,000 and 3,000,000, respectively, and to increase the number of
shares of preferred stock designated as Series A to 1,200,000.
Recently Issued Accounting Pronouncements:
In February 1997, Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (FAS 128) was issued and is effective for the Company's
year ending December 31, 1997. In March 1997, Statement of Financial Accounting
Standards No. 129, "Disclosure of Information About Capital Structure" was
issued and is effective for the Company's year ending December 31, 1998. In June
1997, Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards No. 131
"Disclosures About Segments of An Enterprise and Related Information" were
issued and are also effective for the year ending December 31, 1998. The Company
has not determined the impact of the implementation of these pronouncements.
Reclassifications:
Certain prior year balances have been reclassified to conform to the
current year's presentation. Such reclassifications had no impact on net loss or
shareholders' deficit as previously reported.
3. Concentrations of Credit Risk:
The Company places its temporary cash investments with one financial
institution. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. Two customers accounted for
approximately 40% and 56%, respectively, of revenues in fiscal 1995. One
customer accounted for approximately 96% of revenues in fiscal 1996.
Additionally one customer accounted for approximately 96% of revenues for the
three months ended March 31, 1997
4. Property and Equipment:
Property and equipment at December 31, 1995 and 1996 and March 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
March 31,
December 31, December 31, 1997
1995 1996 (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Computer equipment and software................... $ 272,527 $ 662,676 $ 720,166
Furniture and fixtures............................ 11,297 101,406 115,805
Leasehold improvements............................ 1,000 12,651 15,086
----------------- ------------------ ------------------
284,824 776,733 851,057
Less accumulated depreciation and amortization.... 49,861 208,693 272,188
----------------- ------------------ ------------------
Total property and equipment, net.............. $ 234,963 $ 568,040 $ 578,869
================= ================== ==================
</TABLE>
F-9
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
5. Income Taxes:
The provision for income taxes for the years ended December 31, 1995 and
1996 relates to current state income tax. The estimated tax effect of
significant temporary differences and carry forwards that gave rise to deferred
income tax assets as of December 31, 1995 and 1996, is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
Federal State Federal State
------- ----- ------- -----
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.. $ 578,000 $ 52,500 $ 2,000,000 $ 180,000
Research and experimentation credit
carryforwards and other......... 42,000 25,000 116,000 57,000
------------- ------------- -------------- --------------
620,000 77,500 2,116,000 237,000
Valuation............................ (620,000) (77,500) (2,116,000) (237,000)
------------- ------------- -------------- --------------
Net deferred tax assets.............. $ ---- $ ---- $ ---- $ ----
============= ============= ============== ==============
</TABLE>
Due to the uncertainty of realization, a valuation allowance has been
provided to eliminate the net deferred tax assets at both December 31, 1995 and
1996 The increase in the valuation allowance was $487,500 and $1,655,500 during
the years ended December 31, 1995 and 1996, respectively.
As of December 31, 1996, the Company had net operating loss carryforward of
approximately $5,880,000 and $2,970,000 for federal income tax and California
state franchise tax purposes, respectively. The federal carryforwards expire
through 2010 (through 2000 for state carryforwards). As of December 31, 1996,
the Company also has research and experimentation tax credit carryforwards of
$52,000 and $45,000 for federal and state tax purposes, respectively. These
carryforwards expire in the years ending 2008 through 2011.
Pursuant to the provisions of the Tax Reform Act of 1986, utilization of
these net operating loss and tax credit carryforwards will be subject to an
annual limitation due to certain changes in ownership as defined under the tax
law.
6. Notes Payable:
On May 23, 1994, the Company entered into a $500,000 convertible promissory
note agreement with simple interest at the rate of 7% per annum. The agreement
provided the holder with the option of converting the principal amount plus the
accrued interest into shares of the Company's common stock at a conversion price
of $3.33 per share prior to the due date. Both principal and accrued interest
thereof were due and payable two years from the agreement date. The Company paid
the balance due on the note with the proceeds in October 1996 from the Bridge
Financing (see below). At December 31, 1995 accrued interest relating to this
note was $54,833 and interest paid at December 31, 1996 amounted to $81,083.
In July and August 1996, the Company issued two term notes (the Notes) to
two existing shareholders and directors for a total of $500,000. The Notes bore
interest at 8% per annum and converted into 100,000 shares of the Company's
common stock on the closing date of the Company's initial public offering in
January 1997. At December 31, 1996 accrued interest relating to these notes
amounted to $17,041 and interest paid on these notes at March 31, 1997 amounted
to $18,904.
F-10
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
6. Notes Payable: -- (Continued)
On October 11, 1996, the Company consummated a Bridge Financing pursuant to
which it issued an aggregate of (i) $2,000,000 principal amount of promissory
notes which bear interest at the rate of 9% per annum and were due on the
consummation of the Company's initial public offering, and (ii) 400,000 shares
of the Company's common stock. The Company recorded the notes at a discount of
$900,000, which discount was allocated to the 400,000 shares of common stock
issued. Additionally, $129,250 for debt issuance costs was recorded in
connection with the Bridge Financing. Net proceeds from the bridge financing
amounted to $1,765,000 of which 55% or $970,750 was allocated to short-term
notes payable and 45% or $794,250 was allocated to Common Stock. At December 31,
1996 accrued interest related to these notes amounted to $39,945 and at March
31, 1997 interest paid on these notes amounted to $51,288.
The Company recorded a non-recurring amortization of the bridge finance
charge of $884,227 and $145,023 (unaudited) for the year ended December 31, 1996
and the three months ended March 31, 1997 (unaudited), respectively. Payment of
the bridge notes was made upon completion of the initial public offering in
January 1997 (unaudited).
The Company believes that the carrying amounts of the Notes and the Bridge
Financing promissory notes approximate fair value due to their short maturities
and conversion features.
7. Commitments and Contingencies:
Leases:
The Company entered into a noncancellable lease for its office in January
1996 which expires in early 1999. Additionally, the Company has other
noncancellable operating leases expiring through November 2000. Total rent
expense for 1995 and 1996 aggregated $32,680 and $107,384, respectively. Minimum
future rentals under these operating leases as of December 31, 1996, are as
follows:
Years ending December 31:
1997 114,060
1998 114,060
1999 17,956
2000 8,219
------------
$ 254,295
============
Agreements:
In May 1996, the Company entered into a cross-licensing agreement with
another company. Pursuant to this agreement, the two companies granted each
other a non-exclusive right to market the other party's principal product in
exchange for a semiannual licensing fee of $25,000. A director of the Company is
also a principal shareholder and director of the other company.
The Company has also entered into various agreements granting it a
non-exclusive right to use products of third parties in exchange for royalties
based on usage levels. The Company has incurred $53,693 and $45,459 (unaudited)
in royalty expenses under these agreements during the year ended December 31,
1996 and the three month period ended March 31, 1997, respectively.
The Company has entered into various software and content agreements
pursuant to which it is committed to pay, as of March 31, 1997, non-refundable
minimum royalties of approximately $55,000.
F-11
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies: -- (Continued)
Legal Proceedings:
The Company is subject to a complaint filed by a former employee with the
California Department of Fair Employment and Housing and a second from a former
consultant regarding accelerated vesting of stock options. Management does not
believe these matters will have a material impact on the Company's financial
position or results of operations and intends to defend them vigorously. There
can be no assurance, however, that these matters will be resolved in a manner
favorable to the Company.
8. Employee Benefits Plans:
On February 28, 1996, the Company adopted a 401 (k) plan for employees. All
employees who meet certain service requirements are eligible to participate.
Matching contributions are at the discretion of the Company. As of March 31,
1997, the Company had not elected to make any discretionary contributions.
On August 1, 1994, the Company commenced the deferral of the payment of a
portion of all future compensation of the Company's president. During 1995, all
amounts due were paid to the Company's president as part of an agreement to
terminate his employment as discussed in Note 9.
9. Related Party Transactions:
At December 31, 1996 and 1995, loans payable to related parties consisted
of the following:
<TABLE>
<CAPTION>
President Shareholders Total
--------- ------------ -----
<S> <C> <C> <C>
Balance of loans payable at December 31, 1994............. 8,173 14,766 22,939
Repayment of loans........................................ (8,173) (12,000) (20,173)
Balance of loan forgiven.................................. ---- (2,766) (2,766)
Proceeds from convertible debt received................... ---- 800,000 800,000
Convertible debt exchanged for common stock............... ---- (800,000) (800,000)
---------------- ------------------ ----------------
Balance of loans payable at December 31, 1995............. $ ---- $ ---- $ ----
================ ================= ===============
Proceeds from convertible term note....................... ---- 500,000 500,000
Proceeds from bridge financing notes...................... ---- 198,000 198,000
---------------- ----------------- ---------------
Balance of loans payable at December 31, 1996............. ---- $ 698,000 $ 698,000
================ ================= ===============
Term notes converted to Common Stock...................... ---- (500,000) (500,000)
Repayment of bridge financing notes....................... ---- (198,000) (198,000)
---------------- ------------------ ----------------
Balance of loans payable at March 31, 1997................ $ ---- $ ---- $ ----
================ ================= ===============
</TABLE>
On April 8, 1993, the Company and a related entity (Spartina Corporation),
which was wholly owned by the Company's president and director, entered into an
agreement under which the related entity granted the Company a non-exclusive,
royalty free license to use the source code of a certain software engine and
tools in connection with the development of the Company's software products in
the fields of health and medical management. The Company currently does not use
any of this technology in the current product.
On August 31, 1995, the Company's president signed an agreement to
terminate his employment with the Company. Under the agreement, the president
received a cash payment in consideration for an agreement not to compete with
the Company and the termination of options to purchase an aggregate of 198,000
shares of the Company's common stock. In addition, Spartina Corporation assigned
to the Company all of its right, title and interest in and to certain technology
previously licensed by the Company from Spartina Corporation pursuant to the
agreement discussed above.
F-12
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
9. Related Party Transactions: -- (Continued)
During the period from June 7, 1995 through September 28, 1995, the Company
issued two convertible promissory notes (the Notes) to two existing shareholders
for $800,000. The Notes bore interest at 6% per annum. Interest expense relating
to these Notes amounted to $5,005 during 1995. On September 29, 1995, the
principal of the Notes was converted at a rate of $1.04 per share into 768,000
shares of common stock of the Company.
On August 15, 1995, the Company granted an option to acquire 96,000 shares
of common stock at $1.04 per share to a board member and existing shareholder.
The option was exercised on December 29, 1995 and proceeds of $100,000 were
received by the Company on January 8, 1996.
In December 1995, two principal shareholders and related Board members
purchased 69,000 and 129,000 shares of the Company's Series A preferred stock
for an aggregate purchase price of approximately $144,000 and $268,000,
respectively, in connection with the Company's Series A financing.
As discussed in Note 6, in July and August 1996, the Company issued two
convertible term notes to two existing shareholders and related Board members.
In October 1996, two of the Company's shareholders each purchased $100,000
of units consisting of 20,000 shares of Common Stock at an attributed price of
$2.25 per share and a 9% promissory note in the principal amount of $100,000 in
connection with the Bridge Financing.
10. Preferred Stock:
The Company is authorized to issue 3,000,000 shares of preferred stock. Of
the authorized preferred stock, 1,200,000 shares are designated as Series A. As
of December 31, 1996, the Company had issued 1,059,600 shares of Series A
preferred stock for net proceeds of $2,183,036 which were converted in January
upon consummation of the initial public offering.
The preferred stock is convertible at the option of the holder, into the
Company's common stock at a rate of one share of common stock for one share of
preferred stock, The conversion rate for the preferred stock is subject to
future adjustments. The preferred stock automatically converted upon the closing
of an initial public offering of the Company's common stock.
Each share of preferred stock issued and outstanding has the number of
votes equal to the number of shares of common stock into which such shares of
preferred stock is convertible. The Series A preferred stock may receive
noncumulative dividends in preference to holders of common stock, if and when,
declared by the Board of Directors.
F-13
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
10. Preferred Stock: -- (Continued)
In the event of any liquidation or dissolution, the holders of preferred
stock shall be entitled to receive $2.08 per share in preference to any
distribution to holders of common stock. After payment has been made to the
holders of the preferred stock, any remaining assets shall be distributed
ratably among the holders of the preferred and common stock based on the number
of common shares held or, in the case of preferred stock, the number of shares
of common stock on an as if converted basis. If the Company's assets are
insufficient to provide for the full preference amount for the preferred stock
outstanding, then such assets shall be distributed ratably among the holders of
the preferred stock in proportion to the preferential amount each such holder
would have been entitled to receive.
On January 16, 1997, all outstanding shares of convertible preferred stock
were automatically converted into 1,059,600 shares of Common Stock upon the
closing of the Company's initial public offering (See Note 12).
11. Stock Options:
In June 1994, the Company adopted the 1994 Stock Option Plan (the Plan)
under which eligible employees, directors, and consultants can receive options
to purchase shares of the Company's common stock at a price generally not less
than 100% and 85% of the fair value of the common stock on the date of the grant
for incentive stock options and nonstatutory stock options, respectively.
However, the Company never granted options at below fair value as determined by
the Board of Directors. The Plan, as amended, allows for the issuance of a
maximum of 950,000 shares of the Company's common stock. This number of shares
of common stock has been reserved for issuance under the Plan. The options
granted under the Plan are exercisable over a maximum term of ten years from the
date of grant and vest immediately. Shares purchased under the Plan are subject
to a right of repurchase by the Company at the original exercise price. This
repurchase right lapses with respect to 25% of the shares upon completion of one
year of service and the balance in equal successive monthly installments upon
completion of each of the next 36 months of service. With respect to certain of
the options issued, the repurchase right is eliminated in the event there is a
change in control of the Company.
A summary of the activity under the Plan is set forth below:
<TABLE>
<CAPTION>
Outstanding Options
-------------------
Weighted Avg.
Number of Shares Price Per Share Aggregate Exercise Price
---------------- --------------- --------- -------------
Price
<S> <C> <C> <C> <C>
Balance, January 1, 1994 ---- ---- ---- ----
Options granted 352,800 $1.04 $ 366,912 $1.04
-------------- --------------
Balance, December 31, 1994 352,800 1.04 366,912 1.04
Options granted 771,300 1.04 - 2.08 1,126,713 1.46
Options exercised (102,000) 1.04 (106,080) 1.04
Options forfeited (475,900) 1.04 - 1.67 (620,432) 1.30
--------------- ---------------
Balance, December 31, 1995 546,200 1.04 - 2.08 767,113 1.40
Options granted 485,000 2.08 - 5.00 2,081,908 4.29
Options exercised (120) 1.04 (125) 1.04
Options forfeited (284,022) 2.08 - 5.00 (574,324) 2.02
--------------- ---------------
Balance, December 31, 1996 747,058 $1.04 - $5.00 $ 2,274,572 $3.04
================ ================
</TABLE>
At December 31, 1996, 594,705 of the exercisable options are subject to the
Company's repurchase provision.
F-14
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
11. Stock Options: -- (Continued)
The following information concerning the Company's stock option plan is
provided in accordance with SFAS No. 123. "Accounting for Stock-Based
Compensation." The Company accounts for such plans in accordance with APB No. 25
and related interpretations.
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------
Weighted Avg. Options Exercisable
Remaining ----------------------------------------
Range of Exercise Number Outstanding Contractual Life Number Exercisable
Price December 31, 1996 (Years) Weighted Avg. Price December 31, 1996 Weighted Avg. Price
----------------- ----------------- ----------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
$1.04 - $2.08 546,080 8.5 $1.40 546,080 $1.40
$2.08 - $5.00 200,978 9.5 $4.29 200,978 $4.29
-------------- --------------
$1.04 - $5.00 747,058 8.8 $3.04 747,058 $3.04
============== ==============
</TABLE>
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995:
Risk-Free Interest Rates....... 5.19% - 7.86%
Expected Life.................. 4 years
Volatility..................... .57
Dividend Yield................. ----
The weighted average expected life was calculated based on the estimated
exercise behavior of the Company's employees.
The weighted average fair value of those options granted in 1995 and 1996
was $.69 and $1.90, respectively.
The following proforma information has been prepared following the
provisions of SFAS No. 123:
1995 1996
---- ----
Net loss - proforma............ $ 1,511,876 $ 4,451,416
Net loss per share -proforma... $ .48 $ 1.14
12. Initial Public Offering:
On January 23, 1997, the Company completed an initial public offering of
1,700,000 shares of Common Stock at $5.00 per share, and 1,700,000 Warrants (the
"Warrant") at $0.10 per Warrant. Each Warrant is exercisable through January 16,
2002 and allows the purchase of one share of common stock at $5.00, subject to
adjustment in certain circumstances. In January 1997, the underwriter exercised
its option to purchase an additional 255,000 Warrants at $0.10 per Warrant to
cover over-allotments. The Company sold the securities to the underwriter at a
discount of 10% from the initial public offering price and paid the underwriter
an expense allowance of 3% of the gross proceeds of the public offering. The
Company also sold, pursuant to the underwriting agreement, to the underwriter
for $187, Warrants to purchase up to an aggregate of 170,000 shares of Common
Stock, no par value, at a price of $6.00 per share and/or up to 170,000 warrants
to purchase 170,000 shares of Common Stock at a price of $8.25 per share. After
deducting offering expenses, the Company received net proceeds from the offering
of $7,018,788.
F-15
<PAGE>
HealthDesk Corporation
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
13. Subsequent Events (Unaudited):
On May 28, 1997, the Company authorized a voluntary stock option repricing
program in which 142,400 stock options, originally issued with an exercise price
of $5.00 per share, will be reissued with an exercise price of $3.13 per share,
the fair market value of the Company's Common Stock on May 28, 1997.
Subsequent to December 31, 1996, the Company has granted additional stock
options. At May 31, 1997, there were 802,588 options outstanding and
exercisable, of which 512,794 are subject to the Company's repurchase provision.
F-16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
==================================================== ======================================================
- ---------------------------------------------------- ------------------------------------------------------
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 HEALTHDESK CORPORATION
been authorized by any Selling Shareholder, the
Company or the Solicitation Agent. This Prospectus
does not constitute an offer of any securities other
than these to which it relates or an offer to sell 1,955,000 Shares of Common Stock
or a solicitation of an offer to buy to any person Issuable on Exercise of
in any jurisdiction where such offer or solicitation Redeemable Warrants
would be unlawful. Neither the delivery of this 340,000 Shares of Common Stock Issuable on Exercise
Prospectus nor any sale made hereunder shall, under of Underwriter's Warrants
any circumstances, create any implication that the 400,000 Shares of Common Stock
information in this Prospectus is correct as of any
time subsequent to the date of this Prospectus.
-------------------
___________________ PROSPECTUS
-------------------
TABLE OF CONTENTS
Page
Prospectus Summary........................ 2
Risk Factors.............................. 6
Use of Proceeds........................... 14
Capitalization............................ 15
Dividend Policy........................... 15
Price Range of Common Stock............... 15
Selected Financial Data................... 16
Management's Discussion and
Analysis of Financial Condition August 4, 1997
and Results of Operations.............. 17
Business.................................. 21
Management................................ 31
Principal Shareholders.................... 36
Certain Transactions...................... 37
Description of Securities................. 38
Selling Shareholders and Plan
of Distribution........................ 41
Legal Matters............................. 42
Experts................................... 42
Additional Information.................... 42
Index to Financial Statements............. F-1
- ---------------------------------------------------- ------------------------------------------------------
==================================================== ======================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The California Corporations Code provides for the indemnification of
directors, officers, employees and agents of the Corporation under certain
circumstances set forth in section 317. Section 317 permits a corporation to
indemnify its agents, typically directors and officers, for expenses incurred or
settlements or judgments paid in connection with certain legal proceedings. Only
those legal proceedings arising out of such persons' actions as agents of the
corporation may be grounds for indemnification.
Whether or not indemnification may be paid in a particular case depends
upon whether the agent wins, loses or settles the suit and upon whether a third
party or the Corporation itself is the plaintiff. The section provides for
mandatory indemnification, no matter who the plaintiff is, when an agent is
successful on the merits of a suit. In all other cases, indemnification is
permissive.
If the agent loses or settles a suit brought by a third party, he or she
may be indemnified for expenses incurred and settlements or judgments paid. Such
indemnification may be authorized upon finding that the agent acted in good
faith and in a manner he or she reasonably believed to be in the best interests
of the corporation.
If the agent loses or settles a suit brought by or on behalf of the
corporation, his or her right to indemnification is more limited. If he or she
is adjudged to be liable to the Corporation, the court in which such proceeding
was held must determine whether it would be fair and reasonable to indemnify him
or her for expenses which such court shall determine. If the agent settles such
a suit with court approval, he or she may be indemnified for expenses incurred
upon a finding that the agent acted in good faith and in manner he or she
reasonably believed to be in the best interest of the Corporation and, in
addition, that he or she acted with the care, including reasonable inquiry of an
ordinarily prudent person.
The indemnification discussed above may be authorized by a majority vote of
the disinterested directors or shareholders (the person to be indemnified is
excluded from voting his or her shares) or the court in which the proceeding was
brought. The Corporation's Board of Directors makes all decisions regarding the
indemnification of its officers and directors on a case-by-case basis.
Any provision in the Corporation's Articles of Incorporation or Bylaws
contained in a shareholder or director resolution that indemnifies its officers
or directors must be consistent with section 317. Moreover, such a provision may
prohibit permissive, but not mandatory, indemnification as described above.
Last, a corporation has the power to purchase indemnity insurance for its agents
even if it would not have the power to indemnify them.
The Corporation's Articles authorize the Board of Directors to provide
indemnification of its agents through bylaw provisions or indemnification
agreements, or both, in excess of the indemnification otherwise permitted by
section 317, subject to the limits on such excess indemnification set forth in
section 204 of the California Corporations Code.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the act and is therefore unenforceable.
II-1
<PAGE>
Item 25. Other Expenses Of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, in connection with the sale of Common
Stock being registered. All amounts are estimated except the registration fee
and the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
<S> <C>
Amount
to Be Paid
Item by Registrant
---- -------------
Printing and Engraving Expenses............................................... 3,000
Legal Fees and Expenses....................................................... 15,000
Blue Sky Fees and Expenses.................................................... 2,500
Accounting Fees and Expenses.................................................. 5,000
Transfer Agent and Registrar Fees............................................. 3,500
Underwriter's non-accountable expense allowance............................... 293,250
Miscellaneous................................................................. 20,000
---------------
Total................................................................ $ 342,250
===============
</TABLE>
Item 26. Recent Sales Of Unregistered Securities.
Since its incorporation in September 1992, the Registrant has issued
securities without registration under the Securities Act of 1933, as amended
(the "Act") in the following transactions (in each case giving retroactive
effect to all subsequent stock splits):
The Registrant issued an aggregate of 165,600 shares of Common Stock in
September 1992 to its 4 founders at $0.008 per share. In April 1993 the
Registrant issued an additional 132,000 shares at $0.008 per share to 7
investors including officers, employees and directors. From May 1993 to April
1994, the Registrant issued an aggregate of 300,000 shares to 4 investors at
$1.04 per share, including one director. In September 1995, the Registrant
issued an aggregate of 768,000 shares of Common Stock to 2 investors, including
one director, pursuant to their exercise of Convertible Notes at $1.04 per
share. From December 1995 through February 1996, the Registrant issued an
aggregate of 1,059,600 shares of Series A Preferred Stock to 27 investors,
including an individual who was then a director of the Company, at a purchase
price of $2.08 per share (which will automatically convert into the same number
of shares of Common Stock upon the consummation of this offering). During the
current fiscal year, the Registrant issued 102,120 shares of Common Stock to
three individuals all of who were employees or directors of the Registrant, upon
the exercise of stock options previously issued under the Registrant's 1994
Founder's Stock Option Plan at an exercise price of $1.04 per share. In October
1996, the Registrant issued 40 Units, consisting of 10,000 shares of Common
Stock and a promissory note in the principal amount of $50,000. The Units were
purchased by 35 accredited investors in a private placement.
The sales and issuances of the Preferred Stock and Common Stock described
above were deemed to be exempt from registration under the Securities Act in
reliance upon Section 4 (2) thereof as transactions not involving a public
offering. The purchasers in such private offerings represented their intention
to acquire the securities for investment only and not with a view to the
distribution thereof and appropriate legends were affixed to the stock
certificates issued in such transactions. All purchasers had adequate access,
through their employment or other relationships, to sufficient information about
the Registrant to make an informed investment decision. No underwriter was
employed with respect to any such sales.
II-2
<PAGE>
Item 27. Exhibits.
<TABLE>
<CAPTION>
<S> <C>
Exhibits
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Articles of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Form of Stock Certificate
4.2* Form of Warrant Agreement
5.1* Opinion of and Consent of Gray Cary Ware & Freidenrich, a Professional Corporation, as to legality of securities
being registered
10.1* 1994 Founder's Stock Option Plan, as amended
10.2* Form of Indemnification Agreement
10.3* Registration Rights Agreement dated March 1993 by and among the Registrant and the Investors named therein
10.4* Form of Registration Rights Agreement between the Registrant and Purchasers of the Registrant's Series A Preferred
Stock.
10.5* Employment Agreement dated as of September 19, 1996 between the Registrant and Peter O'Donnell
10.6* Employment Agreement dated as of September 19, 1996 between the Registrant and Molly Coye
10.7* Employment Agreement dated as of September 19, 1996 between the Registrant and Timothy Yamauchi
10.8* Form of Warrant Agreement to be granted to Underwriter
10.9* Form of Bridge Financing Registration Rights Agreement dated October 11, 1996
23.1 Consent of Independent Accountants
23.2* Consent of Counsel contained in Exhibit 5.1
24.1* Powers of Attorney
27 Financial Data Schedule
- ------------------
* Previously Filed.
Item 28. Undertakings.
</TABLE>
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i.) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii.) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii.) Include any additional or changed material information on the
plan of distribution.
(2) For determining liabilities under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant undertakes that: 1) for purposes of determining
any liability under the Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
421(b)(1) or (4) or 497(b) under the Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective and 2) for the
purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be initial bona fide
offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the Closing, as specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of there requirements for filing on Form SB-2 and has duly caused this Amendment
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Berkeley, State of California, on
August 4, 1997.
HEALTHDESK CORPORATION
By: /s/ Peter S. O'Donnell
--------------------------
Peter S. O'Donnell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this post-effective
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Peter S. O'Donnell August 1, 1997
- ---------------------------- President, Chief Executive
Peter S. O'Donnell Officer & Chair of the Board
(Principal Executive Officer)
*
- ---------------------------- Chief Financial Officer August 1, 1997
Timothy S. Yamauchi (Principal Financial
and Accounting Officer)
*
- ---------------------------- Director August 1, 1997
John Pappajohn
*
- ---------------------------- Director August 1, 1997
James A. Gordon
*
- ---------------------------- Director August 1, 1997
Dr. Joseph Rudick, Jr.
*
- ---------------------------- Director August 1, 1997
David Sengpiel
*
- ---------------------------- Director August 1, 1997
Edward C. Geehr, M.D.
*By: /s/ Peter S. O'Donnell
------------------------
Peter S. O'Donnell, as
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Description Page No.
-----------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Articles of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Form of Stock Certificate
4.2* Form of Warrant Agreement
5.1* Opinion of and Consent of Gray Cary Ware & Freidenrich, a Professional Corporation, as to legality
of securities being registered
10.1* 1994 Founder's Stock Option Plan, as amended
10.2* Form of Indemnification Agreement
10.3* Registration Rights Agreement dated March 1993 by and among the Registrant and the Investors
named therein
10.4* Form of Registration Rights Agreement between the Registrant and Purchasers of the Registrant's
Series A Preferred Stock.
10.5* Employment Agreement dated as of September 19, 1996 between the Registrant and Peter O'Donnell
10.6* Employment Agreement dated as of September 19, 1996 between the Registrant and Molly Coye MD
10.7* Employment Agreement dated as of September 19, 1996 between the Registrant and Timothy Yamauchi
10.8* Form of Warrant Agreement to be granted to Underwriter
10.9* Form of Bridge Financing Registration Rights Agreement dated October 11, 1996
23.1 Consent of Independent Accountants
23.2* Consent of Counsel contained in Exhibit 5.1
24.1* Powers of Attorney
27 Financial Data Schedule
- ------------------
* Previously Filed.
</TABLE>
II-6
<PAGE>
LETTERHEAD OF COOPERS & LYBRAND
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post Effective Amendment No. 1 to the
registration statement on Form SB-2 (File No. 333-14519) of our report, which
includes an emphasis of a matter paragraph regarding the Company's need for
additional capital resources, dated February 21, 1997, except for the second
paragraph of Note 1 as to which the date is July 18, 1997, on our audits of the
financial statements of HealthDesk Corporation. We also consent to the
reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
San Francisco, California
July 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,043,546
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,168,651
<PP&E> 851,057
<DEPRECIATION> 63,357
<TOTAL-ASSETS> 4,764,620
<CURRENT-LIABILITIES> 661,512
<BONDS> 0
0
0
<COMMON> 11,457,505
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,764,620
<SALES> 200,485
<TOTAL-REVENUES> 200,485
<CGS> 0
<TOTAL-COSTS> 1,279,852
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,900
<INCOME-PRETAX> (1,201,442)
<INCOME-TAX> 200
<INCOME-CONTINUING> (1,201,642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,201,642)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> 0
</TABLE>
