<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999
Registration No. 333-85481
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
eMed Technologies Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7374 04-3155965
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
25 Hartwell Avenue, Lexington, MA 02421, (781) 862-0000
(Address, including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------
Scott S. Sheldon, Chief Executive Officer
25 Hartwell Avenue, Lexington, MA 02421, (781) 862-0000
(Name, Address, including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------
Copies To:
Joel F. Freedman, esq. Paul Model, esq. David J. Goldschmidt, esq.
Ropes & Gray 477 Madison Avenue Skadden, Arps, Slate,
One International Place New York, New York 10022 Meagher & Flom LLP
Boston, Massachusetts (212) 751-8438 919 Third Avenue
02110-2624 New York, New York 10022
(617) 951-7000 (212) 735-3000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [_]
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
Proposed Maximum
Title of Each Class of Number of Shares Offering Price Proposed Maximum Amount of
Securities to be Registered to be Registered Per Share Aggregate Offering Price Registration Fee
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $.01, per
share.............................. 3,565,000 (1) $14.00 (2) $49,910,000 (2) $13,875 (3)
===================================================================================================================
</TABLE>
(1) Includes 465,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(3) Registrant previously paid filing fee.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER , 1999
PROSPECTUS
3,100,000 Shares
eMed Technologies Corporation
Common Stock
-----------
We anticipate that the initial public offering price for our common stock will
be between $12.00 and $14.00 per share. We have applied to have our common
stock approved for quotation on the Nasdaq National Market System under the
symbol "EMDT."
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 5 to read about risks that you should consider
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to eMed.............................. $ $
</TABLE>
The underwriters may also purchase up to an additional 465,000 shares of common
stock from us to cover any over-allotment at the public offering price less the
underwriting discount. The underwriters expect to deliver the shares against
payment in New York, New York on , 1999.
-----------
Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette
SG Cowen
Wit Capital Corporation
-----------
The date of this Prospectus is , 1999.
<PAGE>
[eMed LOGO]
Our systems for electronically managing and distributing medical images are
installed in approximately one of four U.S. imaging facilities and radiologists'
homes.
[map of U.S. depicting cities in which eMed has systems installed in hospitals
and imaging centers.]
<PAGE>
PROSPECTUS SUMMARY
The following summary contains basic information about eMed and this
offering. It may not contain all the information that may be important to you.
You should read the entire prospectus, including the financial statements and
related notes, before making an investment decision. Except as otherwise noted,
all information in this prospectus (1) assumes no exercise of the underwriters'
over-allotment option, (2) assumes the conversion of all outstanding classes of
preferred stock into common stock and (3) the effectiveness of a 2.4 for 1
reverse split of our common stock.
Overview
Our Company
We are a leading provider of systems that improve the process of
electronically managing and distributing medical images and related patient
information. Our products and services are used by radiologists, technicians,
referring physicians and other health care professionals to improve the
efficiency of the practice of medicine by allowing them to access, transmit and
review medical images and related patient information quickly and easily. Our
products capture, compress, transmit, route, and store medical images,
including x-rays, MRIs, CTs, ultrasounds and others. Our offerings permit the
coordinated transmission and review of images and information over both
proprietary networks and the internet. Our customers are providers of radiology
imaging and interpretive services, including radiologists, hospitals and
outpatient imaging facilities and often operate as part of complex health care
networks. With systems installed in approximately one of four U.S. imaging
facilities and radiologists' homes, we believe that we have the largest
installed user base of any company in our business.
Our new internet-based offerings capitalize on the internet's universal
accessibility to enable our customers to reduce costs and improve their
service. We introduced FrameWave Web in June 1999 and intend to introduce
eMed_Web later this year. FrameWave Web permits our customers to manage and
distribute medical images and related information over the internet. eMed_Web
is a website development and hosting service through which we intend to
establish and manage individual websites for our customers. Through these
eMed_Web sites, our customers will have FrameWave Web's integrated image and
report management capabilities, as well as the opportunity to incorporate other
clinically relevant information and marketing information targeted at their
customers. In addition, we intend eMed_Web to serve as a platform for offering
products and services that further improve the workflow of medical imaging.
We provide our customers remote, comprehensive support services through our
network operations center, which is fully staffed 24 hours a day, seven days a
week. Because medical imaging is critical to patient diagnosis and care, we
believe that our customers highly value comprehensive support services that
increase the reliability of their medical image distribution and management
systems. Our network operations center personnel are able to remotely monitor
and manage customer systems and identify and resolve system problems, including
problems related to systems and system components provided by third parties.
The level of service we provide enables many customers to outsource the
technical management of their image distribution and management systems to us.
Our Strategy
Our objective is to become the leading supplier of comprehensive, medical
imaging workflow systems to health care providers by leveraging our advanced
technology and experience. Elements of our strategy to achieve this objective
include:
. Introducing our eMed_Web website development and hosting service.
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<PAGE>
. Bringing to market additional products and services for improving
medical imaging workflow.
. Leveraging our relationships with our significant base of installed
users to increase sales.
. Expanding our sales and marketing efforts.
. Engaging in strategic acquisitions and relationships to obtain
technology and expand our user base.
Our Market Opportunity
Our market opportunity is characterized by several important elements:
. Based on historical data, we believe that more than 350 million
radiology studies are conducted annually.
. The number of studies has grown due to the increasing usefulness of
radiology as a non-invasive diagnostic technique and the general aging
of the U.S. population.
. Medical images and related information are utilized in forming patient
diagnosis and care judgments by a broad cross-section of health care
professionals at disparate locations.
. The current method for capturing, analyzing, distributing and storing
medical images and associated medical reports is inefficient and
represents a significant opportunity to offer improvements and cost
savings.
. Radiology providers are subject to increasing pressure from their
customers and health care payors to reduce costs and improve the
timeliness and availability of interpretations and related patient
images.
. The internet represents a significant advance in the technology
available to radiologists and other health care professionals to improve
the cost-effectiveness and efficiency of the services they provide.
eMed Solutions
Based on our extensive experience with and insight into the workflow of
medical imaging, we have been able to focus our efforts on products and
services that provide our customers with cost savings, increased efficiencies
and competitive advantages. Our products and services incorporate advanced
technology and offer our customers:
. Improved cost effectiveness.
. Enhanced ability to market their services and serve their customers.
. Solutions tailored to meet functionality and cost requirements.
. High quality, comprehensive customer support.
Corporation Information
Our headquarters are located at 25 Hartwell Avenue, Lexington, MA 02421.
Until August 1999, we were known as ACCESS Radiology Corporation. Our telephone
number is (781) 862-0000 and our internet website address on the Worldwide Web
is www.eMed.com. The contents of our website are not part of this prospectus.
eMed, FrameWave and PACSPro are trademarks of eMed Technologies Corporation.
AWARE is a trademark of AWARE, Inc. All other brand names or trademarks
appearing in this prospectus are the property of their respective owners.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by eMed...... 3,100,000 shares
Common Stock outstanding after the
offering......................... 11,513,475 shares
Use of Proceeds................... We estimate that the net proceeds from this
offering, without exercise of the over-
allotment option, will be approximately
$36.6 million. We intend to use these net
proceeds to repay approximately
$3.0 million of indebtedness and for
general corporate purposes, including the
expansion of our sales, marketing and
development efforts and possibly
acquisitions and partnerships.
Risk Factors...................... See "Risk Factors" for a discussion of
factors you should carefully consider
before deciding to invest in shares of our
common stock.
Proposed Nasdaq National Market
symbol........................... "EMDT"
</TABLE>
The number of shares of common stock outstanding after the offering is based
on the number outstanding as of September 17, 1999, and excludes:
. 1,696,598 shares of our common stock subject to options outstanding as
of September 17, 1999 at a weighted average exercise price of $1.51 per
share;
. warrants to purchase 522,440 shares of common stock at exercise prices
from $0.02 to $1.20 per share and warrants to purchase 409,091 shares of
Series J preferred stock outstanding as of September 17, 1999 at an
exercise price of $1.10 per share. Upon completion of this offering, the
warrants to purchase Series J preferred stock will become warrants to
purchase 170,449 shares of common stock.
3
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 139 $ 466 $ 1,009 $ 8,027 $12,594 $ 6,218 $ 11,369
Cost of revenue......... (141) (313) (1,404) (7,012) (8,976) (4,131) (6,351)
------- ------- ------- ------- ------- -------- --------
Gross margin............ (2) 153 (395) 1,015 3,618 2,087 5,018
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development........... -- 239 610 1,300 2,362 1,031 1,655
Sales and marketing.... 423 571 1,319 2,912 3,498 1,764 2,519
General and
administrative........ 1,443 1,476 1,331 1,982 2,722 1,121 1,851
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............. 1,866 2,286 3,260 6,194 8,582 3,916 6,025
------- ------- ------- ------- ------- -------- --------
Loss from operations.... (1,868) (2,133) (3,655) (5,179) (4,964) (1,829) (1,007)
Interest income
(expense), net......... (14) (119) (70) (204) (106) (19) (68)
Other income (expense).. (15) 218 (21) (242) (43) (6) (82)
------- ------- ------- ------- ------- -------- --------
Net loss................ $(1,897) $(2,034) $(3,746) $(5,625) $(5,113) $ (1,854) $ (1,157)
======= ======= ======= ======= ======= ======== ========
Basic and diluted net
loss per share......... $ (9.10) $ (5.08) $ (8.39) $(12.45) $(11.70) $ (4.30) $ (2.48)
Shares used in computing
basic and diluted net
loss per share......... 209 400 446 452 437 431 467
Unaudited proforma basic
and diluted net loss
per share.............. $ (0.78) $ (0.14)
Shares used in computing
unaudited proforma
basic and diluted net
loss per share......... 6,567 8,324
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------
Actual As Adjusted
------- -----------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $ 5,118 $41,697
Working capital............................................. 4,573 41,152
Total assets................................................ 13,559 50,138
Total long-term liabilities................................. 210 210
Total stockholders' equity.................................. 5,312 41,891
</TABLE>
The as adjusted balance sheet data and pro forma per share data reflects the
conversion of all preferred stock into common stock. The as adjusted balance
sheet data also reflects the sale by us of 3,100,000 shares of common stock at
an assumed public offering price of $13.00 per share in the offering, after
deducting the underwriters' discount and our estimated offering expenses.
4
<PAGE>
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in eMed. As an eMed stockholder, you will be subject to risks inherent
in our business. The value of your investment may increase or decline and could
result in a loss to you. You should carefully consider the following factors as
well as other information contained in this prospectus before deciding to
invest in shares of our common stock.
Risks Related to Our Company
We may not become profitable.
Since our inception, we have incurred significant losses from operations and
negative cash flow. In implementing our strategy, we will significantly
increase our operating expenses as we aggressively market our products and
services and develop new products and services. We are incurring these expenses
under the assumption that the sales we obtain from increased marketing and
developing efforts will permit us to earn revenue in excess of these additional
expenses. If we are unsuccessful in generating revenues to offset these
expenditures, we may continue to incur losses from operations and negative cash
flow. We cannot assure you that we will ever achieve or sustain profitability
or that our operating losses will not increase in the future.
We may be unable to manage growth effectively.
The implementation of our business strategy could result in a period of
rapid growth. This growth could place a strain on our managerial, operational
and financial resources and on our information systems. Our future operating
results will depend on the ability of our senior management to manage rapidly
changing business conditions, and to implement and improve our technical,
administrative, financial control and reporting systems. We may not succeed in
these efforts. The failure to effectively manage and improve these systems
could increase our costs and adversely affect our ability to sell and deliver
our products and services.
We may be unable to hire, retain, motivate or train the key personnel, upon
whom the success of our business will depend.
Our senior management team consists of only seven individuals. Loss of any
senior management or other key personnel could have a disruptive effect on the
implementation of our business strategy and the efficient running of our day-
to-day operations. Also, as we continue to grow, we will need to hire
additional personnel in all operational areas. In particular, we will need to
hire additional sales people and technical staff. Competition for personnel
throughout the health care, information technology and internet industries is
intense. We may be unable to retain our key employees or attract, assimilate,
retain or train other needed qualified employees in the future.
Our market is highly competitive, and we may not be able to compete effectively
because many of our competitors have greater resources and better recognition
in the marketplace.
We operate in a highly competitive environment and we may not be able to
compete effectively. Many of our competitors are larger than we are, have been
in business longer than we have, and have greater financial, technical,
research and development, and sales and marketing resources than we do.
Further, additional internet-based products and services providers may enter
into the market for products and services that improve the workflow of medical
imaging. Larger competitors may have the resources to offer competitive
products at greatly discounted prices or at no charge, sometimes in connection
with the sale of related or complementary products or systems. Customer
decisions to purchase our products are often influenced by the perceived
stability and market recognition of the vendor. We may be at a disadvantage
because many of our competitors are better known and may be perceived as less
risky than we are. For additional information, please see the section
"Business -- Competition."
5
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We may be unable to sell new products and services to our installed user base,
which is a key part of our growth strategy.
A key part of our strategy is to sell to our existing installed user base
additional products and services that we currently offer, as well as products
and services that we intend to develop. We expect that this effort will require
intensive marketing and sales efforts. Customers that have invested substantial
resources in other products may be reluctant to adopt a new product that may
replace or make redundant their existing systems. Because we acquired a large
portion of our installed user base when we acquired the medical imaging
business of E-Systems Medical Electronics, a division of Raytheon, in November
1998, we have limited experience with these users, and we cannot predict what
our success will be in selling new products and services to them.
Our future growth may suffer if we do not achieve broad acceptance of our
internet-based products and services by radiologists, technicians, referring
physicians and other health care professionals.
Our success, in part, depends upon our ability to gain acceptance of our
internet-based products and services by a large number of radiologists,
technicians, referring physicians and other health care professionals.
Achieving market acceptance for our internet-based applications will require
substantial marketing efforts and the expenditure of significant financial and
other resources to create brand awareness and demand by physicians and health
care organizations. In addition, the rate at which physicians and health care
organizations will replace existing medical imaging management products and
systems with more advanced technologies is uncertain. Failure to achieve broad
acceptance of our internet-based applications by physicians and health care
organizations as a preferred medium for medical imaging would have a material
adverse effect on our operating results.
We may be unable to sell our planned eMed_Web service if our target customers
do not accept our subscription fee pricing model.
Our new subscription fee pricing model for internet-based offerings is
untested and will require our target customers to make recurring subscription
fee payments. Currently, customers buy medical systems as a one-time capital
investment with a yearly fee for maintenance and support. Accepting our
subscription fee pricing model may be particularly difficult for larger health
care institutions. If we are unable to convince our existing base and new
target customers to accept this new pricing model, sales of our new internet-
based offerings could suffer.
Our business may be difficult for you to evaluate because the internet
component of our business model is evolving and is unproven.
We only began offering internet products in June 1999 with the introduction
of our FrameWave Web product. We intend to begin marketing our eMed_Web
internet-based service later this year. We have not yet offered or implemented
any of the subscription services we expect to include for use with the eMed_Web
offering. In extending our business into internet-based products and services,
we are significantly changing our business operations, sales and marketing
strategies, pricing models and management focus. We are also facing new risks
and challenges, including a lack of meaningful historical financial data upon
which to plan future budgets and the other risks described in this prospectus.
You must consider our prospects in light of the uncertainties encountered by
companies adopting a modified business strategy, particularly one that depends
on the internet.
Any future strategic acquisitions and partnerships may result in disruptions to
our business and/or the distraction of our management.
Engaging in strategic acquisitions and relationships is a key part of our
strategy. We cannot assure you that we will be able to identify suitable
acquisition candidates, or if we do identify suitable candidates, that we will
be able to make such acquisitions on commercially acceptable terms or at all.
If we acquire another company,
6
<PAGE>
we will only receive the anticipated benefits if we successfully integrate the
acquired business into our existing business in a timely and non-disruptive
manner. We may have to devote a significant amount of time and management and
financial resources to do so. Even with this investment of management and
financial resources, an acquisition may not produce the revenue, earnings or
business synergies that we anticipated. If we fail to integrate the acquired
business effectively or if key employees of that business leave, the
anticipated benefits of the acquisition would be jeopardized. The time,
capital, management and other resources spent on an acquisition that failed to
meet our expectations could cause our business and financial condition to be
materially and adversely affected. In addition, from an accounting perspective,
acquisitions can involve non-recurring charges and amortization of significant
amounts of goodwill that could adversely affect our results of operations.
If our strategic relationship with AWARE is disrupted, our ability to use
important technologies could be halted or delayed.
We currently have arrangements in place with AWARE, Inc. for elements of our
technology for compressing large data files and our web server technology.
These technologies are an integral component of our offerings. Any disruption
in our relationship with AWARE could limit our ability to use these
technologies and could increase our costs or have a material adverse effect on
our revenue. For more information about our relationship with AWARE, please see
the section entitled "Business--Production."
Technological change may render our products and services obsolete.
We expect that the market for our offerings will continue to be
characterized by rapidly changing technology, evolving industry standards,
frequent new product announcements and enhancements and changing customer
demands. The introduction of new products and services embodying new
technologies and the emergence of new industry standards can render existing
products and services obsolete. Our success depends on our ability to adapt to
rapidly changing technologies and to improve the performance, features and
reliability of our products and services in response to changing customer and
industry demands. Furthermore, we may experience difficulties that could delay
or prevent the successful design, development, testing, introduction or
marketing of our products and services. Our new products and services, or
enhancements to our existing products and services, may not adequately meet the
requirements of our current and prospective customers or achieve any degree of
significant market acceptance.
Concerns about integrating our products into their networks may cause customers
to decide not to buy our products or services.
We often must integrate our products with the networks that exist either at
a customer site or between customer sites. We do not control these proprietary
networks. Concerns about the risks of integrating our products into their
networks may cause customers to decide not to buy our products or services.
If our computer systems upon which we depend to provide our services fail or
overload, we could lose customers.
The success of our network-based comprehensive customer service depends on
the uninterrupted, efficient operation of our computer network. The servers
that will host eMed_Web sites will be located at customer sites and supported
by us at our headquarters. The occurrence of fires, floods, earthquakes, power
losses and similar events could cause damage or cause interruptions in these
systems. Computer viruses, worms, electronic break ins or similar disruptions
could also adversely affect our network and, if highly publicized, could
materially damage our reputation and efforts to build brand awareness. If our
systems are affected by any of these occurrences, our business could be
materially and adversely affected. Our insurance policies may not adequately
cover any losses.
7
<PAGE>
Fluctuations in our quarterly and annual results and any failure to meet market
expectations may adversely affect the price of our common stock.
Our operating results may fluctuate significantly on a quarterly basis due
to a variety of factors, including our plans to devote significant additional
financial resources to expand our business and to introduce our new eMed_Web
service. Other factors which may cause our operating results to fluctuate
include the size and timing of significant orders, variations in filling
orders, the demand for and market acceptance of our products and services, the
length of our sales cycles, and possible delays or deferrals of customer
implementation. Also, our revenue and other financial and operating results may
not meet the expectations of securities analysts and our stockholders. Our
revenue is not predictable with any significant degree of certainty. Revenue is
difficult to forecast because, among other things, the market for our products
is rapidly evolving, sales cycles are long and vary substantially from customer
to customer and we are initiating a new subscription fee pricing model for our
eMed_Web service. The sales cycle is subject to a number of factors over which
we have little or no control, including customers' budgetary constraints, the
timing of budget cycles, concerns about the introduction of new products by us
or our competitors. Potential downturns in general economic conditions may
cause reductions in demand for medical imaging workflow management systems. As
a result of such fluctuation or failure to meet expectations, the price of our
common stock could be materially adversely affected.
We may need additional capital in the future to support our growth and such
additional financing may not be available to us.
We expect that the net proceeds from this offering, combined with our
current cash resources, will be sufficient to meet our funding requirements for
at least the next 12 months. However, as we continue our efforts to grow our
business in a rapidly changing and highly competitive market, we may need to
raise additional financing to support expansion, develop new or enhanced
products and services, respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated business
opportunities. We may need to raise additional funds by selling debt or equity
securities, by entering into strategic relationships or through other
arrangements. We may be unable to raise any additional amounts on reasonable
terms when they are needed. Any additional equity financing may cause investors
to experience dilution, and any additional debt financing may result in
restrictions on our operations or our ability to pay dividends in the future.
Any disruption of our relations with our suppliers could increase our costs and
adversely affect our assembling process.
We purchase a number of the proprietary software and hardware components of
our offerings from limited sources. Any disruption of our relationships with
any of our suppliers of these components could increase our costs and adversely
affect our assembling operations and delay or halt our filling customer orders.
We have substantial product liability risk and our insurance coverage may not
be adequate to cover any claims.
Our business entails significant risks of product liability claims. Although
no such claims have ever been asserted against us, we cannot assure you that
our insurance coverage limits would be adequate to protect us against any
product liability claims that may arise. We may require additional product
liability insurance coverage as we commercialize new or improved products. This
insurance is expensive and may not be available on acceptable terms, or at all.
Uninsured product liability claims could have a material adverse effect on our
business, results of operations and financial condition.
We may not be able to successfully protect our intellectual property rights.
We cannot assure you that the steps we have taken to protect our
intellectual property rights will prevent misappropriation of our technology.
These intellectual property rights, which we rely upon to develop and
8
<PAGE>
maintain our competitive position, are important elements of our products and
services. We rely partly on unpatented trade secrets and know-how to protect
our intellectual property. No assurance can be given that others will not
independently develop or otherwise acquire comparable trade secrets or know-how
or otherwise gain access to our proprietary technology or disclose such
technology or that we can meaningfully protect our rights to such unpatented
proprietary technology. Although we generally require our employees,
contractors and consultants who may have access to our confidential
information, and parties to collaboration agreements to execute confidentiality
agreements to protect our unpatented trade secrets and other know-how, these
agreements may be breached by the other party to the agreement or may otherwise
be of limited effectiveness. Misappropriation of our intellectual property
could have a material adverse effect on our business, financial condition,
results of operations and prospects. In addition, we may have to engage in
litigation in the future to enforce or protect our intellectual property rights
or to defend against claims of invalidity, and we may incur substantial costs
as a result. For more information, please see the section "Business --
Intellectual Property."
If we are forced to defend against intellectual property infringement claims,
we could incur significant expenses and our business could be adversely
affected.
Our products include our proprietary intellectual property and intellectual
property rights licensed from others. We may become subject to claims alleging
that we infringe the proprietary rights of others. In the United States, a
significant number of software and business method patents have been issued
over the past decade and the holders of these patents have been actively
seeking out potential infringers. If any element of our products or services
violates third party proprietary rights, we might not be able to obtain
licenses on commercially reasonable terms to continue offering our products or
services without substantial reengineering and any effort to undertake such
reengineering might not be successful. In addition, any claim of infringement
could cause us to incur substantial costs defending against the claim, even if
the claim is invalid, and could distract our management from our business. Any
judgment against us could require us to pay substantial damages and could also
include an injunction or other court order that could prevent us from offering
our products and services.
We may be liable for information retrieved from or transmitted over the
internet.
We may be sued for defamation, negligence, personal injury or other legal
claims relating to information that is published or made available on our
websites. These types of claims have been brought against providers of
internet-based services in the past. We could also be sued for the content that
is accessible from our websites through links to other internet websites. We
could incur significant costs in investigating and defending such claims, even
if we ultimately are not found liable. Our insurance coverage limits may not be
adequate to protect us against liability.
Our business may be adversely affected by Year 2000 problems.
In conducting our business, we rely on computer systems to manage our
business and to service our customers. Further, all of our products include
computer hardware and/or software components. Year 2000 problems may adversely
affect our operations and increase our costs. Among other things, Year 2000
problems could cause us to:
. fail to fulfill our contractual obligations with our customers;
. face substantial claims by such customers and loss of revenue;
. fail to bill our customers accurately and on a timely basis; and
. be subject to the inability by customers and others to pay, on a timely
basis or at all, obligations owed to us.
Although the effects of any or all of these events are not quantifiable at this
time, any of these events could have a material adverse effect on our business
and operating results.
9
<PAGE>
Risks Related to Our Industry
If the internet is not accepted as a medium for medical imaging, our sales will
suffer.
Our future success depends upon the acceptance of the internet as a medium
for medical imaging. Because the internet-based medical imaging market is new,
we cannot yet gauge its effectiveness as compared to current electronic medical
imaging distribution methods. Most physicians and health care organizations
have little or no experience using the internet for medical imaging
transmission and distribution. The adoption of internet-based medical imaging
systems requires radiologists and other health care professionals to accept a
new way of conducting business and exchanging information. If these users
believe that internet-based medical imaging systems are less effective than
traditional medical imaging distribution methods, our sales will suffer.
Security concerns may keep physicians and health care organizations from
allowing confidential patient information to be made available on the internet.
Internet security remains a critical concern to many consumers. Physicians
and health care organizations may be reluctant to allow confidential medical
images and related patient information to be made available to healthcare
professionals through the eMed_Web sites. Any well publicized compromise of
security on the internet, or on any of the eMed_Web sites in particular, could
deter people from using the internet or from using the eMed_Web sites. Any
reluctance for security reasons on the part of physicians or health care
organizations to use the internet or the eMed_Web sites for internet-based
medical imaging would adversely affect our business.
Uncertainty associated with the regulation of the health care industry may
cause our target customers to curtail or delay purchases of our products.
The health care industry is highly regulated and is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operation of health care organizations. Changes in current health
care financing and reimbursement systems could result in delays or
cancellations of orders. Federal and state legislatures have periodically
considered programs to reform or amend the U.S. health care system at both the
federal and state level. These programs may contain proposals to increase
governmental involvement in health care, lower reimbursement rates or otherwise
change the environment in which the health care industry participants operate.
Health care industry participants may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments,
including investments in our products and services. We cannot predict what
impact, if any, such proposals or health care reforms might have on us.
Consolidation in the health care industry may adversely affect our business.
Many health care providers are consolidating to create integrated health
care delivery systems with greater market power. As the number of health care
delivery enterprises decreases due to further industry consolidation, each new
customer will become more significant and competition for these customers will
become greater. These larger health care enterprises could have greater
bargaining power, which might lead to price erosion for our products and
services.
We may be unable to introduce new products or services if we fail to obtain
regulatory clearances and approvals.
Because our products and services are subject to regulation as Class II
medical devices in the United States by the Food and Drug Administration and in
other countries by corresponding regulatory authorities, our ability to market
new products and improvements to existing products will depend upon when we
receive premarket clearance or approval from the Food and Drug Administration
or any foreign counterparts. Failure to
10
<PAGE>
comply with applicable domestic or foreign regulatory requirements at any time
during the production, marketing or distribution of products regulated by the
Food and Drug Administration or its foreign counterparts could result in, among
other things, warning letters, seizures of products, total or partial
suspension of production, refusal of the Food and Drug Administration to grant
clearances or approvals, withdrawal of existing clearances or approvals, or
criminal prosecution. See "Business -- Government Regulation."
Government regulation of the internet could limit our operations or increase
our costs.
Laws and regulations directly applicable to internet communications,
commerce and advertising are becoming prevalent, but the legislative and
regulatory treatment of the internet remains largely unsettled. The U.S.
Congress recently adopted internet laws regarding copyrights, taxation and the
protection of children. In addition, a number of other legislative and
regulatory proposals under consideration by federal, state, local and foreign
governments could lead to additional laws and regulations affecting the right
to collect and use personally identifiable information, internet-based content,
user privacy, taxation, access charges and liability for third party
activities, among other things. For example, the growth and development of the
market for internet commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the internet. These
measures could decelerate the growth in use of the internet and could reduce
the demand for our services or increase our cost of doing business.
State governments or foreign countries might attempt to regulate the content
of our websites or levy sales or other taxes relating to our activities. The
European Union recently enacted its own privacy regulations that may result in
limits on the collection and use of user information. Courts may seek to apply
existing laws not explicitly relating to the internet in ways that could impact
the internet, and it may take years to determine whether and how laws such as
those governing intellectual property, privacy, libel and taxation will affect
the internet and the internet-based medical imaging workflow management
industry.
Risks Related to This Offering
We may allocate the proceeds of this offering in ways with which you may not
agree.
Our management will have significant flexibility in applying the net
proceeds of this offering, including ways with which you may disagree. You will
not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the proceeds.
Our stock price is likely to be highly volatile and could drop unexpectedly and
investors may not be able to resell their shares at or above the offering
price.
Following this offering, the price at which our common stock will trade is
likely to be highly volatile and may fluctuate substantially. We cannot predict
the extent to which investors' interest in us will lead to the development of a
trading market or how liquid the market might become. If you purchase shares of
our common stock in this offering, you will pay a price that was not
established in a competitive market, but was negotiated between us and the
underwriters. The price of the common stock that will prevail in the market
after the offering may be higher or lower than the price you pay, depending on
several factors, including our quarterly variations in results of operations,
estimates of securities analysts, competitive developments and general economic
conditions. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the securities of health care and technology companies, particularly
internet companies. As a result, investors in our common stock may experience a
decrease in the value of their common stock regardless of our operating
performance or prospects. Fluctuations in our common stock price may affect our
visibility and credibility in our market and may affect our ability to secure
additional financing on acceptable terms, if at all.
11
<PAGE>
Shares eligible for public sale after this offering could adversely affect our
stock price.
The market price of our common stock could decline as a result of sales of
shares by our existing stockholders after this offering, or the perception that
such sales will occur. These sales also might make it difficult for us to sell
equity securities in the future at a time and at a price that we deem
appropriate. Approximately 93.5% of our total outstanding shares of common
stock will be freely tradable, subject to Securities Act rules, 180 days after
the date of this prospectus. You should refer to the information in the section
entitled "Shares Eligible for Future Sale" for more information.
Our charter documents and Delaware law may inhibit a takeover that stockholders
may consider favorable.
The health care industry has recently experienced significant consolidation.
There are provisions in our charter and by-laws that may have the effect of
delaying or preventing a change of control or changes in our management that
stockholders consider favorable or beneficial. You should refer to the
information in the section entitled "Description of Capital Stock" for more
information. If a change of control or change in management is delayed or
prevented, the market price of our common stock could suffer.
A small group of existing stockholders, whose interests may differ from other
stockholders, will be able to exert significant influence over us.
After this offering, our officers and directors and parties related to them
will own approximately 22.2% of the outstanding shares of our common stock.
Accordingly, they will have significant influence in determining the outcome of
any corporate transaction or other matter submitted to the stockholders for
approval, including mergers, consolidations and the sale of all or
substantially all of our assets, and also the power to prevent or cause a
change in control. The interests of these stockholders may differ from the
interests of the other stockholders.
Forward-looking statements are inherently uncertain.
Certain statements about us and our industry under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
elsewhere in this prospectus are "forward-looking statements." These forward-
looking statements include, but are not limited to, statements about our plans,
objectives, expectations, intentions and assumptions, the industry in which we
operate and other statements in this prospectus that are not historical facts.
When we use the words "estimate," "project," "believe," "anticipate," "intend,"
"plan," "expect" and similar expressions in this prospectus, we generally
intend to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, including those described in this "Risk Factors" section, actual
results could differ materially from those expressed or implied by these
forward-looking statements. We caution you not to place undue reliance on these
forward-looking statements. These forward-looking statements speak only as of
the date of this prospectus. We do not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect new
information, future events or otherwise.
12
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of the 3,100,000 shares of
common stock we are offering will be approximately $36.6 million, assuming an
initial public offering price of $13.00 per share and after deducting estimated
underwriting discounts and our estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that the net proceeds
would be approximately $42.2 million. Our principal reasons for this offering
are to provide us working capital, to create a public market for our common
stock and to facilitate our future access to public capital markets.
We intend to use approximately $3.0 million of the net proceeds of this
offering to repay indebtedness outstanding under our credit facility. We have
used borrowings incurred under this facility within the past 12 months to fund
our working capital requirements as well as a portion of the purchase price for
the medical imaging business of E-Systems Medical Electronics, a division of
Raytheon, that we acquired in November 1998. As of June 30, 1999, the interest
rate on the working capital portion of this facility was 9.75% and the interest
rate on the equipment line portion was 8.75%.
We intend to use the remaining net proceeds from this offering for general
corporate purposes, including the expansion of our sales, marketing and
development efforts, and for potential acquisitions and partnerships. We are
not currently participating in any active negotiations and have no commitments
or agreements with respect to any acquisition, partnership or investment. We
have not determined the amount of net proceeds to be used for each of the
specific purposes indicated. Accordingly, our management will have significant
flexibility in applying the net proceeds of the offering. Pending any use, we
plan to invest the net proceeds of this offering in short-term, investment-
grade interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid a cash dividend on our common stock and we do
not intend to do so in the foreseeable future. We currently intend to retain
earnings to finance future operations.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 on an
actual basis and as adjusted to reflect (1) the conversion of all of our
outstanding classes of preferred stock into common stock, and (2) the sale of
the shares of common stock offered by us at an assumed initial public offering
price of $13.00 per share, after deducting the estimated underwriting discount
and our estimated offering expenses. The following table assumes (1) no
exercise of the underwriters' over-allotment option and (2) the effectiveness
of a 2.4 for 1 reverse split of our common stock. This table contains unaudited
information and should be read in conjunction with the financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------
Actual As Adjusted
----------- -------------
(dollars in thousands)
<S> <C> <C>
Long-term debt..................................... $ 210 $ 210
----------- -----------
Stockholders' equity:
Convertible preferred stock, $0.01 par value,
15,000,000 shares authorized; 11,877,492
shares issued and outstanding; no shares issued
and outstanding as adjusted ...................... 119 --
Common stock, $0.01 par value, 35,000,000 shares
authorized; 480,488 shares issued and outstanding;
11,436,638 shares issued and outstanding as
adjusted.......................................... 5 114
Additional paid-in capital......................... 28,803 65,392
Deferred compensation.............................. (2,598) (2,598)
Treasury stock .................................... (50) (50)
Accumulated deficit................................ (20,967) (20,967)
----------- -----------
Total stockholders' equity....................... 5,312 41,891
----------- -----------
Total capitalization............................. $ 5,522 $ 42,101
=========== ===========
</TABLE>
The share information in the table is based on our shares of common stock
outstanding as of June 30, 1999. This table excludes:
. 1,654,455 shares of our common stock subject to options outstanding as
of June 30, 1999 at a weighted average exercise price of $1.46 per
share; and
. warrants to purchase 573,624 shares of common stock at exercise prices
from $0.02 to $1.20 and warrants to purchase 409,091 shares of Series J
preferred stock outstanding as of June 30, 1999 at an exercise price of
$1.10 per share. Upon completion of this offering, the warrants to
purchase Series J preferred stock will become warrants to purchase
170,449 shares of common stock.
14
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$5.2 million or $0.63 per share of common stock. Our pro forma net tangible
book value per share represents our total tangible assets less total
liabilities divided by the pro forma total number of shares of common stock
outstanding at such date, assuming the conversion of all outstanding classes of
our preferred stock into an aggregate of 7,856,150 shares of common stock.
After giving effect to the sale of the shares of common stock offered by us
at an assumed initial public offering price of $13.00 per share, after
deducting the estimated underwriting discount and our estimated offering
expenses, our pro forma net tangible book value as of June 30, 1999 would have
been approximately $41.8 million or $3.66 per share. This amount represents an
immediate increase in pro forma net tangible book value of $3.03 per share to
the existing stockholders and an immediate dilution in pro forma net tangible
book value of $9.34 per share to new investors purchasing shares in this
offering. If the initial public offering price is higher or lower, the dilution
to new investors will be greater or less. The following table illustrates the
dilution in pro forma net tangible book value per share to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share as of June 30,
1999....................................................... $0.63
Increase in net tangible book value per share attributable
to new investors........................................... 3.03
-----
Pro forma net tangible book value per share after the
offering..................................................... 3.66
------
Dilution per share to new investors........................... $ 9.34
======
</TABLE>
The following table summarizes on a pro forma basis, as of June 30, 1999,
the number of shares of common stock purchased from us, the aggregate cash
consideration paid to us and the average price per share paid by existing
stockholders and to be paid by new investors purchasing the shares of common
stock in this offering at an assumed initial public offering price of $13.00
per share, before deducting estimated underwriting discounts and our estimated
offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 8,336,638 72.9% $25,685,000 38.9% $3.08
New investors.......... 3,100,000 27.1% 40,300,000 61.1 13.00
---------- ----- ----------- ----- -----
Total................ 11,436,638 100.0% $65,985,000 100.0% $5.77
========== ===== =========== ===== =====
</TABLE>
The above information assumes no exercise of (1) the underwriters' over-
allotment option and (2) stock options or warrants after June 30, 1999. As of
June 30, 1999, we had reserved 1,654,455 shares of our common stock for
issuance upon exercise of outstanding options at a weighted average exercise
price of $1.46 per share and 744,073 shares of common stock for issuance upon
exercise of warrants to purchase 573,624 shares of common stock at exercise
prices from $0.02 to $1.20 per share and warrants to purchase Series J
preferred stock at an exercise price of $1.10 per share. Upon completion of
this offering, the warrants to purchase Series J preferred stock will become
warrants to purchase 170,449 shares of common stock. To the extent any of those
options or warrants are exercised, there will be further dilution to new
investors.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1996, 1997 and 1998, and the balance sheet data as of
December 31, 1997 and 1998, are derived from and are qualified by reference to
the audited financial statements included elsewhere in this prospectus. The
statement of operations data for the two years ended December 31, 1994 and
1995, and the balance sheet data as of December 31, 1994, 1995 and 1996, have
been derived from audited financial statements of eMed that do not appear in
this prospectus. The statement of operations data for the six months ended June
30, 1998 and 1999 and the balance sheet data as of June 30, 1999 are derived
from unaudited financial statements included elsewhere in this prospectus. The
unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of our management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. The historical results
are not necessarily indicative of the operating results to be expected in the
future.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------ -------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenue................. $ 139 $ 466 $ 1,009 $ 8,027 $12,594 $ 6,218 $11,369
Cost of revenue......... (141) (313) (1,404) (7,012) (8,976) (4,131) (6,351)
------- ------- ------- ------- ------- ------- -------
Gross margin............ (2) 153 (395) 1,015 3,618 2,087 5,018
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... -- 239 610 1,300 2,362 1,031 1,655
Sales and marketing.... 423 571 1,319 2,912 3,498 1,764 2,519
General and
administrative........ 1,443 1,476 1,331 1,982 2,722 1,121 1,851
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 1,866 2,286 3,260 6,194 8,582 3,916 6,025
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,868) (2,133) (3,655) (5,179) (4,964) (1,829) (1,007)
Interest income
(expense), net......... (14) (119) (70) (204) (106) (19) (68)
Other income (expense).. (15) 218 (21) (242) (43) (6) (82)
------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,897) $(2,034) $(3,746) $(5,625) $(5,113) $(1,854) $(1,157)
======= ======= ======= ======= ======= ======= =======
Basic and diluted net
loss per share......... $ (9.10) $ (5.08) $ (8.39) $(12.45) $(11.70) $ (4.30) $ (2.48)
Shares used in computing
basic and diluted net
loss per share......... 209 400 446 452 437 431 467
Unaudited pro forma
basic and diluted net
loss per share......... $ (0.78) $ (0.14)
Shares used in computing
unaudited pro forma
basic and diluted net
loss per share......... 6,567 8,324
<CAPTION>
As of June 30,
As of December 31, 1999
------------------------------------------- --------------
1994 1995 1996 1997 1998
------- ------- ------- ------- ------- (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 326 $ 42 $ 2,201 $ 4,421 $ 2,259 $ 5,118
Working capital
(deficit).............. 193 (124) 1,889 5,541 (1,248) 4,573
Total assets............ 1,057 1,022 3,978 9,890 11,506 13,559
Total long-term
liabilities............ 961 1,278 177 963 342 210
Total stockholders'
equity (deficit)....... (343) (810) 2,549 5,503 388 5,312
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto. The following discussion contains forward-looking
statements. Our actual results could differ materially from those discussed in
forward-looking statements. See "Risk Factors."
Overview
We are a leading provider of workflow solutions that improve the process of
electronically managing medical images and related patient information. Our
products permit the capture, compression, transmission, routing, review and
storage of medical images and the coordinated transmission and review of
related patient information over both proprietary networks and the internet.
Prior to 1996, our business consisted primarily of providing network management
services for systems that permit healthcare professionals to access, transmit
and review medical images at remote locations. We began selling FrameWave
products in late 1996.
Product sales currently constitute a substantial portion of our revenue. We
recognize revenue from the sale of our products upon shipment to the customer.
Revenue from our recently introduced FrameWave Web product has not been
material to date. We also derive revenue from installing our products at
customer sites. Our standard installation fee is based on a percentage of the
product sales price. We provide a one year warranty on all products. We
generate recurring revenue from contracts to provide network-based
comprehensive support and post-warranty product maintenance to customers. We
recognize revenue from these contracts ratably over their lives. Recurring fees
constituted approximately 10% of revenue for the year ended December 31, 1998
and 14% of revenue for the six months ended June 30, 1999. As our customer base
grows, we expect recurring fees from service contracts to increase more quickly
than our product sales.
Most of our products are sold under written contracts with our customers.
These contracts generally provide for payment of a portion of the purchase
price upon signing, an additional installment upon shipment, and a final
payment, generally 10% of the purchase price, upon acceptance. Sales to
independent sales and service organizations require payment in full upon
delivery.
We intend to offer our eMed_Web service, which we expect to introduce later
this year, on a subscription fee basis to our current installed base and to new
customers. The result, we believe, will be the gradual decrease of non-
recurring revenue from system sales as a percentage of revenue and the gradual
increase of recurring subscription fees derived from our eMed_Web service as a
percentage of revenue. However, we expect to continue to generate a material
portion of revenue from sales of FrameWave products and our support and other
services, which we anticipate will be used with our internet products.
Customers using our internet services will continue to need products like our
image acquisition devices, servers, workstations and archive products. We
believe we will ultimately derive additional revenue from expanding the medical
imaging workflow management capabilities of our eMed_Web sites.
Costs of product revenue consist primarily of costs of purchased material
and license fees. Costs of service revenue consist primarily of employee-
related costs and the cost of outsourcing services. Historically, our operating
expenses have consisted principally of employee-related costs associated with
the sales, marketing, and research and development of our FrameWave products.
As we seek to increase our customer base and implement our internet strategy,
we expect our operating expenses to increase significantly.
We have incurred net operating losses and negative cash flows since our
inception. As a result, we have recorded no income tax expense or benefit to
date. We expect to continue to incur net losses and negative cash flows as we
seek to rapidly grow our business and continue to implement our internet-based
strategy. We cannot assure you that our customer base or revenue will grow or
that we will achieve or sustain net operating income or positive cash flow.
17
<PAGE>
During the six-month period ended June 30, 1999, we issued stock options to
non-employees and to employees which are exercisable at less than the fair
market value on the date of grant. The issuance of these stock options results
in non-cash compensation charges in the period that the options were granted
and will result in additional non-cash charges over future periods as the
options vest. These charges will be allocated across the various expense
categories as appropriate.
In November 1998, we acquired the assets of the medical imaging business of
E-Systems Medical Electronics, a division of the Raytheon Company, for an
aggregate purchase price of $3.2 million. E-Systems Medical Electronics and its
predecessors have been providing medical imaging products since 1985. The E-
Systems Medical Electronics installed base primarily consists of users who
capture and transmit medical images from an imaging facility to a radiologist's
home for off-hours review. The acquisition was accounted for using the purchase
method of accounting. In February 1999, we sold some non-core assets which we
acquired as part of the transaction for $861,000. The E-Systems Medical
Electronics business, excluding the non-core assets we sold, had net sales of
approximately $8.1 million and a net loss of approximately $6.0 million for the
period from January 1, 1998 to November 23, 1998. Since acquiring E-Systems
Medical Electronics, we have integrated its operations into our existing
business and have eliminated redundant functions. In connection with this
action, we established a reserve of approximately $412,000, of which we have
utilized approximately $331,000 as of June 30, 1999. In addition, we have
discontinued the practice of selling the PACSPro product line at margins below
levels acceptable to us. We generally provide PACSPro products only to existing
users that wish to expand their systems. Therefore, the revenue of E-Systems
Medical Electronics prior to acquisition is not indicative of the incremental
revenue to be generated by us as a result of this acquisition.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue. Revenue increased by 83% to $11.4 million for the six months ended
June 30, 1999 from $6.2 million for the six months ended June 30, 1998. Product
revenue increased by 71% to $9.8 million for the six months ended June 30, 1999
from $5.7 million for the six months ended June 30, 1998. This increase was
attributable to the increased sale of our FrameWave products as well as the
sale of PACSPro products, a product line that we acquired in the E-Systems
Medical Electronics transaction described above. Service revenue increased by
223% to $1.6 million for the six months ended June 30, 1999 from $487,000 for
the six months ended June 30, 1998. This increase was primarily due to the
growth in our installed user base. Approximately $840,000, or 77% of the
service revenue increase is due to increased sales of service to users of our
FrameWave products.
Gross Margin. Gross margin increased to $5.0 million, or 44% of revenue, for
the period ended June 30, 1999 from $2.1 million, or 34% of revenue, for the
period ended June 30, 1998. Gross margin from product revenue increased to $5.1
million, or 52% of product revenue, for the period ended June 30, 1999 from
$2.3 million, or 41% of product revenue, for the period ended June 30, 1998.
The increase in gross margin is attributable to a reduction in the material
cost of products sold and an increase in the selling price of products sold. We
achieved material cost reductions through our negotiations with suppliers and
by re-engineering our products to incorporate better and less expensive
components and sub-assemblies. Gross margin from service revenue improved to a
loss of $76,000 for the period ended June 30, 1999 from a loss of $242,000 for
the period ended June 30, 1998. This improvement is primarily the result of an
increase in the volume of products sold, which resulted in an increase in
recurring revenue generated from service contracts.
Research and Development Expense. Research and development expense increased
by 61% to $1.7 million for the six months ended June 30, 1999 from $1.0 million
for the six months ended June 30, 1998. This increase was primarily the result
of personnel added to expand our internet-based product and service offerings.
As a percentage of revenue, research and development expense decreased to 15%
of revenue for the six months ended June 30, 1999 from 17% of revenue for the
six months ended June 30, 1998.
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Sales and Marketing Expense. Sales and marketing expense increased by 43% to
$2.5 million for the six months ended June 30, 1999 from $1.8 million for the
six months ended June 30, 1998. This increase was primarily the result of the
expansion of our sales force and related support staff. As a percentage of
revenue, sales and marketing expense decreased to 22% for the six months ended
June 30, 1999 from 28% of revenue for the six months ended June 30, 1998.
General and Administrative Expense. General and administrative expense
increased by 65% to $1.8 million for the six months ended June 30, 1999 from
$1.1 million for the six months ended June 30, 1998. Approximately $240,000, or
33%, of this increase is due to a non-cash compensation charge relating
primarily to the issuance of stock options to employees and non-employees
exercisable at less than the fair market value on the date of grant. The
remainder of this increase results primarily from increased personnel cost,
recruiting expense and facilities expense. As a percentage of revenue, general
and administrative expense decreased to 16% for the six months ended June 30,
1999 from 18% of revenue for the six months ended June 30, 1998.
Interest Expense -- Net. Interest expense, net, increased to $69,000 for the
six months ended June 30, 1999 from $19,000 for the six months ended June 30,
1998. This increase was primarily a result of increased borrowing under lines
of credit, which was partially offset by interest earned on short-term
investments.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenue. Revenue increased by 57% to $12.6 million for the year ended
December 31, 1998 from $8.0 million for the year ended December 31, 1997.
Product revenue increased by 58% to $11.3 million for the year ended December
31, 1998 from $7.2 million for the year ended December 31, 1997. This increase
was a result of continued growth in shipments of our FrameWave products.
Service revenue increased by 50% to $1.3 million for the year ended December
31, 1998 from $863,000 for the year ended December 31, 1997. This increase was
primarily due to the growth in our installed user base.
Gross Margin. Gross margin increased to $3.6 million, or 29% of revenue, for
the period ended December 31, 1998 from $1.0 million, or 13% of revenue, for
the period ended December 31, 1997. Gross margin from product revenue increased
to $4.1 million, or 36% of product revenue, for the year ended December 31,
1998 from $1.6 million, or 22% of product revenue for the year ended December
31, 1997. The increase in gross margin was attributable to an increase in the
volume of products sold. Gross margin from service revenue improved to a loss
of $458,000 for the year ended December 31, 1998 from a loss of $596,000 for
the year ended December 31, 1997. This improvement was primarily the result of
an increase in the volume of products sold which resulted in an increase in
recurring revenue generated from service contracts.
Research and Development Expense. Research and development expense increased
by 82% to $2.4 million for the year ended December 31, 1998 from $1.3 million
for the year ended December 31, 1997. This increase was primarily the result of
personnel added to continue the development of our FrameWave products. As a
percentage of revenue, research and development expense increased to 19% for
the year ended December 31, 1998 from 16% of revenue for the year ended
December 31, 1997.
Sales and Marketing Expense. Sales and marketing expense increased by 20% to
$3.5 million for the year ended December 31, 1998 from $2.9 million for the
year ended December 31, 1997. This increase was primarily the result of our
sales force expansion. As a percentage of revenue, sales and marketing expense
decreased to 28% for the year ended December 31, 1998 from 36% of revenue for
the year ended December 31, 1997.
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General and Administrative Expense. General and administrative expense
increased by 37% to $2.7 million for the year ended December 31, 1998 from $2.0
million for the year ended December 31, 1997. This increase was primarily the
result of our increased personnel cost and facilities expenses. As a percentage
of revenue, general and administrative expense decreased to 22% for the year
ended December 31, 1998 from 25% of revenue for the year ended December 31,
1997.
Interest Expense -- Net. Interest expense, net, decreased to $106,000 for
the year ended December 31, 1998 from $204,000 for the year ended December 31,
1997. This decrease was primarily a result of an increase in interest earned on
short-term investments, which was partially offset by increased borrowing under
lines of credit.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenue. Revenue increased to $8.0 million for the year ended December 31,
1997 from $1.0 million for the year ended December 31, 1996. Product revenue
increased to $7.2 million for the year ended December 31, 1997 from $570,000
for the year ended December 31, 1996. This increase was primarily the result of
the successful launch of our FrameWave products. Service revenue increased by
96% to $863,000 for the year ended December 31, 1997 from $439,000 for the year
ended December 31, 1996. This increase was primarily due to the growth in our
installed user base.
Gross margin. Gross margin increased to $1.0 million or 13% of revenue for
the period ended December 31, 1997 from a loss of $394,000 for the period ended
December 31, 1996. Gross margin from product revenue increased to $1.6 million
for the year ended December 31, 1997 from $198,000 for the year ended December
31, 1996. As a percentage of product revenue, gross margin decreased to 22% for
the year ended December 31, 1997 from 35% for the year ended December 31, 1996.
The increase in gross margin was attributable to an increase in the volume of
products sold. The decrease in gross margin as a percentage of revenue was
attributable to the fixed costs of establishing and operating a full-scale
assembly and test operation. Gross margin from service revenue decreased to a
loss of $596,000 for the year ended December 31, 1997 from a loss of $592,000
for the year ended December 31, 1996. The incremental revenue generated from
service activities was offset by an increase in personnel related costs.
Research and Development Expense. Research and development expense increased
by 113% to $1.3 million for the year ended December 31, 1997 from $610,000 for
the year ended December 31, 1996. This increase was primarily the result of
personnel added to continue the development of our FrameWave products. As a
percentage of revenue, research and development expense decreased to 16% for
the year ended December 31, 1997 from 60% of revenue for the year ended
December 31, 1996.
Sales and Marketing Expense. Sales and marketing expense increased by 121%
to $2.9 million for the year ended December 31, 1997 from $1.3 million for the
year ended December 31, 1996. This increase was primarily the result of our
sales force expansion. As a percentage of revenue, sales and marketing expense
decreased to 36% for the year ended December 31, 1997 from 131% of revenue for
the year ended December 31, 1996.
General and Administrative Expense. General and administrative expense
increased by 49% to $2.0 million for the year ended December 31, 1997 from $1.3
million for the year ended December 31, 1996. This increase was primarily the
result of increased personnel expenses. As a percentage of revenue, general and
administrative expense decreased to 25% for the year ended December 31,1997
from 132% of revenue for the year ended December 31, 1996.
Interest Expense -- Net. Interest expense, net, increased to $204,000 for
the year ended December 31, 1997 from $70,000 for the year ended December 31,
1996. This increase was primarily a result of increased borrowing under lines
of credit, which was partially offset by interest earned on short-term
investments.
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Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
equity and debt financings. During the period from inception through June 30,
1999, we received net proceeds from the sale of our capital stock and
convertible notes of $25.7 million. None of the convertible notes remain
outstanding. As of June 30, 1999, we had $5.1 million of cash and cash
equivalents and approximately $674,000 was available under our credit facility.
Cash used in operating activities for the six months ended June 30, 1999 of
$1.2 million consisted primarily of net operating losses of $1.2 million and an
increase in accounts receivable of $1.3 million, offset in part by a decrease
in inventories. The increase in accounts receivable is attributable to the
increase in revenue and the decrease in inventory resulted from our ability to
liquidate inventory acquired as part of our acquisition of E-Systems Medical
Electronics. Cash used in operating activities for the six months ended June
30, 1998 of $1.9 million was due primarily to net operating losses of $1.9
million and an increase in accounts receivable of $853,000, offset by a
decrease in prepaid expenses and other current assets of $513,000. The increase
in accounts receivable is attributable to the increase in revenue, and the
decrease in prepaid expenses and other current assets is attributable to a
reduction in prepaid software licenses. Cash used in operating activities for
the year ended December 31, 1998 of $2.7 million was due primarily to net
operating losses of $5.1 million offset by a decrease in inventories and
prepaid expenses of $638,000 and $554,000, respectively, and an increase in
deferred revenue of $690,000. The decrease in inventory is attributable to
improvements in the materials purchasing process and the decrease in other
current assets is attributable to a reduction in prepaid software licenses. The
increase in deferred revenue is primarily due to an increase in customer
deposits related to a single customer order. Cash used in operating activities
for the year ended December 31, 1997 of $6.1 million was due primarily to net
operating losses of $5.6 million and an increase in accounts receivable,
prepaid expenses and inventories of $2.5 million, $715,000, and $399,000,
respectively, offset by increases in accounts payable, accrued expenses and
deferred revenue of $1.3 million, $677,000 and $284,000, respectively. These
increases are the result of the increased sales activity during the period.
Cash provided by investing activities for the six months ended June 30, 1999
of $569,000 consisted primarily of proceeds from the sale of non-core assets
that we acquired as part of the acquisition of E-Systems Medical Electronics,
offset in part by capital expenditures for computer equipment and other fixed
assets. Cash used in investing activities for the six months ended June 30,
1998 of $315,000 consisted primarily of capital expenditures for computer
equipment and other fixed assets. Cash used in investing activities for the
year ended December 31, 1998 of $1.5 million consisted primarily of $999,000
used for the acquisition of E-Systems Medical Electronics and $465,000 used to
fund capital expenditures for computer equipment and other fixed assets. Cash
used in investing activities for the year ended December 31, 1997 of $841,000
consisted primarily of capital expenditures for computer equipment and other
fixed assets.
Cash provided by financing activities for the six months ended June 30, 1999
of $3.5 million consisted primarily of $5.8 million received from the issuance
of 4,142,857 shares of Series K preferred stock and warrants to purchase
467,186 shares of common stock. This amount was offset in part by $2.2 million
payment of the remaining purchase price owed to Raytheon for our purchase of
E-Systems Medical Electronics. The Series K preferred stock will be converted
into 1,726,152 shares of common stock upon the closing of this offering. Cash
provided by financing activities of $1.1 million for the six months ended June
30, 1998 consisted primarily of $1.2 million received from additional bank
borrowing from lines of credit, offset by debt repayment. Cash provided by
financing activities of $2.1 million for the year ended December 31, 1998
consisted primarily of $2.4 million received from additional bank borrowing
from lines of credit. Cash provided by financing activities for the year ended
December 31, 1997 of $9.2 million consisted primarily of $8.4 million received
from the issuance of 7,730,909 shares of Series J preferred stock and warrants
to purchase 409,091 shares of Series J preferred stock and $885,000 from
additional bank borrowings from lines of credit. The Series J preferred stock
will be converted into 3,221,179 shares of common stock and the Series J
warrants will become warrants to purchase 170,449 shares of common stock upon
the closing of this offering. During 1996, we received $5.8 million from
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the issuance of 2,216 shares of preferred stock and warrants to purchase 64,774
shares of common stock, all of which preferred stock will be converted into
2,522,001 shares of common stock upon the closing of this offering.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least 12 months
after the date of this prospectus. We may require additional capital in the
future. Our capital requirements are expected to include the funding of
operating losses, working capital requirements and other general corporate
purposes, including expansion of our network, advertising and content
development. We intend to repay our current credit facility and may pursue one
or more strategic alliances, partnerships, or acquisition transactions,
although, as of the date of this prospectus, we have no agreement to enter into
any material investment or acquisition transaction. We may need to raise
additional funds, however, to respond to business contingencies which may
include the need to:
. fund more rapid expansion;
. fund additional marketing expenditures;
. develop or acquire content, technology or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses.
Inflation
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods reflected above.
Year 2000 Disclosure
Many existing computer programs use only two digits, rather than four, to
represent a year. Accordingly, date-sensitive software or hardware written or
developed in this fashion may not be able to distinguish between 1900 and 2000,
and programs written in this manner that perform arithmetic operations,
comparisons or sorting of date fields may yield incorrect results when
processing a Year 2000 date. This Year 2000 problem could potentially cause
system failures or miscalculations that could disrupt operations.
Our State of Readiness
We have completed an initial analysis and risk assessment aimed at
identifying Year 2000 issues. Though it is impossible to be certain, we believe
that our mission critical systems and equipment are Year 2000 compliant.
Financial, Information Technology and Non-Information Technology Systems. We
have assessed all of our key financial, information technology and non-
information technology systems, and we believe that the actions required to
correct any non-compliant financial, information technology and non-information
technology systems have been completed. There can be no assurance that we have
identified all Year 2000 problems in these systems or that any necessary
corrective actions have been successfully completed.
Third Party Vendors, Suppliers and Customers. We continue to contact all of
our significant suppliers and customers to determine the extent to which our
networks and systems are vulnerable to the failure of those
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third parties to resolve their own Year 2000 issues. We have not received any
responses that indicate our networks and systems are vulnerable to such
failures. We are continuing to comply with federal guidelines related to the
registration and availability of Year 2000 status information for our products.
We have completed and made available all planned software and system upgrades
related to Year 2000 readiness for fielded products. We believe that all of our
current products are Year 2000 compliant and we have available upgrades for our
fielded legacy systems that represent the highest risk for Year 2000 non-
compliance. We have sent notices to known customers with appropriate
information relative to Year 2000 non-compliance of these legacy systems, and
instructions on how to contact us. We have not and do not plan to evaluate the
risks to us presented by noncompliant fielded products. We have not undertaken,
and will not undertake, an in-depth evaluation of the Year 2000 preparedness of
our suppliers and customers or such other third parties, as their ability to
adequately address Year 2000 issues is outside our control. There can be no
guarantee that their systems will be timely converted, or that any such
converted systems will interact properly with our systems, or that such
conversions, if not completed or improperly implemented, would not have a
material adverse effect on our systems.
Our Year 2000 Risk
Based on the efforts described above, we currently believe that our systems
are Year 2000 compliant. If our systems or those of our suppliers, vendors or
other third parties on which we rely are not Year 2000 compliant, we could,
among other things, fail to fulfill our contractual obligations with customers
in new or existing markets, face substantial claims by such customers and loss
of revenue, fail to bill our customers accurately and on a timely basis,
experience increased expenses associated with litigation, stabilization of
operations after critical systems failures and execution of contingency plans,
and be subject to the inability by customers and others to pay, on a timely
basis or at all, obligations owed to us. Although the adverse effects of any or
all of these events are not quantifiable at this time, any of these events
could have a material adverse effect on our business and operating results.
Our Contingency Plans
We have begun to develop contingency plans which anticipate our most likely
worst case Year 2000 scenarios, which have not yet been identified fully. We
intend to take appropriate actions to mitigate the effects of Year 2000 issues.
Such actions may include having arrangements for alternate suppliers and using
manual intervention where necessary. If it becomes necessary for us to take
these corrective actions, it is uncertain whether this would result in
significant interruptions in service or delays in business operations or
whether it would have a material adverse effect on our results of operations,
financial position or cash flow.
Our Year 2000 Remediation Costs
Our costs incurred to date in addressing the Year 2000 problem have not been
material. We have not deferred information technology projects due to Year 2000
expenses, and we do not expect our costs associated with remediating any Year
2000 problems to have a material adverse impact on our business. However, there
can be no assurance that the costs associated with the Year 2000 problem will
not be material.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued a
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The new standard establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments imbedded in other contracts (collectively
referred to as derivatives), and for hedging activities. In June 1999, the FASB
issued SFAS No. 137 which deferred the effective date of SFAS No. 133 for one
year. SFAS No. 133 is now effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material
effect on our financial position or results of operations.
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In February 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SoP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. SoP 98-1 will be
effective for us beginning in fiscal 1999, and we do not expect adoption of
this SoP to have a material effect on our financial position or results of
operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of Start-
Up Activities." Start-up activities are defined broadly as those one-time
activities related to the opening of a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new
entity. SoP 98-5 requires that the cost of start-up activities be expensed as
incurred. SoP 98-5 is effective for us beginning in 1999, and we do not expect
adoption of this SoP to have a material effect on our financial position or
results of operations.
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BUSINESS
Overview
We are a leading provider of workflow solutions for electronically managing
and distributing medical images and related patient information. Our products
and services are used by radiologists, technicians, referring physicians and
other health care professionals to improve the efficiency of the practice of
medicine by allowing them to access, transmit and review medical images and
related patient information quickly and easily. Our products capture, compress,
transmit, route and store medical images, including x-rays, MRIs, CTs and
ultrasounds. Our offerings also permit the coordinated transmission and review
of images and related patient information over both proprietary networks and
the internet. Our customers are providers of radiology imaging and interpretive
services, including radiologists, hospitals and outpatient imaging facilities,
and often operate as part of complex health care networks. We believe that we
have the largest installed user base of any company in our business. Our
products are installed in approximately one of four U.S. imaging facilities and
provide image viewing capabilities in one of four U.S. radiologists' homes.
Our FrameWave products are modular in design and allow us to tailor
solutions to our customers' needs. This could entail providing an entire image
management workflow solution or individual applications that can be integrated
with the customer's existing products. FrameWave incorporates our advanced
proprietary software including our compression technology. We believe our
FrameWave technology provides us with a significant competitive advantage.
Building from this FrameWave technology, we have developed internet-based
offerings that provide secure access to images and other medical information
quickly and easily using any commercially available internet browser. Our
internet-based offerings take advantage of the internet's open architecture and
universal accessibility to provide expanded access to medical images and
related information. This functionality allows various health care
professionals to securely access medical images and related information in an
organized and efficient manner from any location. We believe it will also
expand the use of electronic image management tools.
Our internet offerings enable our customers to reduce costs and improve
their service. We recently introduced FrameWave Web and intend to introduce
eMed_Web later this year. FrameWave Web permits a customer to manage and make
available medical images and related information over the internet. eMed_Web is
a website development and hosting service, through which we intend to establish
and manage individual websites for our customers. Through these eMed_Web sites,
our customers will have FrameWave Web's integrated image and report management
capabilities as well as the opportunity to incorporate other clinically
relevant information and marketing information targeted at their customers. In
addition, we intend eMed_Web to serve as a platform for offering additional
workflow solutions.
As part of our solutions, we provide our customers remote comprehensive
support services through our network operations center, which is fully staffed
24 hours a day, seven days a week. Because medical imaging is critical to
patient diagnosis and care, we believe that our customers highly value
comprehensive support services that increase the reliability of their medical
image management systems. Our network operations center personnel are able to
remotely monitor and manage customer systems in order to identify and resolve
system problems. These support services include the ability to remotely
diagnose problems related to portions of a customer's system provided by third
parties. The level of service we provide enables many customers to outsource
the technical management of their image distribution and management systems to
us.
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Strategy
Our objective is to become the leading supplier of comprehensive, medical
imaging workflow solutions to health care providers by leveraging our advanced
technology and experience. Elements of our strategy to achieve this objective
include:
. Introducing eMed_Web websites. We intend to introduce our eMed_Web
website development and hosting service later this year. We believe that
eMed_Web will increase our market penetration, build a recurring revenue
base and generate other sources of revenue. We believe that offering the
ability to cost-effectively manage the accessibility and distribution of
imaging, marketing and other information over the internet will drive
the adoption of our eMed_Web sites.
. Expanding our sales by continuing to develop additional medical imaging
workflow solutions. We intend to expand our suite of medical imaging
workflow products and services. For example, the reports that accompany
medical images are generally prepared and stored through inefficient
dictation and transcription procedures. To address this inefficiency, we
intend to incorporate a speech-to-text transcription capability into our
workflow solutions. Also, reporting, scheduling and billing are
currently maintained on separate information systems from medical
images. We believe that efficiencies can be achieved by eliminating the
need for redundant information systems. We intend eMed_Web to serve as a
platform for offering these additional workflow solutions.
. Leveraging our relationships with our installed users to increase
sales. We recently acquired E-Systems Medical Electronics in order to
access a significant installed user base which we believe is ripe for
upgrade. We will continue to aggressively market our internet-based and
other products to our installed user base. We believe that our installed
base of over 1,800 hospitals and outpatient imaging centers and over
7,000 radiologists provides us with a significant advantage in gaining
acceptance of and selling our current products and services, the
eMed_Web service and planned enhancements to our current workflow
solutions.
. Expanding our sales and marketing efforts. We believe there is a
significant opportunity for us to increase our revenues through expanded
sales and marketing efforts. Our success to date has been achieved with
modest sales and marketing efforts and we believe that by investing
additional resources, we can increase sales significantly. We intend to
devote significant additional resources to market and sell our products
and services to both new customers and our installed user base. We also
intend to expand the scope of our sales and marketing efforts into
promising international markets.
. Engaging in strategic acquisitions and relationships. We intend to
engage in acquisitions and enter into strategic relationships to
accelerate the implementation of elements of our strategy. We may pursue
acquisitions, partnerships or licensing arrangements to obtain
technology if we determine that to do so would be more cost effective or
timely than developing our own. We also may selectively continue to
broaden our user base through acquisitions to improve our economies of
scale.
Market Opportunity
Growing Market for Radiology Services. According to the Health Care
Financing Administration, or HCFA, total expenditures on health care services
in the United States were approximately $1.1 trillion in 1997 and are expected
to reach approximately $2.1 trillion by the year 2007. Industry studies
estimate that the 1998 U.S. market for radiology services was approximately $69
billion. Based on historical data, we believe that over 350 million radiology
studies are conducted annually. The number of studies has grown due to the
increasing usefulness of radiology as a non-invasive diagnostic technique and
the general aging of the U.S. population. Medical imaging is critical to
patient diagnosis and care across a broad spectrum of health care
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procedures and disease states. Moreover, an increasing proportion of these
studies is produced in digital format from devices such as MRIs and CTs. All
states have record retention regulations which require radiology images to be
stored for several years.
Fragmented Industry Complicates Communications and Transactions. Radiology
images and information are used by a broad cross-section of industry
participants including radiologists, referring physicians, hospitals and
outpatient imaging centers. Today there are over 29,000 radiologists organized
into approximately 3,200 radiology practice groups serving more than 2,800
imaging centers and over 5,000 hospitals. Referring physicians are a
particularly disparate group. Of the 740,000 physicians in the United States,
60% of them are either sole practitioners or practice in partnerships of only
two physicians. Efficient systems for the distribution, management and storage
of radiology images and information is critical to all of these constituencies.
The inability to easily access and the failure to appropriately manage this
information can result in unnecessary expense. HCFA estimates that
approximately 10% of all health care expenditures are the result of a
duplication of care due to missing patient information.
Inefficiencies in Workflow and Information Technology. Radiology images,
even those generated in a digital format, are typically printed to film for the
radiologist's interpretation. The current paradigm for a typical radiology
procedure is as follows: a technician produces the radiology images; the images
are printed to film and copies of the images are provided to the radiologist
for review and diagnosis; the radiologist dictates a report into a recorder; a
clerk transcribes the oral report into a first draft written report for the
radiologist's review; a final report is generated and distributed to the
referring physician and any consulting specialist; duplicate copies of the
images are produced and are delivered by courier to the referring physician and
any consulting specialist. Under this paradigm, it often takes 2 to 3 days to
produce a final report and to deliver the images and related report to the
referring physician. The significant costs associated with creating duplicate
film images for multiple users, delivering images to remote locations by
courier, creating reports using conventional transcription services, storing
reports and storing images on film represent inefficiencies in medical imaging
workflow which can be rectified with improved use of information and workflow
technology. Based on a 1996 Mayo Clinic report, for radiology images generated
each year, more than $5.6 billion is spent on radiology film and processing
costs and costs associated with the handling and storing of these films over
their lifetime. We estimate that the cost of conventional transcription of
dictated reports is approximately $950 million annually.
Competitive Pressure on Radiology Providers. Radiology, like other medical
specialties, has been fundamentally affected by change in the structure and
economics of U.S. health care. Health care payors and providers are forcing
radiologists and imaging facilities to reduce unit fees, improve the timeliness
and availability of interpretations and related patient images, and ensure the
availability of sub-specialist radiologists. This pressure has driven radiology
providers to look for ways to enhance their efficiency and to provide better
service to referring physicians and other constituencies. Many of these
improvements can be achieved through the use of electronic medical imaging
workflow solutions.
Growth of the Internet. The internet's open architecture, universal
accessibility and growing acceptance make it an increasingly important
environment for business-to-business and business-to-consumer interaction. Use
of the internet is rapidly expanding from simple information publishing,
messaging, and data gathering to critical business transactions and
confidential communications. The power and ability of the internet to connect
various participants in the health care industry, from physicians, to
hospitals, to patients, creates an opportunity to advance the state of
information technology in the health care industry. Internet-based workflow
solutions permit more efficient distribution of information over a broader
range of remote locations than proprietary dedicated networks. We believe that
physicians are increasingly using internet-based medical applications. We
believe that medical imaging workflow management is uniquely suited to benefit
from internet-based tools, given the fragmentation of the health care industry,
the amount and complexity of the data produced and the need for timely access
to medical imaging information.
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eMed Solutions
We have worked with providers of radiology imaging and interpretive services
since 1992 to understand the inefficiencies in medical imaging workflow and to
design cost-effective solutions. Based on this insight, we have been able to
focus our efforts on solutions that provide our customers with cost savings,
increased efficiencies and competitive advantages. Our products and services
incorporate advanced technology and offer our customers the following
advantages:
Our advanced technology improves our customers' cost effectiveness. Our
advanced proprietary technology allows our customers to reduce their costs. For
example, we have pioneered the utilization in medical imaging of a file
compression technology known as "wavelet." This compression technology permits
users to compress very large data files required for film images like x-rays
into files as small as one-fiftieth the original size, without visible loss of
image quality. Other compression technologies typically achieve compression
ratios of one-half or one-third of their original size. Our compression
technology significantly reduces our customers' network transmission and data
storage costs. Using our FrameWave products, a medical image transmission which
would otherwise take up to 27 minutes in uncompressed form can be completed in
as little as 30 seconds.
Our products and services enable our customers to enhance their
competitiveness. Our products and services are designed to enhance our
customers' ability to market their services and to serve their customer base of
referring physicians. By designing our products to operate over the internet
with any commercially available internet browser, we enable our customers to
quickly and easily:
. provide remote access to medical images and related information; and
. communicate medical and marketing information to their referring
physicians and other constituencies.
We believe this enhanced access to images and information will allow our
customers to provide faster, higher quality and more responsive service to
their referring physicians and other constituencies.
The modularity of our products and services permits us to tailor solutions
to our customers' needs. Our FrameWave products and eMed_Web are modular in
design and allow us to conform our products and services to our customers'
functionality and budget requirements. We can provide an entire image
management workflow solution. Alternatively, customers can integrate our
products and services on an application-by-application basis with systems
previously acquired from other vendors. For example, customers can obtain the
benefits of our internet offerings without replacing their existing medical
imaging management systems, modalities, or film printer networks.
We provide our customers with comprehensive support. Our comprehensive
support services increase the cost effectiveness and reliability of our
customers' medical imaging information systems. Because medical imaging is
critical to patient diagnosis and care, we believe that our customers highly
value comprehensive support services that increase the reliability of their
medical image management systems. Our network operations center personnel are
able to remotely monitor and manage customers' systems and identify and resolve
system problems. These services include the ability to remotely diagnose
problems throughout a customer's image distribution and management system,
including components of a system provided by the customer or other third party
vendors. Our comprehensive support service enables many customers to outsource
the technical management of their image distribution and management systems to
us.
28
<PAGE>
Products and Services
Our products and services are sold as solutions tailored to the specific
needs of our customers. Our products generally consist of industry standard,
third-party hardware, elements of third party software and our proprietary
software. Our flagship products and services described below are currently
marketed and sold under the FrameWave brand name. In addition, we market
PACSPro image acquisition devices which we acquired through the E-Systems
Medical Electronics acquisition. Our internet-based offerings are designed to
enhance our customers' image management systems. Image management systems are
typically comprised of image acquisition devices, image management servers,
image review workstations and electronic image archives, all of which can be
purchased from us individually or in larger configurations.
FrameWave Products
FrameWave Web. Our FrameWave Web product is an internet-based image and
report distribution system which enables access to images, together with
reports about the images, in an integrated presentation. FrameWave Web also
includes multiple security features for protection of the confidentiality of
patient information, including access control, information control and
transaction logging.
Image Acquisition Devices. Our image acquisition devices that convert hard-
copy x-rays into digital form include high-resolution scanners and our
proprietary software. Others use our proprietary software to directly obtain
images from equipment that creates them in electronic format. These images can
then be electronically distributed and managed in compliance with industry
standards. All of our image acquisition products feature graphical user
interfaces for ease of use.
Servers. We offer a variety of servers with advanced proprietary software
that compress, decompress, store and manage medical images and interface with
different medical information systems to provide an integrated view of related
patient information over a variety of networks. Our servers can be configured
in a variety of ways to meet the workflow and budget requirements of our
customers.
Clinical Image Viewers. Our viewers are self-installable software products
that permit users to view medical images on personal computers while at home or
in the office through a telephone connection to a hospital. FrameWave viewers
support direct telephone connections to our network operations center enabling
remote support service.
Diagnostic Workstations. We offer high performance image display
workstations suitable for primary diagnostic use. Diagnostic workstations
consist of two or more high resolution, grayscale monitors and a workstation
running proprietary image manipulation and display software. Our workstations
offer a wide variety of image manipulation tools and are designed to comply
with the American College of Radiology Standards for Teleradiology. Our
workstation products are intended for use in a hospital, imaging center or
similar facility where patient diagnosis is performed.
Archives. We offer archives that provide cost-effective storage of digital
images. An archive includes a database management application for the
organization and retrieval of medical images. An archive permits short-term and
long-term storage capacity, both of which may be expanded through upgrades
following an initial purchase. The archives serve as economical alternatives to
the storage of hard copy films that health care professionals are required by
law to retain for several years.
Services
eMed_Web. eMed_Web is a website development and hosting service which
incorporates our FrameWave Web image and report management technology. With our
eMed_Web service, we intend to establish and manage individual customer
websites. Through these eMed_Web sites, our customers will be able
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<PAGE>
to make available images and related patient information remotely over the
internet. Health care professionals, including radiologists, will be able to
access these images and information with authorizing passwords. Also, eMed_Web
sites will provide customers the opportunity to incorporate other clinically
relevant information and marketing information targeted at their customers. In
addition, we intend eMed_Web to serve as a platform from which we can offer
additional workflow solutions and other information of interest to health care
professionals. The servers that will host the eMed_Web sites will be located at
customer sites and supported from our headquarters in Lexington, Massachusetts.
Customer Service and Training. Comprehensive, system-wide support is an
integral part of the solutions we offer our customers. Our network operations
center is staffed 24 hours a day, 7 days a week with engineers, application
specialists and clinical coordinators. Our products include remote diagnostics
technology which permits our network operations center to remotely assume
operation of a customer's equipment. This permits us to offer a high level of
support at relatively low cost. We market this comprehensive network-based
support service as a separate, purchasable offering, not included in the
customer's first-year warranty. Approximately 85% of our FrameWave customers
have purchased this enhanced service offering.
Our products are typically sold with a one year warranty. After the
expiration of the warranty, we encourage our customers to purchase annual
service contracts. Approximately 75% of our customers with FrameWave
applications have purchased post-warranty annual service contracts.
We sell installation services in connection with the sale of our products.
Upon completion of installation, we conduct formal training at the customer's
site in group settings and teach our customers through "hands on" instruction
on our products. We are certified by the American Association of Radiology
Technologists to train customer technologists in the use of our medical imaging
management systems. Because of this certification, training provided by our
employees satisfies three hours of required continuing education certification.
The average time from the beginning of installation through acceptance testing
is less than two weeks.
We outsource a portion of the on-site installation, training and repair
services described above to third party contractors as well as our independent
sales and service organizations.
Sales and Marketing
We employ a direct sales force and we utilize independent sales and service
organizations. We manage our independent sales and service organizations to
complement our direct sales force. Members of our direct sales force are
assigned to regional territories and are responsible for customer activity
within their regions.
The independent sales and service organizations purchase products from us
and resell to their customers at prices they determine. Their customers execute
contracts directly with us covering warranty and other service and support. We
have also begun to train and engage some of these organizations to provide on-
site service to customers under our supervision. These services include
installation, training and on-site repair.
Our marketing activities include telemarketing, advertisements in trade
journals and news releases to the trade press. The focus of our telemarketing
efforts is our installed user base. We also present our products at multiple
trade shows throughout the year. The most significant of these trade shows is
the Radiological Society of North America meeting held in late November of each
year.
Technology
We have historically developed products and services through our own
research and development, acquisitions and strategic relationships. As of
August 1, 1999, our engineering group included approximately one-fourth of our
employees. We will continue to pursue product and service development
internally as well as through strategic relationships.
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The core technology employed in our internet application is what is referred
to as dynamic HTML, which is integrated with our compression technology. This
technology, which we license from AWARE, Inc., differs from typical HTML-based
applications due to the number, size, and grayscale characteristics of the
images. For example, one 14"X17" film, digitized at the resolution standard
adopted by the American College of Radiology Standards for Teleradiology,
results in excess of ten megabytes of data. Our internet server technology
delivers images, text, and voice over any internet connection, including dial-
up modem connections, with acceptable clinical performance. Our internet server
technology is browser-independent and employs layered security defenses against
unauthorized access, as well as secure socket layers, to ensure secure transfer
of information over the internet. Our internet server technology has been
jointly developed under an exclusive relationship with AWARE.
All of our products except our archive products operate on computers with
Intel Pentium processors that run the Microsoft Windows NT or Windows SQL
Server operating systems. Our archive products are built on the Sun Sparc
platform. We believe that the use of a well known and highly developed hardware
and operating system platform simplifies manufacturing and support, encourages
customer acceptance, and reduces the risks of technological obsolescence.
All of our FrameWave products are fully DICOM-compliant and all of our
current PACSPro products can be upgraded to be DICOM-compliant. DICOM, or
Digital Imaging Communications for Medicine, is an industry standard network
communications protocol that allows DICOM-compliant imaging modalities and
other image-related devices to directly communicate with each other without
proprietary interfaces or translations. In addition, our products comply with
the benchmarks for quality and professional practice established by the
American College of Radiology Standards for Teleradiology. Our comprehensive
support services facilitate our customers' quality assurance requirements
within these standards.
Production
Most of our products include some hardware components, our proprietary
software, and software licensed from others. All of the hardware components of
our products are acquired from third parties. We assemble and test components
and sub-assemblies acquired from vendors, and integrate our proprietary and
licensed application software programs. We operate under FDA Good Manufacturing
Practices rules, and we have registered with the FDA as a medical device
manufacturer. We have elected to rely on a limited number of suppliers for
certain components in order to achieve more advantageous pricing through
increased volume. However, we believe that additional suppliers are available
for our hardware components.
Our licensing agreement with AWARE regarding jointly developed web server
technology provides that we will have exclusive rights to this technology for
medical use through its termination on December 31, 2005 and have non-exclusive
rights for a period following termination. This agreement also provides that,
until the same date, AWARE will be our exclusive supplier of web-based image
viewing and distribution software for use in our products. We have agreed to
pay license fees to AWARE based upon the sales we make to our customers. We
have agreed to devote resources to marketing, support and further development
of our web product, and AWARE has agreed to devote engineering resources to
develop new features, applications and technology at our request. The web
server technology agreement provides that AWARE will have exclusive rights to
this technology for non-medical use, and will make royalty payments to us for
any licenses granted by AWARE to customers for non-medical use.
We license compression technology from AWARE under a separate agreement that
provides that we will have rights to this technology for medical use on a non-
exclusive basis through December 31, 2004. We have agreed to pay license fees
for compression technology to AWARE based upon the sales we make to our
customers.
Our licensing agreement for our image viewing software expires on March 31,
2000. Other software included in our products is licensed under a long-term
agreement which terminates on December 31, 2004. Both of these agreements
provide for payment of license fees based upon the number of copies of the
software
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<PAGE>
we use, and require us to obtain signed agreements from our customers
containing specified software licensing provisions. In some cases we have
prepaid, or committed to pay, license fees for software not yet utilized in
order to obtain improved pricing or other benefits. If any of these agreements
expire or are terminated, we believe we would be able to obtain suitable
replacement vendors or internally develop substitute software.
Intellectual Property
We generally do not rely on patent protection for our products and services.
Instead, we rely on a combination of copyright and trade secret law, employee
and third party nondisclosure agreements, and other protective measures to
protect our intellectual property rights. Our policy is to require our
employees, contractors and consultants who may have access to our confidential
information, and parties to collaboration agreements to execute confidentiality
agreements upon the commencement of employment, consulting relationships or
collaborations. We also seek to continuously develop and improve our products
and services in order to offer features not available from our competitors. We
also rely on licensing opportunities to develop and maintain our competitive
positions.
We have registered the names "eMed," "FrameWave" and "PACSPro" as trademarks
with the United States Patent and Trademark Office and have reserved the
internet address: www.eMed.com.
We own three issued U.S. patents covering automated distribution of medical
images over data processing networks. Since this functionality is not yet
necessary in the way medical imaging applications are currently utilized, we
have not yet incorporated these into our products and services.
Competition
Competition in the medical image management market is intense. Competition
in our markets is based on price, functionality, reliability, reputation of the
vendor, and service. Our ability to maintain our competitive position will
depend on our ability to continue to innovate while maintaining quality and
customer satisfaction.
A large number of companies offer medical imaging management and
distribution products that are competitive with ours, including internet-based
products. A number of smaller vendors offer products which compete with a
portion of our current product line. In addition, many of our competitors are
larger than we are, have been in business longer than we have, and have greater
financial, technical, research and development and sales and marketing
resources than we do. Several large multinational corporations, including Agfa,
Siemens, General Electric Medical Systems and Kodak compete in our market. Many
of our competitors have the resources to offer their products at greatly
discounted prices, or to offer functionality competitive with our products at
no charge in connection with the sale of related or complementary products or
systems. Customer decisions to purchase our products are often influenced by
the perceived stability and market recognition of the vendor. We may be at a
disadvantage because many of our competitors are better known and perceived as
less risky than we are.
Our current and future internet-based products and services will compete in
a market that is rapidly growing and not yet fully defined. A number of
companies have recently entered the field of medically related internet
services including Healtheon, CareInsite, and Medscape. We expect this trend to
continue. We also expect our business plan and the business plans of these
companies to overlap in time, creating both increased competition and
opportunities for strategic relationships.
Government Regulation
The manufacturing and marketing of our products are subject to FDA medical
device regulations in the United States and to similar regulations in other
countries by corresponding regulatory authorities. The FDA regulations govern
the testing, manufacture, labeling, record keeping, approval, advertising and
promotion of our products and services. The process of obtaining and
maintaining required regulatory clearances and approvals is lengthy, expensive
and uncertain. Our ability to market new products and improvements to existing
products will depend on obtaining new clearances and approvals in the future.
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<PAGE>
The FDA requires that a manufacturer seeking to market a new medical device
or an existing medical device for a new indication obtain either a premarket
notification clearance under section 510(k) of the Federal Food, Drug and
Cosmetic Act or the approval of a premarket approval application under this
Act prior to the marketing of the new device or commercializing the new
indication. Material changes to existing medical devices are also subject to
FDA review and clearance or approval prior to commercialization in the United
States. Although it is believed to be a shorter, less costly regulatory path
than the process to obtain approval of a premarket approval application, the
process of obtaining a 510(k) clearance generally requires supporting data,
which can be extensive and can extend the regulatory review process for a
considerable length of time. All of our commercially available products have
received 510(k) clearance from the FDA.
We are also required to register as a medical device manufacturer with the
FDA and as a medical device distributor with the Texas Department of Health.
The FDA requires us to maintain detailed manufacturing records, device history
records and complaint logs. We are subject to inspection and audit by the FDA
for compliance with Good Manufacturing Practices (as defined by FDA rules) and
other applicable regulations. Our most recent FDA inspection and audit was
completed in the second quarter of 1999 and did not identify material
problems.
Even after market introduction, the FDA continues to regulate the design,
manufacture and labeling of our medical products. Failure to comply with
applicable regulatory requirements could result in, among other things,
warning letters, seizures of products, total or partial suspension of
production, refusal of the FDA to grant clearances or approvals, withdrawal of
existing clearances or approvals, or criminal prosecution.
Sales of our products and services outside of the United States, which has
been minimal to date, are subject to foreign regulatory requirements that vary
widely from country to country. In Europe, we will be required to obtain the
certificates necessary to enable the CE Mark, an international symbol of
adherence to quality assurance standards and compliance with applicable
European Union Medical Device Directives, to be affixed to our products for
sales in member countries.
Employees
As of September 17, 1999, we employed 110 persons. None of our employees
are represented by unions.
Properties
We maintain our headquarters and assembling facility in approximately
25,500 square feet of leased space in Lexington, Massachusetts. We also
maintain a sales and service facility in approximately 8,000 square feet of
leased space in San Antonio, Texas. We can provide all of our support services
from either our Lexington or San Antonio location. We believe that our
properties are adequate and suitable for their intended purposes.
Litigation
We are party to suits and regulatory proceedings arising in the ordinary
course of our business, none of which we believe are material.
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<PAGE>
MANAGEMENT
The following table sets forth information concerning our executive officers
and directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Chief Executive Officer, President and
Scott S. Sheldon.......... 38 Director
Christine L. Chung........ Vice President -- Business Operations,
32 Corporate Secretary
Jerry Froelich, M.D....... 47 Chief Medical Officer
Gary A. Lortie............ Chief Financial Officer, Vice President --
40 Finance and Administration
David J. Mahoney.......... 36 Vice President -- Sales
Howard Pinsky............. 45 Chief Technology Officer
John Strauss.............. 44 Vice President -- Marketing
James J. Bochnowski....... 56 Director, Chairman of the Board
Thomas B. Neff............ 45 Director
Thomas O. Pyle............ 59 Director
Michael Schmertzler....... 47 Director
Donald E. Strange......... 55 Director
</TABLE>
Scott S. Sheldon has served as our President, Chief Executive Officer, and a
Director since he co-founded eMed in March 1992. From 1987 through 1992, he
held various positions in the Mergers and Acquisitions and Corporate Finance
Departments at Morgan Stanley.
Christine L. Chung has served in various senior capacities since joining
eMed in September 1992. She currently serves as Vice President of Business
Operations and Corporate Secretary. Prior to joining eMed, she served as a
strategy consultant for Monitor Company.
Jerry Froelich, M.D. has served as our Chief Medical Officer since August
1999. From 1990 until joining eMed, Dr. Froelich had been a partner in
Radiology Imaging Associates in Denver, Colorado. Radiology Imaging Associates
is a group of 42 sub-specialty radiologists which provides radiology service to
10 hospitals and 15 clinics. He was Medical Director of Radiology at the
Columbia Swedish Medical Center in Englewood, Colorado, and a Clinical
Associate Professor of Medicine at the University of Colorado.
Gary A. Lortie has served as our Chief Financial Officer and Vice President
of Finance and Administration since May 1998. From 1997 until joining eMed, Mr.
Lortie served as the Director of Corporate Development for the Biomedical
Division of Thermo Electron Corporation. From 1996 to 1997, Mr. Lortie served
as President for the Moisture Systems Division of Thermo Electron. From 1993 to
1995, he served as Director of Finance and Administration for Thermedics
Detection, a subsidiary of Thermo Electron. Mr. Lortie is a certified public
accountant.
David J. Mahoney has served as our Vice President of Sales since February
1998. Since 1988, Mr. Mahoney has held various sales and sales management
positions in the electronic medical imaging management industry. From 1997
until joining eMed, Mr. Mahoney was America's Sales Manager for General
Electric's Medical Systems Integrated Imaging Solutions Division. From 1996 to
1997, Mr. Mahoney held the position of Vice President of Sales for Lockheed
Martin's Medical Systems business until it was acquired by General Electric.
From 1995 to 1996, Mr. Mahoney held the position of National Sales Manager with
Loral's Medical Imaging Systems business until it was acquired by Lockheed
Martin. From 1988 until 1995, Mr. Mahoney held various positions with Advanced
Video Products/E-Systems, a predecessor company to eMed.
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<PAGE>
Howard Pinsky has served as our Chief Technology Officer since January 1993.
From 1992 until joining eMed, Mr. Pinsky was Vice President of Customer Service
for RSTAR, Inc., an electronic medical imaging management technology spin-off
of the Massachusetts General Hospital Department of Radiology. From 1987 to
1992, Mr. Pinsky was Senior Systems Consultant for Digital Equipment
Corporation's health care group.
John Strauss has served as our Vice President of Marketing since May 1999.
From 1990 until joining eMed, Mr. Strauss was Director of Marketing, Imaging
and Information Networks for Fuji Medical Systems U.S.A., Inc. and was
responsible for the electronic medical imaging and computed radiography product
lines.
James J. Bochnowski has served as one of our directors since July 1996 and
currently serves as our Chairman. Mr. Bochnowski has been a General Partner
with Delphi Ventures, a private venture capital firm providing financing and
supportive business expertise to young biomedical and health care companies,
since he co-founded Delphi Ventures in 1988.
Thomas B. Neff has served as one of our directors since November 1995. Mr.
Neff has been Chairman and Chief Executive Officer of FibroGen, Inc. which
produces recombinant collagen and gelatin and develops anti-fibrosis therapies,
since 1993. Mr. Neff has also been General Partner of Three Arch Bay Health
Sciences Fund, a private investment fund focused on emerging biomedical
companies, since 1993. Mr. Neff has also been General Partner of Pharmaceutical
Partners I and Pharmaceutical II Partners since 1993 and 1994.
Thomas O. Pyle has served as one of our directors since June 1993. He has
been the Chairman of Interstudy, a leading health policy organization, and
Chairman of its affiliate, The Jackson Hole Group. From 1972 to 1991, Mr. Pyle
held various senior management positions at Harvard Community Health Plan,
becoming its President, Chief Executive Officer and a member of its Board of
Directors in 1978. From October 1993 to September 1994, Mr. Pyle served as
Chief Executive Officer of MetLife HealthCare Management Corp., Inc. He serves
as a director of Millipore Corporation, Lincare Holdings Inc. and various other
private companies.
Michael Schmertzler has served as a director since he co-founded eMed in
March 1992. Since 1997, Mr. Schmertzler has served as a Managing Director of
Credit Suisse First Boston and co-head of the United States and Canadian
investment activities of its Private Equity Division. From 1992 to 1994, Mr.
Schmertzler was a Managing Director of MS Partners Inc., a general partner of
MSX Public Life Sciences Fund. Prior to that, he was a Managing Director of
Morgan Stanley and Lehman Brothers Kuhn Loeb.
Donald E. Strange has served as one of our directors since June 1993. From
1996 until 1998, Mr. Strange served as Chief Executive Officer, President and
Chairman of the Board of First New England Dental Centers, Inc. Prior thereto,
Mr. Strange served as Chairman and Chief Executive Officer of TRANSCare, a
leading provider of patient transportation services. Since 1974, Mr. Strange
has served in various senior management capacities at Hospital Corporation of
America, Avon's Health Care Group, and EPIC Health Care Group. He currently
serves on the Board of Directors of Bon Secours Health System Inc. First New
England Dental Centers, Inc. filed for bankruptcy in February 1998.
Board of Directors
Upon consummation of this offering, our board of directors will be divided
into three classes, with each class of directors to serve three-year staggered
terms (after their initial terms), subject to election and qualification of
their successors or their earlier death, resignation or removal. Messrs.
Sheldon and Schmertzler will serve for an initial one-year term expiring at our
annual meeting in 2000. Messrs. Bochnowski and Pyle will serve for an initial
two-year term expiring at our annual meeting in 2001. Messrs. Neff and Strange
will serve for an initial three-year term expiring in 2002. Our executive
officers are elected by the board of directors and serve at the discretion of
the Board.
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<PAGE>
Committees
The board of directors has established a compensation committee and an audit
committee. The compensation committee, consisting of Messrs. Bochnowski, Neff
and Strange recommends salaries and bonuses and other compensation matters for
our officers and makes recommendations regarding our stock plans. None of these
members has served as an officer of eMed. The audit committee, consisting of
Messrs. Pyle and Schmertzler, has the authority to recommend the appointment of
our independent auditors and to review the results and scope of audits,
internal accounting controls and tax and other accounting-related matters.
Director Compensation
Non-employee directors are reimbursed for their expenses of attending
meetings, but currently do not receive any cash compensation for their
services. We expect, however, that in the future, non-employee directors will
be paid an annual cash retainer in addition to being reimbursed for all
reasonable expenses incurred in attending meetings. On February 4, 1999, we
granted Messrs. Bochnowski, Neff, Pyle, Schmertzler and Strange options to
purchase 6,250 shares of our common stock at a purchase price of $1.20 per
share. On June 30, 1999, we granted Messrs. Bochnowski, Neff, Pyle, Schmertzler
and Strange options to purchase 6,250 shares of our common stock at a purchase
price of $2.04 per share.
Executive Compensation
The following table shows the cash compensation paid or accrued for the year
ended December 31, 1998, to our Chief Executive Officer and to each of our
three highest paid executive officers other than the Chief Executive Officer
who received more than $100,000 in salary and bonus during the year ended
December 31, 1998 (the "Named Executive Officers"). No other executive officer
received more than $100,000 in salary and bonus during this period.
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ----------------
Shares of Common
Stock Underlying All Other
Name and Principal Position Salary($) Options (#) Compensation ($)
- --------------------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
Scott S. Sheldon................ $160,500 166,666 $ 1,538(3)
Chief Executive Officer and
President
Howard Pinsky................... $136,800 125,000 $ 8,656(4)
Chief Technology Officer
David J. Mahoney(1)............. $107,100 25,000 $12,880(5)
Vice-President -- Sales
Howard B. Kaufman(2)............ $106,700 4,166 $ 1,143(3)
Vice-President -- Operations
</TABLE>
- --------
(1) Mr. Mahoney joined eMed in February 1999.
(2) Mr. Kaufman resigned his position as an officer of eMed in March 1999.
(3) Represents premiums paid on term life insurance policies.
(4) Represents an annual car allowance of $7,200 and premiums of $1,456 paid on
a term life insurance policy.
(5) Represents commissions of $11,747 and premiums of $1,133 paid on a term
life insurance policy.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options to the Named
Executive Officers for the year ended December 31, 1998. We have not granted
any stock appreciation rights during 1998. The potential realizable value is
calculated based on the term of the option at its date of grant. It is
calculated assuming that the fair market value of our common stock on the date
of grant appreciates at the indicated annual rates compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. The percentage of total
options granted to employees in the last fiscal year is based on options to
purchase an aggregate of shares of common stock granted to employees for the
year ended December 31, 1998. All options were granted at fair market value on
the date of grant as determined by the board of directors, unless otherwise
indicated.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
----------------------------------------------- ------------------
Shares of
Common Percent of
Stock Total Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- ------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Scott S. Sheldon........ 166,666(1) 30% $1.20 3/31/08 124,000 320,000
Howard Pinsky........... 125,000(1) 22% $1.20 3/31/08 93,000 240,000
David J. Mahoney........ 25,000(2) 5% $1.20 1/1/06 14,400 34,200
Howard B. Kaufman....... 4,166(3) 1% $1.20 3/31/08 3,100 8,000
</TABLE>
- --------
(1) Options vest 6.25% each fiscal quarter following the date of grant.
(2) Options vest 100% on the fourth anniversary of the date of grant, provided
that, if Mr. Mahoney is terminated without cause, a portion of the options
will vest equal to 6.25% multiplied by the number of fiscal quarters since
the date of grant to termination.
(3) 1,302 of the options vested and were exercised by Mr. Kaufman. The
remaining 2,864 options were canceled on March 31, 1999.
Fiscal Year-End Option Values
The table below sets forth information for the Named Executive Officers with
respect to options exercised during the fiscal year ended December 31, 1998 and
options held as of December 31, 1998. There was no public trading market for
our common stock as of December 31, 1998. Accordingly, the values in the table
have been calculated on the basis of an assumed initial public offering price
of $13.00 per share less the applicable exercise price.
<TABLE>
<CAPTION>
Number of Shares of
Common Stock Underlying Value of Unexercised
Common Unexercised Options In-the-Money Options at
Stock at Fiscal Year End (#) Fiscal Year End
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott S. Sheldon........ 0 -- 84,604 129,909 1,532,926 998,327
Howard Pinsky........... 0 -- 74,971 116,015 886,194 1,369,036
David J. Mahoney........ 0 -- 0 25,000 0 295,000
Howard B. Kaufman....... 0 -- 4,686 7,814 55,295 92,205
</TABLE>
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<PAGE>
Compensation Committee Interlocks and Insider Participation
Series G Preferred Stock From March through June 1996, we sold an aggregate
of 771 shares of Series G preferred stock for net proceeds of $3,848,000
including $217,000 in face amounts of convertible debt and redeemable preferred
stock that were exchanged for shares of Series G preferred stock. On the
closing of this offering, each share of Series G preferred stock will convert
into 1,388.89 shares of common stock. The early investors in the Series G
financing also received warrants to purchase an aggregate of 64,774 shares of
common stock at an exercise price of $1.20 per share. Three Arch Bay Health
Sciences Fund, which holds more than 5% of our common stock and for which
Thomas Neff, our director, has management authority, and related persons
purchased an aggregate of 540 shares of Series G preferred stock, together with
warrants to purchase 50,000 shares of common stock.
1997 Convertible Note Transaction, Series J Preferred Stock In June 1997, we
sold $1.5 million in principal amount of convertible subordinated notes for
aggregate proceeds of $1.5 million. These notes were automatically convertible,
upon our sale of new equity securities for gross proceeds of at least $1.5
million, into securities having the same price and terms as the new equity
securities. Purchasers of the notes also received warrants to purchase an
additional amount of the new equity securities having an aggregate purchase
price of 30% of the amount of the purchaser's note, in exchange for their
commitments to purchase the notes, at the same price that such new equity
securities were issued to other investors. The notes had a maturity date of
October 31, 1997 and bore interest at the rate of 6.0% per annum. Accrued
interest converted on the same terms as the principal amount of the notes. In
September 1997, these notes were automatically converted into 1,384,460 shares
of our Series J preferred stock at a conversion price of $1.10 per share of
Series J preferred stock. The warrants issued with the notes became warrants to
purchase 409,091 shares of Series J preferred stock at an exercise price of
$1.10 per share. On the closing of this offering, each share of Series J
preferred stock will convert into 0.42 share of common stock and the Series J
warrants will become rights to purchase 170,449 shares of common stock.
Three Arch Bay and related persons received warrants to purchase 204,545
shares of Series J preferred stock at an exercise price of $1.10 per share in
connection with their commitment to purchase $750,000 in principal amount of
the convertible subordinated notes. These convertible notes were converted into
691,240 shares of Series J preferred stock. Delphi Ventures III, L.P. and
Delphi Bioinvestments III, L.P., which collectively hold more than 5% of our
common stock and for each of which James Bochnowski, our director, has
management authority, purchased an aggregate of $525,000 in principal amount of
convertible subordinated notes, which were converted into 477,273 shares of
Series J preferred stock, and received warrants exercisable for 143,182 shares
of Series J preferred stock at an exercise price of $1.10 per share.
Series K Preferred Stock In July 1998, various investors entered into
commitments with us to purchase shares of our Series K preferred stock for an
aggregate price of $2.5 million if we notified them of our election to sell the
shares. These commitments provided that the Series K preferred stock would be
issued at a price per share of either $1.40 or $1.50 per share depending on
when we delivered notice of our election to sell. On the closing of this
offering, each share of Series K preferred stock will convert into one share of
our common stock. The investors who made these commitments were eligible to
receive warrants at the time of their commitments to purchase in the aggregate
201,388 shares of our common stock at an exercise price of $0.02 per share as
consideration for their commitments. The exercisability of the warrants was
made subject to satisfaction of the Series K preferred stock purchase
commitment if we elected to sell the shares. Three Arch Bay committed to
purchase shares of Series K preferred stock for an aggregate of $500,000 and
was eligible to receive as consideration warrants to purchase 40,277 shares of
common stock.
In January 1999, we elected to draw upon the initial investors' commitments
to purchase Series K preferred stock. We sold additional shares of Series K
preferred stock together with warrants to purchase additional shares of our
common stock at an exercise price of $0.02 per share to other investors. In
January we sold, in the aggregate, 2,500,000 shares of Series K preferred stock
together with warrants to purchase 281,916 shares of common stock. Delphi
Ventures and Delphi Bioinvestments purchased 178,571 shares of Series K
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preferred stock and warrants to purchase 20,138 shares of common stock for
aggregate consideration of $250,000. We and Three Arch Bay amended Three Arch
Bay's commitment to purchase Series K preferred stock to release Three Arch Bay
from its obligation to purchase Series K preferred stock and to void the
warrants previously issued to it.
Employment Contracts
Scott S. Sheldon. We are a party to an employment agreement with Scott S.
Sheldon. The term of the agreement is until December 31, 2000, although we may,
by mutual agreement, extend the agreement for successive one-year terms.
Pursuant to the agreement, we are obligated to pay Mr. Sheldon an annual salary
of at least $175,000 beginning in April 1999. Mr. Sheldon is eligible to earn
incentive compensation in an amount and on terms mutually agreed upon. In the
event that we elect not to renew Mr. Sheldon's agreement or he is terminated
without cause or other events which would constitute a constructive termination
without cause, he would receive a severance payment of $95,000. However, if
that termination occurs within 12 months after a change in control, he would
receive 12 monthly installments of his base salary. If Mr. Sheldon's employment
terminates due to his death, his beneficiaries would receive six monthly
installments of his base salary after his death. If Mr. Sheldon's employment is
terminated for any of the foregoing reasons, or if his employment is terminated
due to disability, then he or his legal representative would maintain the right
to exercise any stock option which is then exercisable, other than an incentive
stock option, for the remainder of its term.
Howard Pinsky. We are a party to an employment agreement with Howard Pinsky.
The term of the agreement is until December 31, 2000, although we may, by
mutual agreement, extend the agreement for successive one-year terms. Pursuant
to the agreement, we are obligated to pay Mr. Pinsky an annual salary of at
least $160,000 beginning in April 1999. Mr. Pinsky is eligible to earn
incentive compensation in an amount and on terms mutually agreed upon. In the
event that we elect not to renew Mr. Pinsky's agreement or he is terminated
without cause or other events which would constitute a constructive termination
without cause, he would receive a severance payment of $86,000. However, if
that termination occurs within 12 months after a change in control, he would
receive 12 monthly installments of his base salary. If Mr. Pinsky's employment
terminates due to his death, his beneficiaries would receive six monthly
installments of his base salary after his death. If Mr. Pinsky's employment is
terminated for any of the foregoing reasons, or if his employment is terminated
due to disability, then he or his legal representative would maintain the right
to exercise any stock option which is then exercisable, other than an incentive
stock option, for the remainder of its term.
1994 Stock Plan
Our 1994 Stock Plan provides for the grant of incentive stock options and
non-qualified stock options, stock awards and stock purchase rights for the
purchase of shares of our common stock. The number of shares issuable pursuant
to the 1994 Stock Plan is 2,062,500. Our board of directors is responsible for
the administration of the plan and determines the term of each option, the
option exercise price, the number of shares for which each option may be
granted and the rate at which each option is exercisable. The board may grant
incentive stock options only to employees, at an exercise price per share of
not less than the fair market value per share on the date of grant and not less
than 110% of fair market value in the case of holders of more than 10% of our
voting stock. Non-qualified stock options, awards and stock purchase rights may
be granted to any officer, employee, consultant or director. Grants under the
1994 Stock Plan cannot be made after August 10, 2004. As of September 17, 1999,
279,283 options are available for grant under the 1994 Stock Plan.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 17, 1999 and as adjusted to
reflect the sale of the shares offered by us in this offering for (1) each
person who is known by us to own beneficially more than five percent (5%) of
our outstanding shares of common stock, (2) each director and Named Executive
Officer, and (3) all directors and executive officers as a group. As of
September 17, 1999, there were 8,413,475 shares of outstanding common stock.
The table assumes the conversion of all outstanding preferred stock into common
stock. Unless otherwise indicated below, to our knowledge, all persons listed
below have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, each entity or person listed below
maintains a mailing address of c/o eMed Technologies, 25 Hartwell Avenue,
Lexington, MA 02421.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially Owned
Shares ------------------
Beneficially Prior to After the
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- ---------
<S> <C> <C> <C>
Scott S. Sheldon(1)....................... 261,488 3.1% 2.2%
Howard Pinsky(2).......................... 114,811 1.3% 1.0%
Howard B. Kaufman......................... 0 * *
David J. Mahoney.......................... 0 * *
James J. Bochnowski....................... 936,393 11.0% 8.1%
Delphi Ventures III, L.P. and affiliated
entities(3)
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Thomas B. Neff............................ 922,582 10.9% 8.0%
Three Arch Bay Health Sciences Fund and
affiliated entities(4)
c/o FibroGen, Inc.
225 Gateway Blvd.
South San Francisco, CA 94080
Thomas O. Pyle(5)......................... 31,570 * *
Michael Schmertzler(6).................... 319,721 3.8% 2.8%
Donald E. Strange(7)...................... 33,556 * *
Bedrock Capital Partners I, L.P. and af- 861,492 10.2% 7.5%
filiated entities(8).....................
One Maritime Plaza, Suite 500
San Francisco, CA 94111
Bessemer Venture Partners IV L.P. and re- 700,604 8.3% 6.1%
lated entities(9)........................
83 Walnut Street
Wellesley Hills, MA 02481
Pacific Venture Group, L.P. and an affili- 1,325,449 15.8% 11.5%
ated entity(10)..........................
15635 Alton Parkway, Suite 230
Irvine, CA 92618
Seaflower BioVenture Fund II, LLC and an 606,560 7.1% 5.2%
affiliated entity(11)....................
1000 Winter Street, Suite 1000
Waltham, MA 02451
All directors and executive officers as a
group (12 persons)(12)................... 2,692,691 30.0% 22.2%
</TABLE>
- --------
* Less than one percent
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The number of shares beneficially owned by each stockholder is determined
in accordance with the rules of the Securities and Exchange Commission and
are not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes those shares of
common stock that the stockholder has sole or shared voting or investment
power and any shares of common stock that the stockholder has right to
acquire within 60 days after September 17, 1999 through the exercise of
any option, warrant or other right. The percentage ownership of the
outstanding common stock, however, is based on the assumption, expressly
required by the rules of the Securities and Exchange Commission, that only
the person or entity whose ownership is being reported has converted
options or warrants into shares of common stock.
(1) Represents 147,947 shares issuable to Mr. Sheldon upon the exercise of
options exercisable within 60 days of September 17, 1999, 83,333 shares
held by Scott Sheldon and Kimberly Howard-Sheldon as joint tenants with
right of survivorship and 30,208 shares held by the Sheldon Children's
1999 Irrevocable Trust.
(2) Represents 114,811 shares issuable to Mr. Pinsky upon the exercise of
options exercisable within 60 days of September 17, 1999.
(3) Represents:
. 22,917 shares held by Mr. Bochnowski.
. 1,562 shares issuable to Mr. Bochnowski upon the exercise of options
exercisable within 60 days of September 17, 1999.
. 817,406 shares held by Delphi Ventures III, L.P. and 78,386 shares
issuable to Delphi Ventures III, L.P. upon the exercise of warrants
exercisable within 60 days of September 17, 1999.
. 14,711 shares held by Delphi Bioinvestments III, L.P. and 1,411 shares
issuable to Delphi Bioinvestments III, L.P. upon the exercise of
warrants exercisable within 60 days of September 17, 1999.
Mr. Bochnowski, a director of eMed and a managing member of Delphi
Management Partners III, L.L.C., which is the general partner of the
partnerships listed above, may be deemed to share voting and dispositive
power with respect to the shares listed above and not held by him
individually, and disclaims beneficial ownership of such shares.
(4) Represents:
. 46,259 shares held by Mr. Neff.
. 25,520 shares issuable to Mr. Neff upon the exercise of options
exercisable within 60 days of September 17, 1999.
. 718,093 shares held by Three Arch Bay Health Sciences Fund.
. 99,942 shares held by Thomas B. Neff Family Partnership and 32,768
shares issuable to Thomas B. Neff Family Partnership upon the exercise
of warrants exercisable within 60 days of September 17, 1999.
Mr. Neff is a director of eMed and general partner of Three Arch Bay
Health Sciences Fund and Thomas B. Neff Family Partnership.
(5) Represents 31,570 shares issuable to Mr. Pyle upon the exercise of options
exercisable within 60 days of September 17, 1999.
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<PAGE>
(6) Includes 54,010 shares issuable to Mr. Schmertzler upon the exercise of
options and warrants exercisable within 60 days of September 17, 1999.
(7) Includes 31,570 shares issuable to Mr. Strange upon the exercise of
options exercisable within 60 days of September 17, 1999.
(8) Represents:
. 751,220 shares held by Bedrock Capital Partners I, L.P. and 18,784
shares issuable to Bedrock Capital Partners I, L.P. upon the exercise of
warrants exercisable within 60 days of September 17, 1999.
. 40,786 shares held by Credit Suisse First Boston Bedrock Fund, L.P. and
787 shares issuable to Credit Suisse First Boston Bedrock Fund, L.P.
upon the exercise of warrants exercisable within 60 days of September
17, 1999.
. 39,973 shares held by VBW Employee Bedrock Fund, L.P. and 567 shares
issuable to VBW Employee Bedrock Fund, L.P. upon the exercise of
warrants exercisable within 60 days of September 17, 1999.
. 9,375 shares issuable to Jason Rosenbluth upon the exercise of options
exercisable within 60 days of September 17, 1999.
All of the partnerships listed above are managed by Bedrock General Partner
I, LLC. Bedrock Capital Partners I shares voting and dispositive power over
the shares held by Mr. Rosenbluth pursuant to contractual arrangements and
therefore may be considered the beneficial owner of these shares.
(9) Represents:
. 239,129 shares held by Bessemer Venture Partners IV L.P. and 7,134
shares issuable to Bessemer Venture Partners IV L.P. upon the exercise
of warrants exercisable within 60 days of September 17, 1999.
. 238,687 shares held by Bessec Ventures IV L.P. and 7,195 shares
issuable to Bessec Ventures IV L.P. upon the exercise of warrants
exercisable within 60 days of September 17, 1999.
. 68,047 shares held by Bessemer Venture Investors L.P. and 2,014 shares
issuable to Bessemer Venture Investors L.P. upon the exercise of
warrants exercisable within 60 days of September 17, 1999.
. 28,546 shares held by BVP IV Special Situations L.P. and 845 shares
issuable to BVP IV Special Situations L.P. upon the exercise of warrants
exercisable within 60 days of September 17, 1999.
. An aggregate of 106,056 shares held by, and 2,771 shares issuable upon
the exercise of warrants exercisable within 60 days of September 17,
1999 to William T. Burgin, Neill H. Brownstein, Robert H. Buescher, G.
Felda Hardymon, Christopher Gabrieli, the Gabrieli Family Foundation,
Michael I. Barach, David J. Cowan, Bruce K. Graham, Ravi B. Mhatre,
Gautam A. Prakash, Robi L. Soni, Joanna A. Strober, Craighall
Corporation, Richard R. Davis, Conaly Partners, Lindsay 1994 Family
Partnership, L.P., Rothfeld 1994 Family Partnership, L.P., John G.
MacDonald, Howard S. Markowitz, Edward Park, Robert J.S. Roriston,
Steven L. Williamson, and Woods 1994 Family Partnership, L.P.
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<PAGE>
Deer IV & Co. LLC is the general partner of each of the partnerships listed
in the first four paragraphs of this footnote. The individuals and entities
listed in the fifth paragraph of this footnote are managers, members,
former members or employees of, or otherwise associated with, Deer IV &
Co., Deer II & Co. LLC (a company engaging in activities similar to those
of Deer IV & Co.) or Bessemer Securities Corporation, or entities in which
such persons hold beneficial interests. Bessemer Securities Corporation and
its related entities comprise the limited partners of Bessemer Venture
Partners IV and Bessec Ventures IV. The limited partners of BVP IV Special
Situations are non-employee directors of Bessemer Securities Corporation.
Pursuant to the rules of the Securities and Exchange Commission, each of
the above individuals and entities may be deemed to be members of a group.
(10) Represents:
. 1,227,620 shares held by Pacific Venture Group, L.P. and 38,473 shares
issuable to Pacific Venture Group, L.P. upon the exercise of warrants
exercisable within 60 days of September 17, 1999.
. 57,552 shares held by PVG Associates, L.P. and 1,804 shares issuable to
PVG Associates, L.P. upon the exercise of warrants exercisable within 60
days of September 17, 1999.
PVG Equity Partners, L.L.C. is the general partner of both of the
partnerships listed above.
(11) Represents:
. 290,178 shares held by Seaflower BioVenture Fund II, LLC and 78,541
shares issuable to Seaflower BioVenture Fund II, LLC upon the exercise
of warrants exercisable within 60 days of September 17, 1999.
. 210,657 shares held by Seaflower Health and Technology Fund, LLC and
27,184 shares issuable to Seaflower Health and Technology Fund, LLC upon
the exercise of warrants exercisable within 60 days of September 17,
1999.
James Sherblom is the general manager of both of the limited liability
companies listed above.
(12) Represents:
. Shares described in notes 1, 2, 3, 4, 5, 6 and 7 above.
. 21,960 shares held by, and 50,613 shares issuable to, executive officers
not listed in the notes above upon exercise of options exercisable
within 60 days of September 17, 1999, officers of eMed not listed in the
table above.
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<PAGE>
CERTAIN TRANSACTIONS
In addition to the transactions described under "Compensation Committee
Interlocks and Insider Participation" the following describes transactions in
which our directors and principal shareholders have participated.
Series G Preferred Stock
In 1996, Michael Schmertzler received 23.3 shares of Series G preferred
stock and warrants to purchase 1,944 shares of common stock in exchange for
$117,000 in face amount of our Series A redeemable preferred stock then held by
Mr. Schmertzler.
Series K Preferred Stock
Pursuant to their July 1998 commitments, in January 1999 Bedrock Capital
Partners I, L.P., VBW Employee Bedrock Fund, L.P. and Credit Suisse First
Boston Bedrock Fund L.P., which collectively own more than 5% of our common
stock and for each of which Jason Rosenbluth, who was at the time a director,
has management authority, purchased 178,571 shares of Series K preferred stock
and warrants to purchase 20,138 shares of common stock for aggregate
consideration of $250,000. Pacific Venture Group, L.P. and PVG Associates,
L.P., which collectively hold more than 5% of our common stock, purchased
357,142 shares of Series K preferred stock and warrants to purchase 40,277
shares of common stock for aggregate consideration of $500,000. Bessemer
Venture Partners IV, L.P., Bessec Ventures IV, L.P., and certain associated
investors, who collectively hold more than 5% of our common stock, purchased
178,571 shares of Series K preferred stock and warrants to purchase 20,138
shares of common stock for aggregate consideration of $250,000.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our amended and restated certificate of incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
35,000,000 shares of common stock, par value $0.01 per share and 15,000,000
shares of preferred stock, par value $0.01 per share, the rights and
preferences of which may be established from time to time by our board of
directors. As of September 17, 1999, 8,413,475 shares of common stock were
outstanding, held of record by 161 stockholders. As of September 17, 1999,
options were outstanding which are exercisable for 1,696,598 shares of common
stock at a weighted average exercise price of $1.51 per share. Also as of
September 17, 1999, there were warrants to purchase 522,440 shares of common
stock at exercise prices from $0.02 to $1.20 per share and warrants to purchase
409,091 shares of Series J preferred stock at an exercise price of $1.10 per
share. Upon the closing of this offering, the warrants to purchase Series J
preferred stock will become warrants to purchase 170,449 shares of common
stock. Also, as of September 17, 1999, 279,283 additional shares of our common
stock had been reserved for issuance under our stock plans.
Common Stock
Under our amended and restated certificate of incorporation, holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the election of
directors. They do not have cumulative voting rights. Subject to preferences
that may be applicable to any outstanding series of preferred stock, holders of
our common stock are entitled to share ratably in any dividends that may be
declared by the board of directors out of legally available funds. In case of a
liquidation, dissolution or winding up of eMed, the holders of common stock
will be entitled to share ratably in the net assets legally available for
distribution to shareholders, in each case after payment of all of our
liabilities and subject to preferences that may be applicable to any series of
preferred stock then outstanding. The holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. The
rights, preferences and privileges of holders of common stock are subject to
the rights of the holders of shares of any series of preferred stock that we
may designate and issue in the future. After the closing of this offering,
there will be no shares of preferred stock outstanding.
Preferred Stock
Under our amended and restated certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue from time to time, shares of preferred stock in one or more series. The
board of directors may fix the number of shares, designations, preferences,
powers and other special rights of the preferred stock. The preferences,
powers, rights and restrictions of different series of preferred stock may
differ. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock or affect
adversely the rights and powers, including voting rights, of the holders of
common stock. The issuance may also have the effect of discouraging, delaying
or preventing a change in control of eMed, regardless of whether the
transaction may be beneficial to stockholders. We have no current plans to
issue any additional shares of preferred stock.
Liability of Directors
Our amended and restated certificate of incorporation provides that our
directors shall not be liable to eMed or its stockholders for monetary damages
for any breach of fiduciary duty, except to the extent otherwise required by
the Delaware General Corporation Law. This provision will not prevent our
stockholders from obtaining injunctive or other relief against our directors.
This provision also does not shield our directors from liability under federal
or state securities laws.
45
<PAGE>
Antitakeover Effects of Delaware Law and Our Amended and Restated Certificate
of Incorporation and By-laws
Certain provisions of the Delaware General Corporation Law and our amended
and restated certificate of incorporation and amended and restated by-laws may
be deemed to have an antitakeover effect and may discourage, delay or prevent a
tender offer or takeover attempt that a stockholder might consider to be in its
best interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders. These provisions are
summarized in the following paragraphs.
Delaware Anti-Takeover Laws. We will be subject to Section 203 of the
Delaware General Corporation Law. This statute will prohibit us from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the time of the transaction in which one person became an
interested stockholder, unless:
. the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder was approved by our board
of directors before the stockholder became an interested stockholder,
. upon consummation of the transaction that made the stockholder an
interested stockholder, the interested stockholder owns at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by directors who are also
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender stock held by the plan in a tender
or exchange offer, or
. the business combination is approved by the board of directors of the
corporation and authorized at a meeting by two-thirds of the voting
stock, other than voting stock owned by the interested stockholder.
A "business combination" generally includes mergers or consolidations
between us and an interested stockholder, transactions with an interested
stockholder involving our assets or stock or assets or stock of our majority-
owned subsidiaries, if any, and transactions which increase an interested
stockholder's percentage ownership of stock.
An "interested stockholder" generally includes those stockholders who become
beneficial owners of 15% or more of our voting stock, together with affiliates
or associates of that stockholder.
Cumulative Voting. Our amended and restated certificate of incorporation
does not provide stockholders the right to cumulate votes in the election of
directors.
Stockholder Action; Special Meeting of Stockholders. Our amended and
restated certificate of incorporation eliminates the ability of stockholders to
act by written consent. Our by-laws provide that special meetings of our
stockholders may be called only by the chairman of the board of directors, the
chief executive officer or a majority of the board of directors or at the
direction of stockholders holding in the aggregate at least 20% of our common
stock. These provisions could have the effect of delaying for 90 days or until
the next annual meeting of stockholders those actions which are favored by the
holders of a majority of our outstanding voting securities. These provisions
may also discourage another person from making a tender offer for our common
stock, because that person, even if it acquired a majority of our outstanding
voting securities, would be able to take action as a stockholder, such as
electing new directors or approving a merger, only at a duly called meeting of
stockholders and not by written consent.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our amended and restated by-laws provide that stockholders seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be received at our principal executive
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offices not less than (1) 60 days in advance of the meeting if it is held
within 30 days before the anniversary of the previous year's annual meeting or
(2) 90 days in advance of the meeting if it is held on or after the anniversary
of the previous year's annual meeting. In any other event, in order to be
timely, notice from the stockholder must be received no later than the
fifteenth day following the date on which notice of the annual meeting was
mailed to stockholders or made public, whichever occurred earlier. Our amended
and restated by-laws also specify certain requirements as to the form and
content of a stockholder's notice. These provisions may preclude stockholders
from bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual meeting of stockholders. However, in the
case of any meeting called at the direction of stockholders, the stockholders
requesting the meeting be called must give us at least 90 days notice of any
matter to be presented at that meeting.
Authorized but Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. The existence of authorized
but unissued shares of common stock and preferred stock could render more
difficult or discourage an attempt to obtain control of us by means of a proxy
contest, tender offer, merger or otherwise.
Classified Board of Directors. Our amended and restated certificate of
incorporation provides that our board of directors shall be divided into three
classes which serve staggered three-year terms (after their initial terms). As
a result of this classification, no more than one third of the board of
directors will be elected each year. This may make it more difficult for an
acquiring party to take control of the board of directors.
Amendments; Supermajority Vote Requirements. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
Our amended and restated certificate of incorporation imposes supermajority
vote requirements in connection with the amendment of provisions of our amended
and restated certificate of incorporation relating to the classification of our
board of directors. Our by-laws impose supermajority vote requirements in
connection with the amendment of various provisions of our by-laws related to
our corporate structure.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is expected to be
American Stock Transfer & Trust Company.
Listing
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "EMDT."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our common stock in the public market
after this offering could adversely affect the prevailing market price of our
common stock. Furthermore, because few shares will be available for sale
shortly after this offering due to the contractual and legal restrictions on
resale described below, the sale of a substantial amount of common stock in the
public market after these restrictions lapse could adversely affect the
prevailing market price of our common stock and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
11,513,475 shares of our common stock, assuming no exercise of the
underwriters' overallotment option and no exercise of outstanding options or
warrants. Of these shares, all of the shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless the shares are purchased by "affiliates" as that term is
defined in Rule 144 under the Securities Act. Any shares purchased by an
affiliate may not be resold except pursuant to an effective registration
statement or an applicable exemption from registration, including an exemption
under Rule 144 of the Securities Act. The remaining shares of common stock held
by existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. These restricted securities may be sold in
the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act. These rules are summarized below.
Upon the expiration of the lock-up agreements described under "Underwriting"
and subject to the provisions of Rule 144 and Rule 701, restricted shares
totaling 7,667,075 will be available for sale in the public market 180 days
after the date of this prospectus. Of those shares, 2,680,003 will be available
pursuant to Rule 144(k) and 66,293 will be available pursuant to Section 701.
The sale of restricted securities under those rules, is subject to volume
limitations for one year following a one year holding period, unless the shares
are held by affiliates, in which case the sale continues to be subject to
volume limitatons until the holder is no longer an affiliate.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date those shares of
common stock were acquired from us or from an affiliate of ours would be
entitled to sell within any three month period a number of shares that does not
exceed the greater of:
(1) one percent of the number of shares of common stock then
outstanding, which will equal approximately shares immediately after this
offering; or
(2) the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale of any shares of common stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing volume
limitations and other restrictions, but without regard to the one-year holding
period.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years from the later of the date
such shares of common stock were acquired from us or from an affiliate of ours,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted pursuant to the lock-up agreements or otherwise,
those shares may be sold immediately upon the completion of this offering.
48
<PAGE>
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. We are unable to
estimate the number of our shares that may be sold in the public market
pursuant to Rule 144 or Rule 701 because this will depend on the market price
of our common stock, the personal circumstances of the sellers and other
factors. Nevertheless, sales of significant amounts of our common stock in the
public market could adversely affect the market price of our common stock.
Stock Plans
We intend to file a registration statement under the Securities Act covering
2,062,500 shares of common stock reserved for issuance under the eMed 1994
Stock Plan. This registration statement is expected to be filed as soon as
practicable after the effective date of this offering.
At September 17, 1999, there were options to purchase 1,696,598 shares
outstanding under our stock option plans and otherwise. All of these shares
will be eligible for sale in the public market from time to time, subject to
vesting provisions, Rule 144 volume limitations applicable to our affiliates
and, in the case of some of the options, the expiration of lock-up agreements.
Registration Rights
We have entered into two agreements with groups of holders of approximately
6,169,236 shares of our common stock that entitle those holders to require us
to register their shares for resale under the Securities Act of 1933.
Under the agreement with holders of our Series J preferred stock, holders of
at least 30% of the common stock issued on conversion of the Series J preferred
stock can require us to register the sale of their common stock two separate
times. We only must register those shares if they would have an aggregate
offering price of at least $15 million and if the request is made after 180
days following the effective date of this prospectus. After we have satisfied
the requirements for using the shorter S-3 registration form, holders offering
to sell at least $500,000 of common stock can require us to register their
common stock on that form. We would not be required to file more than two of
these registrations in any 12 month period. These holders also have the right
to require us to include their shares in any future registered offering of
securities by us, subject to market conditions.
Under our other registration rights agreement, other holders of our equity
securities have rights similar to those described in the previous paragraph.
However, this agreement provides that if in any registered offering, shares
must be excluded from the offering because of marketing factors, shares covered
by this agreement will be excluded before any shares issuable on conversion of
the Series J preferred stock are excluded.
49
<PAGE>
UNDERWRITING
General
Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, SG Cowen Securities Corporation and Wit Capital Corporation are
acting as representatives of each of the underwriters named below. Subject to
the terms and conditions set forth in an underwriting agreement among us and
the underwriters we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us the
number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
Donaldson, Lufkin & Jenrette Securities Corporation................
SG Cowen Securities Corporation....................................
Wit Capital Corporation............................................
----
Total..........................................................
====
</TABLE>
In the underwriting agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in the underwriting agreement, to
purchase all of the shares of common stock being sold under the terms of the
underwriting agreement if any of the shares of common stock being sold under
the terms of the agreement are purchased. In the event of a default by an
underwriter, the underwriting agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting underwriters may
be increased or the underwriting agreement may be terminated.
We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
Commissions and Discounts and Public Offering Price
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $ per share of
common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may change.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................. $ $ $
Underwriting discount.................. $ $ $
Proceeds, before expenses, to eMed..... $ $ $
</TABLE>
We estimate our offering expenses, exclusive of the underwriting discount,
will be $ .
50
<PAGE>
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us and the representatives. The factors to be considered in determining
the initial public offering price, in addition to prevailing market conditions,
are the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us, certain of our financial
information, the history, of, and the prospects for, our company and the
industry in which we compete, and an assessment of our management, its past and
present operations, the prospects for, and timing of, future revenues of our
company, the present state of our development, and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to ours. There can be no assurance that an active
trading market will develop for our common stock or that our common stock will
trade in the public market subsequent to the offering at or above the initial
public offering price.
The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed five percent of the
number of shares being offered in this offering.
Over-allotment Option
We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 465,000
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
Lock-up Agreements
We, our directors and executive officers and most of our other stockholders
will enter into lock-up agreements with the underwriters. Under those
agreements, neither we nor any of our directors or executive officers nor any
of those stockholders may dispose of or hedge any shares of common stock or
securities convertible into or exchangeable for shares of common stock. These
restrictions will be in effect for a period of 180 days after the date of this
prospectus, subject to limited exceptions. At any time and without notice,
Bear, Stearns & Co. Inc. may, in its sole discretion, release all or some of
the securities from these lock-up agreements.
Price Stabilization, Short Positions and Penalty Bids
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock than we have sold to them. The underwriters may elect to cover any
such short position by purchasing shares of common stock in the open market or
by exercising the over-allotment option granted to the underwriters. In
addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market
and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price
at a level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the common stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
51
<PAGE>
Internet Distribution
A prospectus in electronic format is being made available on an internet
website maintained by Wit Capital Corporation. In addition, all dealers
purchasing shares from Wit Capital in this offering have agreed to make a
prospectus in electronic format available on websites maintained by each of
these dealers. Purchases of shares from Wit Capital are to be made through an
account at Wit Capital in accordance with Wit Capital's procedures for opening
an account and transacting in securities.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc., approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-Manager or selected dealer in over 120 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with us, or any of its founders or significant stockholders.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for eMed
by Ropes & Gray, Boston, Massachusetts. Various legal matters in connection
with this offering will be passed upon for the underwriters by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The financial statements of eMed at December 31, 1997 and 1998 and for the
three years in the period ended December 31, 1998, included in this prospectus,
and the financial statements of E-Systems Medical Electronics, a division of
Raytheon, at December 31, 1997 and November 23, 1998 and for the year ended
December 31, 1997 and the period from January 1, 1998 through November 23,
1998, included in this prospectus, have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules which are part of the registration statement. Any
statements made in this prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus shall
be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the Registration Statement or
any reports, statements or other information in the files at the public
reference facilities of 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 Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee by writing
to the Commission. You may call the Commission at 1-800-SEC-0330 for further
information on the operation of its public reference rooms. Our filings,
including the Registration Statement, will also be available to you on the
internet website maintained by the Commission at http://www.sec.gov.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
eMed Technologies Corporation
Report of Independent Accountants....................................... F-2
Balance Sheet as of December 31, 1997 and 1998 and as of June 30, 1999
(unaudited)............................................................ F-3
Statement of Operations for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 (unaudited) and June 30,
1999 (unaudited)....................................................... F-4
Statement of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999
(unaudited)............................................................ F-5
Statement of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 (unaudited) and June 30,
1999 (unaudited)....................................................... F-6
Notes to Financial Statements........................................... F-7
E-Systems Medical Electronics (a division of Raytheon E-Systems, Inc.)
Report of Independent Accountants....................................... F-17
Balance Sheet as of December 31, 1997 and November 23, 1998............. F-18
Statement of Operations and Accumulated Deficit for the year ended
December 31, 1997 and for the period from January 1, 1998 through
November 23, 1998...................................................... F-19
Statement of Cash Flows for the year ended December 31, 1997 and for the
period from January 1, 1998 through November 23, 1998.................. F-20
Notes to Financial Statements........................................... F-21
Unaudited Pro Forma Combined Statement of Operations
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1998...................................................... F-25
Notes to Unaudited Pro Forma Combined Statement of Operations........... F-26
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
eMed Technologies Corporation:
The reverse common stock split described in Note 8 to the financial
statements has not been consummated at September 17, 1999. When it has been
consummated, we will be in a position to furnish the following report.
"In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of eMed Technologies
Corporation at December 31, 1997 and 1998 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above."
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 22, 1999, except for the last paragraphs of
Notes 7 and 8, as to which the date is September 16, 1999
F-2
<PAGE>
eMed Technologies Corporation
Balance Sheet
<TABLE>
<CAPTION>
Pro Forma
December 31, June 30, June 30,
-------------------------- ------------ ------------
1997 1998 1999 1999
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 4,420,714 $ 2,259,052 $ 5,117,591
Accounts receivable,
net of allowance for
doubtful accounts of
$35,000 and $487,073
at December 31, 1997
and 1998,
respectively, and
$422,461 at June 30,
1999 (unaudited)...... 2,665,415 4,926,216 6,217,453
Inventories............ 1,080,264 2,011,410 961,823
Prepaid expenses and
other current assets.. 798,442 330,641 313,134
------------ ------------ ------------
Total current assets... 8,964,835 9,527,319 12,610,001
Fixed assets, net....... 892,450 991,181 816,027
Goodwill................ -- 77,016 72,523
Other assets............ 32,756 49,810 60,888
Assets held for sale.... -- 861,000 --
------------ ------------ ------------
Total assets........... $ 9,890,041 $ 11,506,326 $ 13,559,439
============ ============ ============
Liabilities and
Stockholders' Equity
Current liabilities:
Current portion of
capital lease
obligations........... $ 153,356 $ 45,796 $ 12,347
Short-term debt........ -- 2,797,359 2,797,359
Note payable to
Raytheon.............. -- 2,200,000 --
Accounts payable....... 1,971,964 2,372,307 1,815,838
Accrued employee
benefits.............. 244,871 351,150 542,978
Accrued warranty
expenses.............. 100,657 478,888 629,112
Other accrued
expenses.............. 668,413 811,470 900,983
Accrued acquisition
reserves.............. -- 335,842 81,136
Deferred revenue....... 284,375 1,382,887 1,257,464
------------ ------------ ------------
Total current
liabilities........... 3,423,636 10,775,699 8,037,217
Capital lease
obligations............ 78,707 6,521 --
Long-term debt.......... 884,527 335,893 210,164
------------ ------------ ------------
Total liabilities...... 4,386,870 11,118,113 8,247,381
------------ ------------ ------------
Commitments (Note 12)
Stockholders' equity:
Convertible preferred
stock, $0.01 par
value.................. 77,346 77,346 118,775 $ --
Common stock, $0.01 par
value; Authorized:
35,000,000 shares;
Issued: 452,314 and
485,640 shares at
December 31, 1997 and
1998, respectively, and
522,154 shares at June
30, 1999 actual
(unaudited): 8,378,304
shares issued at June
30, 1999 pro forma
(unaudited);
Outstanding: 452,314
and 443,974 shares at
December 31, 1997 and
1998, respectively,
480,488 shares at June
30, 1999 actual
(unaudited): 8,336,638
shares outstanding at
June 30, 1999 pro forma
(unaudited)............ 4,524 4,857 5,222 83,783
Additional paid-in
capital................ 20,126,414 20,166,075 28,803,798 28,844,012
Deferred compensation... (8,002) -- (2,598,296) (2,598,296)
Treasury stock.......... -- (50,000) (50,000) (50,000)
Accumulated deficit..... (14,697,111) (19,810,065) (20,967,441) (20,967,441)
------------ ------------ ------------ ------------
Total stockholders'
equity................ 5,503,171 388,213 5,312,058 5,312,058
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity.. $ 9,890,041 $ 11,506,326 $ 13,559,439 $ 13,559,439
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
eMed Technologies Corporation
Statement of Operations
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Product............... $ 570,273 $ 7,164,242 $11,299,756 $ 5,730,260 $ 9,793,624
Service............... 439,182 862,762 1,294,411 487,242 1,575,777
----------- ----------- ----------- ----------- -----------
Total revenue....... 1,009,455 8,027,004 12,594,167 6,217,502 11,369,401
----------- ----------- ----------- ----------- -----------
Cost of revenue:
Product............... 372,681 5,553,543 7,223,230 3,401,750 4,698,982
Service............... 1,031,107 1,458,579 1,752,909 729,125 1,652,093
----------- ----------- ----------- ----------- -----------
Total cost of
revenue............ 1,403,788 7,012,122 8,976,139 4,130,875 6,351,075
----------- ----------- ----------- ----------- -----------
Gross margin........ (394,333) 1,014,882 3,618,028 2,086,627 5,018,326
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and
development.......... 610,189 1,300,360 2,361,430 1,030,630 1,654,635
Sales and marketing... 1,318,696 2,912,125 3,498,169 1,763,734 2,519,051
General and
administrative....... 1,331,297 1,981,861 2,722,340 1,120,800 1,851,731
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 3,260,182 6,194,346 8,581,939 3,915,164 6,025,417
----------- ----------- ----------- ----------- -----------
Loss from operations.... (3,654,515) (5,179,464) (4,963,911) (1,828,537) (1,007,091)
Interest expense, net... (69,686) (203,566) (105,611) (19,243) (68,518)
Other expense........... (21,560) (242,139) (43,432) (6,125) (81,767)
----------- ----------- ----------- ----------- -----------
Net loss............ $(3,745,761) $(5,625,169) $(5,112,954) $(1,853,905) $(1,157,376)
=========== =========== =========== =========== ===========
Basic and diluted net
loss per share......... $ (8.39) $ (12.45) $ (11.70) $ (4.30) $ (2.48)
Shares used in computing
basic and diluted net
loss per share......... 446,428 451,676 436,949 430,843 467,222
Unaudited pro forma
basic and diluted net
loss per share......... $ (0.78) $ (0.14)
Shares used in computing
unaudited pro forma
basic and diluted net
loss per share......... 6,567,037 8,323,501
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
eMed Technologies Corporation
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Convertible
preferred stock Common stock Total
------------------- -------------- Additional stockholders'
Par Par paid-in Deferred Treasury Accumulated equity
Shares value Shares value capital compensation stock deficit (deficit)
---------- -------- ------- ------ ----------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................ 1,510 $ 15 439,155 $4,392 $ 4,511,978 $ -- $ -- $ (5,326,181) $ (809,796)
Exercise of common
stock options....... 11,597 116 13,801 13,917
Issuance of 1,000
shares of Series F
convertible
preferred stock..... 1,000 10 999,990 1,000,000
Issuance of 816
shares of Series G
convertible
preferred stock..... 816 8 4,070,341 4,070,349
Issuance of 400
shares of Series H
convertible
preferred stock..... 400 4 1,999,997 2,000,001
Issuance of stock
options to
nonemployees........ 20,000 20,000
Net loss............. (3,745,761) (3,745,761)
---------- -------- ------- ------ ----------- ----------- -------- ------------ -----------
Balance, December 31,
1996................ 3,726 37 450,752 4,508 11,616,107 -- -- (9,071,942) 2,548,710
Exercise of common
stock options....... 1,562 16 1,859 1,875
Issuance of 409,091
warrants to purchase
Series J convertible
preferred stock..... 161,000 161,000
Issuance of 7,730,909
shares of Series J
convertible
preferred stock..... 7,730,909 77,309 8,333,868 8,411,177
Issuance of stock
options to
nonemployees........ 13,580 (8,002) 5,578
Net loss............. (5,625,169) (5,625,169)
---------- -------- ------- ------ ----------- ----------- -------- ------------ -----------
Balance, December 31,
1997................ 7,734,635 77,346 452,314 4,524 20,126,414 (8,002) -- (14,697,111) 5,503,171
Exercise of common
stock options....... 33,326 333 39,661 39,994
Purchase of common
stock held as
treasury shares..... (50,000) (50,000)
Amortization of
deferred
compensation........ 8,002 8,002
Net loss............. (5,112,954) (5,112,954)
---------- -------- ------- ------ ----------- ----------- -------- ------------ -----------
Balance, December 31,
1998................ 7,734,635 77,346 485,640 4,857 20,166,075 -- (50,000) (19,810,065) 388,213
Exercise of common
stock options
(unaudited)......... 36,514 365 43,455 43,820
Issuance of 4,142,857
shares of Series K
convertible
preferred stock
(unaudited)......... 4,142,857 41,429 5,756,037 5,797,466
Issuance of stock
options
(unaudited)......... 2,838,231 (2,838,231) --
Amortization of
deferred
compensation
(unaudited)......... 239,935 239,935
Net loss
(unaudited)......... (1,157,376) (1,157,376)
---------- -------- ------- ------ ----------- ----------- -------- ------------ -----------
Balance, June 30,
1999 (unaudited).... 11,877,492 $118,775 522,154 $5,222 $28,803,798 $(2,598,296) $(50,000) $(20,967,441) $ 5,312,058
========== ======== ======= ====== =========== =========== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
eMed Technologies Corporation
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(3,745,761) $(5,625,169) $(5,112,954) $(1,853,905) $(1,157,376)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 364,946 469,488 521,006 259,844 374,725
Amortization of debt
discount............. -- 119,000 -- -- --
Loss on disposal of
fixed assets......... 20,032 236,764 50,933 12,339 85,763
Compensation expense
associated with
issuance of stock
options.............. 20,000 5,578 8,002 -- 239,935
Preferred stock
issued in lieu of
cash payment for
interest............. 5,381 22,906 -- -- --
Changes in operating
assets and
liabilities, net of
effects from
acquisition of E-
Systems Medical
Electronics:
Accounts receivable.. (2,389) (2,489,335) 36,664 (853,039) (1,291,237)
Inventories.......... (681,064) (399,200) 638,428 293,751 1,049,587
Prepaid expenses and
other current
assets.............. 12,874 (715,014) 553,719 512,581 17,507
Accounts payable..... 669,905 1,302,059 19,673 (296,930) (556,469)
Accrued employee
benefits............ 35,193 209,678 (19,382) 50,858 191,828
Accrued warranty
expenses............ -- 100,657 178,231 40,017 150,224
Other accrued
expenses............ 145,183 366,210 (302,859) (146,547) 89,513
Accrued acquisition
reserves............ -- -- -- -- (254,706)
Deferred revenue..... -- 284,375 689,532 110,830 (125,423)
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (3,155,700) (6,112,003) (2,739,007) (1,870,201) (1,186,129)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchases of fixed
assets................ (532,796) (853,122) (465,274) (335,838) (280,841)
Change in other
assets................ 15,935 11,596 (17,054) 21,192 (11,078)
Cash paid for the
acquisition of E-
Systems Medical
Electronics, net of
cash acquired......... -- -- (999,300) -- --
Proceeds from sale of
assets held for
sale.................. -- -- -- -- 861,000
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
investing
activities......... (516,861) (841,526) (1,481,628) (314,646) 569,081
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds from sale-
leaseback
transactions.......... 138,709 -- -- -- --
Principal payments of
capital lease
obligations........... (174,897) (189,842) (179,746) (92,067) (39,970)
Cash received for
fixed assets.......... 5,600 46,028 -- -- --
Proceeds from issuance
of convertible notes
and warrants.......... -- 1,500,000 -- -- --
Borrowings from lines
of credit............. -- 884,527 2,390,039 1,242,522 --
Principal payments of
debt.................. -- -- (141,314) (55,756) (125,729)
Payment of note
payable due to
Raytheon for the
acquisition of
E-Systems Medical
Electronics........... -- -- -- -- (2,200,000)
Proceeds from issuance
of convertible
preferred stock....... 5,848,302 6,930,271 -- -- 5,797,466
Proceeds from exercise
of common stock
options............... 13,917 1,875 39,994 35,655 43,820
Purchase of common
stock held in
treasury.............. -- -- (50,000) (50,000) --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 5,831,631 9,172,859 2,058,973 1,080,354 3,475,587
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 2,159,070 2,219,330 (2,161,662) (1,104,493) 2,858,539
Cash and cash
equivalents, beginning
of period............. 42,314 2,201,384 4,420,714 4,420,714 2,259,052
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, end of
period................ $ 2,201,384 $ 4,420,714 $ 2,259,052 $ 3,316,221 $ 5,117,591
=========== =========== =========== =========== ===========
Supplemental cash flow
disclosures:
Cash paid for
interest.............. $ 148,573 $ 122,458 $ 240,343 $ 100,721 $ 148,953
=========== =========== =========== =========== ===========
</TABLE>
Non-cash financing and investing activities:
During 1996, eMed incurred capital lease obligations of $138,709 in connection
with the sale and leaseback of fixed assets.
During 1996, eMed exchanged $116,667 of redeemable preferred stock for
convertible preferred stock.
During 1996 and 1997, eMed converted $1,105,381 and $1,480,906, respectively,
of convertible notes and long-term debt into convertible preferred stock.
During 1998, in connection with the acquisition of E-Systems Medical
Electronics, eMed issued $2,200,000 of notes payable, acquired assets of
$5,020,053 and assumed liabilities of $1,897,069.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements
1. Nature of Business
eMed Technologies Corporation ("eMed"), formerly known as ACCESS Radiology
Corporation, was incorporated under the laws of Delaware in March 1992. As a
provider of workflow solutions for electronically managing and distributing
medical images and related patient information, eMed markets and sells
electronic medical imaging systems and provides related support services to
healthcare providers primarily within the United States. eMed operates in one
business segment.
2. Summary of Significant Accounting Policies
Cash Equivalents
eMed invests its excess cash in money market funds of major financial
institutions. These investments are subject to minimal credit and market risk.
eMed considers all highly liquid investments purchased with an initial maturity
of three months or less to be cash equivalents. Cash equivalent investments are
classified as available-for-sale and are carried at cost, which approximates
fair value.
Fair Value of Financial Instruments
The carrying amounts of eMed's financial instruments, which include cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
short- and long-term debt, approximate their fair values at December 31, 1997
and 1998.
Revenue Recognition, Significant Customers and Concentration of Credit Risk
Revenue from product sales is recognized upon shipment to the customer
provided that risk of loss has passed to the customer and collection of the
related receivable is probable. Customer payments received in advance of
product shipments are recorded as deferred revenue. eMed typically provides a
one-year warranty on all products sold. eMed accrues the estimated costs to be
incurred in connection with product warranty upon product shipment.
Service revenue consists of customer fees from installation and training,
network-based comprehensive support and post-warranty product maintenance.
Revenue from installation and training is recognized as the work is performed.
Revenue from support agreements and post-warranty product maintenance contracts
is deferred and recognized ratably over the applicable periods.
Financial instruments which potentially expose eMed to concentration of
credit risk include accounts receivable. eMed performs ongoing evaluations of
customers' financial condition and does not generally require collateral. At
December 31, 1997 and 1998, accounts receivable from one customer accounted for
approximately 13% and 11%, respectively, of the total amounts due to eMed.
There were no customers with accounts receivable greater than 10% of the total
amounts due to eMed at June 30, 1999.
In 1996, sales with three customers accounted for approximately 23%, 20% and
13% of eMed's total revenue. In 1997, sales with one customer accounted for
approximately 18% of eMed's total revenue. In 1998, sales with two customers
accounted for approximately 10% and 11% of eMed's total revenue. During the six
months ended June 30, 1999, no customers accounted for greater than 10% of
eMed's total revenue.
Inventories and Concentration of Suppliers
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method.
F-7
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
eMed purchases certain components of eMed's products from limited suppliers.
A change in or loss of these suppliers could cause a delay in filling customer
orders and a possible loss of sales, which could adversely affect results of
operations; however, management believes that suitable replacement suppliers
could be obtained in such an event.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Repair and maintenance costs are
expensed as incurred.
Research and Development and Software Development Costs
Costs incurred in the research and development of eMed's products are
expensed as incurred. Costs associated with the development of computer
software are expensed prior to establishing technological feasibility, as
defined by SFAS No. 86, and capitalized thereafter until commercial release of
the products. Software development costs eligible for capitalization have not
been significant to date.
Stock-Based Compensation
eMed accounts for stock-based awards to employees using the intrinsic value
method as prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. eMed
has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes only (Note 9).
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs
were approximately $31,000, $114,000 and $106,000 in the years ended December
31, 1996, 1997 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Pro Forma Balance Sheet
Upon the closing of eMed's anticipated initial public offering, all shares
of convertible preferred stock outstanding at June 30, 1999 (Note 7) will
automatically convert into 7,856,150 shares of common stock. This conversion
has been reflected in the unaudited pro forma balance sheet as of June 30,
1999.
Unaudited Interim Financial Data
The interim financial data as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 have been derived from unaudited financial statements of
eMed. Management believes eMed's unaudited financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations in such
periods. Results for the six months ended June 30, 1999 are not necessarily
indicative of results to be expected for the full fiscal year.
F-8
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
Actual and Unaudited Pro Forma Net Loss Per Share
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share." Basic net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average number of shares of
common stock outstanding. Diluted net loss per share does not differ from basic
net loss per share since potential common shares from conversion of preferred
stock and exercise of stock options and warrants are anti-dilutive for all
periods presented. Unaudited pro forma basic and diluted net loss per share
have been calculated assuming the conversion of all outstanding shares of
preferred stock into common shares, as if the shares had converted immediately
upon their issuance.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999, the FASB issued SFAS
No. 137 which deferred the effective date of SFAS No. 133 for one year. SFAS
No. 133 is now effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. eMed does not expect SFAS No. 133 to have a material
effect on its financial position or results of operations.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SoP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. SoP 98-1 will be
effective for eMed beginning in 1999, and eMed does not expect adoption of this
SoP to have a material effect on its financial position or results
of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of Start-
Up Activities." Start- up activities are defined broadly as those one-time
activities related to the opening of a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new
entity. SoP 98-5 requires that the cost of start-up activities be expensed as
incurred. SoP 98-5 is effective for eMed beginning in 1999 and eMed does not
expect adoption of this SoP to have a material effect on its financial position
or results of operations.
3. Acquisition
On November 23, 1998, eMed purchased certain assets and assumed certain
liabilities of E-Systems Medical Electronics, a division of Raytheon, for total
consideration of $3,200,000. E-Systems Medical Electronics was engaged in the
business of designing, manufacturing and marketing electronic medical imaging
hardware and software systems and providing technical and network services to
healthcare providers within the United States. The acquisition was funded by a
$2,200,000 note payable to Raytheon (Note 6) and $1,000,000 in cash which was
obtained from eMed's working capital facility (Note 6).
The acquisition was accounted for under the purchase method of accounting
and, accordingly, operating results of this business subsequent to the date of
acquisition have been included in eMed's financial statements. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their fair values at the date of acquisition. The excess of the purchase price
over the fair value of the net assets acquired of $77,016 was recorded as
goodwill and is being amortized over a period of ten years using the straight-
line method. In February 1999, certain assets, primarily inventory, purchased
in the acquisition were sold for total consideration of $861,000. These assets
were classified as assets held for sale at December 31, 1998.
F-9
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
The following unaudited pro forma data summarizes the results of operations
for the years ended December 31, 1997 and 1998 as if the acquisition of E-
Systems Medical Electronics had been completed on January 1, 1997 and 1998,
respectively. The pro forma data gives effect to actual operating results prior
to the acquisition with adjustments for interest expense and amortization of
goodwill and the sale of assets held for sale at December 31, 1998. These pro
forma amounts do not purport to be indicative of the results that would have
actually been obtained if the acquisition had occurred on January 1, 1997 and
1998 or that may be obtained in the future.
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Revenue............................................ $19,451,507 $20,708,044
Net loss........................................... (16,302,719) (11,457,663)
Net loss per share:
Basic and diluted.................................. ($36.09) ($26.22)
</TABLE>
In connection with the acquisition of E-Systems Medical Electronics, eMed
has undertaken a restructuring of the acquired business. In accordance with
Emerging Issues Task Force ("EITF") No. 95-3 "Recognition of Liabilities in
Connection with a Purchase Business Combination," eMed established a reserve of
approximately $412,000, primarily related to severance and other employee
related costs of $339,000 and other exit costs of $73,000. The restructuring
plan consists of the sale of certain monitor inventory and the exit of related
activities and a reduction in acquired headcount. eMed has terminated the
direct sales activity of the acquired company and discontinued shipping and
manufacturing certain acquired product lines. From the date of acquisition
through December 31, 1998, eMed has paid approximately $76,000 of the planned
costs which related solely to severance payments. As of June 30, 1999, eMed has
paid approximately $331,000 of the planned costs which is comprised of $73,000
of other exit costs and $258,000 of severance and other employee related costs.
The remaining reserve of $81,000 at June 30, 1999 is related to the settlement
of certain employment agreements and is expected to be paid in December 1999.
4. Inventories
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Raw materials and purchased components... $ 678,005 $1,545,650 $789,264
Work-in-process.......................... 20,654 107,336 126,396
Finished goods........................... 381,605 358,424 46,163
---------- ---------- --------
$1,080,264 $2,011,410 $961,823
========== ========== ========
</TABLE>
5. Fixed Assets
<TABLE>
<CAPTION>
December 31,
Estimated -------------------
Useful lives 1997 1998
(years) --------- ---------
<S> <C> <C> <C>
Furniture and fixtures.................... 5 $ 152,181 $ 194,503
Office equipment and computers............ 3 368,070 256,957
Electronic medical imaging equipment...... 3 1,205,597 1,558,018
Leasehold improvements.................... Lease term 57,066 90,940
--------- ---------
1,782,914 2,100,418
Less - Accumulated depreciation and
amortization............................. 890,464 1,109,237
--------- ---------
$ 892,450 $ 991,181
========= =========
</TABLE>
F-10
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
At December 31, 1997 and 1998, furniture and electronic medical imaging
equipment held under capital leases totaled $499,425 and $321,770,
respectively. Accumulated amortization of furniture and electronic medical
imaging equipment held under capital leases was $420,096 and $319,074 at
December 31, 1997 and 1998, respectively. Depreciation and amortization expense
on fixed assets was $364,946, $469,488 and $521,006, of which $244,824,
$187,838 and $54,727 related to amortization of assets held under capital
leases in 1996, 1997 and 1998, respectively.
6. Borrowings
Notes Payable
In connection with the acquisition of certain assets and liabilities of E-
Systems Medical Electronics (Note 3), eMed issued a $2,200,000 short-term note
payable to Raytheon. In accordance with the terms of the note, a payment of
$1,500,000 was made in January 1999. The remaining balance of $700,000 was paid
in May, 1999.
At various dates through September 1997, eMed issued $1,500,000 in 6.0%
convertible subordinated notes ("Notes") maturing on October 31, 1997. On
September 30, 1997, in connection with the Series J convertible preferred stock
offering, the Notes, together with accrued interest, were converted into
1,384,460 shares of Series J convertible preferred stock. In connection with
the issuance of the Notes, eMed issued warrants to purchase 409,091 shares of
Series J convertible preferred stock at an exercise price of $1.10. The
warrants expire on June 30, 2002. These warrants were ascribed a value of
approximately $161,000 which was reflected as a debt discount to be amortized
to interest expense over the term of the Notes. Approximately $119,000 of the
debt discount was amortized to interest expense for the year ended December 31,
1997.
Loan Facilities
In May 1997, eMed entered into an agreement with a bank under which it may
borrow up to $2,000,000 for working capital purposes ("Working Capital
Facility") and $500,000 for purchases of fixed assets ("Equipment Facility"),
subject to certain limitations. All borrowings under the agreement are
collateralized by substantially all of eMed's assets. Under the terms of the
agreement, eMed is required to comply with certain restrictive covenants,
including the maintenance of certain financial ratios and limitations on
indebtedness, liens, guaranties, mergers and payments of dividends.
In April 1998, the terms of the Working Capital Facility were amended
whereby eMed can borrow up to $3,000,000, subject to certain limitations,
through March 31, 1999, at which time, all outstanding principal and interest
is due. The interest rate on outstanding borrowings under the new Working
Capital Facility fluctuates monthly between the bank's prime rate plus 0.5% to
1.75% based on certain financial ratios. The interest rate at December 31, 1998
was 9.3%. Additionally, eMed is required to pay a fee equal to 0.75% of the
average unused Working Capital Facility, payable quarterly (the "Facility
Fee"). Borrowings under the Working Capital Facility totaled $550,000 and
$2,550,000 at December 31, 1997 and 1998, respectively.
In January and March 1999, the terms of the Working Capital Facility were
further amended whereby eMed can borrow up to $4,000,000, subject to certain
limitations, through September 30, 1999, at which time all outstanding
principal and interest is due. The amended interest rate on outstanding
borrowings fluctuates monthly between the bank's prime rate plus 0.5% to 2.0%
based on certain financial ratios and the Facility Fee was increased to 1.0%.
Additionally, the amended Working Capital Facility requires eMed to raise $2.0
million of additional capital by June 30, 1999. This additional capital was
obtained as discussed in Note 7.
Borrowings under the Equipment Facility bear interest, payable monthly, at
the bank's prime rate plus 1.0% (8.8% at December 31, 1998). In April 1998, the
terms of the Equipment Facility were amended whereby eMed could borrow up to
$750,000, subject to certain limitations. At December 31, 1998, outstanding
F-11
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
borrowings of $583,252 under the Equipment Facility converted to a three-year
term loan payable in 36 monthly installments of principal and interest.
As of December 31, 1998, future minimum principal payments under the
Equipment Facility are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999................................................................ $247,359
2000................................................................ 247,359
2001................................................................ 88,534
--------
$583,252
========
</TABLE>
7. Preferred Stock
Shares authorized, issued and outstanding and the carrying values of eMed's
preferred stock are as follows:
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Series B:
716 shares authorized, issued and outstanding
at December 31, 1997 and 1998 and June 30,
1999 ........................................ $ 700,228 $700,228 $ 700,228
Series C:
450 shares authorized, issued and outstanding
at December 31, 1997 and 1998 and June 30,
1999 ........................................ 2,245,000 2,245,000 2,245,000
Series E:
345 shares authorized at December 31, 1997
and 1998 and June 30, 1999; 344 shares issued
and outstanding at December 31, 1997 and 1998
and June 30, 1999 ........................... 1,566,656 1,566,656 1,566,656
Series F:
1,000 shares authorized, issued and
outstanding at December 31, 1997 and 1998 and
June 30, 1999 ............................... 1,000,000 1,000,000 1,000,000
Series G:
816 shares authorized, issued and outstanding
at December 31, 1997 and 1998 and June 30,
1999 ........................................ 4,070,349 4,070,349 4,070,349
Series H:
400 shares authorized , issued and
outstanding at December 31, 1997 and 1998 and
June 30, 1999 ............................... 2,000,001 2,000,001 2,000,001
Series J:
8,140,000 shares authorized at December 31,
1997 and 1998 and June 30, 1999; 7,730,909
shares issued and outstanding at December 31,
1997 and 1998 and June 30, 1999 ............. 8,411,177 8,411,177 8,411,177
Series K:
No shares authorized, issued or outstanding
at December 31, 1997; 1,785,800 and 4,145,000
shares authorized at December 31, 1998 and
June 30, 1999, respectively; 0 and 4,142,857
shares issued and outstanding at December 31,
1998 and June 30, 1999, respectively ........ -- -- 5,797,466
Undesignated:
6,856,275 shares authorized at December 31,
1997;
5,070,475 shares authorized at December 31,
1998;
and 2,711,275 shares authorized at June 30,
1999 ........................................ -- -- --
</TABLE>
F-12
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
The convertible preferred stock has the following characteristics:
Dividends
No dividends have been declared or paid by eMed through December 31, 1998.
The holders of Series B, Series C, Series E, Series F, Series G and Series H
convertible preferred stock ("Series Preferred") are entitled to receive
noncumulative dividends whenever eMed declares a dividend on its common stock,
in such an amount as they would be entitled to receive if the convertible
preferred stock had been converted into common stock on the date the dividend
was declared. The holders of Series J convertible preferred stock ("Series J")
are entitled to receive noncumulative, annual cash dividends of $0.11 per share
when and if declared by eMed, in preference to the holders of Series Preferred
or common stock.
Voting
The holders of Series Preferred and Series J are entitled to vote, together
with holders of common stock, as a single class on all matters. Each
stockholder is entitled to the number of votes equal to the number of shares of
common stock into which such holder's shares are convertible.
Conversion
Each share of Series B, Series C, Series E, Series F, Series G, Series H,
and Series J convertible preferred stock may be converted at any time, at the
option of the stockholder, into 100, 396.88, 396.83, 833.33, 1,388.89, 1,388.89
and 0.42 shares of common stock, respectively, subject to certain anti-dilution
adjustments. All outstanding shares of Series Preferred automatically convert
into common stock, at their respective conversion rate, upon the closing of an
initial public offering of eMed's common stock or, in the case of Series H
convertible preferred stock and Series J, automatically upon the closing of an
initial public offering of eMed's common stock with gross proceeds of at least
$15,000,000 to eMed and at a price to the public of at least $7.20 per common
share.
Liquidation Preference
In the event of any liquidation, dissolution or winding-up of eMed, the
holders of Series J are entitled to receive, prior to any distribution to
holders of Series Preferred or common stock, up to the amount of $1.10 per
share, plus any declared but unpaid dividends. After the payment of the full
liquidation preference of Series J, the holders of Series B, Series C, Series
E, Series F, Series G and Series H are entitled to receive, prior to any
distribution to holders of common stock, up to the amount of $1,000, $5,000,
$5,000, $1,000, $5,000 and $5,000 per share, respectively, plus any declared
but unpaid dividends. The aggregate liquidation preference of the convertible
preferred stock is approximately $20,265,000 at December 31, 1998.
Subsequent Preferred Stock Issuance
In January and May 1999, eMed sold 4,142,857 shares of Series K Convertible
Preferred Stock ("Series K") for net proceeds of $5,797,466. Each share of
Series K is convertible into 0.42 share of common stock subject to certain
anti-dilution adjustments. The holders of Series K will participate on an as-
converted basis in any dividends paid on common stock and are entitled to vote
together with all other classes of voting stock as a single class on all
matters. The liquidation preference is equal to the issue price. In connection
with the Series K issuance, eMed issued warrants to purchase 467,186 shares of
common stock at an exercise price of $0.02. The warrants expire in 2009.
8. Common Stock
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of eMed's stockholders. Common stockholders are entitled to
receive dividends, if any, as may be declared by the Board of Directors,
subject to any preferential dividend rights of the preferred stockholders.
F-13
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
Reserved Shares
As of December 31, 1998 and June 30, 1999, eMed has 8,938,780 and 10,351,758
shares of common stock reserved for issuance upon the exercise of common stock
options and warrants and conversion of the outstanding convertible preferred
stock, respectively.
Stock Split
On September 15, 1999, eMed authorized a 2.4 for one reverse split on its
common stock. As a result, all common stock share and per share data included
in the accompanying consolidated financial statements and notes have been
retroactively restated for the split.
9. Stock Plans
Prior to adoption of the 1994 Stock Plan described below, eMed granted
25,928 non-qualified stock options to certain employees, directors and
consultants of eMed of which 417 options have been exercised and 3,471 have
been canceled. The stock options vested at various dates through January 1998.
In 1994, eMed adopted the 1994 Stock Plan (the "1994 Plan") which provides
for the grant of incentive stock options and non-qualified stock options, stock
awards and stock purchase rights for the purchase of shares of eMed's common
stock by officers, employees, consultants and directors of eMed. At December
31, 1998, the number of shares issuable pursuant to the 1994 Plan was
1,187,500. In February 1999, the stockholders approved an increase in the
number of shares issuable pursuant to the 1994 Plan to 1,812,500. The Board of
Directors is responsible for administration of the 1994 Plan. The Board
determines the term of each option, the option exercise price, the number of
shares for which each option is granted and the rate at which each option is
exercisable. Incentive stock options may be granted to any employee at an
exercise price per share of not less than the fair value per common share on
the date of the grant (not less than 110% of fair value in the case of holders
of more than 10% of eMed's voting stock) and with a term not to exceed ten
years from the date of the grant (five years for incentive stock options
granted to holders of more than 10% of eMed's voting stock).
No compensation cost has been recognized for employee stock-based
compensation in 1996, 1997 or 1998. Had compensation cost attributable to the
1994 Plan and other options been determined based on the fair value of the
options at the grant date consistent with the provisions of FAS 123, eMed's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss
As reported........................ $(3,745,761) $(5,625,169) $(5,112,954)
Pro forma.......................... (3,782,260) (5,653,283) (5,180,199)
Basic and diluted net loss per share
As reported........................ $ (8.39) $ (12.45) $ (11.70)
Pro forma.......................... (8.47) (12.52) (11.86)
</TABLE>
Because the determination of the fair value of all options granted after
eMed becomes a public entity will include an expected volatility factor,
additional option grants are expected to be made subsequent to December 31,
1998, and most options vest over several years, the above pro forma effects are
not necessarily indicative of the pro forma effects on future years.
F-14
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
Under SFAS No. 123, the fair value of each employee option grant is
estimated on the date of grant using the Black-Scholes option pricing model to
apply the minimum value method with the following weighted-average assumptions
used for grants made during the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Expected option term (years)................... 5 5 5
Risk-free interest rate........................ 6.2% 6.4% 5.0%
Dividend yield................................. 0.0% 0.0% 0.0%
</TABLE>
A summary of the status of eMed's stock options as of December 31, 1996,
1997 and 1998, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
1996 1997 1998
----------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise price Shares exercise price Shares exercise price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 110,452 $2.11 235,812 $1.15 510,197 $1.18
Granted................. 236,737 $1.20 331,536 $1.20 564,697 $1.20
Exercised............... (11,597) $1.20 (1,562) $1.20 (33,326) $1.20
Canceled................ (99,780) $2.35 (55,589) $1.20 (54,268) $1.20
------- ----- ------- ----- ------- -----
Outstanding at end of
year................... 235,812 $1.15 510,197 $1.18 987,300 $1.20
======= ===== ======= ===== ======= =====
Options exercisable at
end of year............ 162,525 261,543 471,356
======= ======= =======
Weighted-average fair
value of options
granted during the
year................... $ 0.31 $ 0.34 $ 0.34
======= ======= =======
Options available for
grant at end of year... 328,887 666,884 175,755
======= ======= =======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Weighted-average
Options remaining Options
Exercise price outstanding contractual life exercisable
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.01 6,646 4.4 6,646
$0.42 14,286 4.1 14,286
$0.50 966,368 7.5 450,424
------- -------
987,300 471,356
======= =======
</TABLE>
Deferred Compensation
During the six months ended June 30, 1999, eMed granted stock options to
purchase 177,395 shares of its common stock with an exercise price of $1.20 per
share and 551,354 shares of its common stock with an exercise price of $2.04
per share. eMed recorded deferred compensation relating to these options
totaling approximately $2,838,231, representing the differences between the
estimated fair market value of the common stock on the date of grant and the
exercise price. Compensation expense related to these options is being
amortized over the related vesting periods. For the six months ended June 30,
1999, eMed recorded approximately $240,000 of compensation expense related to
these options.
F-15
<PAGE>
eMed Technologies Corporation
Notes to Financial Statements--(Continued)
10. Income Taxes
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 5,914,557 $ 7,532,342
Other............................................ 134,336 624,489
----------- -----------
Deferred tax assets................................ 6,048,893 8,156,831
Deferred tax asset valuation allowance............. (6,048,893) (8,156,831)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Realization of deferred tax assets is dependent upon the generation of
future taxable income. eMed has provided a valuation allowance for the full
amount of its deferred tax assets since realization of these future benefits is
not sufficiently assured.
At December 31, 1998, eMed has net operating loss carryforwards of
approximately $18,371,000 to offset future federal taxable income. If not
utilized, these carryforwards will expire at various dates ranging from 2013 to
2018. Under the provisions of the Internal Revenue Code, certain substantial
changes in eMed's ownership may have limited, or may limit in the future, the
amount of net operating loss carryforwards which could be used annually to
offset future taxable income and income tax liability. The amount of any annual
limitation is determined based upon eMed's value prior to an ownership change.
11. 401(k) Plan
During 1995, eMed established a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. This plan covers substantially all
employees who meet minimum age and service requirements and allows participants
to defer a portion of their annual compensation on a pre-tax basis. eMed
contributions to the plan may be made at the discretion of the Board of
Directors. There were no contributions made to the plan by eMed during the
years ended December 31, 1996, 1997 and 1998.
12. Commitments
Leases
eMed leases office space and certain fixed assets under noncancelable
operating and capital leases. The future minimum lease commitments under all
noncancelable leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Lease Leases
---------- -------
<S> <C> <C>
1999..................................................... $ 641,239 $52,919
2000..................................................... 584,980 6,966
2001..................................................... 567,780 --
2002..................................................... 520,465 --
---------- -------
Total minimum lease payments............................. $2,314,464 59,885
==========
Less--amount representing interest....................... 7,568
-------
Present value of minimum lease payments.................. $52,317
=======
</TABLE>
Total rent expense under noncancelable operating leases was approximately
$257,000, $287,000 and $562,000 in 1996, 1997 and 1998, respectively.
F-16
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
eMed Technologies Corporation:
In our opinion, the accompanying balance sheet and the related statements of
operations and accumulated deficit and of cash flows present fairly, in all
material respects, the financial position of E-Systems Medical Electronics (a
division of Raytheon E-Systems, Inc.) at December 31, 1997 and November 23,
1998 and the results of its operations and its cash flows for the year ended
December 31, 1997 and for the period from January 1, 1998 through November 23,
1998 in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 9, 1999
F-17
<PAGE>
E-Systems Medical Electronics
(a division of Raytheon E-Systems, Inc.)
Balance Sheet
<TABLE>
<CAPTION>
December 31, November 23,
1997 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash............................................. $ 90,888 $ 1,009
Accounts receivable, net of allowance for
doubtful accounts of $46,000 and $150,000 at
December 31, 1997 and November 23, 1998,
respectively.................................... 2,978,522 2,332,937
Inventories...................................... 1,175,196 2,430,573
Prepaid expenses and other current assets........ 363,432 54,653
------------ ------------
Total current assets........................... 4,608,038 4,819,172
Fixed assets, net.................................. 681,576 205,398
Other assets....................................... 37,200 --
------------ ------------
Total assets................................... $ 5,326,814 $ 5,024,570
============ ============
Liabilities and Accumulated Deficit
Current liabilities:
Accounts payable................................. $ 1,363,258 $ 1,156,310
Accrued employee benefits........................ 253,010 161,798
Accrued warranty................................. 200,000 200,000
Other accrued expenses........................... 575,679 390,958
Deferred revenue................................. 465,322 432,035
------------ ------------
Total current liabilities...................... 2,857,269 2,341,101
Long-term payable to Raytheon...................... 29,993,246 36,213,392
------------ ------------
Total liabilities.............................. 32,850,515 38,554,493
Commitments (Note 7)
Accumulated deficit................................ (27,523,701) (33,529,923)
------------ ------------
Total liabilities and accumulated deficit...... $ 5,326,814 $ 5,024,570
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
E-Systems Medical Electronics
(a division of Raytheon E-Systems, Inc.)
Statement of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Period from
January 1, 1998
Year ended through
December 31, November 23,
1997 1998
------------ ---------------
<S> <C> <C>
Revenue........................................... $ 15,006,266 $ 11,217,121
Cost of revenue................................... 16,055,320 9,928,411
------------ ------------
Gross margin.................................... (1,049,054) 1,288,710
------------ ------------
Operating expenses:
Research and development........................ 2,369,445 3,365,301
Sales and marketing............................. 3,145,504 2,599,950
General and administrative...................... 2,277,301 1,323,836
------------ ------------
Total operating expenses...................... 7,792,250 7,289,087
------------ ------------
Loss from operations.............................. (8,841,304) (6,000,377)
Other expense..................................... (80,895) (5,845)
------------ ------------
Net loss........................................ (8,922,199) (6,006,222)
Accumulated deficit, beginning of period.......... (18,601,502) (27,523,701)
------------ ------------
Accumulated deficit, end of period................ $(27,523,701) $(33,529,923)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
E-Systems Medical Electronics
(a division of Raytheon E-Systems, Inc.)
Statement of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Period from
January 1, 1998
Year ended through
December 31, November 23,
1997 1998
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (8,922,199) $ (6,006,222)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation................................... 649,650 517,453
Loss on disposal of fixed assets............... -- 3,730
Allocation of costs by Raytheon................ 5,057,882 3,551,205
Changes in operating assets and liabilities:
Accounts receivable........................... 2,132,522 645,585
Inventories................................... 834,282 (1,255,377)
Prepaid expenses and other current assets..... (346,327) 308,779
Accounts payable.............................. 815,510 (206,948)
Accrued employee benefits..................... 23,112 (91,212)
Accrued warranty.............................. 118,300 --
Other accrued expenses........................ 463,955 (184,721)
Deferred revenue.............................. (611,628) (33,287)
Cash provided by Raytheon..................... 18,406,307 15,008,634
Cash remitted to Raytheon..................... (17,222,106) (12,339,693)
------------ ------------
Net cash (used in) provided by operating
activities.................................. 1,399,260 (82,074)
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets....................... (629,604) (45,005)
Change in other assets.......................... (37,200) 37,200
------------ ------------
Net cash used in investing activities........ (666,804) (7,805)
------------ ------------
Cash flows from financing activities:
Cash paid in reorganization (Note 1)............ (9,545,942) --
------------ ------------
Decrease in cash................................. (8,813,486) (89,879)
Cash, beginning of period........................ 8,904,374 90,888
------------ ------------
Cash, end of period.............................. $ 90,888 $ 1,009
============ ============
Supplemental cash flow disclosure:
</TABLE>
No cash was paid for interest or taxes for the year ended December 31, 1997
or for the period from January 1, 1998 through November 23, 1998.
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
E-Systems Medical Electronics (a division of Raytheon E-Systems, Inc.)
Notes to Financial Statements
1. Organization and Nature of Business
E-Systems Medical Electronics markets and sells electronic medical imaging
systems and provides related services to healthcare providers primarily within
the United States. E-Systems Medical Electronics operates in one business
segment.
E-Systems Medical Electronics was established as a wholly owned subsidiary
of E-Systems. In 1995, E-Systems was acquired by Raytheon Company ("Raytheon")
and subsequently became Raytheon E-Systems, Inc., a wholly owned subsidiary of
Raytheon. In February 1997, E-Systems Medical Electronics was reorganized as a
division of Raytheon E-Systems, Inc. As part of the reorganization, the assets,
liabilities and capital of E-Systems Medical Electronics were transferred to
Raytheon E-Systems, Inc. E-Systems Medical Electronics operated as a division
of Raytheon E-Systems, Inc. from the date of transfer through November 23,
1998.
2. Summary of Significant Accounting Policies
Cash
E-Systems Medical Electronics maintains minimal levels of cash. Cash needs
are funded by Raytheon and cash receipts are remitted to Raytheon on a regular
basis.
Fair Value of Financial Instruments
The carrying amount of E-Systems Medical Electronics's financial
instruments, which include cash, accounts receivable, accounts payable, accrued
expenses and long-term payable, approximate their fair values at December 31,
1997 and November 23, 1998.
Revenue Recognition, Significant Customers and Concentration of Credit Risk
Revenue from the sale of electronic medical imaging systems and equipment is
recognized upon shipment to the customer provided that the risk of loss has
passed to the customer and collection of the related receivable is probable.
Service revenue, consisting of installation, training, and support services, is
recognized as the work is performed.
Financial instruments that potentially expose E-Systems Medical Electronics
to concentration of credit risk include accounts receivable. E-Systems Medical
Electronics performs ongoing evaluations of customers' financial condition and
does not generally require collateral. At December 31, 1997 and November 23,
1998, accounts receivable from one customer accounted for 13% and 26%,
respectively, of the total amounts due to E-Systems Medical Electronics.
In 1997, sales with two customers accounted for approximately 15% and 11% of
E-Systems Medical Electronics's total revenue. In 1998, sales with one customer
accounted for approximately 12% of E-Systems Medical Electronics's total
revenue.
Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method.
F-21
<PAGE>
E-Systems Medical Electronics (a division of Raytheon E-Systems, Inc.)
Notes to Financial Statements--(Continued)
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Repair and maintenance costs are
expensed as incurred.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs
were approximately $121,000 and $32,000 in the year ended December 31, 1997 and
the period ended November 23, 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
As a division of Raytheon, E-Systems Medical Electronics does not operate as
a stand-alone taxable entity; however, for purposes of these financial
statements, income tax information has been calculated in accordance with
Statement of Accounting Standards No. 109, "Accounting for Income Taxes", as if
E-Systems Medical Electronics were a stand-alone taxable entity (Note 6).
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. In June 1999, the FASB issued SFAS
No. 137 which deferred the effective date of SFAS No. 133 for one year. SFAS
No. 133 is now effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. E-Systems Medical Electronics does not expect SFAS No. 133
to have a material effect on its financial position or results of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of Start-
Up Activities." Start-up activities are defined broadly as those one-time
activities related to the opening of a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new
entity. SoP 98-5 requires that the cost of start-up activities be expensed as
incurred. SoP 98-5 is effective for E-Systems Medical Electronics beginning in
1999, and E-Systems Medical Electronics does not expect adoption of this SoP to
have a material effect on its financial position or results of operations.
3. Inventories
<TABLE>
<CAPTION>
December 31, 1997 November 23, 1998
----------------- -----------------
<S> <C> <C>
Raw materials and purchased
components.......................... $1,053,037 $2,430,573
Work-in-process...................... 91,646 --
Finished goods....................... 30,513 --
---------- ----------
$1,175,196 $2,430,573
========== ==========
</TABLE>
F-22
<PAGE>
E-Systems Medical Electronics (a division of Raytheon E-Systems, Inc.)
Notes to Financial Statements--(Continued)
4. Fixed Assets
<TABLE>
<CAPTION>
Estimated
Useful life (years) December 31, 1997 November 23, 1998
------------------- ----------------- -----------------
<S> <C> <C> <C>
Furniture and fixtures.. 5 $ 70,330 $ 63,156
Office equipment and
computers.............. 3 613,085 620,720
Electronic imaging
equipment.............. 3 2,368,227 2,231,065
---------- ----------
3,051,642 2,914,941
Less -- Accumulated
depreciation........... 2,370,063 2,709,543
---------- ----------
$ 681,579 $ 205,398
========== ==========
</TABLE>
5. Intercompany Transactions
E-Systems Medical Electronics had a liability due to Raytheon in the amount
of $29,993,246 and $36,213,392 at December 31, 1997 and November 23, 1998,
respectively. The average balance of the liability due to Raytheon during the
year ended December 31, 1997 and the period ended November 23, 1998 was
$29,303,294 and $32,377,065, respectively. The liability due to Raytheon
results from cash transfers between E-Systems Medical Electronics and Raytheon
and the allocation of costs to E-Systems Medical Electronics consisting of
direct costs, such as insurance premiums, payroll services and legal services,
and other allocated services. Other allocated services consist of indirect
costs related to E-Systems Medical Electronics, such as corporate governance
and other general and administrative activities. Such allocations are based
upon estimated support provided to E-Systems Medical Electronics. Management
believes these estimates are reasonable. No interest has been charged on
intercompany liabilities.
The following table summarizes intercompany transactions during the year
ended December 31, 1997 and the period January 1, 1998 through November 23,
1998
<TABLE>
<S> <C>
Balance at December 31, 1996................................. $ 23,751,163
Allocation of costs to E-Systems Medical Electronics....... 5,057,882
Cash transferred from Raytheon to E-Systems Medical
Electronics............................................... 18,406,307
Cash transferred from E-Systems Medical Electronics to
Raytheon.................................................. (17,222,106)
------------
Balance at December 31, 1997................................. 29,993,246
Allocation of costs to E-Systems Medical Electronics....... 3,551,205
Cash transferred from Raytheon to E-Systems Medical
Electronics............................................... 15,008,634
Cash transferred from E-Systems Medical Electronics to
Raytheon.................................................. (12,339,693)
------------
Balance at November 23, 1998................................. $ 36,213,392
============
</TABLE>
6. Income Taxes
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, November 23,
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 6,062,000 $ 8,482,000
Other.......................................... 19,000 62,000
----------- -----------
Deferred tax assets.............................. 6,081,000 8,544,000
Deferred tax asset valuation allowance........... (6,081,000) (8,544,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-23
<PAGE>
E-Systems Medical Electronics (a division of Raytheon E-Systems, Inc.)
Notes to Financial Statements--(Continued)
Realization of deferred tax assets is dependent upon the generation of
future taxable income. E-Systems Medical Electronics has provided a valuation
allowance for the full amount of its deferred tax assets since realization of
these future benefits is not sufficiently assured.
7. Commitments
Leases
E-Systems Medical Electronics leases office space under noncancelable
operating leases. Future minimum lease payments under these leases are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999.............................................................. $73,191
2000.............................................................. 20,483
2001.............................................................. 274
-------
Total minimum lease payments.................................... $93,948
=======
</TABLE>
Total rent expense was approximately $579,348 and $538,683 in 1997 and 1998,
respectively.
8. Subsequent Event
On November 23, 1998, E-Systems Medical Electronics was purchased by eMed
Technologies Corporation for $3,200,000. The acquisition was funded by a
$2,200,000 note payable to Raytheon and $1,000,000 in cash.
F-24
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma statement of operations gives effect to
the acquisition by eMed Technologies Corporation ("eMed") of E-Systems Medical
Electronics, a division of Raytheon E-Systems, Inc., in a transaction accounted
for as a purchase. The unaudited pro forma statement of operations is based on
the individual statements of operations of eMed and E-Systems Medical
Electronics appearing elsewhere in this registration statement, and combines
the results of operations of eMed and of E-Systems Medical Electronics
(acquired by eMed as of November 23, 1998) for the year ended December 31, 1998
as if the acquisition occurred on January 1, 1998. The unaudited pro forma
statement of operations for the year ended December 31, 1998 should be read in
conjunction with the historical financial statements and notes thereto of eMed
and E-Systems Medical Electronics included elsewhere in this registration
statement.
The pro forma information is presented for illustrative purposes only and is
not indicative of the operating results that would have occurred had the
acquisition been consummated at the beginning of the period presented, nor is
it indicative of future operating results.
Pro Forma Combined Statement of Operations
Year ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
E-Systems
Medical Pro forma Pro forma
eMed Electronics Adjustments Combined
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................. $12,594,167 $11,217,121 $(3,103,244)a $ 20,708,044
Cost of Revenue......... 8,976,139 9,928,411 (3,093,517)a 15,811,033
----------- ----------- ----------- ------------
Gross margin.......... 3,618,028 1,288,710 (9,727) 4,897,011
----------- ----------- ----------- ------------
Operating expenses:
Research and develop-
ment................. 2,361,430 3,365,301 -- 5,726,731
Sales and marketing... 3,498,169 2,599,950 -- 6,098,119
General and adminis-
trative.............. 2,722,340 1,323,836 7,704 b 4,053,880
----------- ----------- ----------- ------------
Total operating ex-
penses............. 8,581,939 7,289,087 7,704 15,878,730
----------- ----------- ----------- ------------
Loss from operations.... (4,963,911) (6,000,377) (17,431) (10,981,719)
Interest expense, net... (105,611) -- (321,056)c (426,667)
Other expense........... (43,432) (5,845) -- (49,277)
----------- ----------- ----------- ------------
Net loss.............. $(5,112,954) $(6,006,222) $ (338,487) $(11,457,663)
=========== =========== =========== ============
Pro forma basic and di-
luted net loss per
share.................. $ (11.70) -- -- $ (26.22)
Shares used in computing
pro forma basic
and diluted net loss per
share.................. 436,949 -- -- 436,949
</TABLE>
F-25
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
(unaudited)
The unaudited pro forma combined statement of operations gives effect to the
following pro forma adjustments necessary to reflect the acquisition as if it
had occurred on January 1, 1998:
a. Elimination of revenue and cost of revenue directly associated with
certain assets acquired by eMed as part of E-Systems Medical Electronics
and classified as assets held for sale by eMed at December 31, 1998.
These assets were subsequently sold in February 1999.
b. Additional amortization of goodwill on a straight-line basis over 10
years.
c. Increase in interest expense on debt incurred in connection with the
acquisition of E-Systems Medical Electronics. A change in the interest
rate on variable rate debt by 1/8% would not have a material effect on
the pro forma combined statement of operations.
F-26
<PAGE>
"eMed Internet-Based Products"
"Image-centric presentation for radiologists and specialists"
"Format"
"Screen layout and study navigation"
[radiology image and patient
information as displayed by FrameWave
Web on a computer monitor.
"Patient Jacket"
"Access to current and prior
studies and reports"
"Workflow Tools" "Imaging"
"Worklists and Comprehensive tools for image
search utilities" enhancement
"Report-centric presentation for referring physicians"
"Patient Jacket" [radiology image integrated with
"Access to current and radioligist's report and patient
prior reports, audio clips and studies" information as displayed by
FrameWave Web on a computer monitor.
"Image"
"Reference images with
double click to full view"
"Report"
"Radiologist's reports
readily accessible"
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither eMed nor any underwriter has authorized any other person
to provide prospective investors with different or additional information.
This prospectus is not an offer to sell nor is it seeking an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
The information contained in this prospectus is correct only as of the date of
this prospectus, regardless of the time of the delivery of this prospectus or
any sale of these securities.
---------------
TABLE OF CONTENTS
---------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 25
Management............................................................... 34
Certain Transactions..................................................... 44
Description of Capital Stock............................................. 45
Shares Eligible for Future Sale.......................................... 48
Underwriting............................................................. 50
Legal Matters............................................................ 52
Experts.................................................................. 52
Where You Can Find Additional Information................................ 52
Index to Financial Statements............................................ F-1
</TABLE>
Dealer Prospectus Delivery Obligation:
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell, or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,100,000 Shares
eMed Technologies
Corporation
Common Stock
---------------
PROSPECTUS
---------------
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
---------------
SG Cowen
Wit Capital Corporation
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
Item Amount
---- --------
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 15,985
National Association of Securities Dealers Filing Fee.............. 6,250
Nasdaq National Market Listing Fee................................. 60,000
Blue Sky Fees and Expenses......................................... 10,000
Transfer Agent and Registrar Fees.................................. 3,500
Accounting Fees and Expenses....................................... 350,000
Legal Fees and Expenses............................................ 350,000
Printing Expenses.................................................. 90,000
Miscellaneous...................................................... 14,265
--------
Total............................................................ $900,000
========
</TABLE>
- --------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
The Registrant's Amended and Restated Certificate of Incorporation provides
that the Registrant's Directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the exculpation from liabilities is not permitted
under the Delaware General Corporation Law as in effect at the time such
liability is determined. The Amended and Restated By-Laws provide that the
Registrant shall indemnify its directors to the full extent permitted by the
laws of the State of Delaware. Each of the Registrant's Directors has entered
into an agreement with the Registrant whereby the Registrant has agreed to
indemnify such Director to the full extent permitted by the laws of the State
of Delaware.
Item 15. Recent Sales of Unregistered Securities
The following information is furnished with regard to all Securities sold by
the Registrant within the past three years which were not registered under the
Securities Act.
(a) From August 1, 1996 to September 17, 1999, the Registrant issued a
total of 148,247 shares of common stock for an aggregate consideration of
$177,898 pursuant to the exercise of stock options and warrants by
employees, directors, consultants and their affiliates.
(b) In June 1997, the Registrant sold $1,500,000 in principal amount of
convertible subordinated notes for aggregate proceeds of $1,500,000. These
notes were issued to Delphi Ventures III, L.P., Seaflower Health and
Technology Fund, LLC and certain other private investors. These notes were
automatically convertible, upon the Registrant's sale of new equity
securities for gross proceeds of at least $1,500,000, into securities
having the same price and terms as the new equity securities. Purchasers of
the notes also received warrants to purchase an additional amount of the
new equity securities having an aggregate purchase price of 30% of the
amount of the purchaser's note, at the same price that such new equity
securities were issued to other investors. The notes had a maturity date of
October 31, 1997 and
II-1
<PAGE>
bore interest at the rate of 6% per annum. Accrued interest converted on
the same terms as the principal amount of the notes. In September 1997,
these notes were automatically converted into 1,384,460 shares of Series J
preferred stock at a conversion price of $1.10 per share of Series J
preferred stock. The warrants issued with the notes became warrants to
purchase 409,091 shares of Series J preferred stock at an exercise price of
$1.10 per share. The Series J preferred stock will be converted into
3,221,179 shares of common stock and the Series J warrants will become
warrants to purchase 170,449 shares of common stock upon the closing of
this offering.
(c) In September through December of 1997, the Registrant sold an
aggregate of 6,346,449 shares of Series J preferred stock (excluding the
shares issued upon the conversion of the notes described above) for
aggregate proceeds of $6,981,094. These shares were issued to Bedrock
Capital Partners, Pacific Venture Group, L.P., Bessemer Venture Partners IV
L.P., and certain other private investors.
(d) In July 1998, various investors entered into commitments with the
Registrant to purchase shares of Series K preferred stock for an aggregate
price of $2,500,000 if the Registrant notified them of its election to sell
the shares. The investors who made these commitments also received warrants
to purchase in the aggregate 201,388 shares of common stock at an exercise
price of $.02 per share as consideration for their commitments.
In January 1999, the Registrant elected to draw upon the initial
investors' commitments to purchase Series K preferred stock and sold
additional shares of Series K preferred stock together with warrants to
purchase additional shares of our common stock at an exercise price of $.02
per share to other investors. In the aggregate (including the securities
discussed in the preceding paragraph), the Registrant issued 2,500,000
shares of Series K preferred stock together with warrants to purchase
281,916 shares of common stock for proceeds of $3,500,000. These shares and
warrants were issued to Bedrock Capital Partners, Pacific Venture Group,
L.P., Delphi Ventures III, L.P., Seaflower Bioventure Fund II, LLC,
Bessemer Venture Partners IV L.P., and certain other private investors.
In May 1999, the Registrant sold 1,642,856 additional shares of Series K
preferred stock and warrants to purchase an additional 185,270 shares of
common stock for aggregate proceeds of $2,300,000. These shares and
warrants were issued to Zero Stage Capital VI, L.P. and certain other
private investors.
All of the above securities were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 of the Securities and Exchange Commission promulgated
thereunder, as transactions by an issuer not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules
The following is a list of exhibits filed as a part of this registration
statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1 Form of underwriting agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation.**
3.2 Form of Amended and Restated By-Laws.**
4.1 Specimen Certificate for Common Stock.*
5 Opinion of Ropes & Gray.
10.1 eMed 1994 Stock Plan.**
10.2 Securities Purchase Agreement dated as of September 30, 1997 between
the Registrant and each of the investors named therein.**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.3 Investors Rights Agreement dated as of September 30, 1997 among the
Registrant and each of the holders of the Company's Series J Preferred
Stock parties thereto.**
10.4 Amendment No. 1 dated as of November 13, 1997 to the Investors Rights
Agreement.**
10.5 Securities Purchase Agreement dated as of July 28, 1998 between the
Registrant and each of the investors named therein.**
10.6 Amendment to Securities Purchase Agreement dated as of January 14,
1999.**
10.7 Securities Purchase Agreement dated as of January 20, 1999 between the
Registrant and each of the investors named therein.**
10.8 Amendment to the Securities Purchase Agreement dated as of May 7,
1999.**
10.9 Registration Rights Agreement dated as of July 28, 1998 between the
Registrant and the parties named therein.**
10.10 Acquisition Agreement dated as of November 23, 1998 by and between
Raytheon E-Systems, Inc. and the Registrant.**
10.11 Commercial Lease as of September 26, 1997 by and between Hartwell
Group LLC and the Registrant.
10.12 Amendment 1 to Commercial Lease dated as of November 28, 1997.**
10.13 Employment Agreement dated as of March 31, 1999 by and between Scott
S. Sheldon and the Registrant.**
10.14 Employment Agreement dated as of April 30, 1999 by and between Howard
Pinsky and the Registrant.**
10.15 Form of Director Indemnity Agreement.**
10.16 Form of Director Work Product Agreement.**
10.17 Form of Director Confidentiality Agreement.**
10.18 Form of Common Stock Warrant.**
10.19 Form of Series K Common Stock Warrant.**
10.20 Form of Series J Preferred Warrant.**
10.21 Web Software Licensing and Development Agreement dated as of September
10, 1999 between the Registrant and AWARE, Inc.+**
10.22 Software Licensing and Development Agreement dated as of May 30, 1997
between the Registrant and AWARE, Inc.+**
10.23 Amended and Restated Reseller Agreement dated as of May 30, 1997
between the Registrant and ISG Technologies, Inc.+**
10.24 Amendment No. 1 to Amended and Restated Reseller Agreement dated as of
April 30, 1998 between the Registrant and ISG Technologies, Inc.+**
10.25 Letter Agreement dated as of December 29, 1998 between the Registrant
and ISG Technologies, Inc.+**
10.26 Access Radiology Corporation Confidentiality Agreement dated as of
March 31, 1995 between the Registrant and ISG Technologies, Inc.**
10.27 OEM Development Software Agreement dated as of November 9, 1995
between the Registrant and Mitra Imaging Incorporated.+**
10.28 Amendment to OEM Development Software Agreement dated as of May 20,
1995 between the Registrant and Mitra Imaging Incorporated.+**
10.29 Amendment to OEM Development Software Agreement dated as of April 28,
1999 between the Registrant and Mitra Imaging Incorporated.+**
23.1 Consent of Ropes & Gray (Exhibit 5).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (included on page II-5).**
27.1 Financial Data Schedule.**
</TABLE>
- --------
*To Be Filed by Amendment
**Previously Filed
+Portions have been omitted pursuant to a request for confidential treatment
dated September 10, 1999
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts.
<TABLE>
<CAPTION>
Balance at Balance at
beginning of Charged to end of
Description period Operations Deductions period
- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Reserves and allowances
deducted from
asset accounts...............
Allowance for doubtful
accounts.................... $ -- 25,000 -- $ 25,000
Year ended December 31, 1997
Reserves and allowances
deducted from
asset accounts ..............
Allowances for doubtful
accounts ................... $25,000 10,000 -- $ 35,000
Year ended December 31, 1998
Reserves and allowances
dededucted from
asset accounts ..............
Allowances for doubtful
accounts ................... $35,000 460,000 (7,927)(1) $487,073
</TABLE>
- --------
(1) Uncollectible accounts written off.
All other schedules are omitted because they are not applicable or the
required information is shown in the other Financial Statements or Notes
thereto.
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(b) 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.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the purchase agreements, certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lexington, MA on this
17th day of September 1999.
eMed Technologies Corporation
/s/ Scott S. Sheldon
By: _________________________________
Scott S. Sheldon
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Scott S. Sheldon President, Chief Executive September 17, 1999
______________________________________ Officer and Director
Scott S. Sheldon
/s/ Gary A. Lortie Chief Financial Officer September 17, 1999
______________________________________
Gary A. Lortie
* Director September 17, 1999
______________________________________
James J. Bochnowski
* Director September 17, 1999
______________________________________
Thomas B. Neff
* Director September 17, 1999
______________________________________
Thomas O. Pyle
* Director September 17, 1999
______________________________________
Michael Schmertzler
* Director September 17, 1999
______________________________________
Donald E. Strange
</TABLE>
By: /s/ Gary A. Lortie
-----------------------------
Attorney in fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1 Form of underwriting agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation.**
3.2 Form of Amended and Restated By-Laws.**
4.1 Specimen Certificate for Common Stock.*
5 Opinion of Ropes & Gray.
10.1 eMed 1994 Stock Plan.**
10.2 Securities Purchase Agreement dated as of September 30, 1997 between
the Registrant and each of the investors named therein.**
10.3 Investors Rights Agreement dated as of September 30, 1997 among the
Registrant and each of the holders of the Company's Series J Preferred
Stock parties thereto.**
10.4 Amendment No. 1 dated as of November 13, 1997 to the Investors Rights
Agreement.**
10.5 Securities Purchase Agreement dated as of July 28, 1998 between the
Registrant and each of the investors named therein.**
10.6 Amendment to Securities Purchase Agreement dated as of January 14,
1999.**
10.7 Securities Purchase Agreement dated as of January 20, 1999 between the
Registrant and each of the investors named therein.**
10.8 Amendment to the Securities Purchase Agreement dated as of May 7,
1999.**
10.9 Registration Rights Agreement dated as of July 28, 1998 between the
Registrant and the parties named therein.**
10.10 Acquisition Agreement dated as of November 23, 1998 by and between
Raytheon E-Systems, Inc. and the Registrant.**
10.11 Commercial Lease as of September 26, 1997 by and between Hartwell
Group LLC and the Registrant.**
10.12 Amendment 1 to Commercial Lease dated as of November 28, 1997.**
10.13 Employment Agreement dated as of March 31, 1999 by and between Scott
S. Sheldon and the Registrant.**
10.14 Employment Agreement dated as of April 30, 1999 by and between Howard
Pinsky and the Registrant.**
10.15 Form of Director Indemnity Agreement.**
10.16 Form of Director Work Product Agreement.**
10.17 Form of Director Confidentiality Agreement.**
10.18 Form of Common Stock Warrant.**
10.19 Form of Series K Common Stock Warrant.**
10.20 Form of Series J Preferred Warrant.**
10.21 Web Software Licensing and Development Agreement dated as of September
10, 1999 between the Registrant and AWARE, Inc.+**
10.22 Software Licensing and Development Agreement dated as of May 30, 1997
between the Registrant and AWARE, Inc.+**
10.23 Amended and Restated Reseller Agreement dated as of May 30, 1997
between the Registrant and ISG Technologies, Inc.+**
10.24 Amendment No. 1 to Amended and Restated Reseller Agreement dated as of
April 30, 1998 between the Registrant and ISG Technologies, Inc.+**
10.25 Letter Agreement dated as of December 29, 1998 between the Registrant
and ISG Technologies, Inc.+**
10.26 Access Radiology Corporation Confidentiality Agreement dated as of
March 31, 1995 between the Registrant and ISG Technologies, Inc.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.27 OEM Development Software Agreement dated as of November 9, 1995
between the Registrant and Mitra Imaging Incorporated.+**
10.28 Amendment to OEM Development Software Agreement dated as of May 20,
1995 between the Registrant and Mitra Imaging Incorporated.+**
10.29 Amendment to OEM Development Software Agreement dated as of April 28,
1999 between the Registrant and Mitra Imaging Incorporated.+**
23.1 Consent of Ropes & Gray (Exhibit 5).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (included on page II -5).**
27.1 Financial Data Schedule.**
</TABLE>
- --------
*To Be Filed by Amendment
**Previously Filed
+Portions have been omitted pursuant to a request for confidential treatment
dated September 10, 1999.
<PAGE>
Exhibit 5
[ROPES & GRAY LETTERHEAD]
September 17, 1999
eMed Technologies Corporation
25 Hartwell Avenue
Lexington, Massachusetts 02421
Re: eMed Technologies Corporation
-----------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a registration
statement on Form
S-1 (the "Registration Statement"), filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, for the registration of
3,565,00 shares of Common Stock, $.01 par value (the "Shares"), of eMed
Technologies Corporation, a Delaware corporation (the "Company"). The Shares are
to be sold pursuant to an underwriting agreement (the "Underwriting Agreement")
to be entered into among the Company and Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette, Inc., SG Cowen Securities Corporation and Wit Capital, as
representatives of the underwriters named therein.
We have acted as counsel for the Company in connection with its proposed
issuance and sale of the Shares. For purposes of this opinion, we have examined
and relied upon such documents, records, certificates and other instruments as
we have deemed necessary.
We express no opinion as to the applicability of compliance with or effect
of Federal law or the law of any jurisdiction other than The Commonwealth of
Massachusetts and the corporate laws of the State of Delaware.
Based on the foregoing, we are of the opinion that the shares have been
duly authorized and, when the Shares have been issued and sold and the Company
has received the consideration in accordance with the terms of the Underwriting
Agreement, the Shares will be validly issued, fully paid and non-assessable.
<PAGE>
e-Med Technologies Corporation -2- September 17, 1999
We hereby consent to your filing this opinion as an exhibit to the
Registration Statement and to the use of our name therein and in the related
prospectus under the caption "Legal Matters".
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 22, 1999, except
for the last paragraphs of Notes 7 and 8 which are as of September 16, 1999,
relating to the financial statements of eMed Technologies Corporation, which
appears in such Prospectus. We also consent to the application of such report
to the Financial Statement Schedule for the three years ended December 31, 1998
listed under Item 16(b) of this Registration Statement when such schedule is
read in conjunction with the financial statements referred to in our report.
The audits referred to in such report also included this schedule. We also
consent to the reference to us under the headings "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 17, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 9, 1999 relating
to the financial statements of E-Systems Medical Electronics (a division of
Raytheon E-Systems, Inc.) which appears in such Prospectus.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 17, 1999
