<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
REGISTRATION NO. 333-41259
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
ENACT HEALTH MANAGEMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 8082 77-0326649
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1975 WEST EL CAMINO REAL, SUITE 306
MOUNTAIN VIEW, CA 94040
(650) 967-0379
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,OF
PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL EXECUTIVE OFFICERS)
----------------
MATTHEW SANDERS
CHIEF EXECUTIVE OFFICER
ENACT HEALTH MANAGEMENT SYSTEMS
1975 WEST EL CAMINO REAL, SUITE 306
MOUNTAIN VIEW, CA 94040
PHONE: (650) 967-0379
FACSIMILE: (650) 967-9223
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
J. HOWARD CLOWES, ESQ. DONALD J. MURRAY, ESQ.
GRAY CARY WARE & FREIDENRICH LLP DEWEY BALLANTINE LLP
400 HAMILTON AVENUE 1301 AVENUE OF THE AMERICAS
PALO ALTO, CALIFORNIA 94301 NEW YORK, NY 10019
PHONE: (650) 328-6561 PHONE: (212) 259-8000
FACSIMILE: (650) 327-3699 FACSIMILE: (212) 259-6333
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
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, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
3,000,000 SHARES
[LOGO OF ENACT]
COMMON STOCK
--------
All of the shares of Common Stock offered hereby are being sold by ENACT
Health Management Systems, Inc. ("ENACT" or the "Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for listing on the
Nasdaq Stock Market's National Market under the symbol "ENCT."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $750,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about ,
1998 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001.
--------
SALOMON SMITH BARNEY LEHMAN BROTHERS
, 1998
<PAGE>
TELE-HEALTH MONITORING
LINKING PATIENTS, PROVIDERS
AND PLANS IN MINUTES
[ENACT LOGO]
[Picture of a young girl breathing into the AirWatch monitor]
Home-based monitoring
[Picture of the AirWatch monitor and the LifeScan blood glucose meter
superimposed on four sample Monthly Care Reports]
Objective, physiological data for providers, patients and payors
[Picture of two people discussing results]
Defines a new paradigm in health management
[Picture of a doctor giving information to a patient]
Provides information to allow care team to remotely monitor patients between
office visits
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
[ENACT LOGO] THE ENACT TELE-HEALTH SYSTEM
Personal Health Monitors*
RESPIRATORY
- -----------
The ENACT AirWatch(R) monitor measures and stores lung function data for use in
managing asthma and other pulmonary diseases. Data is transmitted to Care
Central via telephone lines.
[Picture of the AirWatch monitor]
DIABETES
- --------
Blood glucose meters manufactured by Johnson & Johnson's LifeScan subsidiary
connect to the ENACT Reporter. The meters store blood glucose measurements and
the ENACT Reporter transmits these readings to Care Central.
[Picture of LifeScan's blood glucose meter]
[Picture of the ENACT Reporter]
[Picture of Care Central]
CARDIOVASCULAR AND OTHERS
- -------------------------
Many other types of personal health monitors have the potential to connect to
the ENACT System. Other potential applications include congestive heart
failure, hypertension and drug delivery monitoring.
ENACT Care Central
DATABASE
- --------
ENACT's Care Central receives data from personal health monitors and stores
and formats it in a relational database. Care Central's scalable architecture
is designed to handle large patient populations.
*To date, the Company (i) has begun commercial distribution of its AirWatch
Monitor to a limited number of patients, (ii) is preparing for the commercial
launch of its diabetes product in collaboration with LifeScan and (iii) is
developing products for cardiovascular and other disease markets. The Company
has a limited operating history and has received limited revenue from sales of
products and services attributable solely to sales of the AirWatch Monitor and
related services. See "Risk Factors."
<PAGE>
[ENACT LOGO] THE ENACT TELE-HEALTH SYSTEM
Information Products
[Picture of three sample Monthly Care Reports]
REPORTS
- -------
Reports can be generated automatically or on demand from Care Central and sent
within minutes to members of the care team. Monthly Care Reports(TM) are mailed
to enrolled patients.
[Picture of a computer accessing the worldwide web]
INTERNET ACCESS
- ---------------
Via the worldwide web, data from Care Central is also available electronically
to healthcare professionals. ENACT's sophisticated Internet tools, as well as
standard reports, provide clinicians the data needed to manage large patient
populations.
The Care Team
THE PATIENT
- -----------
As patients take more responsibility for their own health and treatment, the
ENACT System provides them a new paradigm. Knowing their health state data is
stored safely, they can direct it to the healthcare providers and payors of
their choice.
[Picture of a young girl breathing into the AirWatch monitor]
THE CASE MANAGER
- ----------------
Using ENACT's Internet tools, case managers at managed care organizations can
target patients requiring intervention.
[Picture of a case manager]
THE PHYSICIAN
- -------------
The ENACT tele-health system enables physicians to remotely monitor their
patients between office visits. This improved monitoring can help evaluate the
patient's compliance and can help assess medication effectiveness.
[Picture of a physician]
THE PHARMACIST
- --------------
The role of the pharmacist in providing patient counseling and other cognitive
services is increasing. The ENACT System gives pharmacists a powerful new tool
for evaluating drug therapies and helping their customers manage chronic
illnesses.
[Picture of a pharmacist]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
ENACT is a tele-health monitoring company which collects objective
physiological data regarding patients' health states and provides timely, low-
cost reporting of that information to patients, case managers, clinicians and
other members of the care team. ENACT's initial development and marketing
efforts are focused on the management of chronic diseases such as asthma,
diabetes and cardiovascular disease. The Company has enrolled patients in a
program using its health monitoring and reporting system (the "ENACT System")
for asthma, which includes the Company's Food and Drug Administration ("FDA")
510(k)-cleared AirWatch personal health monitor, and is preparing to launch a
program for diabetes, which will include the Company's Reporter interface which
connects to blood glucose monitors. Based on preliminary marketing efforts,
patient surveys and discussions with collaborative partners, the Company
believes that the ENACT System is likely to appeal both to patients who are
increasingly taking a more active role in managing their own health and managed
care organizations seeking cost savings. To supplement its internal marketing
programs, the Company seeks to develop strategic relationships with market
leaders in specific disease states to take advantage of their installed patient
bases, marketing expertise and distribution resources. Consistent with this
objective, the Company recently formed an alliance in diabetes with Johnson &
Johnson's LifeScan subsidiary, the market leader for diabetes monitoring
equipment.
The ENACT System consists of (i) personal health monitors, which are used by
patients to collect objective medical data; (ii) a communications interface
(the "ENACT Interface"), which links the personal health monitors to the
Company's on-line database ("Care Central"); (iii) the Care Central database,
which formats and stores the medical data; and (iv) information services, which
produce and distribute processed data in a variety of formatted reports and
through a case management capability available via the Internet and other
electronic media.
While healthcare payors have been successful in achieving cost savings
through negotiated discounts with healthcare providers and the reduction of
unnecessary use of healthcare services, payors are now seeking new methods to
curb healthcare costs. Payors have identified chronic disease treatment as a
potential source of healthcare cost reductions. A study by the University of
California, San Francisco reported that chronic disease treatment costs totaled
$425 billion in 1990 and that chronic disease patients account for more than
70% of healthcare expenditures, despite only comprising 40% of the population.
Traditionally, healthcare providers have treated chronic diseases reactively
by responding to acute medical episodes and the complications arising from a
substantial deterioration in a patient's health state. This mode of treatment
often results in expensive emergency room care and hospitalizations. A
significant number of these acute medical episodes and health declines are the
consequence of patients' failure to comply with prescribed treatment programs
and caregivers' lack of information about the patients' compliance and current
health state. Recently, payors have recognized that their costs can be reduced
by adopting more proactive programs which emphasize improved patient
compliance. While current health management programs have laid the ground work
for improved patient compliance, these programs generally lack objective
physiological data to guide medical treatment decisions and often require
expensive, labor-intensive telephonic contact.
The Company believes that the ENACT System both addresses many of the
shortcomings of current health monitoring programs for chronic disease and
enables new forms of health monitoring. Specifically, the ENACT System
establishes a low-cost link between the patient at home and the care team,
provides objective physiological data and the means to encourage patient
compliance, reduces reporting errors, creates a relational database of patient
outcomes which enables providers and payors to analyze the cost effectiveness
of various treatment methodologies, and may help minimize expensive emergency
room visits and unnecessary hospital utilization.
The Company's goal is to become the leading provider of tele-health
monitoring systems for objective patient health information. The key elements
of the Company's strategy to achieve this goal include (i) focusing the initial
implementation of the ENACT System on asthma, diabetes and cardiovascular
disease; (ii) aligning with market leaders in various disease states to gain
market acceptance; (iii) marketing directly with customers and partners to
build primary demand for ENACT's products and services; and (iv) capitalizing
on the broad applicability of the ENACT System across additional healthcare
applications.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock being offered.................... 3,000,000 shares (1)
Common Stock outstanding after the offering... 8,912,853 shares (1)(2)
Use of proceeds............................... For marketing programs, advertising and
product development efforts; repayment of
debt to an existing stockholder; working
capital and other general corporate purpos-
es.
Proposed Nasdaq National Market Symbol........ ENCT
</TABLE>
- --------
(1) Excludes up to 450,000 shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares outstanding as of December 31, 1997. Includes
(i) 3,389,533 shares of Common Stock issuable upon the automatic conversion
of all outstanding shares of the Company's Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
(collectively, the "Convertible Preferred Stock"), upon completion of this
offering, and (ii) 131,420 shares of Common Stock issuable upon the
exercise of warrants to purchase Convertible Preferred Stock which
terminate upon the completion of this offering. Excludes (i) 783,529 shares
of Common Stock issuable upon exercise of options with a weighted average
exercise price of $2.35 per share, (ii) 816,571 shares of Common Stock
reserved for issuance of options which may be granted in the future under
the Company's stock option plans, (iii) 200,000 shares of Common Stock
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan
(the "Purchase Plan"), (iv) 60,000 shares of Common Stock issuable upon
exercise of warrants with a weighted average exercise price of $0.48 per
share which do not terminate upon the completion of this offering and (v)
459,667 shares of Common Stock issuable upon the conversion of convertible
promissory notes in the aggregate principal amount of $3,000,000. See
"Management--Stock Plans" and Notes 5 and 6 of Notes to Financial
Statements.
RISK FACTORS
The Company is in an early stage of development, has a limited operating
history and has generated limited revenues to date. For a description of these
and other risks associated with the purchase of Common Stock, see "Risk
Factors."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................ $ 140 $ 614 $ 3,096 $ 6,459
Operating costs and expenses:
Cost of revenues........................ -- -- 1,796 5,006
Research and development................ 1,417 1,365 1,752 2,035
Sales and marketing..................... -- 1,185 1,475 2,758
General and administrative.............. 288 420 770 1,085
------- ------- ------- -------
Total operating costs and expenses........ 1,705 2,970 5,793 10,884
------- ------- ------- -------
Loss from operations...................... (1,565) (2,356) (2,697) (4,425)
Interest income (expense), net............ 9 (24) (110) (249)
------- ------- ------- -------
Net loss.................................. $(1,556) $(2,380) $(2,807) $(4,674)
======= ======= ======= =======
Pro forma basic net loss per share (1).... $ (0.81)
=======
Shares used in computing pro forma basic
net loss per share (1)................... 5,782
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................. $(2,731) $26,859
Total assets.......................................... 2,901 32,491
Notes payable to stockholders......................... 4,000 3,000
Accumulated deficit................................... (12,010) (13,178)
Total stockholders' equity (net capital deficiency)... (4,350) 26,240
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing pro forma basic net loss per share.
(2) Adjusted to reflect (i) the issuance of 131,420 shares of Common Stock upon
the exercise of warrants to purchase Convertible Preferred Stock which
terminate upon the completion of this offering at a weighted average
exercise price of $4.95 and (ii) the sale of shares of Common Stock offered
hereby at an assumed offering price of $11.00 per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds." Also
includes the effect of an imputed non-cash charge to interest expense with
an offsetting entry to additional paid-in capital of $1,168,000 as a result
of certain short-term borrowings becoming convertible upon completion of
this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 of Notes to Financial
Statements.
----------------
Unless otherwise indicated, information in this Prospectus, including share
and per share data, (i) assumes an initial public offering price of $11.00,
(ii) gives effect to the reincorporation of the Company in Delaware prior to
the date of this offering, (iii) assumes the exercise of warrants to purchase
Convertible Preferred Stock which terminate on the completion of this offering
and the conversion thereof into 131,420 shares of Common Stock, (iv) reflects
the conversion of all of the outstanding shares of the Convertible Preferred
Stock into 3,389,533 shares of Common Stock upon completion of this offering
(For purposes of determining the number of shares of Common Stock issuable upon
conversion of the Company's Series D Preferred Stock, this Prospectus assumes
an initial public offering price of $11.00 and a closing date prior to February
20, 1997. See "Certain Transactions.") and (v) assumes no exercise of the
Underwriters' option to purchase from the Company up to 450,000 additional
shares of Common Stock to cover over-allotments, if any. The conversion price
for the Series D Preferred Stock is subject to adjustment based upon the
offering price of the Common Stock and the date of the closing for this
offering. All share amounts contained herein with respect to, or that include
shares of Common Stock issuable upon conversion of Series D Preferred Stock,
assume a public offering price of $11.00 per share and a closing date on or
prior to February 20, 1998. If the public offering price is lower, or the
closing date is after February 20, 1998, a larger number of shares of Series D
Preferred Stock would be issuable upon the conversion of the Series D Preferred
Stock. See "Description of Capital Stock," "Underwriting" and "Certain
Transactions."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider the following risk factors in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve certain risks
and uncertainties. The Company's actual results and the timing of certain
events may differ significantly from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below as well as those
discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company was formed in October 1992, is in an early stage of development
and has a limited operating history from which to evaluate its performance. To
date, the Company has generated limited revenues and through December 31, 1997
had incurred cumulative net losses of $12.0 million. The Company expects such
losses to continue for the foreseeable future. The Company's cumulative
revenues are $10.3 million, consisting primarily of revenues from non-
recurring sources, including a development contract and sales of monitors and
services for clinical and marketing trials conducted by customers. The Company
may encounter problems and delays in its product development and sales and
marketing efforts, and the failure to address these problems and delays
successfully could have a material adverse effect on the Company's business
prospects. The Company's prospects also must be considered in light of the
numerous risks, expenses, delays and difficulties frequently encountered in
the establishment of a new business in an industry characterized by intense
competition, as well as the risks inherent in the commercialization of new
services. There can be no assurance that the Company's efforts will result in
an ability to provide any services that can be marketed or operated in a
commercially successful manner, or that any such services will be able to
compete with other services that might be in the market now or in the future.
There can be no assurance that the Company will achieve recurring revenue or
profitability on a consistent basis or at all. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements.
UNCERTAINTY OF MARKET ACCEPTANCE; LIMITATIONS OF COMMERCIALIZATION STRATEGY
The Company's products and services represent a new approach to healthcare
management. Demand and market acceptance for newly introduced products and
services are subject to a high level of uncertainty. Further, the acceptance
of new products and services is particularly uncertain due to an emphasis in
the healthcare industry on cost containment and the necessity of securing
approvals for reimbursement. As the Company's products and services have only
been introduced on a limited commercial scale, there can be no assurance that
payors or patients will find the prices of the Company's products and services
acceptable or that patients will be successful in obtaining widespread
reimbursement. If the Company is not successful in obtaining advance payments
through managed care contracts or reimbursement approvals from payors, the
market for the Company's products and services will be limited. To date the
Company has enrolled a limited number of patients in its asthma program and no
patients in any other program other than those enrolled through various pilot
diabetes programs. The Company intends to commence a substantial sales and
marketing effort for its AirWatch personal health monitor ("AirWatch Monitor")
and related tele-health services following this offering, and the market
acceptance of such products and services will depend in part upon whether such
sales and marketing effort is successful. Further, the transmission and
availability of patient data electronically is a relatively new development,
and patient and healthcare industry concerns regarding confidentiality could
limit the acceptance of the Company's products and services. There can be no
assurance that the Company's products and services will achieve market
acceptance or that any market for the Company's services will develop. See
"Business--Sales and Marketing."
DEPENDENCE ON CUSTOMERS AND PARTNERS FOR MARKETING AND PATIENT ENROLLMENT
The Company has limited marketing experience and limited financial,
personnel and other resources to undertake extensive marketing activities. One
element of the Company's marketing strategy involves marketing
6
<PAGE>
its products and services to pharmacies, managed care organizations,
diversified healthcare companies and pharmaceutical companies with the intent
that those customers and partners will market its products and services
directly to customers or integrate the Company's tele-health monitoring system
into health management programs. Another element of the Company's marketing
strategy is to form strategic alliances with market leaders in several disease
states, which leaders have greater resources and marketing experience than the
Company, in order to effectively co-market the Company's products and
services. Accordingly, the Company will be dependent upon its customers and
partners, over whom it has no control, for the marketing and implementation of
its tele-health monitoring system, and the timing and extent of patient
enrollment (and related revenues) will be substantially within the control of
the Company's customers and partners. The Company's ability to generate
recurring revenue is dependent on enrollment of patients in healthcare
programs which utilize the Company's tele-health monitoring system. To the
extent that an adequate number of patients are not enrolled in programs which
incorporate the Company's tele-health monitoring system, the Company will be
unable to generate recurring revenue or achieve profitability. See "Business--
Collaborative Agreements."
SIGNIFICANT AND EXTENSIVE CHANGES IN THE HEALTHCARE INDUSTRY
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. The reform of the United States
healthcare system remains an important concern of both federal and state
lawmakers. Several lawmakers have proposed programs that contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company and its targeted
customers. Healthcare industry participants may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring certain
expenditures, including those which may utilize the Company's services.
Although the Company cannot predict what further changes in the healthcare
industry may occur, any such changes could have a material adverse effect on
its business, financial condition and results of operations. In addition many
healthcare providers are consolidating to create larger healthcare delivery
enterprises with greater regional market power. As a result, the remaining
enterprises could have greater bargaining power, which could adversely affect
the Company's ability to establish and maintain adequate price levels for its
products and services. The failure of the Company to establish and maintain
adequate price levels could have a material adverse effect on the Company.
CUSTOMER CONCENTRATION
A small number of customers have historically accounted for a substantial
portion of the Company's revenues. Sales to the Company's two largest
customers accounted for approximately 75% of the Company's revenues in 1997.
During fiscal 1997, Glaxo Wellcome, Inc. and LifeScan, a subsidiary of Johnson
& Johnson, accounted for 60% and 15%, respectively, of the Company's revenues.
During fiscal 1996, Teijin, Ltd. and Zeneca Pharmaceuticals, Inc. accounted
for 49% and 23%, respectively, of the Company's revenues. No other customer
represented more than 10% of the Company's revenues for any of such periods.
The loss of or reduction or delay in orders from a significant customer could
adversely affect the Company's business, financial condition and operating
results. There can be no assurance that large purchases from these customers
will recur from year to year. See "Business--Collaborative Agreements" and
Note 2 of Notes to Financial Statements.
DEPENDENCE ON THIRD-PARTY MANUFACTURER
The Company does not engage in any direct manufacturing operations. The
Company's AirWatch Monitor and ENACT Reporter are manufactured by a
subcontractor at a single manufacturing facility. The occurrence of
operational problems at such facility or any other event as a result of which
the sub-contractor cannot or will not furnish to the Company its requirements
of personal health monitors would have a material adverse effect on the
Company's business and results of operations. The Company anticipates that the
manufacture of any future Company products also will be subcontracted out and
thus will be subject to the same risks. There can be no assurance that the
Company will be able to successfully outsource such products or,
alternatively, develop in-house manufacturing capabilities. Additionally,
because the Company has contracted with a single manufacturer
7
<PAGE>
which manufactures product for the Company in its facilities located in the
Far East, production of the AirWatch Monitor and the ENACT Reporter may be
directly affected by the political and economic conditions in the Far East.
Although the Company believes it can find alternate manufacturers for its
products on relatively short notice, any prolonged work stoppages, civil
unrest or other inability of the manufacturer to manufacture the Company's
products, could materially adversely affect the Company's business, financial
condition or results of operations.
DEPENDENCE ON TELECOMMUNICATIONS SYSTEMS; RAPID TECHNOLOGICAL CHANGE AND
OBSOLESCENCE
The business of the Company is dependent upon its ability to store,
retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. As the Company expands its commercial activities, an
increased burden will be placed upon the Company's telecommunications and data
processing equipment. Interruptions of telephone service for any extended
length of time, loss of stored data, programming errors or other computer
problems could have a material adverse effect on the business of the Company.
Moreover, the communications and information technology industries are subject
to rapid and significant technological change, and the ability of the Company
to operate and compete is dependent in significant part on its ability to
update and enhance its tele-health monitoring system on an ongoing basis. In
order to do so, the Company must be able to effectively implement new
technologies in order to enhance its tele-health monitoring system, while not
jeopardizing its ability to provide its current services. There can be no
assurance that the Company will be able to develop and implement technological
changes to its tele-health monitoring system. Furthermore, following this
offering, the Company will maintain a significant investment in its
technology, and therefore is subject to the risk of technological
obsolescence. In addition, advances in medical therapies or other innovations
in health management could render the Company's services obsolete. If the
Company's technology or services were rendered obsolete, the Company's
business and operating results would be materially adversely affected. See
"Business--The ENACT Tele-Health Monitoring System. "
COMPETITION
The market for healthcare information products, services and devices for
health state management is a relatively new and emerging market. Although the
Company currently has only limited direct competition, it faces indirect
competition from a number of sources and expects to experience intense
competition in the future if its products and services are accepted in the
marketplace. The Company's potential competitors include specialty healthcare
companies, healthcare information system and software vendors, healthcare
management organizations, pharmaceutical companies and other service companies
within the healthcare industry. In particular, the Company is aware of several
large pharmaceutical and medical service companies that have stated publicly
that they intend to be involved in providing comprehensive health state
management services. The Company also expects to compete against other
companies that provide statistical and data management services, including
clinical trial services to pharmaceutical companies. Many of these competitors
have substantial installed customer bases in the healthcare industry and the
ability to fund significant product development and acquisition efforts. The
Company's potential competitors include companies with significantly greater
financial, technical, product development and marketing resources than the
Company. There can be no assurance that a competitor will not develop and
successfully introduce competitive products or services, that the introduction
of such products or services will not cause a reduction in the price at which
the Company sells its products and services or that the Company will be able
to compete successfully with any of these potential competitors. See
"Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend upon its ability to retain members of its
senior management team, including a core group of key officers and employees.
The loss of certain key employees or the Company's inability to attract and
retain other qualified employees could have a material adverse effect on the
Company's business. The Company has employment agreements with only a limited
number of key employees. See "Management--Executive Compensation--Employment
Agreements." Also, the Company's ability to
8
<PAGE>
transition from development stage to commercial operations will depend upon,
among other things, the successful recruiting of highly skilled managerial and
marketing personnel with experience in business activities such as those
contemplated by the Company. Competition for the type of highly skilled
individuals sought by the Company is intense. There can be no assurance that
the Company will be able to retain existing employees or that it will be able
to find, attract and retain skilled personnel on acceptable terms. See
"Management."
SUBSTANTIAL FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations may fluctuate significantly from quarter
to quarter as a result of a number of factors, including, without limitation,
the timing and success of the Company's future marketing and sales efforts,
the timing of performance and payments under development agreements, if any,
the rate at which customers and partners implement disease state management
and other health information programs within their patient populations, the
rate of patient enrollment in such programs, the entry into the Company's
market of additional competitors, the number and size of clinical trials in
which the Company participates, and general economic conditions. Accordingly,
the Company's future operating results are likely to be subject to variability
from quarter to quarter and could be adversely affected in any particular
quarter. Due to the foregoing, there can be assurance that the Company's
operating results will not be below the expectations of public market analysts
and investors. In such event, the price of the Common Stock could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS RELATED TO PROPRIETARY RIGHTS
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary rights. Although the Company continues to
implement protective measures and intends to defend its proprietary rights,
there can be no assurance that these measures will be successful or that its
patents will provide meaningful protection against potential competitors
developing substantially similar products and services. The Company has filed
nine patent applications in the United States, two of which have resulted in
issued patents and two others of which have had claims allowed by the Patent
and Trademark Office. The Company has not yet filed patent applications
outside the United States and may determine to pursue such filings in only a
limited number of jurisdictions. There can be no assurance that patents will
issue from any pending application, that the Company's patent application
filings, if any, outside the United States will be adequate to protect its
interests, that any patents issued to the Company will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
a competitive advantage to the Company.
The Company is not currently aware of any pending or threatened claims of
infringement of the proprietary rights of others with respect to the Company's
current or planned products. However, there can be no assurance that third
parties will not assert such claims or that any such claims will not require
the Company to enter into license agreements or result in costly and
protracted litigation, regardless of the merits of such claims. No assurance
can be given that any necessary licenses will be available or that, if
available, such licenses will be obtainable on commercially reasonable terms.
See "Business--Proprietary Rights."
FUTURE DEPENDENCE UPON REIMBURSEMENT BY THIRD-PARTY PAYORS; POTENTIAL
REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company expects that in the future a significant portion of its revenues
may be derived directly or indirectly from reimbursements by third-party
payors. Cost containment pressures are increasing in the health care industry
as third-party payors institute measures designed to limit payments to health
care providers. Such cost containment measures include reducing reimbursement
rates, limiting services and products covered, increasing utilization review
of services, negotiating prospective or discounted contract pricing, adopting
capitation strategies and seeking competitive bids. There can be no assurance
that such measures will not adversely affect the amounts or types of services
and products that may be reimbursable in the future, or that this trend will
not result in significant pressure on the price of the Company's products and
services. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate
9
<PAGE>
adjustments, administrative rulings and government restrictions, all of which
could materially decrease the range of services and products covered or the
reimbursement rates paid for the Company's services or products. Any such
reductions or changes could have a material adverse effect on the Company's
business, financial condition and operating results.
EXTENSIVE GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign agencies. The regulatory approval process is lengthy,
expensive and uncertain, and there can be no assurance that any approvals or
clearances that the Company may seek will ultimately be obtained. Product
approvals and clearances, if issued, can be withdrawn for failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial marketing. Foreign governments also have review processes for new
products that present many of the same risks. The Company and any
manufacturing contractor used by the Company is also required to adhere to FDA
regulations setting forth requirements for Good Manufacturing Practices
("GMP") and similar regulations in other countries, which include extensive
testing, control and documentation requirements. Failure to comply with
applicable regulations could result in sanctions being imposed on the Company,
including fines, injunctions, civil penalties, failure of the government to
grant premarket clearances or premarket approvals, delays, suspension or
withdrawal of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. See "Business--Government Regulation."
Additionally, state laws prohibit the practice of medicine and nursing
without a license. There can be no assurance that the Company's operations
will not be challenged as constituting the unlicensed practice of medicine or
nursing. If such a challenge were made successfully in any state, the Company
could be subject to civil and criminal penalties and could be required to
restructure its contractual arrangements in that state. Such results or the
inability to successfully restructure its contractual arrangements could have
a material adverse effect on the Company.
The Company is subject to Federal and state laws governing the
confidentiality of patient information. In addition, Federal legislation
adopted in 1996 requires that new national standards for the security of
electronic health information transactions be issued in 1998. The legislation
also requires that standards for privacy of individually identifiable health
information be adopted by January 21, 2000. The Company expects further
legislation and regulations will be enacted as methods of transmitting and
storing patient records evolve. Such regulations could adversely affect the
Company or its customers and partners. The Company and its customers and
partners may also be subject to Federal and state laws and regulations which
govern financial and other arrangements between healthcare providers,
including fee splitting arrangements between healthcare providers and
payments, referrals or other financial arrangements that are designed to
induce the referral of patients to a particular provider for medical products
and services. Sanctions for violation of these laws and regulations include
civil and criminal penalties and exclusion from participation in Medicare and
Medicaid programs. Failure to comply with these laws and regulations could
have a material adverse effect on the Company. See "Business--Government
Regulation."
Regulation in the healthcare field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental
approvals, comply with applicable regulations or comply with existing or
future laws, rules or regulations or their interpretations.
POTENTIAL LIABILITY AND INSURANCE
The Company will provide information to healthcare providers and payors upon
which determinations affecting medical care will be made, and claims could be
made against it for liabilities resulting from adverse medical consequences to
patients. In addition, the Company could have potential legal liability in the
event it fails to correctly record or disseminate patient information. There
can be no assurance that the Company's
10
<PAGE>
procedures for limiting liability have been or will be effective, that the
Company will not be subject to litigation that may adversely affect the
Company's results of operations, that adequate insurance will be available to
it in the future at acceptable cost or at all or that any insurance maintained
by the Company will cover, as to scope or amount, any claims that may be made
against the Company.
POSSIBLE NEED FOR ADDITIONAL FINANCING
In order to successfully exploit the ENACT System and implement programs
using the Company's medical data analysis and reporting system, the Company
may be required to make substantial additional investments to market and
promote its products. The Company will also be required to retain the services
of employees in advance of obtaining contracts to provide its services. The
Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the anticipated costs of marketing and
promotion of the Company's tele-health monitoring system), that the proceeds
of this offering, together with available resources, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 18 months
following the consummation of this offering. In the event that the Company's
plans change, or its assumptions change or prove to be inaccurate, the Company
could be required to seek additional financing or curtail its activities. The
Company has limited current arrangements with respect to, or sources of,
additional financing. Any additional equity financing may involve substantial
dilution to the interest of the Company's stockholders, and any debt financing
could result in operational or financial restrictions on the Company. There
can be no assurance that any additional financing will be available to the
Company on acceptable terms or at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
YEAR 2000 COMPLIANCE
Both the Company's internal operations and products use a significant number
of computer software programs and operating systems. To the extent that these
software applications contain source code that is unable to appropriately
interpret the upcoming calendar year 2000, some level of modification or
possibly even replacement of such source code or applications will be
necessary. The Company is in the process of identifying the software
applications that are not "Year 2000" compliant. Given the information known
at this time about the Company's systems, coupled with the Company's ongoing
efforts to upgrade or maintain business critical systems as necessary, it is
currently not anticipated that the "Year 2000" issue or related costs will
have a material adverse effect on the Company's business, financial condition
and results of operations. However, the Company is still analyzing its
software applications and those utilized by key suppliers and, to the extent
they are not fully "Year 2000" compliant, there can be no assurance that the
costs necessary to update software or potential systems interruptions would
not have a material adverse effect on the Company's business, financial
condition and results of operations.
CONTROL OF THE COMPANY
Following this offering, the executive officers and directors of the Company
together with their affiliates will beneficially own, in the aggregate,
approximately 31.9% of the outstanding Common Stock. As a result of such
ownership, these stockholders, in the event they act in concert, will have
control over the management policies of the Company and all matters requiring
approval by the stockholders of the Company, including the election of
directors. See "Principal Stockholders."
MANAGEMENT'S DISCRETION WITH RESPECT TO USE OF PROCEEDS
The Company intends to use approximately $15.0 million of the net proceeds
of this offering to accelerate the national commercialization of the ENACT
System by hiring sales and marketing personnel, funding advertising programs
and launching the Company's pharmacy programs and managed care sales
initiatives. The Company will also expend up to $1.0 million of such net
proceeds for the repayment of a promissory note held by a current stockholder
of the Company. The balance of the net proceeds has not been designated for
any
11
<PAGE>
specific use. The Company intends to use any such balance primarily for
general corporate purposes, including product development efforts, expansion
of the Company's computer system, working capital and potential acquisitions
of companies, products and technologies that complement or expand the
Company's business. Accordingly, management will have significant flexibility
in applying the net proceeds of this offering. There can be no assurance that
the use of proceeds will not change from that currently anticipated. See "Use
of Proceeds."
DILUTION; DIVIDENDS
The initial public offering price per share of the Common Stock will exceed
the negative net tangible book value per share of the Common Stock.
Accordingly, purchasers of shares of Common Stock in this offering will
experience immediate dilution in net tangible book value per share of $8.06
(assuming a public offering price of $11.00 per share and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company). The Company has not paid any dividends on its Common Stock
and does not anticipate paying any dividends on such stock in the foreseeable
future. See "Use of Proceeds," "Dilution" and "Dividend Policy."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined by
negotiations between the Company and the representatives of the Underwriters.
For a description of the factors considered in determining the initial public
offering price, see "Underwriting." The market price of the Common Stock
following this offering may be highly volatile, as has been the case with the
securities of other early stage companies. The stock market recently has
experienced a high level of price and volume volatility, and market prices for
the stock of many companies (particularly of small and emerging growth
companies) have experienced wide price fluctuations which have not necessarily
been related to the operating performance of such companies. There can be no
assurance that these broad market fluctuations or other factors will not have
a material adverse effect on the market price of the Common Stock.
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding options and warrants will
become eligible for sale in the public market at prescribed times after this
offering.
Upon completion of this offering, the Company will have outstanding
8,912,853 shares of Common Stock, based on the number of shares of Common
Stock outstanding as of December 31, 1997. Of these shares, the 3,000,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 of the Securities Act. The
remaining 5,912,853 shares will be "restricted securities" as that term is
defined under Rule 144 (the "Restricted Shares"). Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act. Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock.
Upon completion of this offering 2,470,027 Restricted Shares of Common Stock
(2,292,033 of which are subject to the lock-up agreements described below)
held by current stockholders will be immediately eligible for sale in the
public market without restriction pursuant to Rule 144(k) of the Securities
Act. An additional 2,757,575 Restricted Shares of Common Stock (2,757,575 of
which are subject to the lock-up agreements described below) will be eligible
for sale beginning 90 days after the date of this Prospectus pursuant to Rule
144 of the Securities Act. All directors, officers and certain stockholders
holding in the aggregate 5,734,859
12
<PAGE>
shares of Common Stock outstanding prior to this offering have agreed that for
a period of 180 days after the date of this Prospectus they will not, without
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock. See
"Underwriting."
Commencing six months after the date of this Prospectus, certain security
holders of the Company holding 3,389,533 shares of Common Stock and a note
convertible into an additional 171,788 shares of Common Stock, will be
entitled to certain rights with respect to the registration of such shares of
Common Stock for sale to the public. See "Shares Eligible for Future Sale."
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may inhibit changes in control of the Company not approved by the Company's
Board of Directors. The Company will also be afforded the protection of
Section 203 of the Delaware General Corporation Law ("Delaware Law"), which
could have similar effects. Additionally, the Company's collaborative
agreement with Johnson & Johnson's LifeScan subsidiary contains provisions
that could delay or hinder a change in control of the Company in the event
that certain LifeScan competitors attempt to merge with or acquire the
Company. These provisions could limit the price that investors might be
willing to pay in the future for shares of Common Stock. There can be no
assurance that these factors will not have an adverse effect on the market for
the Common Stock. See "Description of Capital Stock and Business--
Collaborative Agreements--Johnson & Johnson's LifeScan Subsidiary."
13
<PAGE>
THE COMPANY
The Company was incorporated in California on October 28, 1992 and will be
reincorporated in Delaware concurrently with the closing of this offering. The
Company's principal executive offices are located at 1975 West El Camino Real,
Suite 306, Mountain View, CA 94040 and its telephone number at that address is
(650) 967-0379. AirWatch is a registered trademark of the Company in the
United States and Japan; AirWatch Care Report is a registered trademark of the
Company in the United States; Wilby is a registered trademark of the Company
in Australia; and the Wilby logo is a registered tradelogo of the Company in
the United States. This Prospectus also contains trade names of companies
other than the Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being
offered hereby are estimated to be approximately $29.9 million ($34.5 million
if the Underwriters' over-allotment option is exercised in full), assuming a
public offering price of $11.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company.
The Company intends to use approximately $15.0 million of the net proceeds
to accelerate the national commercialization of the ENACT System by hiring
sales and marketing personnel (approximately $6.0 million), funding
advertising programs (approximately $4.0 million) and launching the Company's
pharmacy programs and managed care sales initiatives (approximately $5.0
million). The Company also intends to repay $1.0 million of outstanding
indebtedness under its loan agreement with a stockholder. Such note bears
interest at the prime rate (8.5% as of November 26, 1997) and becomes due and
payable on June 30, 2000. The foregoing uses of the net proceeds are estimates
based on current projections and are subject to change. The actual amount of
the net proceeds of this offering expended for each purpose may vary
significantly depending on many factors, including the timing and success of
the Company's marketing and sales efforts, the rate at which the Company's
partners implement the Company's programs and the rate of patient enrollments
in such programs. Any proceeds not used for the purposes stated above will be
used for general corporate purposes including product development efforts and
expansion of the Company's computer system. Management will have broad
discretion in the application of the net proceeds. The Company may consider
using a portion of the net proceeds for the acquisition of complementary
businesses, products or technologies. However, the Company is not currently a
party to any letter of intent or definitive agreement with respect to any such
acquisitions.
Pending such uses, the Company intends to invest the net proceeds in short-
term, investment-grade, interest bearing securities. See "Risk Factors--
Management's Discretion with Respect to Use of Proceeds".
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain all of its earnings, if any, for use in the
operation and expansion of its business. The payment of future dividends, if
any, will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's future earnings, financial condition, capital
requirements and such other factors as the Company's Board of Directors deems
relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1997, (i) on a pro forma basis to reflect the conversion of the
Convertible Preferred Stock into Common Stock and the issuance of 131,420
shares of Common Stock upon exercise of warrants which terminate on the
completion of this offering at a weighted average exercise price of $4.95 per
share and (ii) on a pro forma as adjusted basis to reflect the sale of the
shares of Common Stock offered hereby (at an assumed public offering price of
$11.00 per share) after deducting estimated underwriting discounts and
commissions and offering expenses and the application of the net proceeds
therefrom as described in "Use of Proceeds." The pro forma and adjusted
capitalization also includes the effect of an imputed non-cash charge to
interest expense with an offsetting entry to additional paid-in capital of
$1,168,000 as a result of certain short-term borrowings becoming convertible
upon the consummation of this offering. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations" and Note 5 of Notes
to Financial Statements. This table should be read in conjunction with the
financial statements of the Company and the notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to stockholders--noncurrent................ $ 2,000 $ 1,000
Long-term capital lease obligations...................... 309 309
-------- -------
Total long-term obligations........................... 2,309 1,309
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000
authorized, none issued and outstanding, as adjusted.. -- --
Common Stock, $0.001 par value, 50,000,000 shares
authorized, 5,912,853 shares issued and outstanding,
pro forma; 8,912,853 shares issued and outstanding, as
adjusted (1).......................................... 6 9
Additional paid-in capital............................. 8,595 39,700
Deferred compensation.................................. (259) (259)
Note receivable from stockholder....................... (32) (32)
Accumulated deficit.................................... (12,010) (13,178)
-------- -------
Total stockholders' equity (net capital deficiency)... (3,700) 26,240
-------- -------
Total capitalization................................. $ (1,391) $27,549
======== =======
</TABLE>
- --------
(1) Excludes (i) 783,529 shares of Common Stock issuable upon exercise of
options with a weighted average exercise price of $2.35 per share (ii)
816,571 shares of Common Stock reserved for issuance of options which may
be granted in the future under the Company's stock option plans, (iii)
200,000 shares of Common Stock reserved for issuance under the Company's
1997 Employee Stock Purchase Plan, (iv) 60,000 shares of Common Stock
issuable upon exercise of warrants with a weighted average exercise price
of $0.48 per share which do not terminate upon the completion of this
offering and (v) 459,667 shares of Common Stock issuable upon the
conversion of convertible promissory notes in the aggregate principal
amount of $3,000,000. See "Management--Stock Plans" and Notes 5, 6 and 8
of Notes to Financial Statements.
15
<PAGE>
DILUTION
The pro forma negative net tangible book value of the Company at December
31, 1997 was $3.7 million, or $0.63 per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the pro forma net
tangible book value (total tangible assets less total liabilities) of the
Company at December 31, 1997 by the number of shares of Common Stock
outstanding, assuming conversion of the Convertible Preferred Stock and the
issuance of 131,420 shares of Common Stock upon the exercise of warrants which
terminate on the completion of this offering. Dilution per share represents
the difference between the amount per share paid by purchasers of Common Stock
in this offering and the pro forma net tangible book value per share of Common
Stock immediately after this offering. Without taking into account any changes
in pro forma net tangible book value after December 31, 1997, other than to
give effect to the sale of the shares of Common Stock offered hereby (at an
assumed public offering price of $11.00 per share and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company), the adjusted pro forma net tangible book value of the Company
at December 31, 1997, would have been $26.2 million, or $2.94 per share. This
represents an immediate dilution in net tangible book value of $8.06 per share
to new investors purchasing shares in this offering and an immediate increase
in net tangible book value of $3.57 per share to existing stockholders. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $11.00
Pro forma net tangible book value per share at December
31, 1997................................................. $(0.63)
Increase per share attributable to new investors.......... 3.57
------
Pro forma net tangible book value per share after offering.. 2.94
------
Dilution per share to new investors......................... $ 8.06
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1997
(giving pro forma effect to the conversion of all outstanding shares of
Convertible Preferred Stock and the exercise of warrants to purchase
Convertible Preferred Stock which terminate upon completion of this offering)
the number of shares of Common Stock purchased from the Company, the total
consideration paid (based upon, in the case of new investors, an assumed
public offering price of $11.00 per share and before deduction of estimated
underwriting discounts and commissions and offering expenses) and the average
price per share paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 5,912,853 66% $ 8,498,989 20% $ 1.44
New investors............... 3,000,000 34 33,000,000 80 11.00
--------- --- ----------- ---
Total..................... 8,912,853 100% $41,498,989 100%
========= === =========== ===
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or outstanding stock options after December 31, 1997, and no conversion
of outstanding convertible promissory notes in the aggregate amount of $3.0
million. As of December 31, 1997, there were options outstanding to purchase a
total of 783,529 shares of Common Stock under the Company's stock option plan,
at a weighted average exercise price of $2.35 per share, and warrants to
purchase a total of 60,000 shares of Common Stock at a weighted average
exercise price of $0.48 per share. To the extent that any of these options and
warrants, or additional options or warrants granted after December 31, 1997,
are exercised, or the convertible promissory notes are converted, there will
be further dilution to new investors. See "Management--Stock Plan" and Note 6
of Notes to Financial Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data at December 31, 1996 and 1997 and for
each of the three years in the period ended December 31, 1997 have been derived
from financial statements of ENACT audited by Ernst & Young LLP, independent
auditors, and included elsewhere herein. The selected financial data at
December 31, 1993, 1994 and 1995 and for the year ended December 31, 1994 and
the period from inception to December 31, 1993 are derived from the audited
financial statements not included herein. The selected financial data should be
read in conjunction with the financial statements, related notes, and other
financial information included herein.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 28,
1992
(INCEPTION) TO YEARS ENDED DECEMBER 31,
DECEMBER, 31 ----------------------------------
1993 1994 1995 1996 1997
-------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues............. $ -- $ 140 $ 614 $ 3,096 $ 6,459
Operating costs and
expenses:
Cost of revenues......... -- -- -- 1,796 5,006
Research and
development............. 335 1,417 1,365 1,752 2,035
Sales and marketing...... -- -- 1,185 1,475 2,758
General and
administrative.......... 257 288 420 770 1,085
----- ------- ------- ------- -------
Total operating costs and
expenses.................. 593 1,705 2,970 5,793 10,884
----- ------- ------- ------- -------
Loss from operations....... (593) (1,565) (2,356) (2,697) (4,425)
Interest income (expense),
net....................... -- 9 (24) (110) (249)
----- ------- ------- ------- -------
Net loss................... $(593) $(1,556) $(2,380) $(2,807) $(4,674)
===== ======= ======= ======= =======
Pro forma basic net loss
per share (1)............. $ (0.81)
=======
Shares used in computing
pro forma basic net loss
per share (1)............. 5,782
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $1,018 $ 230 $ 787 $ (33) $ (2,731)
Total assets..................... 1,066 434 3,646 2,899 2,901
Notes payable to stockholders.... -- -- 1,000 3,000 4,000
Long-term capital lease
obligations..................... -- -- 69 243 309
Accumulated deficit.............. (593) (2,149) (4,529) (7,336) (12,010)
Total stockholders' equity
(net capital deficiency)........ 1,038 277 (80) (2,828) (4,350)
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing pro forma basic net loss per share.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the
actual events or results may differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors"
and "Business," as well as those discussed elsewhere in this Prospectus. The
historical results set forth in this discussion and analysis are not
indicative of trends with respect to any actual or projected future financial
performance of the Company. This discussion and analysis should be read in
conjunction with the audited financial statements of ENACT and Notes thereto
included elsewhere in this Prospectus.
OVERVIEW
The Company was founded in October 1992 to link chronic disease populations
with their care providers through the use of personal devices and the
Company's tele-health monitoring system. The Company has enrolled patients in
a health monitoring program using the ENACT System for asthma which includes
the Company's AirWatch Monitor and is preparing to launch a program for
diabetes, which will include the Company's Reporter interface which connects
to blood glucose monitors. The Company received 510(k) clearance from the FDA
for its AirWatch Monitor in November 1994 and began commercial introduction on
a limited basis in November 1995. To date, the Company has generated limited
revenues and through December 31, 1997 had incurred cumulative losses of $12.0
million. The Company expects such losses to continue for the foreseeable
future.
The Company's revenues are primarily derived from three sources: device
sales, enrollments and contract revenue. Devices are priced for rapid market
penetration to facilitate patient enrollments and consequently have relatively
low margins. Enrollment revenue represents monthly or annual fees for access
to the Company's Care Central database and related information services. The
Company intends for enrollments to form the basis of a recurring revenue
stream and intends to price enrollments, at high volumes, to generate higher
margins than devices. The Company also, from time to time, enters into
development contracts with customers and partners which generate contract
revenue. The margins associated with these programs vary by contract.
The Company's cost of revenues represents the cost for producing devices and
providing tele-health monitoring services and the direct costs of fulfilling
the Company's obligations under development contracts. Sales and marketing
expenses consist primarily of commission payments, marketing personnel costs,
promotional material, travel and administrative support for the Company's
marketing efforts. Research and development expenses relate to the development
of software to facilitate access to the Company's Care Central database and
development of devices to communicate with Care Central and consist primarily
of personnel costs, facilities, administrative items, computing, supplies and
other costs allocated to such activities. General and administrative costs
consist primarily of the cost of corporate operations and personnel, legal,
accounting and other general operating expenses of the Company.
To date, the Company's cumulative revenues have been $10.3 million and have
consisted primarily of revenues from non-recurring sources, including a
development contract and sales of devices and services for clinical and
marketing trials conducted by customers. The Company's primary focus is on
developing revenue from sales of its devices and services through retail
pharmacies and managed care organizations. The Company is commencing a
substantial sales and marketing campaign for the ENACT System, including the
AirWatch Monitor and related Care Central information services for the asthma
market and intends to use a significant portion of the proceeds of this
offering to launch such campaign. As a result, the Company expects sales and
marketing expenses to increase substantially in absolute dollars and as a
percentage of revenues.
As historical revenues relate primarily to non-recurring revenue sources,
trends in revenues to date are not relevant to the Company's expected future
performance. Future revenues will depend substantially upon the
18
<PAGE>
success of the Company's future marketing and sales efforts in generating
recurring revenue, and there can be no assurance that the Company will
generate meaningful revenue from these or other programs, or that such
revenues will have significant margins.
Upon the closing of this offering, outstanding borrowings totaling to $2.0
million will become convertible into shares of Common Stock. The conversion
price of such borrowings will be based on the offering price. To the extent
the market value of the shares issuable upon conversion of the borrowings
exceeds the $2.0 million carrying value of the borrowings, then the difference
will be recognized as a one-time, non-cash charge to interest expense at the
date the offering is consummated. Assuming an offering price of $11.00 per
share, the outstanding borrowings will be converted into approximately 288,000
shares of Common Stock with a market value of $3.2 million, resulting in an
imputed non-cash interest charge of $1.2 million. The Company anticipates
borrowing an additional $0.5 million with similar terms prior to the
consummation of this offering which, based on an offering price of $11.0 per
share, would result in an additional non-cash interest charge of $0.2 million
at the date this offering is consummated.
The conversion price of the Company's Series D Preferred Stock will be
adjusted based on the date of the closing of this offering and the per share
offering price. To the extent that this adjusted conversion price results in
the holders of Series D Preferred Stock receiving additional shares of Common
Stock upon conversion, the fair value of such incremental shares will be
deemed to be the equivalent of a Preferred Stock dividend. Any such deemed
dividend will be recorded at the time of conversion by offsetting charges and
credits to additional paid in capital, without any effect on total
stockholders' equity (net capital deficiency). There will be no effect on net
income (loss) from the conversion; however, the amount will reduce the income
allocable to Common Stock in the calculation of net income (loss) per share in
the period of conversion. If this offering price is $11.00 per share, the
Company will recognize a deemed dividend of $1.8 million at the date this
offering is consummated.
Neither the non-cash interest charge nor the non-cash deemed dividend
represents an amount guaranteed as a gain for the holders of the underlying
securities. The actual amounts of gain or loss realized by these investors
will be based on the price at which they are able to sell their shares of
Common Stock obtained upon conversion after their 180 day lock-up periods
expire, should they choose to sell their holdings.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Total revenues increased to $6.5 million for the year ended December 31,
1997 from $3.1 million for the year ended December 31, 1996, an increase of
$3.4 million or 109%. Revenues in the 1997 period resulted primarily from the
sale of AirWatch Monitors to a major domestic customer for a marketing trial,
and revenues in the 1996 period resulted primarily from the Company's
agreement with Teijin, Ltd ("Teijin").
Cost of revenues increased to $5.0 million for the year ended December 31,
1997 from $1.8 million for the year ended December 31, 1996, an increase of
$3.2 million. The development contract which comprised the majority of revenue
in the 1996 period had a substantially higher gross margin than the device
sales which comprised the majority of revenue in the 1997 period.
The Company's research and development expenses increased to $2.0 million
for the year ended December 31, 1997 from $1.8 million for the year ended
December 31, 1996, an increase of $0.3 million or 16%. This increase was
primarily due to the development of new reporting devices, the addition of new
disease applications for its reporting system and the development of software
for use in analyzing data captured by Care Central.
Sales and marketing expenses increased to $2.8 million for the year ended
December 31, 1997 from $1.5 million for the year ended December 31, 1996, an
increase of $1.3 million or 87%. This increase was the result of expansion of
the Company's marketing efforts, including the hiring of additional sales and
marketing personnel. Under its agreement with Alza, the Company agreed to
expend a minimum of $2,500,000 in
19
<PAGE>
marketing efforts for its AirWatch Monitors and services, and the Company
fulfilled such obligation through sales and marketing expenses incurred in the
years ended December 31, 1995, 1996 and 1997. The Company intends to expand
its marketing effort in 1998 to facilitate the growth of sales of the AirWatch
Monitors and enrollments and anticipates a rapid increase in marketing
expenditures in future quarters in absolute dollars and as a percentage of
revenues.
The Company's general and administrative expenses increased to $1.0 million
for the year ended December 31, 1997 from $0.8 million for the year ended
December 31, 1996, an increase of 41%. The increase in absolute dollars from
the 1996 period to the 1997 period primarily reflects added administrative
capacity necessary to support Company growth.
Interest expense increased to $0.3 million from $0.2 million as a result of
increased borrowings under the Company's existing credit facilities.
The Company has not recorded an income tax expense (benefit) as the Company
has not been profitable to date. At December 31, 1997, the Company had net
operating loss carryforwards for federal and state income tax purposes of
approximately $10.4 million and $4.1 million, respectively, which expire at
various dates through 2012, if not utilized. Utilization of the net operating
loss carryforwards may be subject to an annual limitation due to the "change
of ownership" provisions of the Internal Revenue Code and similar state
provisions.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased to $3.1 million for the year ended December 31,
1996 from $0.6 million for the year ended December 31, 1995. The increase from
1995 to 1996 was due to revenue recognized under the Company's agreement with
Teijin and to the commercial launch of the AirWatch Monitor in the United
States in late 1995.
Cost of revenues were $1.8 million for the year ended December 31, 1996 and
were negligible for the year ended December 31, 1995. Increases in cost of
revenues were related to costs associated with decreased sales, the provision
of tele-health monitoring services and costs associated with the Company's
development contract.
Research and development expenses increased to $1.8 million for the year
ended December 31, 1996 from $1.4 million for the year ended December 31,
1995, an increase of 28%. The increase from 1995 to 1996 was due to the
development of additional disease applications for its reporting system and to
the development of software for use in analyzing and delivering data captured
by Care Central.
Sales and marketing expenses increased to $1.5 million for the year ended
December 31, 1996 from $1.2 million for the year ended December 31, 1995, an
increase of 24%. The Company began its pre-commercial marketing efforts in
early 1995 after receiving 510(k) clearance for the AirWatch Monitor in late
1994 and expanded its marketing effort in 1996 to promote the growth of
AirWatch Monitor sales.
The Company's general and administrative expenses increased to $0.8 million
for the year ended December 31, 1996 from $0.4 million for the year ended
December 31, 1995, an increase of 83%. The increases reflect growth in the
Company's infrastructure to support the commercial launch of the Company's
respiratory program in late 1995 and to support commercial operations in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
$2.4 million raised in private financings, $4.0 million of net borrowings from
stockholders and $5.1 million from corporate partners' equity investments. As
of December 31, 1997, the Company has $1.1 million of cash and $0.5 million
available for borrowing under a convertible note agreement with a stockholder.
Operations used net cash of $3.7 million during the year ended December 31,
1997, used net cash of $4.1 million in 1996 and generated a negligible amount
in 1995. Cash used in operations in the year ended December
20
<PAGE>
31, 1997 was due to increased operating activities offset in part by increased
payables and device sales and collections on accounts receivable. Cash used in
operations in 1996 related primarily to the timing of sales in the fourth
quarter and the resulting increase in accounts receivable, and to a reduction
in deferred revenue pursuant to revenue recognized under an agreement with
Teijin entered into in 1995. Cash was generated in 1995 due primarily to the
timing of a payment from Teijin.
Net cash provided by financing activities was $3.8, $1.9 and $2.9 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash
provided by financing activities was generated from the sale of common and
preferred stock to individuals, employees and corporate partners and through
borrowings under credit facilities.
Of the $4.0 million of borrowings from stockholders, $2.5 million bears
interest at the prime rate, $1.0 million bears interest at the prime rate plus
1.75% and $0.5 million bears interest at LIBOR plus 2.5%. Of the outstanding
borrowings, $2.0 million is due on December 31, 1998 and becomes convertible
into a maximum of 333,333 shares of Common Stock on the closing of this
offering at the option of the lenders. The conversion price of such borrowings
will be based on the offering price. To the extent the market value of the
shares issuable upon conversion of the borrowings exceeds their $2.0 million
carrying value, the difference will be recognized as a one-time, non-cash
charge to interest expense at the date the initial public offering is
consummated. Assuming an offering price of $11.00 per share, the outstanding
borrowings will be converted into approximately 288,000 shares of Common Stock
with a market value of $3.2 million, resulting in an imputed non-cash interest
charge of $1.2 million. The Company anticipates borrowing an additional $0.5
million with similar terms prior to the consummation of the offering which,
based on an offering price of $11.00 per share, would result in an additional
non-cash interest charge of $0.2 million at the date the offering is
consummated. The remaining $2.0 million of borrowings is due on June 30, 2000,
of which $1.0 million is convertible into 171,788 shares of common stock at
the option of the lender.
The Company's monitoring devices and reporters are manufactured by a single
supplier. Open purchase orders with this supplier were approximately $244,000
at December 31, 1997. The Company expects to take delivery of such inventory
during the first quarter of 1998. If and as purchase orders for products
increase, the Company will need to increase its inventory levels. In
particular, the Company has agreed with LifeScan to maintain levels of raw
materials for use in producing products for LifeScan, with such levels to be
agreed upon and maintained during such time as LifeScan places purchase orders
exceeding 10,000 units per month.
The actual amount of the Company's future capital requirements will depend
on many factors, including the extent and success of its marketing programs,
retention of enrolled patients, continued progress in its development
programs, continued good relations with its manufacturing partner, the ability
of the Company to establish profitable customer and partner relationships, the
total amount of future revenues and the ability of the Company to collect its
accounts receivable in a timely manner. The development of the Company's
future products and markets may require substantial amounts of cash for
development, equipment and marketing purposes, and in the long term the
Company's ability to meet these cash obligations will depend on achieving
profitable operations and the timely collection of its accounts receivable. To
date, inflation has not had a material impact on the Company's revenue or
losses.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the anticipated costs of marketing and
promotion of the Company's tele-health monitoring system), that the proceeds
of this offering, together with available resources, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 18 months
following the consummation of this offering. In the event that the Company's
plans change, or its assumptions change or prove to be inaccurate, the Company
could be required to seek additional financing or curtail its activities. The
Company has limited current arrangements with respect to, or sources of,
additional financing.
21
<PAGE>
YEAR 2000 COMPLIANCE
Both the Company's internal operations and products use a significant number
of computer software programs and operating systems. To the extent that these
software applications contain source code that is unable to appropriately
interpret the upcoming calendar year 2000, some level of modification or
possibly even replacement of such source code or applications will be
necessary. The Company is in the process of identifying the software
applications that are not "Year 2000" compliant. Given the information known
at this time about the Company's systems, coupled with the Company's ongoing
efforts to upgrade or maintain business critical systems as necessary, it is
currently not anticipated that the "Year 2000" issue or related costs will
have a material adverse effect on the Company's business, financial condition
and results of operations. However, the Company is still analyzing its
software applications and those utilized by key suppliers and, to the extent
they are not fully "Year 2000" compliant, there can be no assurance that the
costs necessary to update software or potential systems interruptions would
not have a material adverse effect on the Company's business, financial
condition and results of operations.
22
<PAGE>
BUSINESS
OVERVIEW
ENACT is a tele-health monitoring company which collects objective
physiological data regarding patients' health states and provides timely, low-
cost reporting of that information to patients, case managers, clinicians and
other members of the care team. ENACT's initial development and marketing
efforts are focused on the management of chronic diseases such as asthma,
diabetes and cardiovascular disease. The Company has enrolled patients in a
program using its health monitoring and reporting system (the "ENACT System")
for asthma, which includes the Company's Food and Drug Administration ("FDA")
510(k)-cleared AirWatch personal health monitor, and is preparing to launch a
program for diabetes, which will include the Company's Reporter interface
which connects to blood glucose monitors. Based on preliminary marketing
efforts, patient surveys and discussions with collaborative partners, the
Company believes that the ENACT System is likely to appeal both to patients
who are increasingly taking a more active role in managing their own health
and managed care organizations seeking cost savings. To supplement its
internal marketing programs, the Company seeks to develop strategic
relationships with market leaders in specific disease states to take advantage
of their installed patient bases, marketing expertise and distribution
resources. Consistent with this objective, the Company recently formed an
alliance in diabetes with Johnson & Johnson's LifeScan subsidiary
("LifeScan"), the market leader for diabetes monitoring equipment.
The ENACT System consists of (i) personal health monitors, which are used by
patients to collect objective medical data; (ii) a communications interface
(the "ENACT Interface"), which links the personal health monitors to the
Company's on-line database ("Care Central"); (iii) the Care Central database,
which formats and stores the medical data; and (iv) information services,
which produce and distribute processed data in a variety of formatted reports
and through a case management capability available via the Internet and other
electronic media.
INDUSTRY BACKGROUND
Despite various attempts by government and private payors to control
healthcare spending, there has been a dramatic increase in U.S. healthcare
expenditures. According to the Health Care Financing Administration,
healthcare costs grew from $697.5 billion in 1990 to $988.5 billion in 1995,
an increase of 41.7%. Managed care organizations arose, in part, as a response
to this trend of increasing healthcare costs. While payors have been
successful in achieving cost savings through managed care initiatives such as
negotiated price discounts with healthcare providers and the reduction of
unnecessary healthcare services, payors are now searching for new methods to
curb healthcare costs.
Recently, payors and managed care organizations have identified chronic
disease treatment as a potential source of healthcare cost reductions. A study
by the University of California, San Francisco reported that direct medical
costs for chronic disease treatment, which include physician fees, hospital
care, emergency services and medication, totaled $425 billion in 1990. The
same study indicated that despite only comprising 40% of the population,
chronic disease patients account for more than 70% of direct healthcare
expenditures. The majority of chronic disease patients fall into a limited
number of disease states, thus allowing for some degree of treatment
standardization aimed at preventing acute episodes and complications as well
as improving quality of life. Most chronic diseases run their course over a
long period of time, thus providing a stable patient base and an opportunity
for long-term savings. The rise of managed care organizations has created an
opportunity to monitor large patient groups and to concentrate cost and
quality improvement efforts on these patient populations.
Chronic Disease
Chronic diseases are long-term disorders, generally with no known cure. The
complications associated with a chronic disease vary across disease states,
ranging from inconvenient to life-threatening. Typically, chronic diseases are
treated by a life-long course of drug therapy and lifestyle modification. To
maximize the effectiveness of drug therapies and achieve the associated
savings in healthcare costs, both the patient and
23
<PAGE>
caregiver must monitor the patient's health state and compliance with the
therapeutic program throughout the patient's life. Chronic diseases include
asthma, diabetes and cardiovascular disease. Each of these diseases has a
large patient base and represents a substantial cost to the healthcare system.
Asthma. Asthma affects approximately 14 million people in the United States
and over 100 million people worldwide. In the United States, people with
asthma collectively have more than 100 million days of restricted activity and
470,000 hospitalizations annually. More than 5,000 Americans die of asthma
each year. Total costs associated with asthma are estimated to be $6.2 billion
annually, $2.2 billion of which represents direct costs and the remainder of
which represents indirect costs including opportunity costs associated with
lost work days. The National Institutes of Health ("NIH") reports that asthma
can be controlled with programs based on patient education, effective therapy
and patient monitoring. The NIH recommends lung function monitoring for all
moderate and severe asthmatics.
Diabetes. There are approximately 16 million people with diabetes in the
United States and more than 60 million worldwide. The American Diabetes
Association ("ADA") estimates that the direct and indirect cost of treating
diabetes is $92 billion annually. A study has estimated that diabetics
comprise 4% of the population but account for 15% of the total healthcare
costs in the United States. The NIH sponsored Diabetes Control and
Complications Trial ("DCCT") demonstrated that close blood glucose monitoring
and more frequent and accurate insulin intake can prevent the onset and
progression of complications by up to 60%.
Cardiovascular Disease. There are multiple diseases which affect the
cardiovascular system, including hypertension, congestive heart failure,
coronary artery disease, arrhythmia and stroke. The American Medical
Association estimates that over 60 million Americans suffer from one or more
of these cardiovascular diseases. The annual direct cost for treatment of
cardiovascular disease is estimated to be $129 billion.
Approaches to Chronic Disease
Traditionally, healthcare providers have treated chronic diseases reactively
by responding to acute medical episodes and the complications arising from a
substantial deterioration in a patient's health state. This mode of treatment
often results in expensive emergency room care and hospitalizations. A
significant number of these acute medical episodes and health declines are the
consequence of patients' failure to comply with their prescribed treatment
programs and caregivers' lack of information about the patients' compliance
and current health state. Recent estimates by the Task Force For Compliance
place the costs of non-compliance with prescribed therapies at $100 billion
annually in the United States. Recently, payors have recognized that their
costs can be reduced by adopting more proactive programs which emphasize
improved patient compliance. To date, these programs have taken one or more of
the following forms:
Education. Educational programs have been introduced to foster patient
involvement in the care process by increasing patient knowledge of the disease
and its treatment. Such programs, typically taking the form of patient
seminars and the distribution of brochures, have stressed the importance of
compliance with therapeutic programs and have attempted to increase patient
awareness of changes in their condition which may indicate the onset of an
acute episode or the need to vary their treatment regimes. Generally, these
programs are of limited scope and do not provide patients with opportunities
for feedback or supervision and, as a consequence, provide patients with only
limited motivation to continue their treatment programs.
Proactive Supervision. Medical care providers are increasingly using case
management to improve patient compliance with treatment programs and avoid
acute care incidents. In case management, nurses and other personnel contact
patients in order to collect information about both their health states and
their compliance with prescribed treatment programs. Such information provides
case managers with the opportunity to encourage and reward compliance and may
enable intervention to prevent acute episodes. Although case management
programs provide a higher degree of proactive care without the expense of
physician office visits, most of these programs are highly labor-intensive.
Moreover, the data gathered by case managers tends to be either subjective or
subject
24
<PAGE>
to intentional or unintentional patient reporting errors and thus does not
provide care providers with current objective medical data necessary to
monitor and control a chronic disease.
Self Monitoring. In recent years, there has been a proliferation of low-cost
health monitoring devices which allow patients to obtain objective medical
data with respect to their conditions without visiting a doctor. These
devices, which are designed to be used at the patient's home, have been
increasingly incorporated into treatment programs. If the data gathered with
such devices is reviewed regularly by the patient and/or care provider, it can
be used as an information source in a proactive program to improve compliance
and avoid acute episodes. However, these products have several shortcomings.
First, because existing personal health monitors typically require patients to
measure test results and manually record test data, the potential for
inaccurate evaluations, erroneous entries and forgotten or fabricated
measurements is great. Second, the collected data is typically provided to
healthcare providers only during costly office visits or through labor-
intensive case monitoring. Third, because the information gathered by these
devices is only sporadically provided to care providers, there is limited
opportunity for early warning and assessment or for real-time evaluation of
monitoring compliance. Finally, such devices are generally not integrated into
computerized data collection and retrieval systems and, therefore, the
information collected by such devices cannot be readily accessed or
distributed to healthcare providers.
Current programs have laid the ground work for improved patient compliance
with treatment programs through patient involvement and health state
monitoring. However, these current programs generally lack objective
physiological data to guide medical treatment decisions and often require
labor-intensive data collection and monitoring.
THE ENACT SOLUTION
ENACT has designed a nationwide tele-health monitoring and reporting system
(the "ENACT System") which collects objective physiological data regarding
patients' health states and provides timely, low-cost reporting of that
information to patients, case managers, clinicians and other members of the
care team. The Company believes the ENACT System appeals both to patients who
are increasingly taking a more active role in managing their own health and
managed care organizations seeking to achieve cost savings. Specifically, the
ENACT System establishes a low-cost link between the patient at home and the
care team, provides objective physiological data and the means to encourage
patient compliance, reduces reporting errors, creates a relational database of
patient outcomes which enables providers and payors to analyze the cost
effectiveness of various treatment methodologies, and may help minimize
expensive emergency room visits and unnecessary hospital utilization.
The ENACT System consists of several components. The system collects
information by means of a personal health monitor, which is disease specific
and may be designed either by the Company or a third party. The personal
health monitor is used by the patient in the home to collect and store
objective physiological data regarding the patient's disease state. When
plugged into a standard phone line, the monitor transmits data by means of a
communications interface (the "ENACT Interface") to a central database ("Care
Central"). Care Central receives, stores and formats the data. An electronic
publishing system distributes processed data by mail, fax, E-Mail or via the
Internet to the care team in the form of standard or customized reports. Once
the patient initiates a transmission, the remaining process is fully automated
and is completed in a matter of minutes.
Benefits of the ENACT System
The ENACT System enables payors and the care team to:
. Obtain objective data. Objective physiological data collected by the
ENACT System is transmitted to the care team without patient
interpretation or manipulation, thus providing relevant clinical
information and eliminating one of the primary causes of reporting
errors.
25
<PAGE>
. Remotely monitor patients between office visits. The ENACT System sends
periodic updates on the patient's status to the care team, linking the
patient at home with the care team and providing a flow of information
which typically would not occur between irregular office visits.
. Detect early warning signs of deterioration. Using trend reports to
assess a patient's status, the ENACT System provides caregivers with the
means to detect early signs of deterioration and adjust the patient's
therapy to reduce acute episodes and other complications which may
require emergency care.
. Encourage compliance through patient-specific feedback and reward
programs. Because all patient data is automatically recorded with the
time and date, the ENACT System can provide real-time information about
compliance with the health monitoring program, which can form the basis
of patient incentive and reward programs.
. Develop case management action plans to optimize therapy. By establishing
a historical database of objective medical information relating to a
patient's health state, the ENACT System enables the care team to adopt a
proactive approach in its treatment of chronic diseases by allowing the
care team to monitor and evaluate a patient's response to a variety of
therapeutic approaches over time.
. Provide objective outcomes analysis. The ENACT System's centralized
relational database can provide a platform for multiple healthcare
professionals to access and analyze the responses of a broad-based
patient population to a variety of treatment programs for various disease
states, including patients with multiple diseases.
. Educate patients on improving control of disease. The ENACT System
provides objective feedback to patients. By educating patients on how to
interpret the results of personal monitoring, the caregiver can enhance
the patient's ability to identify deteriorations in condition and alter
treatment or seek care in order to improve quality of life.
. Realize substantial cost savings. By providing the benefits described
above, the ENACT System enables payors and members of the care team to
improve compliance and avoid acute care incidents, resulting in
substantial reductions in the cost of care. The ENACT System provides a
low-cost, automated, and faster alternative to current labor-intensive
information collection and distribution systems.
STRATEGY
The Company's goal is to become the leading provider of tele-health
monitoring systems for objective patient health information. The key elements
of the Company's strategy to achieve this goal are to:
. Focus Initial Implementation on Asthma, Diabetes and Cardiovascular
Disease. Asthma, diabetes and cardiovascular disease may represent large
market opportunities, yet are serviced by a relatively concentrated group
of healthcare providers, pharmaceutical companies and other healthcare
industry participants. Moreover, each of these disease states has a large
population of patients for whom studies have shown a significant benefit
from ongoing objective monitoring. The Company believes that focusing its
efforts initially on these three disease states will enable it to achieve
maximum leverage of its financial, marketing and other resources to
create a large installed base of users.
. Align with Market Leaders in Various Disease States to Gain Market
Acceptance. The Company intends to continue to develop strategic
relationships with diversified health and pharmaceutical companies which
have leading positions with respect to the treatment of various chronic
diseases. Such companies have shown a desire to implement advanced health
management programs which they believe will result in more effective
treatment and cost reductions to payors. By working with market leaders
to design and implement health management programs which utilize the
ENACT System for particular chronic diseases, the Company believes that
it can leverage the existing market position of such partners. To date,
the Company has formed alliances with Johnson & Johnson's LifeScan
subsidiary with respect to diabetes and with Teijin Ltd. in Japan with
respect to asthma.
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. Market with Partners and Customers to Create Demand for ENACT Products
and Services. The Company intends to develop broad awareness of the ENACT
System among payors, medical professionals and patients through joint
marketing of health monitoring solutions with collaborative partners and
customers. In addition, the Company plans to build market demand among
patients and healthcare providers through advertising and direct
marketing and by continually innovating product and service offerings to
meet the evolving demands of consumers across different disease states.
. Build a Direct-to-Consumer Franchise. Recognizing the recent trend
towards increased patient involvement in their own healthcare, the
Company intends to drive demand for its products and services with
targeted marketing to chronic disease populations. By appealing directly
to consumers, the Company believes that it can build primary demand
without being reliant solely on doctors' recommendations (although the
AirWatch Monitor requires a prescription). The Company believes that
distribution through pharmacies will be a crucial element in building
this primary demand, and the Company intends to actively pursue
distribution arrangements with major pharmacy chains. Pharmacies have
created a strong customer awareness of similar product offerings such as
blood glucose meters, home blood pressure monitors and advanced
thermometers. In addition, sales through pharmacies may simplify
enrollment and reimbursement issues by moving administration out of the
doctor's office.
. Capitalize on Broad Applicability of the ENACT System Across Additional
Markets. The Company intends to extend its services beyond the asthma,
diabetes and cardiovascular disease markets by exploiting the
adaptability and flexibility of the ENACT System. Because Care Central,
the backbone of the ENACT System, has been designed to have general
applicability throughout the healthcare industry and the ENACT Interface
is readily adaptable to new and existing monitoring devices, the Company
believes it is positioned to develop additional applications for the
ENACT System both within and outside of the chronic disease field. Many
medical conditions may be suited for home monitoring programs utilizing
the ENACT System such as chronic obstructive pulmonary disease and
medication compliance.
THE ENACT TELE-HEALTH MONITORING SYSTEM
The ENACT System is a proprietary health monitoring and reporting system
which is designed to facilitate the collection, analysis and distribution of
objective physiological data relating to a wide variety of medical conditions.
The ENACT System has four basic components: (i) personal health monitors,
which are used by patients to collect objective medical data, (ii) the ENACT
Interface, which is used to send such data to the Company's Care Central
database, (iii) the Care Central database, which stores and formats the data
and (iv) information services for producing and distributing reports of
patient data in a variety of forms to patients and members of the care team.
Personal Health Monitors
Personal health monitors are portable, usually hand-held, devices which
collect and store objective physiological data from patients with respect to
specific disease states. These proprietary devices allow for the collection of
accurate data outside of a clinical setting without the need for recording or
interpretation by the patient. The ENACT System is designed to accommodate
personal health monitors which are developed by either the Company, such as
the AirWatch Monitor, which measures and records a patient's lung function
levels, for the Company's asthma program, or by third parties, such as blood
glucose monitors, which measure and record patients' blood glucose levels,
manufactured by Johnson & Johnson's LifeScan subsidiary. The Company has
designed the ENACT System so that it may accommodate the collection and
monitoring of physiological data on patients' health states across numerous
disease states, including cardiovascular disease. The Company intends, when
possible, to develop personal health monitors in conjunction with market
leaders in the care and treatment of specific diseases in order to take
advantage of the market acceptance that may be generated by collaborations
with such partners.
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The ENACT Interface
The ENACT Interface is a communications protocol that links personal health
monitors to the Company's Care Central database. The interface can be directly
embedded in a monitor or configured as an external device (the "ENACT
Reporter") attached to a monitor. The ENACT Interface has been designed to
make the process of transmitting monitored data from the personal health
monitor to Care Central both simple and error free. To download objective
monitored data directly to Care Central, the patient connects his or her
personal health monitor to a phone line and presses a button. The ENACT
Interface automatically dials a pre-programmed 800 number, identifies the
patient by means of the serial number which has been assigned to the patient's
monitor and transfers the objective patient data which has been collected and
stored by the personal health monitor to the Care Central database.
Care Central Database
Care Central, the core of the ENACT System, is the Company's on-line medical
data storage, processing and retrieval system which is designed to support all
of the Company's current and contemplated programs. Care Central receives data
from personal health monitors and stores and formats it in a relational
database for distribution in accordance with one of the Company's information
services. This entire process is fully automated and takes place in a matter
of minutes. Care Central combines the following components: (i) data receiver
with error protection, (ii) secure on-line transaction system and relational
database, (iii) automated database publishing with graphical reports, (iv)
high throughput electronic delivery system, and (v) fully redundant subsystems
and automatic back-up. Care Central has been designed so that it can be
expanded to serve growing patient populations and new disease monitoring
programs by adding readily available hardware. Care Central is owned and
operated by the Company with redundant facilities in separate locations.
ENACT Information Services
The ENACT System produces and distributes reports containing the objective
medical data stored in the Care Central database to case managers, doctors,
pharmacists, patients, payors and other members of the care team. The ENACT
System provides users with a high degree of flexibility with respect to the
form and content of such reports. Information is distributed through commonly
available, low cost methods, including fax, direct modem dial-up and the
postal service. In addition, the Company introduced e-mail and secure
Internet-based reporting services in 1997. The ENACT System provides the
following types of information services across the disease states being
monitored:
Report Generation and Delivery. The ENACT System publishes easy to read,
graphical reports, which can be readily customized to satisfy a variety of
differing needs. Typically, these reports involve short term and long term
trend charts, compliance calculations and bar charts illustrating a patient's
health status. Reports may be assembled and disseminated according to pre-set
instructions residing in the Care Central database or may be customized
pursuant to the telephonic voice response system that is incorporated into
Care Central.
Information Analysis. The ENACT System enables authorized users to access
patient reports to ascertain a patient's level of compliance with daily
monitoring requirements and progress over long intervals of time. These
reports not only help patients and their caregivers understand the development
of a patient's disease, but can be used by healthcare professionals to
identify developing medical problems before they develop into a crisis state.
The care team can use these reports to evaluate the effectiveness of a therapy
program and to compare individual results to those of similar patient
populations. Additionally, by allowing institutional healthcare providers to
evaluate patient compliance with monitoring regimes, such reports can be used
as a basis for providing patient incentives which could include reduced
insurance premiums or other rewards.
Remote Case Management Access Tools. The Company is currently testing an
application that is accessible via the Internet using a standard web browser,
which allows case managers to access current patient information including
ranks and reviews of all patients in a managed population. This service will
be used to
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monitor patients' conditions remotely, identify non-compliant patients, detect
signs of deterioration and determine when interventions to avoid costly
exacerbations are necessary.
Health Plan Reporting and Access. The Company anticipates that Care Central
will contain a large database of objective information relating to various
disease states across broad patient populations. Care Central is designed to
facilitate analysis and reporting for patients on particular therapies or
patients enrolled in a particular health plan. The Company intends to position
itself to be able to deliver reports covering a range of demographic
information that can be used to improve the treatment of various patient
populations.
Interactive Capabilities. The ENACT System contains an interactive voice
response system which enables the ENACT System to provide a report to any
authorized user within minutes of a call placed to the twenty-four hour
request line. This interactive capability also allows the ENACT System to
conduct outbound quality of life and patient satisfaction surveys quickly and
cost effectively by having patients respond to a series of pre-programmed
questions using a touch-tone phone. Finally, payors and members of the care
team can utilize the ENACT System to send automated, outbound reminder calls
to patients with historically low compliance rates.
ENACT HEALTH MONITORING PROGRAMS
The Company has devoted substantial efforts in connection with the
development of programs for asthma, diabetes and cardiovascular disease.
Currently, the Company (i) has begun commercial distribution of its AirWatch
Monitor to a limited number of patients, (ii) is preparing for the commercial
launch of its diabetes product in collaboration with LifeScan and (iii) is
developing products for cardiovascular and other disease markets. To date, the
Company has not generated any revenue from sales of products or services in
the diabetes or cardiovascular disease markets.
Asthma
Asthma is a chronic disease in which patients experience breathing
difficulties due to narrowing of the bronchial tubes. Experts believe that the
high incidence of asthma emergencies leading to hospitalization and urgent
care results from caregivers' and case managers' failure to detect early
warning signs of medical emergencies and to assess the severity of changes in
patients' conditions. In 1997, the NIH issued updated guidelines that
recommend the use of anti-inflammatory drugs to treat underlying inflammation
of the bronchial tubes, and monitoring of lung function for patients with
moderate or severe asthma to assess severity and to guide therapy. The NIH
recommended that asthma patients on regular medication be considered for
regular objective monitoring of their lung functions based on the patients'
peak flow (i.e., the maximum rate of air flow out of a patient's lungs at a
given time), or FEV1 (i.e., the total volume of air expelled in a one second
period). This type of monitoring can indicate deterioration of lung
performance before an asthma crisis.
The prevailing method for monitoring peak flow is for a patient to blow into
a simple plastic mechanical meter. The patient reads a value from the meter,
then writes the value, time, and date onto a graph to produce a hand-made
chart which is delivered to the patient's physician at irregular intervals.
The Company believes that the majority of the patient health monitors
currently available for home use do not record FEV1, which medical experts
considers to be a more useful measurement of lung function than peak flow.
Patients monitoring their condition frequently find it inconvenient to write
down graph information and often fail to keep accurate records. Moreover, most
patients' caregivers do not have timely access to the data collected by their
patients and as a consequence are not able to observe and take a proactive
role with respect to the patients' disease states.
The Company has developed a respiratory monitoring system consisting of the
Company's proprietary AirWatch Monitor and Care Central database that it
believes solves many of the problems relating to the accuracy, consistency and
speed of patient data collection and distribution. In 1993 and 1994, the
Company developed and received FDA clearance for the prescription marketing of
its AirWatch Monitor, and in November 1995 began the commercial introduction
of this device in the United States on a limited basis. Approximately the size
of a pager, the AirWatch Monitor is designed for patient ambulatory use. The
AirWatch Monitor
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measures both peak flow and FEV1 and retains the results of the last 500
tests. According to researchers, FEV1 is the best single measure of pulmonary
function and is the most reproducible measure, linearly related to the
severity of airway obstruction. Because of its sophisticated software and
inexpensive sensor, the AirWatch Monitor makes both peak flow and FEV1 data
available at a low cost. In addition, in accordance with NIH Expert Panel
guidelines, the AirWatch Monitor calculates each measurement as a percent of
the patient's personal best peak flow as determined by his or her doctor and
programmed into the AirWatch Monitor.
In order to monitor his or her peak flow and FEV1, a patient blows into the
AirWatch Monitor. The results of the patient's test are digitally recorded and
stored in the monitor and indicated in three ways. First, a zone chart on the
monitor's display contains a cell which emits a blinking green, yellow, or red
light depending on the peak flow value. Second, a character icon, Wilby(TM),
smiles or frowns depending on the peak flow value. Finally, the actual reading
(in liters per minute) is presented above the zone chart together with the
percent of personal best for that reading. The monitor's display also shows
the patient's nine most recent measurements so that the patient can see the
trend of his or her recent lung function, and displays a medical alert warning
for readings which indicate potentially dangerous conditions. The device
contains a post-medication event marker, which allows patients to mark
measurements recorded immediately after taking medication by pressing a button
after exhaling into the AirWatch Monitor.
Information collected through the AirWatch Monitor may be downloaded to Care
Central through an ENACT Interface which is built into the AirWatch Monitor.
Patients are typically instructed to make routine data transmissions on a bi-
weekly or monthly basis. Once the data has been received by Care Central, it
can be used to automatically generate several types of standard and customized
reports, which can be transmitted to patients and healthcare professionals via
mail, facsimile, and e-mail or the Internet.
The Company believes that the use of the AirWatch Monitor in conjunction
with the ENACT System can significantly improve management of patients with
moderate or severe asthma. The Company has initially targeted large
pharmaceutical companies within the asthma field for sales of its AirWatch
Monitor and related services based on the belief that utilization of these
products and services by such companies will help create a greater awareness
of the Company's products. The following companies have purchased products and
services from the Company since the beginning of fiscal 1996 in connection
with various clinical and marketing trials: Glaxo Wellcome Inc., Zeneca
Pharmaceuticals, Inc., Abbott Laboratories, Boehringer Ingelheim International
GMBH, Novartis, Kaiser Permanente, Merck & Co. and the National Jewish Center
for Immunology and Respiratory Medicine. As the Company attempts to capitalize
on this greater product awareness by funding marketing programs with a portion
of the proceeds of this offering, the Company anticipates that its future
customer base will contain proportionately more payors and patients. The
Company intends to use some of the proceeds from this offering to accelerate
the national commercialization of the ENACT System by hiring sales and
marketing personnel, funding advertising programs and launching the Company's
pharmacy programs and managed care sales initiatives. See "Use of Proceeds."
The Company anticipates distributing the AirWatch Monitor and enrollment
services both directly to the patient through retail pharmacies and indirectly
through managed care organizations. The Company has obtained approval from
over 100 health plans for reimbursement of the Company's devices and services
on a claim by claim basis.
Diabetes
Diabetes is a chronic, life-threatening disease, for which there is no known
cure. In patients with diabetes, the body does not produce or respond
adequately to insulin, a hormone produced by the pancreas that is critical to
the metabolism of glucose. There are two types of diabetes: (i) Type 1, which
usually begins in young people and is the more severe form of the disease, and
(ii) Type 2, which is the more prevalent form of the disease and often
develops later in life. Diabetes often leads to serious and potentially fatal
complications. According to the ADA, diabetes is not only the sixth leading
cause of death by disease (169,000 deaths in 1992), but is also the leading
cause of blindness in adults 20 to 74 years old (12,000-24,000 new cases
annually), renal failure (more than 19,000 cases in 1992), amputations
(approximately 54,000 cases annually), as well as a major contributor to
cardiovascular disease. According to the ADA, diabetes afflicts approximately
16 million people
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(approximately half of whom are undiagnosed) in the United States, 800,000 of
whom are estimated by the ADA to suffer from Type 1 diabetes. According to
industry sources, there are approximately 3.0 million Type 2 patients using
insulin. The ADA estimates that the direct and indirect cost of treating
diabetes is $92 billion annually.
To avoid the acute effects of diabetes and to reduce the associated
complications, patients with Type 1 diabetes (and many Type 2 patients) must
use insulin daily to control glucose levels. A patient's glucose level will
vary depending upon food intake, insulin availability, exercise, stress and
illness. The landmark NIH sponsored Diabetes Control and Complications Trial
study published in The New England Journal of Medicine in September 1993
established that close glucose control based on monitoring and insulin intake
can prevent the onset and progression of complications by up to 60%.
To ascertain the actual amount of insulin needed, a patient typically
measures his or her glucose level at least several times per day. Currently,
this is accomplished by pricking a finger with a small lancet, drawing a drop
of blood, placing it on a disposable strip, inserting the strip into a glucose
meter about the size of a beeper and waiting from 12 seconds to two minutes
for a number to appear on the display. The patient must then assess his or her
carbohydrate intake, determine the appropriate amount of insulin required, if
any, and administer that amount of insulin using a syringe, a pen injector or
an infusion pump. While some of these blood glucose meters are capable of
storing objective data and downloading it when brought to a healthcare
facility, the primary shortcoming of these systems is that they do not provide
a direct link between the patient at home and the care provider or case
manager. As a result, even if data is regularly collected, it is not readily
available to the care team.
The worldwide market for glucose meters, strips and related disposables has
been estimated to be approximately $1.3 billion. Currently, there are several
companies offering glucose monitors for sale, including LifeScan, Boehringer-
Mannheim, Bayer and MediSense (a division of Abbott Laboratories, Inc.).
Industry sources have estimated that LifeScan is the market leader with over
40% of the installed base in the United States. See "--Collaborative
Agreements."
The Company has formed an alliance with LifeScan to interface various
LifeScan blood glucose monitors with Care Central. The Company has developed a
device, the ENACT Reporter, which extracts data from LifeScan blood glucose
meters and transmits this data via phone line to Care Central. At Care
Central, data is compiled into clinical reports and automatically delivered to
designated recipients.
Cardiovascular Disease
There are multiple diseases which affect the cardiovascular system,
including hypertension, congestive heart failure, coronary artery disease,
arrhythmia and stroke. The American Medical Association estimates that over 60
million Americans suffer from one or more of these cardiovascular diseases.
The annual direct cost for treatment of cardiovascular disease in the United
States is estimated to be $129 billion. The Company believes the ENACT
Reporter can support extraction and communication of data from the wide
variety of portable cardiovascular devices that are currently available. The
Company is actively pursuing corporate partners within various segments of the
cardiovascular disease market.
Other Chronic Diseases
There are currently a variety of monitors which collect physiological data
on patients' health states across numerous chronic disease fields. The Company
has designed the ENACT System to interact with such medical devices or with
new devices created by the Company or third parties by extracting the data
from these devices and transmitting the data via a phone line to Care Central
for processing, similar to the ENACT Reporter developed in collaboration with
LifeScan for use with LifeScan's products. Based on preliminary marketing
efforts, patient surveys and discussions with collaborative partners, the
Company believes that the ENACT System can be a valuable component in health
maintenance programs where patients' self-monitoring of their
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medical conditions can help prevent deterioration and acute medical episodes.
The Company is currently researching the use of the ENACT System in programs
related to chronic obstructive pulmonary disease.
SALES AND MARKETING
The Company intends to focus its marketing efforts on sales directly to
patients through pharmacies and bundled sales of product and services to
managed care organizations. In addition, from time to time, the Company
provides its products and services for use in clinical and marketing trials.
Pharmacies. The Company believes that pharmacies are particularly well-
suited for distribution of the Company's products and services directly to
patients because they have proven effective for distribution of other home
medical devices, including blood glucose meters, home blood pressure monitors
and electronic thermometers. In addition, the Company believes that the trend
in pharmacies to enhance their relationship with high-utilizing, chronic
disease patients will create an incentive for pharmacies to facilitate the
enrollment and reimbursement process for users of the Company's products.
Furthermore, because pharmacies are the primary point of sale for
pharmaceutical products for chronic disease patients, the Company believes
that they are a logical distribution channel for its products.
Managed Care Organizations. The Company is developing programs to address
the managed care market. The standard program is targeted at managed care
organizations with in-house case managers that can utilize the ENACT System,
including the Internet case manager access tool, to manage their populations
of chronic disease patients. The enhanced program is targeted at managed care
organizations that seek to outsource or supplement their disease management
function, including case managers. The Company intends to contract or partner
with a company or companies that have counseling capabilities, which coupled
with the objective clinical data generated from the ENACT System, will
comprise a complete health management solution.
Clinical and Marketing Trials. The Company believes that clinical trials
have generated a high degree of awareness of the Company's products and
services among medical opinion leaders. Clinical trials, which evaluate the
efficacy of a particular therapy, share features with chronic disease
management programs and thus may serve as a starting point for future
relationships. Glaxo Wellcome Inc., Abbott Laboratories, Merck, Zeneca
Pharmaceutical, Inc., Boehringer-Ingerheim, Novartis, Kaiser-Permanente and
the National Jewish Center for Immunology and Respiratory Medicine have all
incorporated the ENACT System in certain of their clinical or marketing
trials. The Company also hopes to assist in the design and implementation of
trials with prestigious academic institutions and respected managed care
organizations both to document the value of the ENACT System and to provide
early marketing opportunities with potential customers.
The Company employs a Vice President of Sales and Marketing and a sales and
marketing staff of nine persons to market the ENACT System. In addition, the
senior members of the Company's management are actively engaged in marketing
the ENACT System. The Company intends to use proceeds from this offering to
hire sales and marketing personnel, fund advertising programs, launch the
Company's pharmacy marketing program and managed care sales initiative, and
fund the development of additional new products. See "Use of Proceeds."
COLLABORATIVE AGREEMENTS
The Company seeks to develop strategic relationships with diversified health
and pharmaceutical companies which have leading positions with respect to the
treatment of various chronic diseases. By working with market leaders to
design and implement health management programs which utilize the ENACT System
for particular chronic diseases, the Company believes that it can leverage the
existing market position of such partners. To date, the Company has formed
alliances with Johnson & Johnson with respect to diabetes and with ALZA
Corporation and Teijin with respect to asthma.
Johnson & Johnson's LifeScan Subsidiary. The Company entered into a
Development and Marketing Agreement with LifeScan, a manufacturer of home-
based blood glucose monitoring systems, and a related stock
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purchase agreement with Johnson & Johnson Development Corporation in July
1997. The agreement between LifeScan and the Company provides for the use of
various LifeScan blood glucose monitors with the ENACT Reporter and the
development of Care Central reports and services to meet the needs of
healthcare providers and patients in the diabetes field. Under the agreement,
LifeScan has agreed to provide specifications for Care Central services for
use in diabetes management, undertake pilot market studies, prepare marketing
programs for the ENACT Reporter and Care Central services for use with
LifeScan monitors and attempt to achieve a commercial launch of ENACT's
products and services within a specified time frame. The Company has agreed to
work with LifeScan to tailor the ENACT System to meet the needs of the
diabetes market. Under the agreement, each party owns the intellectual
property that it develops, and if the parties undertake any joint development
efforts, the resulting intellectual property would be jointly owned. The
initial term of the agreement is from execution through December 31, 2000 with
a one-year renewal option and requires ENACT to work exclusively with LifeScan
in the area of diabetes monitoring and reporting in a defined territory,
provided LifeScan meets minimum enrollment targets. The agreement provides for
payments of $1.8 million, all of which has been received by the Company, in
connection with the establishment of a pilot program. As long as LifeScan
meets certain specified levels of product purchases from the Company, LifeScan
has the right to prohibit the transfer of the Development and Marketing
Agreement if the Company enters into an agreement to be acquired by a
competitor of LifeScan without first offering LifeScan the opportunity to
acquire the Company on the same terms offered by such competitor. Further, if
a competitor does acquire the Company, it must continue to provide the Care
Central services and make certain equipment and patient data available so that
LifeScan may operate a Care Central system. These provisions could delay or
hinder a change of control of the Company in the event the specified LifeScan
competitors attempt to merge with or acquire the Company. The stock purchase
agreement provides for the purchase of 250,000 shares of Series D Preferred
Stock (which will convert into 419,580 shares of Common Stock upon completion
of this offering) at an aggregate sales price of $3.0 million. See "Certain
Transactions."
ALZA. The Company and ALZA Corporation, a designer and producer of
therapeutic drug delivery systems ("ALZA"), entered into an agreement in
August 1995 pursuant to which ALZA supplements the Company's sales force by
presenting the Company's AirWatch Monitors and related services to managed
care accounts. In addition, ALZA agreed to act as the Company's agent for
obtaining additional approvals for third-party reimbursement. In return for
these services, the Company has agreed to pay ALZA a commission on all net
sales in the United States of products and/or services which are related to
the measurement and reporting of pulmonary function in connection with
respiratory illness unless the agreement is terminated for cause. In addition,
ALZA has made equity investments in the Company totaling approximately $2.0
million and subject to certain conditions, made a $2.0 million line of credit
available to the Company. To date, the Company has obtained approval from over
100 payors for reimbursement of the Company's devices and services on a claim
by claim basis. See "Certain Transactions."
Teijin. The Company entered into a strategic relationship in November 1995
with Teijin, a Japanese conglomerate diversifying into home healthcare, for
the implementation of the ENACT System as part of a health management program
for respiratory disease in Japan. Under the agreement, Teijin is conducting
trials in Japan and seeking Japanese governmental approval for the commercial
introduction of AirWatch Monitor and the ENACT System in Japan. The Company
received non-refundable up-front payments of $2.5 million and may receive up
to an additional $2.0 million upon achievement of certain milestones by
Teijin. Subject to obtaining such approval, the parties have agreed to
negotiate an agreement for Teijin's exclusive distribution of the AirWatch
Monitor and the ENACT System for asthma in Japan.
PAYMENT AND REIMBURSEMENT
Historically, the Company has received payment for its products and services
through contracts with collaborative partners and customers conducting
clinical and marketing trials. The company has also obtained approval from
over 100 payors for reimbursement of the Company's devices and services on a
claim by claim basis. The Company intends to develop a pharmacy based
distribution channel and to negotiate contracts with managed care
organizations which provide for direct payment of the Company's products and
services. When
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directly marketing to customers via pharmacies, the Company intends to include
with its products a reimbursement package which will include a certificate of
medical necessity for the physician to complete and instructions for the
patient on submitting the certificate and other materials to the payor for
reimbursement. In marketing to managed care organizations, the Company intends
to contract directly with, and be paid directly by, managed care organizations
for provision of products and services to their patient populations. Failure
of the Company to obtain additional reimbursement approvals from payors for
the Company's products and services could have a material adverse effect on
the Company's business and operating results. There can be no assurance that
the Company will be successful in entering contracts with managed care
organizations, or in promoting its products to consumers in pharmacies.
COMPETITION
The market for healthcare information products, services and devices for
health state management is a relatively new and emerging market. Although the
Company has limited direct competition, it faces indirect competition from a
number of sources and expects to experience intense competition in the future
if its products and services are accepted in the marketplace. The Company's
potential competitors include specialty healthcare companies, healthcare
information system and software vendors, healthcare management organizations,
pharmaceutical companies and other service companies within the healthcare
industry. In particular, the Company is aware of several large pharmaceutical
and medical service companies that have stated publicly that they intend to be
involved in providing comprehensive health state management services. The
Company also expects to compete against other companies that provide
statistical and data management services, including clinical trial services to
pharmaceutical companies. The Company's potential competitors include
companies with significantly greater financial, technical, product development
and marketing resources than the Company. There can be no assurance that a
competitor will not develop and successfully introduce competitive products or
services, that the introduction of such products or services will not cause a
reduction in the price at which the Company sells its products and services or
that the Company will be able to compete successfully with any of these
potential competitors. See "Risk Factors--Competition."
MANUFACTURING
The Company does not currently engage in any direct manufacturing
operations. The Company currently uses Flextronics, Ltd. ("Flextronics"), a
manufacturing sub-contractor, to act as a turnkey provider for the Company-
designed monitoring and data reporting devices. Devices are manufactured to
Company specifications and quality standards. Flextronics is ISO 9002
registered and has considerable experience in manufacturing medical devices.
Under its agreement with the Company, Flextronics is responsible for materials
purchasing, inventory management, tooling, and test fixturing, and ships
finished goods inventory to the Company or its designees from plants located
in the Far East.
FDA AND OTHER GOVERNMENT REGULATIONS
The Company's products and services are subject to substantial regulation in
the United States and foreign countries.
Medical Products. The Company's medical products are subject to stringent
government regulation in the United States and other countries. In the United
States, the Food, Drug, and Cosmetic Act, as amended ("FDC Act"), and other
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of such
products. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution.
The regulatory process is lengthy, expensive and uncertain. Prior to
commercial sale in the United States, most medical devices, including the
Company's products, must be cleared or approved by the FDA. Securing
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FDA approvals and clearances may require the submission of extensive clinical
data and supporting information to the FDA.
Under the FDC Act, medical devices are classified into one of three classes
(i.e., class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness can
reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to Good Manufacturing
Practices) and for class II devices through the use of general and special
controls (e.g., performance standards, postmarket surveillance, patient
registries and FDA guidelines). Generally, class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life supporting and implantable devices
or new devices which have been found not to be substantially equivalent to
legally marketed devices.)
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval ("PMA"). A 510(k) clearance will be
granted if the submitted data establishes that the proposed device is
"substantially equivalent" to a legally marketed class I or class II medical
device, or to a class III medical device for which the FDA has not called for
PMAs. It generally takes from four to 12 months from submission to obtain
510(k) premarket clearance, although it may take longer. The FDA may determine
that the proposed device is not substantially equivalent, or that additional
clinical data are needed before a substantial equivalence determination can be
made. Modifications or enhancements to products that are cleared through the
510(k) process that could significantly affect safety or effectiveness or
effect a major change in the intended use of the device require new 510(k)
submissions. The Company's manufacturer is also required to adhere to FDA Good
Manufacturing Practices and similar regulations in other countries, which
include testing, control and documentation requirements enforced by periodic
inspections.
The Company's AirWatch Monitor has received clearance through the 510(k)
process as a Class II device and the Company intends to obtain clearance for
additional personal health monitors pursuant to Section 510(k) of the FDC Act
whenever necessary. The AirWatch Monitor has been cleared as a prescription
device only. FDA clearance of a new 510(k) submission would be required should
the Company decide to market the AirWatch Monitor as an over-the-counter
device. No assurance can be given that the necessary clearances for its
products will be obtained by the Company on a timely basis, if at all, or that
extensive clinical data and supporting information or a PMA application will
not be required. FDA clearance is subject to continual review, and later
discovery of previously unknown problems may result in restrictions on a
product's marketing or withdrawal of the product from the market.
The Company understands that the FDA has recently required a more rigorous
demonstration of substantial equivalence in connection with 510(k)
notifications and that in many cases the time periods required for product
approvals have increased. If additional data is requested by the FDA, it could
delay the Company's market introduction of future monitors. There can be no
assurance that the FDA will not require additional data or that the Company
will receive marketing clearance from the FDA for any of its future monitors.
Medical Services. A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide healthcare
services. Additionally, services provided to health benefit plans in certain
cases are subject to the provisions of the Employee Retirement Income Security
Act ("ERISA") and may be affected by other state and Federal statutes.
Generally, state laws prohibit the practice of medicine and nursing without a
license. Many states interpret the practice of nursing to include health
teaching, health counseling, the provision of care supportive to or
restorative of life and well being and the execution of medical regimens
prescribed by a physician. Accordingly, to the extent that the Company assists
providers in improving patient compliance by publishing educational materials
or providing behavior modification training to patients, such activities could
be deemed by a state to be the practice of medicine or nursing. Although the
Company has not conducted a survey of the applicable law in all 50 states, it
believes that it is not engaged in the practice of medicine or nursing. There
can be no assurance, however, that the Company's operations will not be
challenged as constituting the unlicensed practice of medicine or nursing. If
such a challenge were made successfully in any state, the Company could be
subject to civil and criminal penalties under such state's law and could be
required
35
<PAGE>
to restructure its contractual arrangements in that state. Such results or the
inability to successfully restructure its contractual arrangements could have
a material adverse effect on the Company.
Confidentiality Requirements. The confidentiality of patient information is
subject to regulation by state law. A variety of statutes and regulations
exist safeguarding privacy and regulating the disclosure and use of medical
information. State constitutions may provide privacy rights and states may
provide private causes of action for violations of an individual's
"expectation of privacy." Tort liability may result from unauthorized access
and breaches of patient confidence. The Company intends to comply with state
law and regulations governing medical information privacy.
In addition, on August 21, 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996, P.L. 104-191 (the "HIPPA"). This
legislation requires the Secretary of Health and Human Services to adopt
national standards for electronic health transactions and the data elements
used in such transactions. The Secretary is required to adopt safeguards to
ensure the integrity and confidentiality of such health information. Violation
of the standards is punishable by fines and, in the case of wrongful
disclosure of individually identifiable health information, imprisonment. The
Secretary is required to issue the standards not later than February 21, 1998.
Separately, the HIPPA also requires the Secretary to submit recommendations to
Congress on standards for the privacy of individually identifiable health
information. These recommendations, which were submitted in September 1997,
propose restrictions on the disclosure and use of patient-identifiable
information, guarantees of rights of patients to information and access to
their health records and punishment for the misuse of personal health
information. Under the HIPPA, Congress has until August 1999 to adopt
legislation regarding the privacy of individually identifiable health
information. If Congress does not act, the Secretary is required to issue
regulations by January 21, 2000. The Company cannot predict what requirements
will ultimately be adopted by Congress however, any limitations imposed by or
the cost of compliance with such requirements could have an adverse effect on
the Company's business.
The Company and its customers may be subject to Federal and state laws and
regulations which govern financial and other arrangements between healthcare
providers. These laws prohibit certain fee splitting arrangements between
healthcare providers, as well as direct and indirect payments, referrals or
other financial arrangements that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Possible sanctions for violation of these
restrictions include civil and criminal penalties. Further, criminal
violations may result in mandatory exclusions of up to five years and
additional permissive exclusions from participation in Medicare and Medicaid
programs.
Regulation in the healthcare field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental
approvals, comply with applicable regulations or comply with existing or
future laws, rules or regulations or their interpretations.
PROPRIETARY RIGHTS
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. Although the Company continues
to implement protective measures and intends to defend its proprietary rights,
there can be no assurance that these measures will be successful or that its
patents will provide meaningful protection against potential competitors
developing substantially similar products and services. The Company has filed
nine patent applications in the United States, two of which have resulted in
issued patents and two others of which have had claims allowed by the Patent
and Trademark Office relating to the AirWatch Monitor and certain aspects of
the ENACT Reporter and Care Central database system. The Company intends to
file additional applications as appropriate for patents covering the ENACT
System. There can be no assurance that patents will issue from any of these
pending applications, that any patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide proprietary protection to the Company.
36
<PAGE>
The Company is not currently aware of any pending or threatened claims of
infringement of the proprietary rights of others with respect to the Company's
current or planned products. However, there can be no assurance that third
parties will not assert such claims or that any such claims will not require
the Company to enter into license agreements or result in costly protracted
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses will be obtainable on commercially reasonable terms.
EMPLOYEES
As of December 31, 1997, the Company had 36 employees and three nearly full-
time contractors, comprising nine in sales and marketing, 15 in systems
development and operations, five in product development, six in customer
service and four in administration.
FACILITIES
The Company's principal administrative, sales and marketing and product
development activities are conducted at a 4,500 square foot facility in
Mountain View, California that the Company occupies pursuant to a lease that
expires in October 1998. The Company has a short term lease, which will expire
on February 28, 1998, on an additional 2,200 square foot facility in Palo
Alto, California which is used for research and development activities. The
Company's Care Central database is located at the Mountain View site, and the
Company is in the process of completing a fully redundant system in a 685
square foot facility in San Diego, California, leased through December 1999.
Although the Company believes that its existing facilities are adequate for
its current requirements, the Company intends to relocate to larger facilities
in the near future in order to consolidate all of the Company's Northern
California operations in a single facility and to facilitate future expansion
of its workforce. In the interim the Company is negotiating a short term
extension of its lease which expires on February 28, 1998 and actively
pursuing additional short term alternatives. There can be no assurance that
the Company will be able to locate additional space, or that such space will
be available on reasonable commercial terms.
LEGAL MATTERS
The Company is not a party to any material legal proceedings.
37
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and other key employees of the Company as of
December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Matthew H. L. Sanders ............... 45 Chairman of the Board, President and Chief
Executive Officer
Gilbert S. Mott, Jr. ................ 46 Executive Vice President and Director
Eitan M. Fenson, Ph.D. .............. 44 Vice President, Information Services
John H. Hyle......................... 48 Vice President, Sales and Marketing
Chris A. Tacklind.................... 41 Vice President, Advanced Technology, Secretary
and Director
Henry W. Evans....................... 36 Vice President, Finance and Chief Financial
Officer
Wayne C. Wager (1)(2)................ 42 Director
A. Crawford Cooley (1)(2)............ 71 Director
Ernest Mario, Ph.D. (1)(2)........... 59 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Matthew H. L. Sanders is the co-founder of the Company and has served as its
President, Chief Executive Officer and Chairman of the Board of Directors
since its inception in October 1992. Mr. Sanders has nearly 20 years of
experience in the information technology field. Mr. Sanders was a founder of
Ardent Computer, a maker of graphics supercomputers ("Ardent"), and served in
various executive capacities with Ardent, including Chief Operating Officer
and Co-Chairman of the Board of Directors. Mr. Sanders served in various
capacities with Convergent Technologies, a maker of desktop and workstation
computers, from October 1979 to October 1984, including Division Vice
President and General Manager of several divisions. Mr. Sanders has also
worked in new product development at Hewlett-Packard Co. Mr. Sanders received
a B.S. in Mechanical Engineering and a M.S. in Product Design from Stanford
University.
Gilbert S. Mott, Jr. joined the Company as its Senior Vice President,
Marketing and Sales and a Director in March 1995 and has served as the
Company's Executive Vice President, since March 1997. Mr. Mott was with Glaxo,
Inc. from January 1979 to February 1995. He served as Vice President of
Marketing for Glaxo's Health Management Division and Vice President of Managed
Care before joining ENACT from June 1993 to February 1995. He was Vice
President of Marketing for Glaxo's Allen & Hanburys, Division of Glaxo Inc.
from January 1991 to June 1993. Mr. Mott has served on the Board of the
American Lung Association and the Allergy and Asthma Foundation of America.
Mr. Mott received a B.A. from the University of Miami in Coral Gables, Florida
in 1973.
Eitan M. Fenson, Ph.D. has served as the Company's Vice President,
Information Services since July 1994. Dr. Fenson was employed by OnTrack,
Inc., a private computer systems consultant serving clients including
Motorola, Inc. and Auspex Systems, Inc. from January 1992 to July 1994. Dr.
Fenson was Director of Customer Service at Auspex Systems, a network server
manufacturer, from August 1990 to January 1992. He also served as a Director
of Customer Service at Ardent from October 1986 to August 1990. Dr. Fenson
served in a variety of positions at AT&T Bell Laboratories, Unix Development
Laboratory, including Product Manager for UNIX System V from June 1981 to
October 1986. Dr. Fenson received a B.A. in Mathematics from Amherst College
and an M.A. in Mathematics, an M.A. in Computer Science and a Ph.D. in
mathematics from the University of Michigan.
John H. Hyle has served as the Company's Vice President, Sales and Marketing
since March 1997. Mr. Hyle was employed by Thermoscan Inc. where he held the
title of Vice President and was responsible for sales
38
<PAGE>
and marketing, customer service, professional relations and international
operations from May 1989 to March 1997. Mr. Hyle attended The United States
Naval Academy, received a B.A. in Economics from Albright College and is a
graduate of the Program for Executives at Carnegie Mellon University.
Chris A. Tacklind is a co-founder of the Company and has served as its Vice-
President, Advanced Technology since July 1997 and as Secretary and a Director
since its inception in October 1992. From inception to July 1997, Mr. Tacklind
served as the Company's Vice President, Product Development. Mr. Tacklind was
a principal in Tacklind Design, a private engineering and design consulting,
from January 1985 to October 1992, where he participated in the design and
development of products for clients in the industrial, medical, computer and
consumer fields. Prior to that, Mr. Tacklind held various positions on the
technical staff at Hewlett-Packard Co. from July 1979 to December 1985 where
he was a co-inventor of the technology and patents for Hewlett-Packard's Ink
Jet printing technology. Mr. Tacklind received a B.A. in Mathematics and
Physics at the University of California, Santa Cruz, and an M.S. in Mechanical
Engineering from Stanford University.
Henry W. Evans has served as the Company's Chief Financial Officer since
September 1995. Prior to that time, Mr. Evans was a Senior Manager in Ernst &
Young LLP's Life Sciences Group in Palo Alto, California from August 1992 to
September 1995. Mr. Evans received a B.S. in Accounting from the University of
Notre Dame and an M.B.A. from Stanford University.
Wayne C. Wager has served as a Director of the Company since November 1993.
Mr. Wager has been the President of Cascadia Ventures, a private venture
capital firm, since January 1997, and has been a partner with Cable & Howse
Ventures, a private venture capital firm, since June 1983. Mr. Wager received
a B.S. in Engineering and an M.B.A. from Stanford University.
A. Crawford Cooley has served as a Director of the Company since April 1994.
Mr. Cooley is currently a private investor, and was a partner with the venture
firm of Draper, Gaither, Anderson from 1959 to 1967. He currently serves on
the board of directors of E.D. Bullard Co. and Pacific Coast Farm Credit
Services.
Ernest Mario, Ph.D. has served as a Director of the Company since April
1997. Dr. Mario has been the Chief Executive Officer and a Director of ALZA
Corporation and a designer and producer of therapeutic drug delivery systems
since August 1993. Dr. Mario was the Co-Chairman of ALZA Corporation from
August 1993 to November 1997 and has been the Chairman of ALZA Corporation
since November 1997. Dr. Mario was the Chief Executive Officer of Glaxo
Holdings P.L.C. from July 1988 to March 1993, served as a member of the Board
of Directors of that company from April 1988 to March 1993, and served as its
Deputy Chairman from January 1992 to March 1993. Dr. Mario also served as the
President and Chief Operating Officer of Glaxo, Inc., a subsidiary of Glaxo
Holdings, from September 1986 until April 1988. Prior to that time, Dr. Mario
held a number of positions with Squibb Corporation from 1977 to 1986,
including President and Chief Executive Officer of Squibb Medical Products and
served as a member of the Board of Directors of Squibb from May 1984 to August
1986. Dr. Mario serves on the Board of Directors of ATL Ultrasound, Inc.,
Catalytica, Inc., Catalytica Pharmaceuticals, Cor Therapeutics and
Pharmaceutical Product Development, Inc. Dr. Mario received a B.S. in pharmacy
from Rutgers University and a M.S. and a Ph.D. in physical sciences from the
University of Rhode Island.
----------------
The Company's Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes with the directors in each class
serving staggered three-year terms. The Class I directors are Messrs. Wager
and Tacklind, whose current terms will end in 1998; the Class II directors are
Messrs. Cooley and Sanders, whose current terms will end in 1999; and the
Class III directors are Messrs. Mario and Mott, whose current terms will end
in 2000. At each annual meeting of the stockholders of the Company, the
successors to the class of directors whose term expires at such meeting will
be elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. See
"Description of Capital Stock--Delaware Law and Certain Charter Provisions."
The Company's executive officers are appointed by and serve at the
discretion of the Board of Directors.
39
<PAGE>
There are currently two standing committees of the Board of Directors: the
Compensation Committee and the Audit Committee. The Compensation Committee has
responsibility for reviewing the performance of the officers of the Company
and making recommendations to the Board of Directors concerning salaries and
incentive compensation for such officers. The Compensation Committee currently
consists of Mr. Wager, Mr. Cooley and Dr. Mario. The Audit Committee has
responsibility for reviewing the Company's financial statements and
significant audit and accounting practices with the Company's independent
auditors and making recommendations to the Board of Directors with respect
thereto. The Audit Committee currently consists of Mr. Wager, Mr. Cooley and
Dr. Mario.
DIRECTOR COMPENSATION
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors and committees thereof.
In March 1996, in connection with his service on the Board of Directors, Mr.
Cooley received an option to purchase 20,000 fully-vested shares of Common
Stock at an exercise price of $0.50 per share. In March 1996, in connection
with Mr. Wager's service on the Board of Directors, Mr. Wager and certain of
his business associates received options to purchase an aggregate of 20,000
fully-vested shares of Common Stock at an exercise price of $0.50 per share.
In December 1996, in consideration for consulting services provided by
Mr. Wager, Mr. Wager received an option to purchase 20,000 fully-vested shares
of Common Stock at an exercise price of $5.00 per share. In March 1997, in
connection with his appointment to the Company's Board of Directors, Dr.
Ernest Mario received a fully vested option to purchase 25,000 shares of the
Company's common stock at an exercise price of $5.00 per share. In addition,
the Company has adopted, subject to shareholder approval, the 1997 Outside
Directors Stock Option Plan, which provides for formula-based grants of
options to nonemployee directors. See "--Stock Incentive Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Messrs. Wager, Cooley and Mario.
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of
directors or compensation committee. The Compensation Committee makes
recommendations regarding the Company's employee stock plans and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
40
<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation received in the most recent
fiscal year and the fiscal year ended December 31, 1996 by the Company's
President and Chief Executive Officer and by the Company's other four most
highly compensated executive officers (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
---------------------
ANNUAL COMPENSATION
------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- --------------------------- ---- ---------- --------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Matthew H. L. Sanders... 1997 $180,000 $36,000 0 $ 0
Chief Executive Officer 1996 180,000 0 0 0
and President
Gilbert S. Mott, Jr..... 1997 238,000 16,000 0 12,000(1)
Executive Vice 1996 238,000 0 0 12,000(1)
President
Chris A. Tacklind....... 1997 144,000 16,000 0 0
Vice President, 1996 144,000 0 0 0
Advanced Development
and Secretary
Eitan M. Fenson......... 1997 135,000 16,000 0 0
Vice President, 1996 133,625 0 50,000 0
Information Services
Henry W. Evans.......... 1997 120,000 16,000 0 0
Chief Financial Officer 1996 96,000 0 30,000 0
</TABLE>
- --------
(1) Represents a monthly expense allowance paid by the Company.
STOCK INCENTIVE PLANS
None of the Named Executive Officers received grants of options to purchase
the Company's Common Stock during the fiscal year ended December 31, 1997.
The following table sets forth information concerning stock options held as
of December 31, 1997 by the Named Executive Officers. There were no option
exercises by any Named Executive Officers during the fiscal year ended
December 31, 1997.
AGGREGATE OPTION EXERCISES IN THE 1997 FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/97 (1) 12/31/97 ($)(2)
------------------------- -------------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Matthew H. L. Sanders......... -- -- -- --
Gilbert S. Mott, Jr........... 366,666 33,334 $ 3,244,995 $ 295,006
Chris A. Tacklind............. -- -- -- --
Eitan M. Fenson............... 20,833 29,167 $ 83,332 $ 116,668
Henry W. Evans................ 12,500 17,500 $ 50,000 $ 70,000
</TABLE>
- --------
(1) Consist of stock options granted pursuant to the Company's 1995 Stock
Option Plan. Each option is immediately exercisable at the date of grant
but vests over a three-year period at a rate of approximately 1/36 at the
end of one month following the date of grant and approximately 1/36 per
month thereafter, as long as the optionee remains an employee of the
Company. The maximum term of each option granted is ten years from the
date of grant. The exercise price exceeds the fair market value of the
stock on the grant date as determined by the Board of Directors.
(2) Calculated by determining the difference between the fair value of the
securities underlying the option at December 31, 1997 ($9.00 per share)
and the exercise price of the Named Executive Officer's option.
41
<PAGE>
1995 Stock Option Plan. The 1995 Stock Option Plan (the "1995 Option Plan")
provides for the grant of stock options to employees (including officers),
directors and consultants of the Company and its subsidiaries. The 1995 Option
Plan provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
nonstatutory stock options, although incentive stock options may be granted
only to employees. As of December 31, 1997, options to purchase an aggregate
556,584 shares of Common Stock were outstanding under the 1995 Option Plan of
which 439,658 shares underlying unexercised options were no longer subject to
the Company's right of repurchase. Options granted under the 1995 Option Plan
will remain outstanding in accordance with their terms, but the Board of
Directors has determined that no further options will be granted under the
1995 Option Plan.
1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the "1997
Option Plan") was adopted by the Board of Directors in March 1997 and approved
by the shareholders in July 1997. The Board of Directors has reserved 904,000
shares of Common Stock for issuance under the Company's 1997 Option Plan. As
of December 31, 1997, there were outstanding options to purchase an aggregate
of 226,945 shares of Common Stock under the 1997 Plan of which 66,459 shares
underlying unexercised options were no longer subject to the Company's right
of repurchase. Options may be granted to the Company's employees (including
officers), directors and consultants, although only employees and officers and
directors who are also employees may receive "incentive stock options"
intended to qualify for certain tax treatment. Nonemployees, including
nonemployee directors, may receive nonstatutory stock options, which do not
qualify for such treatment. The exercise price of incentive stock options
under the 1997 Option Plan must at least equal the fair market value of the
Common Stock on the date of grant, while the exercise price of nonstatutory
options must at least equal 85% of such market value and must be no less than
100% of such market value if such options are to qualify for certain tax
treatment as performance based compensation. Generally, each option is
immediately exercisable at the date of grant but vests over a three-year
period at a rate of approximately 1/36 at the end of one month following the
date of grant and approximately 1/36 per month thereafter, as long as the
optionee remains an employee of the Company. The term of each option is no
more than ten years from the date of grant unless terminated sooner pursuant
to the provisions of the 1997 Option Plan. In the event of a change of control
of the Company, including a merger or sale of substantially all of the
Company's assets, outstanding options will terminate unless they are assumed
by the acquiring corporation.
1997 Outside Directors Stock Option Plan. The 1997 Outside Directors Stock
Option Plan (the "Directors Plan") was adopted by the Board of Directors in
November 1997, subject to stockholder approval. A total of 125,000 shares of
Common Stock have been reserved for issuance under the Directors Plan. The
Directors Plan provides for the grant of nonstatutory stock options to
nonemployee directors of the Company. The Directors Plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the Board of Directors. The Directors Plan
provides that each future nonemployee director of the Company will be granted
an option to purchase 20,000 shares of Common Stock on the date on which the
optionee first becomes a nonemployee director of the Company (the "Initial
Grant"). Thereafter, on the date of each annual meeting of the Company's
stockholders, each nonemployee director who has served on the Board of
Directors continuously for 6 months will be granted an additional option to
purchase 5,000 shares of Common Stock (an "Annual Grant"). Subject to an
optionee's continuous service with the Company, the Initial Grant will become
exercisable 1/36 per month. Each Annual Grant will become exercisable in
twelve monthly installments beginning in the 25th month after the date of
grant, subject to the optionee's continuous service. The exercise price per
share of all options granted under the Directors Plan will equal the fair
market value of a share of Common Stock on the date of grant. Options granted
under the Directors Plan have a term of ten years and are non-transferable. In
the event of certain changes in control of the Company, options outstanding
under the Directors Plan will become immediately exercisable and vested in
full.
Employee Stock Purchase Plan. A total of 200,000 shares of the Company's
Common Stock have been reserved for issuance under the Company's 1997 Employee
Stock Purchase Plan (the "Purchase Plan"), none of which have yet been issued.
The Purchase Plan permits full time employees of the Company or a parent or
subsidiary of the Company as designated by the Board of Directors to purchase
Common Stock at a discount,
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<PAGE>
but only through payroll deductions, during concurrent offering periods of
approximately 24 months in duration. Each offering period will be divided into
four consecutive purchase periods, each of which is generally six months long.
The price at which stock is purchased under the Purchase Plan is equal to 85%
of the fair market value of the Common Stock on the first day of the offering
period or the last day of the purchase period, whichever is lower. The initial
offering period will commence on the date this offering is completed and will
end on January 31, 2000.
Employment Agreements
The Company entered into an employment agreement with Mr. Mott on March 1,
1995 for a term of three years. The agreement provides that Mr. Mott will
serve as Senior Vice President, Sales and Marketing, and will be nominated to
join the Board of Directors of the Company. The agreement sets forth an
initial base salary of $238,000, subject to an annual raise and/or bonus
consistent with the Company's practices, provides for customary employee
benefits and provides for an expense allowance of up to $1,000 a month. The
agreement provides for a grant of an option to purchase 400,000 shares of the
Company's Common Stock at the time of the execution of the employment
agreement (the "Employment Option") which will vest monthly over a three year
period. In the event of Mr. Mott's termination of employment with the Company
for any reason, the agreement provides Mr. Mott with any unpaid salary,
expenses and benefits up to his date of termination. In the event that Mr.
Mott's employment with the Company is terminated without "cause" or he resigns
for "good reason" (as these terms are defined in the agreement), Mr. Mott will
also be entitled to any unpaid bonus earned to his date of termination, a one-
time, lump-sum severance payment of $250,000, and accelerated vesting of one
year on his Employment Options. In the event that the Company is involved in a
merger where it is not the surviving entity or the Company sells substantially
all its assets, the Employment Option will become 100% vested. The agreement
also contains nonsolicitation, intellectual property assignment, and
confidentiality provisions.
The Company entered into an at will employment agreement with Mr. Evans on
September 8, 1995 for an unspecified term for the position of Vice President,
Finance and Chief Financial Officer. The agreement sets forth an initial base
salary of $96,000, subject to an annual raise consistent with the Company's
practices and provides for customary employee benefits. The agreement provides
for a grant of an option to purchase 65,000 shares of the Company's Common
Stock which will vest monthly over a three year period. In the event the
Company is acquired by another entity, the agreement provides that all of Mr.
Evans' unvested options will vest automatically. In the event that Mr. Evans
is terminated by the Company, the agreement provides for a one-time, lump-sum
severance payment of $50,000 in return for Mr. Evans promptly returning all
Company property and proprietary information and continuing to maintain the
Company's confidentiality agreements.
Limitations on Directors' Liabilities and Indemnification
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which
provide that directors of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) an act related to the unlawful stock
repurchase or payment of a dividend under Section 174 of Delaware General
Corporation Law; and (iv) transactions from which the director derived an
improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company
intends to enter into separate indemnification agreements with its directors
and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses
43
<PAGE>
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms.
At present, there is no pending litigation or proceeding involving a
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 which may result in a claim for such indemnification.
44
<PAGE>
CERTAIN TRANSACTIONS
In August 1995, the Company sold shares of Series C Preferred Stock
convertible into 381,024 shares of Common Stock at a price of $5.25 to ALZA
Corporation ("ALZA"), a 10.7% stockholder of the Company, in return for
aggregate cash consideration of approximately $2.0 million. The Company also
entered into a loan agreement with ALZA pursuant to which it issued ALZA a
warrant to purchase shares of Series C Preferred Stock convertible into 72,327
shares of Common Stock, at an exercise price of $6.913 per share, (the "ALZA
Warrant") in return for a loan commitment of up to $2.0 million, of which the
Company drew down $1.0 million. The Company also entered into an agreement
with ALZA pursuant to which ALZA undertook to act as a promotional
representative for the Company's AirWatch products and services in the United
States to the managed care industry and third party payors, and the Company
agreed to pay ALZA certain commissions, as set forth in the agreement, on the
net sales in the United States of products and/or services which are related
to the measurement and reporting of pulmonary function in connection with
respiratory illness unless the agreement is terminated for cause. Through
December 31, 1997, the Company has incurred commission expenses of $423,000
pursuant to this agreement.
In April 1995, R.D. Merrill Corporation ("R.D. Merrill"), together with its
affiliates a 12.7% stockholder of the Company, loaned an aggregate of $500,000
to the Company in return for a term note, which was repaid in fiscal 1995, and
a warrant to purchase shares of Series C Preferred Stock convertible into
95,256 shares of Common Stock at an exercise price of $4.20 per share. The
right to purchase 47,628 of such shares was subsequently transferred to
affiliates of R.D. Merrill Corporation.
In March 1996, the Company issued to each of Mr. Wager (and his assignees)
and Mr. Cooley, directors of the Company, options to purchase 20,000 shares of
common stock at an exercise price of $0.50 per share in consideration of
services rendered to the Company.
In August 1996, the Company and ALZA entered into an amendment to the
original loan agreement, pursuant to which the Company issued a $1.0 million
convertible note, $250,000 of which is convertible into 36,164 shares of
Series C Preferred Stock at a conversion price of $6.913 per share and
$750,000 of which is convertible in 135,624 shares of Series C Preferred Stock
at a conversion price of $5.53 per share, and cancelled a portion of the
warrant representing 36,163 shares of Series C Preferred Stock with an
exercise price of $6.913 per share.
In September 1996, the Company issued a warrant to purchase 9,000 shares of
Common Stock at an exercise price of $0.50 per share to R.D. Merrill and
issued warrants to purchase 9,000 shares of Common Stock at an exercise price
of $0.50 per share to certain affiliates of R.D. Merrill in connection with
the November 1995 loan.
In October 1996, R.D. Merrill agreed to loan the Company up to an aggregate
of $1.5 million under the terms of a Convertible Note, which was amended in
November 1997 to extend the term and increase the number of shares issuable
under such note. The Company has drawn down $1.5 million under such
Convertible Note which becomes convertible into 204,545 shares of Common Stock
upon the consummation of this offering.
In October 1996, Nippon Enterprises Development agreed to loan the Company
$500,000 under the terms of a Convertible Note, which was amended in November
1997 to extend the term and increase the number of shares issuable under such
note. In December 1997 the note was amended again to provide for the
commitment of an additional $500,000. The Company has not drawn down the
additional $500,000 under such Convertible Note. The outstanding borrowings
become convertible into 83,333 shares of Common Stock upon the consummation of
this offering.
In December 1996, the Company issued to Mr. Wager, a director of the
Company, in consideration of certain consulting services rendered to the
Company, an option to purchase 20,000 shares of Common Stock at an exercise
price of $5.00 per share. Also in 1996 the Company paid a $250,000 commission
to Cable & Howse
45
<PAGE>
Ventures, a private venture capital firm, of which Mr. Wager is a partner in
connection with their services securing the Teijin agreement.
In July 1997, the Company sold 250,000 and 25,373 shares of Series D
Convertible Preferred Stock to Johnson & Johnson Development Corporation
("J&J"), a 7.1% stockholder, and ALZA, respectively, at a price per share of
$12.00 (the "Series D Shares"). The Series D Shares are convertible into
Common Stock based on a percentage of the price per share paid in a subsequent
equity financing which results in gross proceeds of at least $10.0 million. If
this offering closes on or prior to February 20, 1998 the Series D Shares held
by J&J and ALZA will convert into 419,580 and 42,584 shares of Common Stock,
respectively (assuming an initial public offering price of $11.00 per share).
If this offering closes after February 20, 1998, the Series D Shares held by
J&J and ALZA will convert into 545,454 and 55,359 shares of Common Stock,
respectively. The Company also entered into a Development and Marketing
Agreement with LifeScan which provides for the use of various LifeScan blood
glucose monitors with the ENACT Reporter and the development of Care Central
reports and services to meet the needs of healthcare providers and patients in
the diabetes field.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of December 31, 1997 (after giving
effect to the conversion of the Convertible Preferred Stock, the exercise of
warrants to purchase Convertible Preferred Stock of the Company and the
conversion thereof into 131,420 shares of Common Stock), and as adjusted to
reflect the sale of the shares of Common Stock offered hereby by (i) each
person who is known by the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each of the named executive officers, (iii) each of
the Company's directors, and (iv) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OWNED
SHARES -------------------------
NAMES AND ADDRESSES BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNERS(1) OWNED (2) THE OFFERING THE OFFERING
- ----------------------- ------------ ------------ ------------
<S> <C> <C> <C>
5% STOCKHOLDERS
R. D. Merrill Company.............. 885,801(3) 15.0% 9.9%
95 South Jackson Street, Suite 300
Seattle, WA 98104-2818
ALZA Corporation................... 656,560(4) 10.7 7.2
950 Page Mill Road
Palo Alto, CA 94304
Johnson & Johnson Development
Corporation....................... 419,580(5) 7.1 4.7
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
First Marathon Securities, Ltd..... 305,300(6) 5.2 3.4
Commerce Place
400 Burrad St., Suite 2001
Vancouver, BC Canada V6C 3A6
DIRECTORS AND NAMED EXECUTIVE
OFFICERS
Matthew H. L. Sanders.............. 1,303,752 22.0 14.6
Chris A. Tacklind.................. 480,000(7) 8.1 5.4
Gilbert S. Mott, Jr................ 400,000(8) 6.3 4.3
Eitan M. Fenson, Ph.D. ............ 125,000(9) 2.1 1.4
Wayne C. Wager..................... 78,733(10) 1.3 *
A. Crawford Cooley................. 126,500(11) 2.1 1.4
Ernest Mario, Ph.D. ............... 656,560(12) 10.7 7.2
Henry W. Evans..................... 95,000(13) 1.6 1.0
All directors and executive
officers as a group (9 persons)... 3,365,545(14) 56.9 37.8
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, the business address is in care of the
Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of
December 31, 1997 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage ownership
of each other person. The persons named in this table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and except as indicated in the other footnotes to this table.
47
<PAGE>
(3) Includes 284,000 shares of Common Stock held by affiliates of R.D.
Merrill, 204,545 shares of common stock issuable upon conversion of a
convertible note and 18,000 shares of Common Stock issuable upon exercise
of warrants which do not terminate on the completion of this offering, of
which 9,000 shares are held of record by affiliates of R.D. Merrill.
Although R.D. Merrill may be deemed to be a beneficial owner of the
shares and shares subject to warrants held by its affiliates, it
disclaims all such beneficial ownership except to the extent of any
pecuniary interest therein which it may have.
(4) Includes 171,788 shares of Common Stock issuable upon conversion of a
convertible note and 25,000 shares of Common Stock issuable upon exercise
of stock options held of record by Dr. Mario who is Chief Executive
Officer of ALZA Corporation. Although ALZA Corporation may be deemed to
be a beneficial owner of such shares, it disclaims all such beneficial
ownership except to the extent of any pecuniary interest therein which it
may have.
(5) Johnson & Johnson Development Corporation is a wholly-owned subsidiary of
Johnson & Johnson, a public corporation.
(6) The beneficial owner of the shares held by First Marathon Securities,
Ltd. is Peripatetic Investments, Ltd. ("Peripatetic"). The sole owner,
director and shareholder of Peripatetic is Robert Disbrow, an individual.
(7) Includes 30,000 shares of Common Stock held of record by a trust for the
benefit of the minor children of Mr. Tacklind. Although Mr. Tacklind may
be deemed to be a beneficial owner of such shares, he disclaims all such
beneficial ownership except to the extent of any pecuniary interest
therein which he may have.
(8) Includes 400,000 shares of Common Stock issuable upon exercise of stock
options, none of which are subject to a right of repurchase in favor of
the Company on the date 60 days from December 31, 1997.
(9) Includes 50,000 shares of Common Stock issuable upon exercise of stock
options, of which 26,388 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997.
(10) Includes 20,000 shares of Common Stock issuable upon exercise of stock
options, of which 8,833 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997.
(11) Includes 35,500 shares of Common Stock held of record by a trust for
which Mr. Cooley is trustee. Although Mr. Cooley may be deemed to be a
beneficial owner of such shares, he disclaims all such beneficial
ownership except to the extent of any pecuriary interest therein he may
have.
(12) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options on the date 60 days from December 31, 1997, and 459,771 shares of
Common Stock and 171,788 shares of Common Stock issuable upon conversion
of a convertible note held of record by ALZA Corporation, of which Dr.
Mario is Chief Executive Officer. Although Dr. Mario may be deemed to be
a beneficial owner of such shares, he disclaims all such beneficial
ownership except to the extent of any pecuniary interest therein which he
may have.
(13) Includes 30,000 shares of Common Stock issuable upon exercise of stock
options, of which 15,833 were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997 and 12,639 shares of unvested Common Stock subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997.
(14) Includes 525,000 shares of Common Stock issuable upon exercise of stock
options, of which 105,831 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997, 65,500 shares held of record by trusts for which an officer or
director is trustee and 631,560 shares owned by ALZA Corporation, of
which Dr. Mario is Chief Executive Officer, 171,788 shares of which are
issuable upon conversion of a convertible note.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 of Common Stock, $0.001 par value, of which
8,912,853 shares will be outstanding and 2,000,000 of Preferred Stock, $0.001
par value. Each outstanding share of Convertible Preferred Stock will be
automatically converted into one share of Common Stock upon the closing of the
offering being made hereby. Upon such conversion, such Preferred Stock will
revert to authorized but unissued shares of preferred stock. The following
description of the capital stock of the Company and certain provisions of the
Company's Certificate of Incorporation (the "Certificate of Incorporation")
and Bylaws is a summary and is qualified in its entirety by the provisions of
the Certificate of Incorporation and Bylaws, copies of which have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
At December 31, 1997, there were 5,912,853 shares of Common Stock
outstanding held of record by 108 holders after giving effect to the
conversion of all outstanding shares of Convertible Preferred Stock and the
exercise of outstanding warrants which terminate upon the closing of this
offering. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders.
Stockholders do not have the right to cumulate their votes in the election of
directors. Subject to preferences that may be applicable to any outstanding
shares of Convertible Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available for the payment of dividends. See "Dividend
Policy." Holders of Common Stock have no preemptive rights and no right to
convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are, and all shares of Common Stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 2,000,000 shares of undesignated Preferred Stock. The Board of
Directors will have the authority to (i) issue the undesignated Preferred
Stock in one or more series and to determine the powers, preferences and
rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated Preferred Stock and
(ii) fix the number of shares constituting any series and the designation of
such series without any further vote or action by the shareholders. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. At present, the Company has no plans to issue any
shares of Preferred Stock.
REGISTRATION RIGHTS
After this offering, the holders of 3,389,533 shares of the Company's Common
Stock and a holder of a note convertible into an additional 171,788 shares of
the Company's Common Stock will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. Under the terms of
the agreement between the Company and the holders of such registrable
securities, if the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
securityholders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. Subject to certain limitations in the agreement, the holders of
registrable shares may require, on two occasions, that the Company use its
best efforts to register such shares for public resale, subject to certain
limitations. Further, holders may require the Company to file additional
registration statements on Form S-3 at the Company's expense. These rights are
subject to certain conditions and limitation, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration in certain circumstances.
49
<PAGE>
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law.
In general, Section 203 of the Delaware Law prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have an anti-takeover effect, including attempts that might result
in a premium over the market price for the shares of Common Stock held by
stockholders.
The Company's Certificate of Incorporation provides that, upon the closing
of this offering, the Board of Directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
the Company and may maintain the incumbency of the Board of Directors, as it
generally makes it more difficult for stockholders to replace a majority of
the directors. The Company's Certificate of Incorporation also eliminates the
right of stockholders to act without a meeting and does not provide for
cumulative voting in the election of directors. These and other provisions may
have the effect of deferring hostile takeovers or delaying changes in control
or management of the Company. The amendment of any of these provisions would
require approval by holders of 66 2/3% or more of the outstanding Common
Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for shares of Common
Stock of the Company. Future sales of substantial amounts of Common Stock in
the public market could adversely affect market prices prevailing from time to
time.
Upon completion of this offering, the Company will have outstanding
8,912,853 shares of Common Stock, based on the number of shares of Common
Stock outstanding as of December 31, 1997 and giving effect to the conversion
of all outstanding shares of Convertible Preferred Stock and the exercise of
outstanding warrants which terminate upon completion of this offering. Of
these shares, the 3,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act
unless purchased by "affiliates" of the Company as that term is defined in
Rule 144 of the Securities Act. The remaining 5,912,853 shares will be
"restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares"). Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the number
of shares of Common Stock then outstanding or the average weekly trading
volume of the Common Stock as reported through the Nasdaq National Market
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an "affiliate" of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned for at least two years the shares
proposed to be sold, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. In general, Rule 701
permits resale of shares issued pursuant to certain compensatory benefit plans
and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144.
Upon completion of this offering 2,470,027 Restricted Shares of Common Stock
(2,292,033 of which are subject to the lock-up agreements described below)
held by current stockholders will be immediately eligible for sale in the
public market without restriction pursuant to Rule 144(k) of the Securities
Act. An additional 2,757,575 Restricted Shares of Common Stock (2,757,575 of
which are subject to the lock-up agreements described below) will be eligible
for sale beginning 90 days after the date of this Prospectus pursuant to Rule
144 of the Securities Act.
All directors, officers and certain stockholders holding in the aggregate
5,734,859 shares of Common Stock outstanding prior to this offering have
agreed that for a period of 180 days after the date of this Prospectus (the
"Lockup Period") they will not, without the prior written consent of Smith
Barney, offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for any shares of Common Stock. See "Underwriting."
The Company has granted registration rights to certain of its
securityholders. See "Description of Capital Stock--Registration Rights."
51
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc......................................................
Lehman Brothers Inc...................................................
---------
Total............................................................... 3,000,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. ("Smith Barney") and Lehman
Brothers Inc. are acting as Representatives, propose initially to offer part
of the shares of Common Stock directly to the public at the public offering
price set forth on the cover page hereof and part to certain dealers at a
price that represents a concession not in excess of $ per share under the
public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to other Underwriters or
to certain other dealers. After the initial public offering, the public
offering price and such concessions may be changed by the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
450,000 additional shares of Common Stock at the public offering price set
forth on the cover page hereof less underwriting discounts and commissions.
The Underwriters may exercise such option to purchase additional shares solely
for the purpose of covering over-allotments, if any, incurred in connection
with the sale of the shares offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
In connection with this offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more shares of Common Stock than the
total amount shown on the list of Underwriters and participations which appear
above) and may effect transactions which stabilize, maintain or otherwise
affect the market price of the shares of Common Stock at levels above those
which might otherwise prevail in the open market. Such transactions may
include placing bids for the shares of Common Stock or effecting purchases of
the shares of Common Stock for the purpose of pegging, fixing or maintaining
the price of the shares of Common Stock or for the purpose of reducing a
syndicate short position created in connection with this offering. A
52
<PAGE>
syndicate short position may be covered by exercise of the option described
above in lieu of or in addition to open market purchases. In addition, the
contractual arrangements among the Underwriters include a provision whereby,
if the Underwriters purchase shares of Common Stock in the open market for the
account of the underwriting syndicate and the securities purchased can be
traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the shares of Common Stock in question at the cost price
to the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
The Company and its directors, officers and stockholders holding in the
aggregate 5,734,859 shares of Common Stock outstanding prior to this offering,
have agreed that, for a period of 180 days after the date of this Prospectus,
they will not, without the prior written consent of Smith Barney, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for any shares of
Common Stock except, in the case of the Company, in certain limited
circumstances.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
has been determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors considered in
determining the initial public offering price will be the history of, and the
prospects for, the Company's business and the industry in which it competes,
an assessment of the Company's management, its past and present operations,
its past and present earnings and the trend of such earnings, the prospects
for earnings of the Company, the present state of the Company's development,
the general condition of the securities market at the time of this offering
and the market prices and earnings of similar securities of comparable
companies at the time of this offering.
Lehman Brothers Inc., an Underwriter of this offering, acted as financial
advisor to the Company in connection with the sale by the Company of 250,000
shares of Series D Convertible Preferred Stock to Johnson & Johnson
Development Corporation in July 1997 for which the Company received net
proceeds of $2.8 million. For its services, Lehman Brothers Inc. will receive
customary compensation and reimbursement of its related expenses.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by its counsel, Gray Cary Ware & Freidenrich LLP ("GCWF"), 400
Hamilton Avenue, Palo Alto, CA 94301. Certain legal matters will be passed
upon for the Underwriters by Dewey Ballantine LLP, 1301 Avenue of the
Americas, New York, New York 10019. GCWF Partners I, an investment partnership
composed of certain current and former attorneys of GCWF, beneficially owns
14,200 shares of the Common Stock of the Company.
EXPERTS
The financial statements of the Company at December 31, 1996 and 1997, and
for each of the three years in the period ended December 31, 1997, appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
53
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the Common Stock offered hereby Statements contained herein
concerning the provisions of any documents are not necessarily complete, and
in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement, including exhibits and
schedules filed therewith, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New
York, New York 10007 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois, at prescribed rates. In addition, certain of the
documents filed by the Company with the Commission are available through the
Commission's Electronic Data Gathering and Retrieval System ("EDGAR") at
http://www.sec.gov. For further information pertaining to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the Financial Statements notes and
schedules included as a part thereof.
54
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Audited Financial Statements
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statement of Stockholders' Equity (Net Capital Deficiency).................. F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ENACT Health Management Systems
We have audited the accompanying balance sheets of ENACT Health Management
Systems as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ENACT Health Management
Systems at December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 6, 1998
F-2
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DECEMBER 31, DEFICIENCY) AT
----------------- DECEMBER 31,
1996 1997 1997 (NOTE 6)
------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 1,048 $ 1,088
Accounts receivable, net of allowance for
doubtful accounts of $79 and $39 in 1996
and 1997, respectively.................... 1,162 139
Inventories................................ 224 407
Deferred financing costs................... -- 530
Other current assets....................... 17 47
------- --------
Total current assets......................... 2,451 2,211
Property and equipment, net.................. 435 679
Deposits..................................... 13 11
------- --------
$ 2,899 $ 2,901
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET
CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable........................... $ 579 $ 1,179
Accrued liabilities........................ 153 240
Accrued financing costs.................... -- 470
Current portion of capital lease
obligations............................... 180 332
Deferred revenue........................... 1,572 721
Convertible notes payable to stockholder... -- 2,000
------- --------
Total current liabilities.................... 2,484 4,942
Long-term capital lease obligations.......... 243 309
Note payable to stockholder.................. 1,000 1,000
Convertible notes payable to stockholders.... 2,000 1,000
Commitments
Stockholders' equity (net capital
deficiency):
Convertible Preferred Stock, $0.001 par
value, 10,000,000 shares authorized,
issuable in series; 2,927,369 shares
issued and outstanding at December 31,
1996 and 3,202,742 shares issued and
outstanding at December 31, 1997;
2,000,000 shares authorized and no shares
issued and outstanding pro forma
(aggregate liquidation preference of
$7,742,000 at December 31, 1997), at
amounts paid in........................... 4,374 7,492 $ --
Common Stock, $0.001 par value, 20,000,000
shares authorized, 2,389,500 and 2,391,900
shares issued and outstanding at
December 31, 1996 and 1997, respectively;
50,000,000 shares authorized, 5,912,853
shares issued and outstanding pro forma... 205 106 6
Additional paid-in capital................. -- 353 8,595
Deferred compensation...................... (39) (259) (259)
Note receivable from stockholder........... (32) (32) (32)
Accumulated deficit........................ (7,336) (12,010) (12,010)
------- -------- --------
Total stockholders' equity (net capital
deficiency)................................. (2,828) (4,350) $ (3,700)
------- -------- ========
$ 2,899 $ 2,901
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Product sales...................................... $ -- $ 1,162 $ 4,075
Service revenue.................................... -- 414 1,204
Contract and other revenue......................... 614 1,520 1,180
------- ------- -------
Total revenue...................................... 614 3,096 6,459
Operating costs and expenses:
Cost of product sales............................ -- 877 3,498
Cost of service revenue.......................... -- 435 1,071
Cost of contract and other revenue............... -- 484 437
Research and development......................... 1,365 1,752 2,035
Sales and marketing.............................. 1,185 1,475 2,758
General and administrative....................... 420 770 1,085
------- ------- -------
Total operating costs and expenses................. 2,970 5,793 10,884
------- ------- -------
Loss from operations............................... (2,356) (2,697) (4,425)
Interest income.................................... 29 61 86
Interest expense................................... (53) (171) (335)
------- ------- -------
Net loss........................................... $(2,380) $(2,807) $(4,674)
======= ======= =======
Pro forma basic net loss per share................. $ (0.81)
=======
Shares used in computing pro forma basic net loss
per share......................................... 5,782
=======
</TABLE>
See accompanying notes.
F-4
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
NOTE STOCKHOLDERS'
CONVERTIBLE ADDITIONAL RECEIVABLE EQUITY
PREFERRED COMMON PAID-IN DEFERRED FROM ACCUMULATED (NET CAPITAL
STOCK STOCK CAPITAL COMPENSATION STOCKHOLDER DEFICIT DEFICIENCY)
----------- ------ ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $2,398 $ 28 $-- $ -- $-- $ (2,149) $ 277
Issuance of 125,000
shares of Common
Stock for services at
$0.15 per share...... -- 19 -- -- -- -- 19
Issuance of 381,024
shares of Series C
convertible Preferred
Stock for cash at
$5.25 per share, net
of issuance costs of
$24.................. 1,976 -- -- -- -- -- 1,976
Deferred compensation
related to grant of
stock options........ -- -- 100 (100) -- -- --
Amortization of
deferred
compensation......... -- -- -- 28 -- -- 28
Net loss.............. -- -- -- -- -- (2,380) (2,380)
------ ---- ---- ----- ---- -------- -------
Balance at December 31,
1995................... 4,374 47 100 (72) -- (4,529) (80)
Issuance of 50,000
shares of Common
Stock upon exercise
of warrants.......... -- 1 -- -- -- -- 1
Issuance of 114,500
shares of Common
Stock upon exercise
of options........... -- 57 -- -- (32) -- 25
Amortization of
deferred
compensation......... -- -- -- 33 -- -- 33
Net loss.............. -- -- -- -- -- (2,807) (2,807)
------ ---- ---- ----- ---- -------- -------
Balance at December 31,
1996................... 4,374 105 100 (39) (32) (7,336) (2,828)
Issuance of 275,373
shares of Series D
convertible Preferred
Stock for cash at
$12.00 per share, net
of issuance costs of
$186................. 3,118 -- -- -- -- -- 3,118
Issuance of 2,400
shares of Common
Stock upon exercise
of options........... -- 1 -- -- -- -- 1
Deferred compensation
related to grant of
stock options........ -- -- 253 (253) -- -- --
Amortization of
deferred compensation
..................... -- -- -- 33 -- -- 33
Net loss.............. -- -- -- -- -- (4,674) (4,674)
------ ---- ---- ----- ---- -------- -------
Balance at December 31,
1997 .................. $7,492 $106 $353 $(259) $(32) $(12,010) $(4,350)
====== ==== ==== ===== ==== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................... $(2,380) $(2,807) $(4,674)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 49 199 329
Amortization of deferred compensation............ 28 33 33
Issuance of Common Stock for services............ 19 -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (53) (1,109) 1,023
Inventories.................................... (90) (134) (183)
Deferred financing costs....................... -- -- (530)
Other assets................................... (69) 39 (28)
Accounts payable, accrued financing costs and
accrued liabilities........................... 498 154 1,157
Deferred revenue............................... 2,020 (448) (851)
------- ------- -------
Net cash provided by (used in) operating
activities........................................ 22 (4,073) (3,724)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net........... (21) (34) (73)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of Preferred and Common
Stock............................................. 1,976 26 3,119
Proceeds from issuance of notes payable............ 1,500 2,000 1,000
Repayment of note payable.......................... (500) -- --
Principal payments on capital lease obligations.... (33) (155) (282)
------- ------- -------
Net cash provided by financing activities.......... 2,943 1,871 3,837
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 2,944 (2,236) 40
Cash and cash equivalents at beginning of period... 340 3,284 1,048
------- ------- -------
Cash and cash equivalents at end of period......... $ 3,284 $ 1,048 $ 1,088
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES
Acquisition of equipment with capital lease
financing......................................... $ 84 $ 450 $ 500
======= ======= =======
Deferred compensation related to grant of stock
options........................................... $ 100 $ -- $ --
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................. $ 53 $ 110 $ 260
======= ======= =======
Issuance of Common Stock for stockholder note...... $ -- $ 32 $ --
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
ENACT Health Management Systems (the "Company" or "ENACT"), a California
corporation is a tele-health monitoring company which collects objective
physiological data regarding patients' health states and provides timely low-
cost reporting of that information to patients, case managers, clinicians and
other members of the care team.
The Company has funded its operations to date through issuances of Common
and Preferred Stock, notes payable, technology licensing arrangements and
product sales. In the absence of positive cash flows from operations,
management believes that additional funds will be available from public or
private equity or debt financings, collaborative or other arrangements with
corporate partners or from other sources in amounts sufficient to fund
continuing operations. The Company has limited arrangements with respect to,
or sources of, additional financing. Any additional financing may involve
substantial dilution to the interest of the Company's stockholders, and any
debt financing could result in operational or financial restrictions on the
Company. If adequate funds are not available, the Company may be required to
substantially reduce its operations, eliminate one or more of its research or
development programs or obtain funds through arrangements with corporate
partners or others which may require the Company to relinquish certain rights
to its technologies or product candidates that it would otherwise seek to
retain. There can be no assurance that any additional financing will be
available to the Company on acceptable terms or at all.
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 amounts reported in the financial statements and
the accompanying notes. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
The Company invests its excess cash in a money market account which bears
minimal risk and is available on demand. The Company has not experienced any
realized gains or losses on its cash equivalents. The fair value of the money
market account approximates its carrying value at December 31, 1996 and 1997.
CONCENTRATION OF CREDIT RISK
The Company has sold its products and services directly to major
pharmaceutical companies under contractual arrangements and to others through
a combination of direct sales, distributors and corporate partners. The
Company performs ongoing credit evaluations of its customers and generally
does not require collateral. Uncollectible accounts receivable have not been
significant. Revenues from customers representing 10% or more of total revenue
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Source:
Customer A...................................... 81% 49% 2%
Customer B...................................... -- 23% 6%
Customer C...................................... -- -- 60%
Customer D...................................... -- -- 15%
</TABLE>
F-7
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES
Inventory, consisting primarily of finished goods and purchased components,
is valued at the lower of cost or market on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three years.
REVENUE RECOGNITION
Revenues from the sale of monitoring devices are recognized upon shipment.
Revenues from monitoring services are recognized as the services are performed
over the contract term. Revenues from collaborations with corporate partners
are recognized as the Company fulfills its obligations under the related
contracts (see Note 2). Deferred revenue primarily represents unrecognized
contract and service revenue.
STOCK-BASED COMPENSATION
The Company has elected to continue to use the intrinsic value method of
accounting for stock-based compensation, as permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and thus recognizes no compensation expense for
options granted with exercise prices that are not less than the fair value of
the Company's Common Stock on the date of grant.
NET LOSS PER SHARE
Effective December 31, 1997, the Company adopted statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented.
In accordance with SFAS 128, basic net loss per share has been computed
using the weighted-average number of shares of Common Stock outstanding during
the period, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common shares issued in each of the periods
presented for nominal consideration have been included in the calculation as
if they were outstanding for all periods presented. Diluted net loss per share
has not been presented as given the Company's net loss position the result
would be anti-dilutive.
Basic pro forma net loss per share as presented in the Statement of
Operations has been computed as described above and also gives effect to the
conversion of the convertible Preferred Stock that will automatically convert
upon completion of the Company's initial public offering (using the as-if
converted method) from the original date of issuance.
F-8
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of shares used in the calculation of basic and pro forma
basic net loss per share follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss............................... $(2,380,000) $(2,807,000) $(4,674,000)
=========== =========== ===========
Basic
Weighted average shares of Common Stock
outstanding........................... 2,192,033 2,259,516 2,390,237
Shares related to Staff Accounting
Bulletin No. 98:
Common Stock......................... 199,867 132,112 2,035
----------- ----------- -----------
Shares used in computing basic net loss
per share............................. 2,391,900 2,391,628 2,392,272
=========== =========== ===========
Basic net loss per share............... $ (1.00) $ (1.17) $ (1.95)
=========== =========== ===========
Pro Forma Basic
Shares used in computing basic net loss
per share............................. 2,392,272
Adjusted to reflect the effect of the
assumed conversion of Preferred
Stock................................. 3,389,533
-----------
Shares used in computing pro forma
basic net loss per share.............. 5,781,805
===========
Pro forma basic net loss per share..... $ (0.81)
===========
</TABLE>
Had the Company been in a net income position, diluted earnings per share
would have been presented and would have included the shares used in the
computation of pro forma basic net loss per share as well as an additional
745,783 shares related to outstanding options and warrants not included above
(as determined using the treasury stock method at the estimated public
offering price) and 171,788 shares related to convertible notes payable. See
also Note 5 for a description of contingently convertible notes payable.
2. DEVELOPMENT AND MARKETING AGREEMENTS
In August 1995, the Company entered into an agreement with ALZA Corporation
("ALZA"), under which ALZA will promote certain products and services provided
by the Company to customers in the managed care industry and to third-party
payors. Under the agreement, the Company shall pay ALZA a commission on net
sales until the agreement terminates on March 31, 2001, or after termination
under certain conditions. During the years ended December 31, 1996 and 1997,
the Company recognized commission expense of $88,000 and $335,000,
respectively, pursuant to this agreement. At December 31, 1996 and 1997, the
Company owed $70,000 and $127,000 to ALZA related to commissions. In
conjunction with this arrangement, ALZA purchased 381,024 shares of Series C
convertible Preferred Stock and, subject to the satisfaction of certain
conditions, made available to the Company a $2.0 million line of credit (see
Note 5).
In September and November 1995, the Company entered into agreements with
Teijin, Ltd. ("Teijin") under which the Company agreed to license its
monitoring technology in the asthma field for evaluation and clinical trial
purposes in Japan. In exchange, the Company received non-refundable payments
of $2.5 million which are being recognized as revenue as the Company's
obligations under the contract are fulfilled, including delivery of computer
equipment, related technology and technical support. The Company may also
receive up to $2.0 million upon the achievement of certain milestones by
Teijin, including the negotiation of a distribution agreement between the
parties. No milestone payments have been earned or received to date. During
the years ended December 31, 1995, 1996 and 1997, revenue totaling $500,000,
$1.5 million and $156,000, respectively, was recognized pursuant to this
agreement. At December 31, 1997, $324,000 is included in deferred revenue.
During 1996, the Company paid a $250,000 commission related to this contract
to a firm in which one of the Company's directors is a partner.
F-9
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In July 1997, the Company entered into an agreement with LifeScan, Inc., a
subsidiary of Johnson & Johnson ("LifeScan"), under which LifeScan will
develop, market and distribute various products and services which utilize the
Company's health monitoring and reporting systems in the diabetes field. Under
the agreement, the Company will complete pre-commercial development of its
diabetes product, manufacture a specified number of pilot production units, and
provide pre-commercial monitoring and reporting services for a specified number
of patients. In exchange, the Company is entitled to receive $1.8 million, of
which $1.0 million was received and recognized as revenue upon completion of
certain pre-commercial development activities and the delivery of the pilot
production units in 1997. The remaining $800,000 was received in January 1998
and will be recognized as revenues as the Company fulfills its obligations to
provide pre-commercial monitoring and reporting services under the agreement.
Additionally, the Company issued 250,000 shares of Series D Preferred Stock at
$12.00 per share to Johnson & Johnson for gross proceeds of $3.0 million (see
Note 6).
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures.................................... $ 4 $ 10
Computers and purchased software.......................... 737 1,165
------ -------
741 1,175
Less accumulated depreciation............................. (306) (496)
------ -------
Property and equipment, net............................... $ 435 $ 679
====== =======
</TABLE>
Computers and purchased software include approximately $1.0 million recorded
under capital leases at December 31, 1997 ($628,000 at December 31, 1996). The
related accumulated amortization totaled approximately $444,000 at December 31,
1997 ($231,000 at December 31, 1996).
4. COMMITMENTS
OPERATING LEASE COMMITMENTS
The Company leases its facilities under agreements expiring in October 1998.
Rent expense was approximately $48,000, $115,000 and $189,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1997,
minimum rental payments under operating leases were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998..................................................... $123
1999..................................................... 10
----
$133
====
</TABLE>
CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancelable capital leases.
Obligations under capital leases represent the present value of future
noncancelable rental payments under various lease agreements. Upon completion
of each lease, the Company has the option to renew the lease or purchase the
equipment for $1.00.
F-10
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital leases are as follows at December
31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year ended
1998...................................................... $388
1999...................................................... 255
2000...................................................... 74
----
Total minimum lease payments................................ 717
Less amount representing interest........................... (76)
----
Present value of net minimum lease payments................. 641
Less current portion........................................ 332
----
Long-term portion........................................... $309
====
</TABLE>
PURCHASE COMMITMENTS
The Company's monitoring devices and reporters are currently manufactured by
a single supplier with significant operations in Asia. While alternate sources
of supply exist, in the event of the discontinuance of the supplier
relationship, the Company would be required to locate and qualify a new
supplier or suppliers, which could take up to several months. Purchase
commitments for inventory at December 31, 1997 were approximately $244,000. The
Company expects to take delivery of such inventory during the first quarter of
1998.
5. CREDIT FACILITIES
The Company has a $2.0 million line of credit with ALZA (see Note 2), all of
which was outstanding at December 31, 1996 and 1997. Borrowings under the line
of credit must be repaid by June 30, 2000. Interest is payable quarterly at the
then current prime rate (8.5% at December 31, 1997). During 1996, the line of
credit was modified to permit ALZA to convert $1.0 million of outstanding
borrowings under the line of credit into shares of Series C Preferred Stock.
The initial $250,000 of the convertible portion of the line of credit is
convertible at any time by the lender into 36,164 shares of Series C Preferred
Stock. The remaining $750,000 is convertible at any time after June 30, 1997
into 135,624 shares of Series C Preferred Stock. The interest rate on the $1.0
million of convertible borrowings increased to prime plus 1.75% on June 30,
1997.
In October 1996, the Company established $2.0 million of credit facilities
with two stockholders. The credit facilities were originally due to expire on
December 31, 1997, but in November 1997 were extended to December 31, 1998. At
December 31, 1996 and 1997, $1.0 million and $2.0 million, respectively, of
borrowings were outstanding under the credit facilities. The credit facilities
are subordinated to the outstanding borrowings described in the paragraph above
and bear interest at the prime rate. The borrowings become convertible into the
class of equity securities issued in an offering by the Company which generates
gross proceeds to the Company of at least $10.0 million (a "Qualified
Offering"). Initially, the borrowings were to become convertible at 80% of the
price per share paid in a Qualified Offering, however in connection with the
November 1997 extension of the credit facilities, the conversion price was
modified for borrowings outstanding as of that date ($1.0 million) to 50%, and
for any new borrowings to 75%, of the price paid in a Qualified Offering. In no
case will the conversion price be less than $6.00 per share. To the extent that
the value of the shares issuable upon conversion of the outstanding borrowings
exceeds the carrying value of such borrowings, then the difference will be
recognized as an imputed, non-cash charge to interest expense. Thus if the
Company's proposed initial public offering (the "Offering") is consummated at
an $11.00 per share price, the $2.0 million of outstanding borrowings will
become convertible into approximately 288,000 shares of Common Stock with a
market value of $3.2 million, resulting in an imputed, non-cash interest charge
of $1.2 million which will be recognized upon
F-11
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the closing of the Offering. On December 31, 1997, one of the lenders increased
the credit facility by $500,000 which remains available for borrowing at an
interest rate of LIBOR plus 2.5% (8.5% at December 31, 1997). Simultaneously
the lender amended the interest rate on $500,000 of outstanding borrowings to
LIBOR plus 2.5%.
The carrying value of the above obligations approximate their fair value
based on prevailing interest rates.
6. STOCKHOLDERS' EQUITY
In November 1997, the Board of Directors authorized the Company to proceed
with the Offering of the Company's Common Stock. If the Offering is consummated
under the terms presently anticipated, including an assumed offering price of
$11.00 per share, all of the outstanding Preferred Stock at December 31, 1997
will automatically convert into 3,389,533 shares of Common Stock. The
conversion price of outstanding shares of Series D Preferred Stock is dependent
on the initial public offering price as discussed below. Unaudited pro forma
stockholders' equity (net capital deficiency), as adjusted for the assumed
conversion of all outstanding shares of Convertible Preferred Stock and for the
assumed exercise of warrants to purchase 131,420 shares of Convertible
Preferred Stock which terminate upon completion of the Offering, and their
related conversion to Common Stock is set forth on the accompanying balance
sheet. Concurrent with the closing of the Offering, the Company intends to
reincorporate in the State of Delaware and to file Articles of Incorporation
which authorize the issuance of 50,000,000 shares of Common Stock and 2,000,000
shares of Preferred Stock.
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock consists of the following at December 31, 1997:
<TABLE>
<CAPTION>
LIQUIDATION TOTAL
SHARES SHARES PREFERENCE LIQUIDATION
DESIGNATION AUTHORIZED OUTSTANDING PER SHARE PREFERENCE
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series A.................... 2,340,160 2,325,960 $0.704 $1,638,000
Series B.................... 220,385 220,385 $ 3.63 800,000
Series C.................... 684,231 381,024 $5.249 2,000,000
Series D.................... 550,746 275,373 $12.00 3,304,000
Undesignated................ 6,204,478 -- --
---------- --------- ----------
10,000,000 3,202,742 $7,742,000
========== ========= ==========
</TABLE>
Each share of Preferred Stock is convertible, at the option of the holder,
into a share of Common Stock, on a one-for-one basis, subject to certain
adjustments for dilution, if any, resulting from future stock issuances, stock
splits or stock dividends. The conversion price for the Series D Preferred
Stock will be adjusted based upon the date of the closing of a Qualified
Offering and the price per share paid in such offering. If the Offering closes
on or prior to February 20, 1998, the outstanding shares of Series D Preferred
Stock will convert into Common Stock at a price equal to 65% of the price
received in such offering. If the Offering closes after February 20, 1998, the
outstanding shares of Series D Preferred Stock will convert into Common Stock
at a price equal to 50% of the price received in such offering. In no event
will the conversion price be less than $5.25 per share. To the extent the
adjusted conversion price results in the holders of Series D Preferred Stock
receiving in excess of 275,373 shares of Common Stock upon conversion, then the
fair value of the incremental shares is deemed to be the equivalent of a
preferred stock dividend. Any such deemed dividend will be recorded at the time
of conversion by offsetting charges and credits to additional paid in capital,
without any effect on total stockholders' equity (net capital deficiency).
There will be no effect on net income (loss) from the conversion. However, the
amount will reduce the income allocable to Common Stock, or increase the loss
allocable to Common Stock, in the calculation of net income (loss) per share in
the period of the conversion. If the Company's proposed initial
F-12
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
public offering is consummated prior to February 20, 1998 at an $11.00 per
share price, the Series D Preferred Stock will convert into 462,164 shares of
Common Stock with a market value of $5.1 million, resulting in a deemed non-
cash dividend of $1.8 million. Additionally, shares of Preferred Stock
automatically convert into Common Stock upon completion of an underwritten
public offering of Common Stock under the Securities Act of 1933 in which the
Company receives at least $10.0 million in gross proceeds and the price per
share is at least $7.50 (subject to adjustment for a recapitalization, stock
splits or stock dividends).
Series D preferred stockholders are entitled to receive a stock dividend of
one share of Series D Preferred Stock if the Company has not completed a
Qualified Offering within 210 days following the date of the first issuance of
any Series D Preferred Stock (the "Series D Stock Dividend"), or February 20,
1998. Should the Series D Stock Dividend occur prior to the close of a
Qualified Offering, the formula by which the Series D Preferred Stock
conversion price is determined will be modified such that the number of shares
of Common Stock issuable upon conversion will be unchanged as a result of the
dividend. Series A, B, C and D preferred stockholders are entitled to annual
noncumulative dividends, before and in preference to any dividends paid on
Common Stock, when and as declared by the board of directors. No dividends have
been declared.
The Series A, B, C and D preferred stockholders are entitled to receive, upon
liquidation or certain merger transactions, a distribution of $0.704, $3.63,
$5.249 and $12.00 ($6.00 per share after the Series D stock dividend) per
share, respectively (subject to adjustment for a recapitalization) plus all
declared but unpaid dividends. Thereafter, the remaining assets and funds, if
any, shall be distributed ratably on a per-share basis among the common
stockholders and the Series A, B, C and D preferred stockholders, on an as-
converted basis.
If, upon liquidation or certain merger transactions, the assets and funds
distributed among the preferred stockholders are insufficient to permit the
payment to which they are entitled as set forth above, the entire assets and
funds of the Company legally available for distribution shall be distributed
ratably among the holders of Series A, B, C and D Preferred Stock in proportion
to the aggregate preferential amounts owed to each such holder.
The Series A, B, C and D preferred stockholders have voting rights
substantially equal to the common shares they would own upon conversion. The
holders of Series A Preferred Stock, voting together as a class, are entitled
to elect one director. The holders of Series B, C and D Preferred Stock also
enjoy certain preferential voting rights in the event of a liquidation,
dissolution or winding up of the Company.
After the earlier of August 29, 1998 or six months after the effective date
of the first registration statement for a public offering of the Company's
securities, a majority of the preferred stockholders may request the Company
file a registration statement covering the registration of at least 50% of the
registrable securities outstanding, as defined in the Amended and Restated
Rights Agreement.
COMMON STOCK
Certain outstanding common shares are subject to the Company's right of
repurchase which generally expires ratably over three years from date of
issuance. At December 31, 1996 and 1997, 65,222 and 18,232 shares were subject
to repurchase at their original issue prices.
The Company has reserved shares of Common Stock for issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Outstanding stock options..................................... 783,529
Future grants of stock options................................ 816,571
Outstanding Common Stock warrants............................. 60,000
Conversion of Preferred Stock and warrants.................... 3,688,213
Conversion of notes payable to stockholders................... 505,121
---------
5,853,434
=========
</TABLE>
F-13
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common Stock reserved for issuance upon the conversion of Series D Preferred
Stock and the notes payable to stockholders is based on the maximum number of
shares issuable upon conversion.
In November 1997, the Board of Directors adopted, subject to stockholder
approval, the Employee Stock Purchase Plan (the "Purchase Plan"), and reserved
200,000 shares of issuance thereunder. Under the terms of the Purchase Plan,
employees may purchase shares of Common Stock at the lower of 85% of fair
market value at the beginning or end of the applicable offering period. The
Purchase Plan will become effective following the consummation of the Offering.
WARRANTS
In 1993, the Company issued two warrants to a consultant and a vendor to
purchase a total of 12,000 shares of Common Stock at an exercise price of $0.02
per share. One of the warrants was fully exercised during fiscal 1996 for
10,000 shares of Common Stock. The other warrant expires in August 2000. In
1994, the Company issued two warrants to a consultant to purchase a total of
40,000 shares of Common Stock at an exercise price of $0.02 per share. These
warrants were fully exercised during fiscal 1996.
In April 1995, the Company issued a warrant to a lender to purchase 95,256
shares of Series C Preferred Stock at an exercise price of $4.199 per share.
The warrant expires on the earliest to occur of April 14, 2000 or the
consummation of an underwritten public offering of the Common Stock of the
Company. In September 1995, in connection with a line of credit, the Company
issued a warrant to purchase 72,327 shares of Series C Preferred Stock at an
exercise price of $6.913 per share. The warrant expires on the earliest to
occur of December 31, 2003, a change in control, sale or transfer of
substantially all of the assets of the Company or the consummation of an
underwritten public offering of the Common Stock of the Company. The fair value
of the warrants was determined to be immaterial and was not recorded. During
1996, warrants to purchase 36,163 shares of Series C Preferred Stock were
canceled.
In July and September 1996, the Company issued warrants to purchase a total
of 58,000 shares of Common Stock at an exercise price of $0.50 per share to
various third parties including a lender. The warrants expire at various dates
in 2001.
At December 31, 1997, the warrants outstanding have a weighted average
exercise price of $3.55 and a weighted average remaining contractual life of 41
months.
1995 AND 1997 STOCK OPTION PLANS
In March 1995, the board of directors adopted the 1995 Stock Option Plan (the
"1995 Plan") which provides for issuance of Common Stock options to employees,
consultants and directors. Incentive stock options may be granted under the
1995 Plan with exercise prices not less than the fair value, and nonstatutory
options may be granted with exercise prices of no less than 85% of the fair
value of the Company's Common Stock on the date of the grant, as determined by
the board of directors. Options become exercisable as determined by the board
of directors (generally over four years) and expire after ten years.
In March 1997, the board of directors adopted the 1997 Stock Option Plan (the
"1997 Plan") which provides for issuance of Common Stock options to employees,
consultants and directors. Incentive stock options may be granted under the
1997 Plan with exercise prices of not less than the fair value, nonstatutory
options may be granted with exercise prices of no less than 85% of the fair
value, and 10% owner options may be granted with exercise prices of no less
than 110% of the fair value of the Company's Common Stock on the date of the
grant, as determined by the board of directors. A 10% owner option means
options granted to an optionee who, at the date of the grant, owns stock
possessing more than 10% of the total combined voting power of all classes
F-14
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of stock of the Company. Options are immediately exercisable, however shares
issued pursuant to options are subject to the Company's right of repurchase
which lapses over periods determined by the board of directors (generally over
three years) and expire after ten years. Shares previously reserved for grant
under the 1995 Plan are available for grant under the terms of the 1997 Plan.
In November 1997, the Board of Directors adopted, subject to stockholder
approval, the 1997 Directors' Stock Option Plan (the "Directors' Plan") and
reserved 125,000 shares of Common Stock for issuance thereunder. The
Directors' Plan provides for automatic grants of options to purchase shares of
Common Stock to nonemployee directors of the Company. The Directors' Plan is
effective upon the closing of the Offering and no options have been granted
under the Directors' Plan. The Board of Directors also approved, subject to
stockholder approval, a 650,000 share increase in the number of shares of
Common Stock reserved for issuance under the Company's 1997 Stock Option Plan.
Activity under the option plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------
WEIGHTED-
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Options authorized.................. 600,000 -- --
Options granted at exercise prices
equal to fair value................ (503,000) 503,000 $0.22
-------- --------
Balance at December 31, 1995.......... 97,000 503,000 $0.22
Options authorized.................. 200,000 -- --
Options granted at exercise prices
equal to fair value................ (54,000) 54,000 $0.50
Options granted at exercise prices
greater than fair value............ (131,000) 131,000 $5.00
Options exercised................... -- (114,500) $0.50
-------- --------
Balance at December 31, 1996.......... 112,000 573,500 $1.29
Options authorized.................. 792,000 -- --
Options granted at exercise prices
equal to fair value................ (231,000) 231,000 $5.00
Options exercised................... -- (2,400) $0.50
Options canceled.................... 18,571 (18,571) $2.69
-------- --------
Balance at December 31, 1997.......... 691,571 783,529 $2.35
======== ========
</TABLE>
At December 31, 1997 508,517 shares underlying unexercised options were no
longer subject to the Company's right of repurchase. Stock options outstanding
at December 31, 1997 had exercise prices and remaining contractual lives as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------------------------
WEIGHTED- UNDERLYING
AVERAGE SHARES NOT
EXERCISE NUMBER REMAINING SUBJECT TO
PRICES OF SHARES CONTRACTUAL LIFE REPURCHASE
-------- --------- ---------------- ----------
(IN YEARS)
<S> <C> <C> <C>
$0.15 400,000 7.16 366,667
$0.50 30,584 8.19 16,332
$5.00 352,945 9.23 125,518
------- -------
783,529 508,517
======= =======
</TABLE>
F-15
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company adopted SFAS 123. SFAS 123 is applicable only for
options granted subsequent to December 31, 1994 and therefore, its pro forma
effect will not be fully realized until 1998. In future years, the application
of SFAS 123 may result in a pro forma net loss which is materially different
from actual reported results. The fair value of stock options granted in 1995,
1996 and 1997 was estimated at the date of grant using the minimum value method
with the following weighted-average assumptions: risk-free interest rates for
1995, 1996 and 1997 of 6.30%, 5.74% and 5.5%, respectively, an expected option
life of three years, and no dividends. The weighted-average fair value of
options granted in 1995, 1996 and 1997 was $0.03, $0.05 and $2.01 per share.
The weighted-average fair value of options granted in 1996 at exercise prices
in excess of fair value was negligible. For purposes of pro forma disclosures,
the estimated fair value of options is amortized to pro forma net income (loss)
over the options' vesting period. The Company's pro forma net loss and pro
forma net loss per share were $4.8 million and $0.83 for the year ended
December 31, 1997. The effect of applying the minimum value method to value
options and stock purchase rights granted to employees in 1995 and 1996 did not
result in a pro forma net loss materially different from the historical amounts
reported. Therefore, such pro forma information has not been presented.
7. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $10.4 million and $4.1
million, respectively. At December 31, 1997, the Company also has federal and
California research and development tax credit carryforwards of approximately
$288,000. The federal net operating loss and credit carryforwards expire at
various dates beginning in the year 2007 through 2012, if not utilized. The
State of California net operating losses will expire at various dates beginning
in 1997 through 2002, if not utilized.
Utilization of the Company's net operating loss carryforwards and credits may
be subject to an annual limitation due to the "change of ownership" provisions
of the Internal Revenue Code and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward................. $ 2,500,000 $ 3,770,000
Research and development credit carryforward.... 200,000 288,000
Deferred revenue................................ 200,000 395,000
Other........................................... -- 277,000
----------- -----------
Total deferred tax assets....................... 2,900,000 4,730,000
Valuation allowance............................. (2,900,000) (4,730,000)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased by $984,000, $1,050,000 and $1,830,000 for
the fiscal years ended 1995, 1996 and 1997, respectively.
F-16
<PAGE>
BETTER INFORMATION--
BETTER UNDERSTANDING
[Picture of a smiling child with a doctor]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN, OR MADE, SUCH INFORMATION REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HERE-
BY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUM-
STANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS COR-
RECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 14
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 23
Management............................................................... 38
Certain Transactions..................................................... 45
Principal Stockholders................................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 52
Legal Matters............................................................ 53
Experts.................................................................. 53
Additional Information................................................... 54
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1998, (25 DAYS FROM THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE-
LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF ENACT LOGO]
COMMON STOCK
-------
PROSPECTUS
, 1998
-------
SALOMON SMITH BARNEY
LEHMAN BROTHERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All amounts shown are estimates
except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
Registration fee................................................ $ 12,546
NASD filing fee................................................. 4,640
Nasdaq National Market fee...................................... 39,782
Blue sky qualification fees and expenses........................ 15,000
Printing and engraving expenses................................. 140,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 150,000
Transfer agent and registrar fees............................... 1,500
Miscellaneous................................................... 136,532
--------
Total......................................................... $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to Section 145 of the Delaware General Corporation Law, a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of a corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful.
With respect to suits by or in the right of a corporation, however,
indemnification is not available if such person is adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless the court determines that indemnification is appropriate. In addition,
a corporation has the power to purchase and maintain insurance for such
persons. The statute also expressly provides that the power to indemnify
authorized thereby is not exclusive of any rights granted under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise.
The Registrant's Certificate of Incorporation includes provisions
eliminating a director's personal liability for monetary damages to the
Registrant and its stockholders arising from a breach of a director's
fiduciary duty, except for liability under Section 174 of the Delaware General
Corporation Law or liability for any breach of the director's duty of loyalty
to the Registrant or its stockholders, for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law or for
any transaction in which the director derived an improper personal benefit.
The Registrant's Bylaws provide generally for indemnification of officers,
directors, agents and employees of the Registrant to the extent authorized by
the General Corporation Law of the State of Delaware.
The Registrant anticipates that it will enter into indemnification
agreements (Exhibit 10.1) with directors. These agreements will provide
substantially broader indemnity rights than those provided under the Delaware
General Corporation Law and the Registrant's Bylaws. The proposed
indemnification agreements are not intended to deny or otherwise limit third
party or derivative suits against the Registrant or its directors or officers,
but to the extent a director or officer were entitled to indemnity or
contribution under the indemnification agreement, the financial burden of a
third party suit would be borne by the Registrant, and the Registrant would
not benefit from derivative recoveries against the director or officer. Such
recoveries would accrue to the benefit of the Registrant but would be offset
by the Registrant's obligations to the director or officer under the
indemnification agreement.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since January 1, 1994, the Registrant has sold the following
unregistered securities:
(1) In June 1994, the Registrant issued warrants to purchase 40,000
shares of Common Stock at an exercise price of $0.02 per share to a
sophisticated investor as consideration for consulting services previously
provided to the Registrant by the investors. These warrants were exercised
in 1996.
(2) In September 1994, the Registrant sold 14,200 shares of Series A
Preferred Stock to GCW&F Partners I for aggregate cash consideration of
$10,000.
(3) In September 1994, the Registrant sold 220,385 shares of Series B
Preferred Stock to two sophisticated foreign investors for aggregate cash
consideration of $800,000.
(4) In April 1995, the Registrant sold 125,000 shares of Common Stock to
employees of the Registrant in return for promissory notes in the aggregate
amount of $18,750. Said promissory notes were canceled by the Registrant
pursuant to their terms upon the completion by the employees of four months
employment with the Registrant.
(5) In April 1995, the Registrant issued warrants to purchase 95,256
shares of Series C Preferred Stock at an exercise price of $4.20 per share
to a sophisticated investor as consideration for a loan made to the
Registrant by said investor.
(6) In July 1996, the Registrant issued two warrants to purchase 40,000
shares of Common Stock at an exercise price of $0.50 per share to
sophisticated investors as consideration for services provided by a vendor
and customer.
(7) In September 1995, the Registrant sold 381,024 shares of Series C
Preferred Stock in return for aggregate cash consideration of $1,999,995,
and issued a warrant to purchase an additional 72,327 shares of Series C
Preferred Stock at an exercise price of $6.913 per share to ALZA
Corporation. In August 1996, the Registrant cancelled 36,163 shares subject
to such warrant.
(8) In August 1996, the Registrant issued a Convertible Promissory Note
to ALZA Corporation in the amount of $1,000,000, which will be convertible
upon the completion of this offering into 171,788 shares of Common Stock at
a weighted average price of $5.82 per share.
(9) In September 1996, the Registrant issued warrants to purchase 18,000
shares of Common Stock at an exercise price of $0.50 per share to
sophisticated investors in connection with the issuance of the warrants
described in (5) above.
(10) In October 1996, the Registrant issued to two sophisticated
investors Convertible Promissory Notes which were amended in November and
December 1997, to increase the aggregate amount of loan commitments from
$2,000,000 to $2,500,000 of which $2,000,000 is outstanding. Such
outstanding borrowings will become convertible upon the completion of this
offering into 287,878 shares of Common Stock (or 348,484 shares of Common
Stock if the Company draws down the entire $2,500,000) at a weighted
average price of $6.95 per share.
(11) In July 1997, the Registrant sold 275,373 shares of Series D
Preferred Stock to Johnson & Johnson Development Corp. and ALZA Corporation
for aggregate cash consideration of $3,304,476, or $12 per share. If this
offering closes on or prior to February 20, 1998, these shares will convert
into 462,164 shares of Common Stock. If this offering closes after February
20, 1998, these shares will convert into 600,813 shares of Common Stock.
(12) From March 1995 to December 31, 1997, the Registrant issued options
to purchase an aggregate of 919,000 shares of Common Stock under the
Company's stock option plans, of which options to purchase 116,900 shares
have been exercised at a weighted average exercise price of $2.119 per
share.
(b) The issuances of securities described in Item 15(a)(1) through (13) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering. The issuance's of securities described in Item 15(a)(14)
were deemed to be exempt from registration under the Securities Act in
reliance on Rule 701 promulgated thereunder as transactions pursuant to a
compensatory benefit plan or a written contract relating to compensation.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits filed herewith as part of this
amendment to the Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between ENACT Health Management
Systems, a California corporation, and ENACT Health Management
Systems, a Delaware Corporation.
3.1 Amended and Restated Articles of Incorporation of ENACT Health
Management Systems, a California Corporation.
3.2 Certificate of Incorporation of ENACT Health Management Systems, a
Delaware corporation.
3.3 Bylaws of ENACT Health Management Systems, a California corporation.
3.4 Bylaws of ENACT Health Management Systems, a Delaware corporation.
4.1 Form of certificate for Common Stock.
5.1 Legal Opinion of Gray Cary Ware & Freidenrich, a Professional
Corporation, with respect to the Common Stock being registered.
10.1 Form of Indemnity Agreement for officers and directors.
10.2 The Registrant's 1995 Stock Option Plan, form of Incentive Stock
Option Agreement and form of Nonstatutory Stock Option Agreement
thereunder.
10.3 The Registrant's 1997 Stock Option Plan form of Nonstatutory Stock
Option Agreement and form of Incentive Stock Option Agreement
thereunder.
10.4 The Registrant's 1997 Directors' Stock Option Plan.
10.5 The Registrant's 1997 Employee Stock Purchase Plan and form of
Subscription Agreement thereunder.
10.6 Amended and Restated Rights Agreement dated August 29, 1996, as
amended.
10.7 Convertible Note issued by ENACT Health Management Systems to R.D.
Merrill Associates II dated October 17, 1996, as amended.
10.8 Convertible Note issued by ENACT Health Management Systems Health
Management Systems to ALZA Corporation dated August 30, 1996, as
amended.
10.9 Convertible Note issued by ENACT Health Management Systems to Nippon
Enterprise Development Corp. dated October 21, 1996, as amended.
10.10 Form of Warrant to Purchase Common Stock (the "Form") issued by ENACT
Health Management Systems (see Amended Schedule A in Exhibit 10.10 for
a list of other documents omitted from this Index and a statement of
the material details in which such documents differ from the Form).
10.11 Warrant to Purchase Series C Preferred Stock issued by ENACT Health
Management Systems to ALZA Corporation dated August 30, 1996, as
amended.
10.12 Form of Warrant to Purchase Series C Preferred Stock ("Form of
Warrant") issued by ENACT Health Management Systems (see Schedule A in
Exhibit 10.12 for a list of other documents omitted from this Index to
Exhibits and a statement of the material details in which such
documents differ from the Form of Warrant).
10.13 Employment Agreement by and between ENACT Health Management Systems
and Gilbert S. Mott dated March 1, 1995.
10.14 Offer Letter by ENACT Health Management Systems to Henry Evans dated
September 8, 1995.
10.15 Consulting Agreement by and between ENACT Health Management Systems
and Wayne Wager Cascadia Ventures dated December 1, 1996.
10.16++ Memorandum by and between ENACT Health Management Systems and Teijin
Ltd. dated September 21, 1995.
10.17++ Agreement by and between ENACT Health Management Systems and Teijin
Ltd. dated November 21, 1995.
10.18++ Operating Agreement by and between ENACT Health Management Systems and
ALZA Corporation dated August 29, 1995.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<C> <S>
10.19++ Development and Marketing Agreement by and between ENACT Health
Management Systems and LifeScan, Inc. dated July 25, 1997.
10.20 Lease Agreement between ENACT Health Management Systems and El Camino
Office Investments dated September 19, 1995.
10.21 Lease Agreement between ENACT Health Management Systems and North
Hills Property, Inc.
21.1 List of Subsidiaries of ENACT Health Management Systems (none).
23.1* Consent of Ernst & Young LLP, Independent Auditors (See page II-6).
23.2 Consent of Gray Cary Ware & Freidenrich, a Professional Corporation,
(included in Exhibit 5.1).
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed with this Amendment 5. Exhibits not marked have been previously filed.
+ As proposed to be filed with the Secretary of State of the State of Delaware
prior to the effectiveness of this offering.
++ Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of Exhibit
have been omitted and are marked by an asterisk.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts has been included at S-1.
Other schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Mountain View, State of California,
on the 11th day of February 1998.
Enact Health Management Systems
/s/ Henry Evans
By: _________________________________
HENRY EVANS
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on February 11, 1998 by the
following persons in the capacities indicated.
SIGNATURE TITLE
Matthew Sanders* Chairman of the Board, President and
- ------------------------------------- Chief Executive Officer (Principal
(MATTHEW SANDERS) Executive Officer)
/s/ Henry Evans Vice-President--Finance, Chief
- ------------------------------------- Financial Officer (Principal
(HENRY EVANS) Financial and Accounting Officer)
Chris Tacklind* Director
- -------------------------------------
(CHRIS TACKLIND)
Gilbert S. Mott* Director
- -------------------------------------
(GILBERT S. MOTT)
Wayne Wager* Director
- -------------------------------------
(WAYNE WAGER)
A. Crawford Cooley* Director
- -------------------------------------
(A. CRAWFORD COOLEY)
Ernest Mario* Director
- -------------------------------------
(ERNEST MARIO)
/s/ Henry Evans
*By: ________________________________
HENRY EVANS, ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 6,
1998, in Amendment No. 5 to the Registration Statement (Form S-1) and related
Prospectus of ENACT Health Management Systems for the registration of
3,450,000 shares of its common stock.
Our audits also included the financial statement schedule of ENACT Health
Management Systems listed in Item 16(b). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Palo Alto, California
February 10, 1998
II-6
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT THE CHARGED TO BALANCE AT THE
BEGINNING OF COSTS AND END OF THE
DESCRIPTION THE PERIOD EXPENSES WRITE-OFFS PERIOD
- ----------- -------------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31,
1994................... $ -- $ -- $ -- $ --
Year ended December 31,
1995................... $ -- $ 2 $ -- $ 2
Year ended December 31,
1996................... $ 2 $ 77 $ -- $ 79
Year ended December 31,
1997................... $ 79 $(28) $(12) $ 39
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between ENACT Health Management
Systems, a California corporation, and ENACT Health Management
Systems, a Delaware Corporation.
3.1 Amended and Restated Articles of Incorporation of ENACT Health
Management Systems, a California Corporation.
3.2 Certificate of Incorporation of ENACT Health Management Systems, a
Delaware corporation.
3.3 Bylaws of ENACT Health Management Systems, a California corporation.
3.4 Bylaws of ENACT Health Management Systems, a Delaware corporation.
4.1 Form of certificate for Common Stock.
5.1 Legal Opinion of Gray Cary Ware & Freidenrich, LLP, with respect to
the Common Stock being registered.
10.1 Form of Indemnity Agreement for officers and directors.
10.2 The Registrant's 1995 Stock Option Plan, form of Incentive Stock
Option Agreement and form of Nonstatutory Stock Option Agreement
thereunder.
10.3 The Registrant's 1997 Stock Option Plan form of Nonstatutory Stock
Option Agreement and form of Incentive Stock Option Agreement
thereunder.
10.4 The Registrant's 1997 Directors' Stock Option Plan.
10.5 The Registrant's 1997 Employee Stock Purchase Plan and form of
Subscription Agreement thereunder.
10.6 Amended and Restated Rights Agreement dated August 29, 1996, as
amended.
10.7 Convertible Note issued by ENACT Health Management Systems to R.D.
Merrill Associates II dated October 17, 1996, as amended.
10.8 Convertible Note issued by ENACT Health Management Systems Health
Management Systems to ALZA Corporation dated August 30, 1996, as
amended.
10.9 Convertible Note issued by ENACT Health Management Systems to Nippon
Enterprise Development Corp. dated October 21, 1996, as amended.
10.10 Form of Warrant to Purchase Common Stock (the "Form") issued by ENACT
Health Management Systems (see Amended Schedule A in Exhibit 10.10 for
a list of other documents omitted from this Index and a statement of
the material details in which such documents differ from the Form).
10.11 Warrant to Purchase Series C Preferred Stock issued by ENACT Health
Management Systems to ALZA Corporation dated August 30, 1996, as
amended.
10.12 Form of Warrant to Purchase Series C Preferred Stock ("Form of
Warrant") issued by ENACT Health Management Systems (see Schedule A in
Exhibit 10.12 for a list of other documents omitted from this Index to
Exhibits and a statement of the material details in which such
documents differ from the Form of Warrant).
10.13 Employment Agreement by and between ENACT Health Management Systems
and Gilbert S. Mott dated March 1, 1995.
10.14 Offer Letter by ENACT Health Management Systems to Henry Evans dated
September 8, 1995.
10.15 Consulting Agreement by and between ENACT Health Management Systems
and Wayne Wager Cascadia Ventures dated December 1, 1996.
10.16++ Memorandum by and between ENACT Health Management Systems and Teijin
Ltd. dated September 21, 1995.
10.17++ Agreement by and between ENACT Health Management Systems and Teijin
Ltd. dated November 21, 1995.
10.18++ Operating Agreement by and between ENACT Health Management Systems and
ALZA Corporation dated August 29, 1995.
10.19++ Development and Marketing Agreement by and between ENACT Health
Management Systems and LifeScan, Inc. dated July 25, 1997.
10.20 Lease Agreement between ENACT Health Management Systems and El Camino
Office Investments dated September 19, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.21 Lease Agreement between ENACT Health Management Systems and North
Hills Property, Inc.
21.1 List of Subsidiaries of ENACT Health Management Systems (none).
23.1* Consent of Ernst & Young LLP, Independent Auditors (See page II-6).
23.2 Consent of Gray Cary Ware & Freidenrich, LLP, (included in Exhibit
5.1).
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed with this Amendment 5. Exhibits not marked have been previously filed.
+ As proposed to be filed with the Secretary of State of the State of Delaware
prior to the effectiveness of this offering.
++ Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of Exhibit
have been omitted and are marked by an asterisk.
