<PAGE>
As filed with the Securities and Exchange Commission on March 3, 2000
Registration 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
POINTSHARE CORPORATION
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C> <C>
Delaware 7374 91-1675071
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
1300 114th Avenue SE, Suite 100
Bellevue, Washington 98004
(425) 635-0500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
TIMOTHY J. KILGALLON
Chief Executive Officer
Pointshare Corporation
1300 114th Avenue SE, Suite 100
Bellevue, Washington 98004
(425) 635-0500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
SONYA F. ERICKSON ALAN F. DENENBERG
NOEL C. HOWE Shearman & Sterling
GORDON EMPEY 1550 El Camino Real, Suite 100
Venture Law Group Menlo Park, California 94025
A Professional Corporation (650) 330-2200
4750 Carillon Point
Kirkland, Washington 98033-7355
(425) 739-8700
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
Proposed
Maximum Aggregate Amount Of
Title Of Each Class Of Securities To Be Registered Offering Price(1) Registration Fee
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.001..................... $60,000,000 $15,840
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
amount of the registration fee.
----------------
The registrant hereby amends this registration statement on the 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 this registration statement shall become
effective on the 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 MARCH 3, 2000
Shares
[LOGO OF POINTSHARE]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$ and $ per share. We will apply to list our common stock on the
Nasdaq Stock Market's National Market under the symbol "PSHR."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting Proceeds
Price to Discounts and to
Public Commissions Pointshare
---------- ------------- ----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total....................................... $ $ $
</TABLE>
Delivery of our shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Thomas Weisel Partners LLC
J.C. Bradford & Co.
William Blair & Company
The date of this prospectus is , 2000
<PAGE>
Inside Front Cover
At the top of the page, the heading "Healing takes time, information shouldn't."
Pointshare logo in the center of the page, surrounded by images of Pointshare
service offerings: VeriPoint, ReferralPoint, DeliveryPoint, ContactPoint, and
PointStore. Includes the following five photographs:
1. Two physicians in medical clothing with the caption "Hospitals."
2. A physician sitting at a desk with a computer with the caption "Payors."
3. A physician using a microscope with the caption "Laboratories."
4. A physician with patient undergoing treatment with the caption "Imaging
Centers."
5. Two physicians reviewing patient x-ray with the caption "Physician
Practices."
At the bottom of the page the caption "Pointshare provides business to business
services to local healthcare communities through its' online network."
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................................................................... 3
Risk Factors........................................................................... 6
You Should Not Rely on Forward-Looking Statements...................................... 14
Use of Proceeds........................................................................ 15
Dividend Policy........................................................................ 15
Capitalization......................................................................... 16
Dilution............................................................................... 17
Selected Financial Data................................................................ 18
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 19
Business............................................................................... 25
Management............................................................................. 36
Related Party Transactions............................................................. 47
Principal Stockholders................................................................. 49
Description of Capital Stock........................................................... 52
Shares Eligible for Future Sale........................................................ 56
Underwriting........................................................................... 58
Notice to Canadian Residents........................................................... 61
Legal Matters.......................................................................... 62
Experts................................................................................ 62
Where You Can Find Additional Information.............................................. 62
Index to Financial Statements.......................................................... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information contained in this prospectus is
accurate only as of the date of this prospectus.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, 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 an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Pointshare Corporation and our financial statements and
the related notes appearing elsewhere in this prospectus.
Pointshare Corporation
We are a leading provider of business-to-business services to local
healthcare communities through our online network that connects physician
practices with other healthcare participants. We offer a comprehensive suite of
services that facilitates the exchange of clinical and administrative
information among local healthcare participants, including physician practices,
hospitals, payors, laboratories and imaging centers. We designed our solution
to automate the daily workflow and communication needs of healthcare
participants and improve the delivery of patient care within healthcare
communities. Our solution allows healthcare participants to verify patient
insurance coverage, manage and track patient referrals, receive laboratory and
hospital reports, order supplies and access clinical reference materials. We
currently operate three statewide networks in Washington, Oregon and Nevada,
providing services to over 4,100 physicians.
The delivery of healthcare services is local and involves a significant
exchange of clinical and administrative information among healthcare
participants. The information exchange among healthcare participants has relied
heavily on paper and phone-based processes. Because healthcare participants are
not networked, they often lack timely access to relevant patient information,
which may result in the delivery of unnecessary or unauthorized patient care,
redundant tests and procedures and excessive administrative costs. During 1998,
an estimated $250 billion, or 25% of every healthcare dollar, was wasted due to
administrative inefficiencies.
We believe our solution provides significant benefits to physician practices
and other healthcare participants. Our applications and services enable timely
information exchange and collaboration among healthcare participants, minimize
administrative costs associated with healthcare business-to-business
transactions, reduce unauthorized and non-reimbursed patient care, decrease the
waiting time and delivery costs for diagnostic test results and provide access
to online medical and other content.
As of January 31, 2000, our services were being used by 3,751 physicians and
31 hospitals in Washington and Oregon, which represents over 20% of the
physicians and hospitals in these two states. Our relationships with payors in
Washington and Oregon provide our subscribers access to over 70% of the
commercially insured patients in these two states. In addition, we recently
acquired a network of subscribers in Nevada that enables us to serve an
additional 400 physicians and five hospitals.
Our objective is to expand our position as a leading provider of business-to-
business services connecting physician practices with other healthcare
participants. Key elements of our strategy include expanding:
. our services into new markets and increasing adoption of our services in
existing markets;
. our business through strategic alliances with local community and state
healthcare organizations to endorse and promote our network to their
members;
. our service offering to increase subscriber usage and attract new
subscribers; and
. our e-commerce service offering which leverages our sales channel to
physician practices and other healthcare participants.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered................ shares
Common stock to be outstanding after
this offering...................... shares
Use of proceeds..................... For general corporate purposes, including
working capital and capital expenditures.
Proposed Nasdaq National Market
symbol............................. PSHR
</TABLE>
The outstanding share information is based on our shares outstanding as of
February 29, 2000. This information excludes:
. 480,955 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $2.61 per share;
. 348,630 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans at a weighted average exercise
price of $0.24 per share; and
. 8,130,999 shares of common stock available for future grant or issuance
under our stock option plans and employee stock purchase plan.
------------
Unless otherwise indicated, all information contained in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. includes the sale by us of 1,205,000 shares of Series D convertible
preferred stock at a price of $5.00 per share in a private placement in
February 2000;
. gives effect to the conversion of all outstanding shares of our
convertible preferred stock into common stock upon the completion of
this offering; and
. assumes the exercise of warrants to purchase 292,086 shares of our
common stock that will expire if not exercised before the completion of
this offering.
------------
We were incorporated in Washington in 1995 as HealthKnowledge Corporation. In
1997, we reincorporated in Delaware, and in 1998 we changed our name to
Pointshare Corporation. Our headquarters are located at 1300 114th Avenue S.E.,
Suite 100, Bellevue, Washington 98004, and our telephone number at that
location is (425) 635-0500. Our web site is located at www.pointshare.com. The
information contained on our web site is not part of this prospectus.
Pointshare, VeriPoint, ReferralPoint, DeliveryPoint, ContactPoint,
DiscoveryPoint, CommunityPoint, PointStore, the phrase "Healing takes time.
Information shouldn't" and the Pointshare corporate logo are our trademarks and
servicemarks, and we have filed for trademark or servicemark registration. This
prospectus also includes trade dress, trade names, trademarks and service marks
of other companies. Use or display by Pointshare of other parties' trademarks,
trade dress or products is not intended to and does not imply a relationship
with, or endorsement or sponsorship of Pointshare by, the trademark or trade
dress owners.
4
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1998 1999
---------- -------- ----------
(in thousands, except per
share data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue..................................... $ 101 $ 506 $ 1,289
Total operating expenses.................... 2,078 5,134 12,503
Loss from operations........................ (1,977) (4,628) (11,214)
Net loss.................................... $ (1,913) $ (4,629) $ (11,072)
Basic and diluted net loss per share........ $ (1.32) $ (9.69) $ (9.75)
Basic and diluted weighted average shares
outstanding................................ 1,449,782 477,700 1,135,534
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------
Pro forma
Actual as adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $35,912 $
Total assets................................................ 39,748
Long-term debt, less current portion........................ 1,394 1,394
Total stockholders' equity.................................. 35,827
</TABLE>
The pro forma as adjusted information in the above balance sheet data table
reflects the sale of 1,205,000 shares of convertible preferred stock on
February 29, 2000 at $5.00 per share, the exercise of warrants to purchase
292,086 shares of our common stock that will expire if not exercised before
completion of this offering, the conversion of all outstanding shares of
convertible preferred stock into shares of common stock upon closing of this
offering, and the sale of shares of common stock offered by us at an
assumed initial public offering price of $ per share, after deduction of
the estimated underwriting discounts and commissions and estimated offering
expenses.
See note 11 of the notes to our financial statements for an explanation of
the determination of the number of weighted average shares used to compute net
loss per common share amounts.
5
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and the other information in this
prospectus before investing in our common stock. If any of the following risks
actually occur, our business could be harmed, the trading price of our common
stock could decline and you could lose all or part of your investment.
Risks Related to Our Business
We have incurred substantial losses, we expect to have continuing losses in the
future and we may never achieve or sustain profitability.
We have not earned significant revenue to date. We have lost money in each
period since we launched our service in July 1997. Our net losses were
approximately $1.9 million in 1997, $4.6 million in 1998 and $11.1 million in
1999. As of December 31, 1999, we had an accumulated deficit of $17.8 million.
If we do not achieve or sustain profitability in the future, we may be unable
to continue our operations. We cannot assure you that our revenue will continue
to grow. We anticipate that our losses will increase in the future as we plan
to invest heavily in market expansion, infrastructure development, application
and service development and sales and marketing, and to make selective
acquisitions. We expect that we will continue to lose money for the foreseeable
future, and we may never achieve or sustain profitability.
We are an early stage company with a new and unproven business model and a
limited operating history, which makes it difficult to evaluate our business.
Our limited operating history makes financial forecasting and evaluation of
our business difficult. Since we have limited historical financial data, any
predictions about our future revenue and expenses may not be as accurate as
they would be if we had a longer operating history. Because of the emerging
nature of our industry and the fact that our business model is unproven, we
cannot determine trends that may emerge in our market or affect our business.
The revenue and income potential of our industry and business are unproven.
Our operating results have varied significantly in the past and are likely to
vary significantly from period to period, and our stock price may decline if we
fail to meet the expectations of analysts and investors.
Our operating results have varied significantly in the past and are likely to
vary significantly from period to period. As a result, our operating results
are difficult to predict and may not meet the expectations of securities
analysts or investors. If this occurs, the price of our common stock would
likely decline.
If significant numbers of healthcare participants in our target markets do not
accept our solution, our business will not succeed.
To be successful, we must attract a significant number of physician practices
and other healthcare participants in the markets in which we operate our
business. We believe that we must gain significant market share in those
markets before our competitors introduce alternative applications or services
that are similar to our current or proposed offerings. One barrier for us to
achieve acceptance in a market is that both physician practices and other
healthcare participants will each await the other's adoption of our solution
before contracting with us. This can be particularly challenging where a small
number of healthcare organizations have significant market power and do not
accept our solution. Some healthcare organizations have long and well-
established practices relating to how they manage information. Still other
healthcare organizations have long and well-established relationships with our
competitors. To successfully expand our business into new regions, we must
establish relationships with these key healthcare organizations. If we are
unable to achieve this market acceptance, our business will not succeed. We
cannot assure you that we will succeed in positioning our services as a
preferred method of business-to-business services for the healthcare industry,
or that any pricing strategy we develop will be accepted by the market.
6
<PAGE>
Our business is expanding rapidly and our failure to manage growth could
disrupt our business and impair our ability to generate revenues.
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and is expected to continue to
place, a significant strain on our managerial, operational, financial and other
resources. As of January 31, 2000, we had grown to 115 employees, from 49
employees as of December 31, 1998. We expect to hire a significant number of
new employees to support our business. We are in the process of evaluating our
management information systems and the need to augment these systems to support
our rapid growth. We could experience interruptions to our business while we
add or transition to new systems. These challenges will grow as we expand
geographically.
If we cannot establish and maintain strategic alliances with healthcare
organizations in our target markets, our ability to expand into new markets
will be delayed.
We have limited experience in establishing and maintaining strategic
alliances with healthcare organizations. Strategic alliances are critical to
our success because we believe these relationships will enable us to:
. enter new markets and achieve acceptance in those markets;
. extend the reach of our services to the various participants in the
healthcare industry;
. establish our credibility and provide references to support our entry
into new markets;
. deploy new applications; and
. further enhance our brand.
Once we have established strategic alliances, we will depend on our partners'
ability to generate increased acceptance and use of our services. If we lose
any existing strategic alliances or fail to establish additional alliances, or
if our strategic alliances fail to generate increased usage of our services, we
would not be able to execute our business strategy and our business would
suffer significantly.
A small number of subscribers account for a high percentage of our revenue, and
the loss of a major subscriber could result in lower than expected revenue.
A small number of subscribers account for a high percentage of our revenue
primarily as a result of initial one-time network installation and
implementation fees charged to these larger subscribers. For the year ended
December 31, 1999, two of our subscribers accounted for 29% and 10% of our
revenue. For the year ended December 31, 1998, two of our subscribers accounted
for 45% and 26% of our revenue. We expect that a small number of subscribers
will continue to account for a high percentage of our revenue for at least the
next twelve months. The loss of a major subscriber, or the failure to attract
additional subscribers requiring large scale installation and implementation
services, could harm our business.
If we experience performance or security problems with our systems, our
business could be harmed.
Our business could be harmed if our subscribers or other healthcare
participants experience system delays, failures or loss or corruption of data.
We currently process substantially all our subscriber transactions and data at
our network operations center in Seattle, Washington. Although we have
safeguards for emergencies, our backup capabilities are limited. These systems
and operations are vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunication failures and similar events. They
are also subject to break-ins, sabotage, intentional acts of vandalism and
similar misconduct. The occurrence of such an event in Seattle, Washington or
other system failure could interrupt data flow, result in the loss of data and
adversely affect our operations and our strategic alliances. In addition, we
depend on the efficient operation of internet and other network connections
from subscribers to our systems. These connections, in turn, depend on the
efficient operation of web browsers, internet service providers and internet
backbone service providers, all of which have had periodic operational problems
or experienced outages.
7
<PAGE>
We could become liable if confidential subscriber, patient or other healthcare
participant information retained on our network is disclosed inappropriately or
if transmitted data becomes corrupted.
We retain confidential subscriber, patient and other information for
healthcare participants on our network. We cannot assure you, however, that we
will be able to prevent unauthorized individuals from gaining access to this
data. We could become liable if confidential information is disclosed
inappropriately or if transmitted data becomes corrupted, particularly if our
subscribers make use of this corrupted data. If third persons were able to
penetrate our network security measures or otherwise misappropriate our users'
personal information, our reputation could be damaged and we could be subject
to liability. It is critical that our facilities and infrastructure remain
secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar disruptive problems. It
is also possible that one of our employees could attempt to misuse confidential
subscriber, patient or other healthcare participant information, exposing us to
liability and damaging our reputation.
Rapid changes in technology and industry standards could render our
applications and services unmarketable or obsolete.
We may be unsuccessful in responding to technological developments and
changing subscriber needs on a timely basis, if at all. Online healthcare
information exchange between physician practices and other healthcare
participants is a relatively new and evolving market. The pace of change in our
market is rapid and there are frequent new product introductions and evolving
industry standards. In addition, our application and service offerings may
become obsolete due to the adoption of new technologies or standards.
Competition in the market for the online exchange of healthcare information
services is intense and, if we are unable to compete effectively, our business
may fail.
Our industry is intensely competitive. We compete with numerous companies,
including online business-to-business services companies, companies providing
electronic data interchange services to healthcare participants and companies
providing physician practice management systems. Several of these organizations
offer services that overlap with some components of our solution and may become
increasingly competitive with us in the future. In addition, Healtheon/WebMD
Corporation, a national business-to-consumer and business-to-business
healthcare services company, has recently acquired several companies offering
various components of our solution, which when combined, further strengthen
their application and service offerings. It is likely that we will compete for
subscribers with Healtheon/WebMD in new regional markets that we enter.
Healtheon/WebMD's recent acquisitions may also make it more difficult for us to
transact business with, or offer the products or services of, service providers
who are acquired by, or enter into a relationship with, Healtheon/WebMD.
Many companies that offer applications or services that compete with one or
more of our services have greater financial, technical, product development,
marketing and other resources than we have. These organizations may be better
known and may have more subscribers than we have. In order to succeed, we
believe we must gain significant market share for our services in our markets
before our competitors introduce alternative applications and services with
features similar to ours. If we fail to do so, we may be unable to compete
effectively in those markets.
We may have to reduce or cease operations if we are unable to obtain necessary
funding.
We expect that the cash generated from this offering, combined with our
current cash resources and credit facilities, will be sufficient to meet our
cash requirements for at least the next 18 months. We may need to raise
additional financing to support further expansion, develop new or enhanced
applications and services, respond to competitive pressures, acquire
complementary businesses or take advantage of unanticipated opportunities.
8
<PAGE>
We may raise additional funds by selling equity or debt securities, by entering
into strategic alliances or through other arrangements. We may be unable to
raise any additional amounts on reasonable terms when they are needed. If we
are unable to generate sufficient cash flow from operations or to obtain funds
through additional financing, we may have to reduce some or all of our
expansion, development and sales and marketing efforts.
We may not be able to execute our business strategy if we cannot attract and
retain key personnel.
Our success will depend significantly on our senior management team and other
key employees. We need to attract, integrate, motivate and retain additional
highly skilled technical people. In particular, we need to attract experienced
professionals capable of developing, selling and installing complex healthcare
information systems. We face intense competition for these people. Our
executive management team, including Timothy J. Kilgallon, our president and
chief executive officer, Dennis P. Schmuland, M.D., our vice president and
chief medical officer, and R. Scott Wiley, our chief operating officer, is
critical to our success, and the loss of any of them could negatively impact
our business. These employees are not obligated to continue their employment
with us and may leave at any time. If we fail to identify, attract, retain and
motivate these highly skilled personnel, we may be unable to successfully
introduce new services or otherwise implement our business strategy.
Our ability to achieve our expansion strategy into new regional markets and
expand our service offerings may be limited if we are unable to acquire new
networks and service offerings.
We regularly evaluate opportunities to acquire existing networks with
subscriber bases in new regional markets. The successful implementation of this
strategy depends on our ability to identify suitable acquisition candidates,
acquire the networks on acceptable terms, integrate their operations and
technology successfully with our own and maintain the acquired subscriber base.
We are unable to predict whether or when any prospective acquisition candidate
will become available or the likelihood that any acquisition will be completed.
Moreover, in pursuing acquisition opportunities, we may compete for acquisition
targets with other companies with similar growth strategies. Some of these
competitors may be larger and have greater financial and other resources than
we have. Competition for these acquisition targets could also result in
increased prices of acquisition targets.
In addition, in order to expand our service offerings, we may acquire
businesses with service offerings that we believe are complementary to our own.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, services, products and personnel of the acquired entity, the
diversion of management's attention from other business concerns, entry into
markets in which we have little or no direct experience and the potential loss
of key employees of the acquired entity.
Future acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the assumption of known and
unknown liabilities, and the amortization of expenses related to goodwill and
other intangible assets, all of which could negatively impact our business. We
have taken, and in the future may take, charges against earnings in connection
with acquisitions. The costs and expenses incurred may exceed the estimates
upon which we base these charges.
We depend on the increasing use and acceptance of the internet by healthcare
participants.
Our business-to-business services depend upon healthcare participants being
willing to use the internet to meet their daily work flow and communication
needs. We believe that healthcare participants generally have not traditionally
used the internet to operate their businesses. Demand and market acceptance for
recently introduced products and services over the internet are subject to a
high level of uncertainty. As a result, acceptance and use of the internet may
not develop or a sufficiently broad base of subscribers may not adopt or
continue to use the internet as a medium of information exchange.
9
<PAGE>
Our business could be disrupted if any of the computer systems or software we
rely on experience Year 2000 problems.
Although we have not experienced any Year 2000 problems, it is possible that
we could still face problems or disruptions. While we believe that all of our
systems are Year 2000 compliant, we cannot assure you that we will not discover
a problem during 2000 that needs to be upgraded, modified or replaced. In
addition, we depend on a number of third-party vendors to provide technology
systems and services. While we believe that our material third-party systems
and services are Year 2000 compliant, we cannot be sure that we will not
experience any problems with these systems and services during 2000. We also
cannot provide any assurance that governmental agencies, telecommunications
companies, internet access companies and others outside of our control will not
experience any future Year 2000 problems.
If third party telecommunications services are not available in the regional
markets into which we expand, our ability to expand into these markets may be
delayed or prevented.
We depend on third party telecommunications service providers in each of the
regional markets we enter. There are typically a limited number of these
providers in each regional market. If we cannot obtain telecommunications
services at a reasonable cost and on a timely basis for us and our subscribers,
we may not be successful in these new markets.
Risks Related to Our Intellectual Property
If we are unable to adequately protect our intellectual property, third parties
could use our intellectual property without our consent.
Our ability to successfully compete is substantially dependent upon our
internally developed technology and intellectual property, which we protect
through a combination of copyright, trade secret and trademark law, and
contractual obligations. We may not be able to adequately protect our
proprietary rights. Unauthorized parties may attempt to obtain and use our
proprietary information. Policing unauthorized use of our proprietary
information is difficult, and we cannot be certain that the steps we have taken
will prevent misappropriation.
Our operating results may suffer if we were forced to defend against a
protracted infringement claim or if a third party were awarded significant
damages.
There is substantial risk of litigation regarding intellectual property
rights in our industry. A successful claim of infringement against us and our
failure or inability to license the infringed or similar technology could harm
our business. In June 1999, we received a notice of a claim that we may be
infringing a patent owned by a third party and we received an offer to license
the patent from the third party. We have received an opinion from our patent
counsel, that, based on information known as of August 1999, our services do
not infringe any claims of the patent held by the third party.
We expect that our technologies may experience an increase in third-party
infringement claims as the number of our competitors grows. In addition, we
believe that many of our competitors have filed or intend to file patent
applications covering aspects of their technology that they may claim our
intellectual property infringes. We cannot be certain that third parties will
not make a claim of infringement against us relating to our technology. Any
claims, with or without merit, could:
. be time-consuming and costly to defend;
. divert management's attention and resources;
. cause delays in delivering services;
. require the payment of monetary damages which may be tripled if the
infringement is found to be willful;
. result in an injunction which would prohibit us from offering a
particular service; and
. require us to enter into royalty or licensing agreements which may not
be available on acceptable terms.
10
<PAGE>
Risks Related to Government Regulation and Healthcare Reform
We could face additional burdens associated with government regulation of and
legal uncertainties surrounding the internet.
A number of legislative and regulatory proposals under consideration may lead
to laws or regulations concerning various aspects of the internet, including
electronic commerce. Furthermore, it is uncertain as to how existing laws will
be applied to the internet. The adoption of new laws or the application of
existing laws may decrease the growth of the internet. Future government
regulations could relate to liability for information received from or
transmitted over the internet, online content regulation, intellectual property
rights, user privacy, taxation and quality of products and services provided
over the internet. In particular, forthcoming federal regulations concerning
"administrative simplification" of healthcare data will require us to adopt
uniform formats and security measures concerning the information we communicate
on behalf of our subscribers and contractors. The implementation of these
regulations could impair our marketing efforts, decrease the demand for our
services and prohibit, limit or increase our cost of doing business.
Some of our activities may subject us to risks under laws protecting the
privacy of confidential patient information.
State laws aimed at protecting the privacy of confidential patient health
information vary widely, and their applicability in the context of internet
health services is evolving. While these laws primarily are directed at
healthcare facilities, providers and payors, some of these laws could be
applied to some aspects of our business, particularly the way we facilitate
communication of health information among healthcare participants. We cannot
predict which state privacy laws might be found applicable to our business, or
assure you that our operations would be found to be in full compliance with all
these laws. Complying with these laws may be expensive and may limit our
ability to provide a full range of services. A challenge under one of these
laws could result in adverse publicity and, if successful, imposition of civil
and criminal penalties, any of which could negatively impact our business.
Some of our activities may subject us to risks under laws prohibiting
"kickbacks."
A federal "fraud and abuse" law commonly known as the Medicare/Medicaid
antikickback law, and several similar state laws, prohibit payments that are
intended to induce persons or entities either to refer patients, or to acquire
or arrange for or recommend the purchase of healthcare products or services.
While the federal law applies only to referrals, products or services for which
payment may be made by a federal healthcare program, the state laws often apply
regardless of whether federal funds may be involved. Because of the services we
provide to subscribers, we could be seen as positioned to influence physician
or hospital referrals or choices of healthcare products or services. Thus, our
financial arrangements with healthcare participants could be challenged under
these broad laws. A challenge could lead to adverse publicity and, if
successful, to civil and criminal penalties, including excluding us from
providing services to physicians or hospitals that participate in Medicare or
Medicaid, any of which could negatively impact our business.
Some of our activities may subject us to risks under laws prohibiting false or
fraudulent claims.
We offer our subscribers a third party product known as CodeCorrect that
assists our subscribers in selecting appropriate reimbursement codes for some
of the services provided to patients, and therefore may be subject to state and
federal laws that govern the submission of these claims for medical expense
reimbursement. These laws generally prohibit an individual or entity from
knowingly presenting or causing to be presented a claim for payment from
Medicare, Medicaid, or other third party payors that is false or fraudulent, or
is for an item or service that was not provided as claimed. The government
potentially could regard coding errors that may be made by our subscribers as
having been caused by information furnished by CodeCorrect and made available
through our service offering, resulting in violation of these laws. A challenge
could lead to adverse publicity and, if successful, to civil and criminal
penalties, including excluding us from providing services to physicians or
hospitals that participate in Medicare or Medicaid, any of which could
negatively impact our business.
11
<PAGE>
Some of our activities may lead to scrutiny and regulation by the U.S. Food and
Drug Administration.
Some computer applications and software are subject to regulation by the U.S.
Food and Drug Administration, also known as the FDA, as medical devices. We do
not believe that any of our services or applications are regulated by the FDA
as medical devices. If the FDA asserts jurisdiction over any of our current or
future applications as medical devices, they would be subject to various laws,
regulations and policies enforced by the FDA, including those related to
promotional practices and pre-market and post market approval requirements.
Compliance with the FDA's regulations in this area may be time-consuming,
burdensome and expensive and could limit our ability to continue to provide
some of our services and introduce new services. A challenge by the FDA could
lead to adverse publicity and, if successful, to civil and criminal penalties,
any of which could negatively impact our business.
Risks Related to this Offering
Internet-related stock prices are especially volatile and this volatility may
depress our stock price.
The stock market and specifically the stock prices of internet-related
companies have been very volatile. Because we are an internet-related company,
we expect our stock price to be similarly volatile. As a result of this
volatility, the market price of our common stock could significantly decrease.
This volatility is often not related to the operating performance of the
companies and may accordingly reduce the price of our common stock without
regard to our operating performance.
Our management has broad discretion in using the proceeds from this offering,
which might not be used in ways that increase our operating results or market
value.
We estimate the net proceeds from this offering to be approximately $
million, after deducting estimated underwriting discounts and commissions and
the expenses of the offering. Our management will have broad discretion in how
we use the net proceeds of this offering and may apply the proceeds for uses
which may not increase our operating results or market value. We currently
expect to use these proceeds for general corporate purposes, including capital
expenditures and working capital. We may also use a portion of the net proceeds
to acquire additional networks with existing subscriber bases, applications and
technologies to complement our existing services or to establish strategic
alliances. You will not have the opportunity, as part of your investment
decision, to assess whether the proceeds are being used appropriately.
A total of or % of our total outstanding shares after the offering are
restricted from immediate resale but may be sold into the market in the near
future. This could cause the market price of our common stock to drop
significantly, even if our business is doing well.
After this offering, we will have shares of common stock outstanding. This
includes shares that we are selling in the offering, which may be resold
immediately in the public market. The remaining shares will become eligible for
resale in the public market as shown in the table below.
<TABLE>
<CAPTION>
Number of
Shares/Percent
Outstanding
After the Date When Shares Become Available for Resale in the Public
Offering Market
-------------- ----------------------------------------------------------
<C> <S>
/ % 180 days after the date of this prospectus under agreements
between the stockholders and the underwriters or us, provided
that none of these shares are released from lock-up
restrictions by Credit Suisse First Boston Corporation.
/ % Between 180 and 365 days after the date of this prospectus due
to the requirements of federal securities laws.
</TABLE>
12
<PAGE>
Because the initial public offering price will be substantially higher than the
pro forma net tangible book value per share of our outstanding common stock,
new investors will incur immediate and substantial dilution in the amount of
$ per share.
The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of our common stock outstanding
immediately after this offering based on the total value of our pro forma
tangible assets less our total liabilities. Therefore, if you purchase common
stock in this offering, you will experience immediate and substantial dilution
of approximately $ per share in the price you pay for the common stock as
compared to its pro forma tangible book value. Furthermore, investors
purchasing common stock in this offering will own only % of our shares
outstanding even though they will have contributed % of the total
consideration received by us in connection with our sales of common stock. To
the extent outstanding options or warrants to purchase common stock are
exercised, there will be further dilution.
Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed.
Upon completion of this offering, our officers and directors will, in the
aggregate, beneficially own approximately % of our outstanding common stock.
As a result, these stockholders, acting together, will have the ability to
control substantially all matters submitted to our stockholders for approval,
including:
. the election or removal of our board of directors;
. the amendment of our certificate of incorporation or bylaws; and
. the adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.
These stockholders will have substantial influence over our management and
our affairs. Accordingly, this concentration of ownership may have the effect
of impeding a merger, consolidation, takeover or other business consolidation
involving us, or discouraging a potential acquirer from making a tender offer
for our shares. This concentration of ownership could also adversely affect our
stock's market price or lessen any premium over the market price that an
acquiror might otherwise pay.
We have anti-takeover defenses that could delay or prevent an acquisition of
our company, which could reduce the value of your investment.
Some provisions of our certificate of incorporation and bylaws and the
provisions of Delaware and Washington law could delay, defer or prevent an
acquisition of us, even if an acquisition would be beneficial to our
stockholders. Any delay or prevention of a change of control or change in
management could cause the market price of our common stock to decline. See
"Description of Capital Stock" for a more complete description of these
provisions.
13
<PAGE>
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and in other sections of this prospectus are forward-
looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
factors are described in "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other sections of this
prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of these
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable as of the date of this prospectus, we cannot
guarantee future results, levels of activity, performance or achievements. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of
common stock we are offering will be $ million, assuming an initial public
offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be approximately $ million.
We intend to use the net proceeds of this offering for additional working
capital, capital equipment for network expansion, and other general corporate
purposes, including increased customer service, sales and marketing expenses
and increased development expenditures for new services. We may use a portion
of the net proceeds to acquire additional networks with existing subscriber
bases, applications and technologies to complement our existing services or to
establish strategic alliances. The amounts we actually expend for working
capital purposes will vary significantly depending upon a number of factors,
including future revenue growth, if any, the amounts of cash we use in
operations and our product and expansion progress.
As a result, we will retain broad discretion in allocating the net proceeds
of this offering. Pending the uses described above, we will invest the net
proceeds in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual, pro forma and pro forma, as adjusted basis:
. The "actual" column reflects our capitalization as of December 31, 1999;
. The pro forma column reflects (1) the sale of 1,205,000 shares of Series
D convertible preferred stock at a price per share of $5.00 after
deducting offering expenses; (2) the conversion of all outstanding
shares of convertible preferred stock into shares of common stock upon
the closing of this offering; (3) the exercise of warrants to purchase
292,086 shares of our common stock that will expire if not exercised
before the completion of this offering; and (4) the change in the
authorized number of shares upon completion of this offering; and
. The pro forma, as adjusted column reflects the receipt and application
of the estimated net proceeds from the sale of shares of our
common stock in this offering at an initial public offering price per
share of $ .
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------
Pro Pro forma,
Actual forma as adjusted
-------- -------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Long-term debt, less current portion........... $ 1,394 $ 1,394 $ 1,394
Stockholders' equity:
Preferred stock, par value $0.001 per share;
35,000,000 shares authorized, actual
10,000,000 shares authorized pro forma and
pro forma, as adjusted; 30,643,065 shares
issued and outstanding actual, and no shares
issued and outstanding pro forma and pro
forma, as adjusted........................... 31 -- --
Common stock, par value $0.001 per share;
20,000,000 shares authorized actual,
200,000,000 shares authorized pro forma and
pro forma, as adjusted; 1,879,582 shares
issued and outstanding actual; 34,019,733
shares issued and outstanding pro forma; and
shares issued and outstanding pro
forma, as adjusted........................... 2 34
Additional paid-in capital.................... 59,450 65,477
Deferred stock-based compensation............. (5,880) (5,880) (5,880)
Accumulated deficit........................... (17,776) (17,776) (17,776)
-------- -------- --------
Total stockholders' equity..................... 35,827 41,855
-------- -------- --------
Total capitalization........................... $ 37,221 $ 43,249 $
======== ======== ========
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of December 31, 1999 and excludes:
. 341,750 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $0.38 per share;
. 4,244,075 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans with a weighted average
exercise price of $0.17 per share; and
. 8,552,593 shares of common stock available for future grant under our
stock option plans and employee stock purchase plan.
16
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $41.2
million or approximately $1.21 per share. Pro forma net tangible book value per
share represents the amount of our total tangible assets less total liabilities
divided by the number of shares of common stock outstanding after giving effect
to the sale of the Series D convertible preferred stock, the conversion of all
outstanding shares of convertible preferred stock into common stock and the
exercise of warrants to purchase 292,086 shares of common stock which will
expire if not exercised before the completion of this offering. Dilution in pro
forma net tangible book value per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the receipt of the net
proceeds from the sale of the shares of common stock offered at the
assumed initial public offering price of $ per share and after deducting
the estimated underwriting discount and commissions and estimated offering
expenses, our pro forma net tangible book value at December 31, 1999 would have
been $ million or approximately $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors of common stock in this offering. The following table illustrates
this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
31, 1999................................................. $1.21
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value per share after the
offering...................................................
-------
Dilution per share to new investors $
=======
</TABLE>
The following table describes, on a pro forma basis as of December 31, 1999
the differences between the number of shares of common stock purchased from us,
the total price and average price per share paid by existing investors and by
new investors, before deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, at an initial public offering price
of $ per share.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ ------------------- Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 34,019,733 % $59,737,940 % $1.76
New investors................. $
---------- ----- ----------- -----
Total....................... -- 100.0% -- 100.0% $
========== ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of the underwriters' overallotment
option and excludes the following shares:
. 341,750 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $0.38 per share;
. 4,244,075 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans with a weighted average
exercise price of $0.17 per share; and
. 8,552,593 shares of common stock available for future grant under our
stock option plans and employee stock purchase plan.
17
<PAGE>
SELECTED FINANCIAL DATA
This section presents our historical financial data. You should read the
following selected financial data in conjunction with our financial statements
and the related notes and with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in this prospectus. The
selected data in this section is not intended to replace the financial
statements.
The statements of operations data set forth below for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 have been derived from our audited financial statements included
elsewhere in this prospectus, which have been audited by Ernst & Young LLP,
independent auditors. The balance sheet data as of December 31, 1997, has been
derived from our audited financial statements not included in this prospectus,
which have been audited by Ernst & Young LLP, independent auditors. The
statement of operations data for the period from March 14, 1995 (inception) to
December 31, 1995 and for the year ended December 31, 1996, and the balance
sheet data as of December 31, 1995 and 1996 have been derived from our
unaudited financial statements not included in this prospectus. The historical
results do not necessarily indicate the results you should expect in any future
period.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
March 14, 1995
(inception) to
December 31, 1995 1996 1997 1998 1999
----------------- --------- --------- ------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $23 $ 216 $ 101 $ 506 $ 1,289
Operating expenses:
Telecommunications and
connectivity......... 3 24 47 408 1,124
Customer service...... -- 30 313 1,254 3,482
Research and
development.......... 22 109 432 1,312 2,116
Sales and marketing... -- 103 271 845 1,542
General and
administrative....... 2 110 1,004 1,272 2,550
Noncash stock-based
compensation......... -- -- 11 43 1,689
--- --------- --------- ------- ---------
Total operating
expenses........... 27 376 2,078 5,134 12,503
--- --------- --------- ------- ---------
Loss from operations... (4) (159) (1,977) (4,628) (11,214)
Other income
(expense)............. -- 1 64 (1) 142
--- --------- --------- ------- ---------
Net loss............... $(4) $ (158) $ (1,913) $(4,629) $ (11,072)
=== ========= ========= ======= =========
Basic and diluted net
loss per share........ N/A $ (0.08) $ (1.32) $ (9.69) $ (9.75)
=== ========= ========= ======= =========
Weighted average shares
outstanding used to
compute basic and
diluted net loss per
share................. N/A 2,008,917 1,449,782 477,700 1,135,534
=== ========= ========= ======= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996 1997 1998 1999
---- ---- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 2 $195 $3,810 $ 905 $35,912
Working capital.............................. (4) 83 3,582 (1,200) 34,023
Total assets................................. 13 361 4,487 2,765 39,748
Long-term debt, less current portion......... -- -- 164 1,015 1,394
Total stockholders' equity (deficit)......... (4) 208 3,981 (574) 35,827
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our financial statements and notes thereto appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of several factors including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this prospectus.
Overview
We were incorporated in March 1995 and commenced active operations in July of
1997. From July 1997 to March 1998, we began to develop our application
services and build our management team. In March 1998, we commercially launched
our initial service, now called VeriPoint. Since launching VeriPoint, we have
introduced five additional services to our subscribers.
In March 1998, we acquired MedLynx LLC, an online network with a substantial
subscriber base in western Washington. In December 1998, we acquired Peregrin
Medical Review, Inc, a company that provided an online service to verify
patient insurance coverage in Oregon. In February 2000, we acquired Health
Trade Link, Inc., an online network with a substantial subscriber base in
Nevada. These acquisitions were accounted for using the purchase method of
accounting. The excess of the purchase price over the net tangible and
intangible assets acquired has been allocated to goodwill and amortized to
general and administrative expense over 15 years.
As of December 31, 1999, we had an accumulated deficit of $17.8 million. We
anticipate that our losses will increase in the future as we plan to invest
heavily in market expansion, infrastructure development, application and
service development, sales and marketing, and make selective acquisitions. We
expect that we will continue to lose money for the foreseeable future, and we
may never achieve or sustain profitability.
Since inception, we have derived substantially all of our revenue through a
combination of installation and implementation and subscription fees. Our
subscribers include physician practices and other healthcare participants,
including hospitals, laboratories and imaging centers. We initially charge our
new subscribers a one-time network implementation fee to build out their
existing internal networks or create new networks. This fee typically includes
hardware, implementation and installation, training services and network
design. The fee charged for implementation depends upon the size and complexity
of the installation. We recognize installation and implementation revenue when
hardware is delivered or over the period of time the installation and
implementation work is performed, typically two to three months. In addition,
we charge our subscribers monthly subscription fees, on a per user basis, which
vary based on the services for which they subscribe. Subscription agreements
are typically 12 months in duration. We recognize subscription revenue on a
monthly basis as the service is provided.
Telecommunications and connectivity expenses consist primarily of costs to
build the network infrastructure necessary to connect a subscriber to our
service, including access line costs, network and desktop hardware costs and
other telecommunications costs.
Customer service expenses consist primarily of the costs of operating our
regional offices and the personnel necessary to provide local customer support,
network installation and implementation and subscriber training. These expenses
consist primarily of personnel-related expenses, such as salaries and benefits,
as well as depreciation of network equipment.
Development expenses consist primarily of salaries and benefits for software
developers, contract programmer fees and equipment depreciation. The
technological feasibility of our service is not established until substantially
all of the product development is complete. We expense development costs as
incurred.
19
<PAGE>
Sales expenses consist mainly of salaries, commissions and bonuses. Marketing
expenses consist primarily of salaries and benefits, local and regional
advertising and promotion and public relations costs.
General and administrative expenses consist primarily of salaries and
benefits for our executive, finance, human resources and administrative
personnel, third party professional service fees and headquarters facilities
costs.
Noncash stock-based compensation is recorded in connection with the grant of
stock options and other equity instruments. This charge represents the excess
of the deemed value of our common stock for accounting purposes and the
exercise price of the options or sale price of other equity instruments. This
amount is presented as a reduction of stockholders' equity and is amortized on
an accelerated basis as a charge to operations over the vesting period of the
options, typically four years. During the year ended December 31, 1999, we
recorded deferred stock-based compensation of $7.5 million of which $1.7
million was amortized to expense during the year. We recorded additional
deferred stock-based compensation of approximately $3.2 million for additional
stock option grants made in January and February 2000. The deferred stock-based
compensation for options issued through February 2000 is expected to be
amortized in the amounts of $4.7 million in 2000, $2.5 million in 2001, $1.4
million in 2002 and $466,000 in 2003. Such amortization amounts assume that all
vesting periods are completed by all employees; to the extent that unvested
options are forfeited by an employee, previously recorded amortization related
to the unvested options will be credited to non-cash stock-based compensation
expense.
We intend to substantially increase our operating expenses in 2000 and beyond
as we:
. enter new regions while increasing penetration in existing regions and
communities;
. increase development of new applications and services;
. market our brand and services in new healthcare communities and regional
markets; and
. expand our customer service and support operations.
Results of Operations
Years Ended December 31, 1999 and 1998
Revenue. Our revenue increased by $783,000 or 155% to $1.3 million in 1999
from $506,000 in 1998. Subscription revenue increased $304,000 or 150% to
$507,000 in 1999 from $203,000 in 1998. Installation, implementation and other
revenue increased $479,000 or 158% to $782,000 in 1999 from $303,000 in 1998.
This revenue increase was attributable to greater demand for our services and
the addition of new subscribers. We extended the availability of our services
through regional expansion into Washington and Oregon, and increased our
penetration in existing healthcare communities.
Telecommunications and connectivity expenses. Telecommunications and
connectivity expenses increased by $716,000 or 175% to $1.1 million in 1999
from $408,000 in 1998. This increase was primarily due to the accelerated
expansion of our network infrastructure and the addition of new subscribers.
Customer service expenses. In 1999, customer service expenses increased by
$2.2 million or 178% to $3.5 million from $1.3 million in 1998. This increase
was primarily due to the expansion of our regional operations into Washington
and Oregon and the expansion of our network operations and infrastructure to
support these additional subscribers.
Development expenses. Development expenses increased by $804,000 or 61% to
$2.1 million in 1999 from $1.3 million in 1998. This increase was primarily due
to a significant increase in the number of software engineers and outside
contractors engaged to expand and enhance our suite of applications and service
offerings.
20
<PAGE>
Sales and marketing expenses. Sales and marketing expenses increased by
$697,000 or 82% to $1.5 million in 1999 from $845,000 in 1998. This increase
was primarily due to establishing corporate and direct sales functions and
hiring additional marketing personnel to promote our brand and services to new
healthcare communities.
General and administrative expenses. General and administrative expenses
increased by $1.3 million or 100% to $2.6 million in 1999. This increase was
primarily due to hiring additional personnel and expanding the office
facilities needed to support the growth of our business.
Noncash stock-based compensation. Amortization of noncash stock-based
compensation was $1.7 million in 1999 as compared to $43,000 in 1998. This
increase was due to the issuance of options in 1999 to our employees at a
deemed fair value for common stock for accounting purposes above the exercise
price of these options.
Years Ended December 31, 1998 and 1997
Revenue. Our revenue increased $405,000 or 401% to $506,000 in 1998 from
$101,000 in 1997. Subscription revenue increased $135,000 or 199% to $203,000
in 1998 from $68,000 in 1997. Installation, implementation and other revenue
increased $270,000 or 818% to $303,000 in 1998 from $33,000 in 1997. This
revenue increase was attributable to greater demand for our services and the
addition of new subscribers.
Telecommunications and connectivity expenses. Telecommunications and
connectivity expenses increased by $361,000 or 768% to $408,000 in 1998 from
$47,000 in 1997. This increase was primarily due to the expansion of our
network infrastructure and the addition of new subscribers.
Customer service expenses. In 1998, customer service expenses increased by
$941,000 or 306% to $1.3 million from $313,000 in 1997. This increase was
primarily due to the expansion of our regional operations in Washington and the
expansion of our network operations and infrastructure to support these
additional subscribers.
Development expenses. Development expenses increased by $880,000 or 204% to
$1.3 million in 1998 from $432,000 in 1997. This increase was primarily due to
an increase in the number of software engineers and outside contractors engaged
to expand and enhance our suite of applications and service offerings.
Sales and marketing expenses. Sales and marketing expenses increased by
$574,000 or 212% to $845,000 in 1998 from $271,000 in 1997. This increase was
primarily due to hiring sales and marketing personnel to support expansion into
other healthcare communities in Washington.
General and administrative expenses. General and administrative expenses
increased by $268,000 or 27% to $1.3 million in 1998 from $1.0 million in 1997.
This increase was primarily due to hiring several executive personnel and
expanding our office facilities to support this employee growth.
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<PAGE>
Selected Quarterly Operating Results
The following table sets forth the unaudited quarterly statement of
operations data for the six quarters ended December 31, 1999. The quarterly
data should be read in conjunction with our audited financial statements and
the notes thereto appearing elsewhere in this prospectus. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------
Sept. Dec. June Sept. Dec.
30, 31, March 31, 30, 30, 31,
1998 1998 1999 1999 1999 1999
------- ------- --------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 229 $ 166 $ 178 $ 253 $ 354 $ 504
Operating expenses:
Telecommunications and
connectivity.......... 201 113 169 186 285 484
Customer service....... 355 334 726 739 885 1,132
Development............ 348 310 443 361 454 858
Sales and marketing.... 265 176 286 318 432 506
General and
administrative........ 323 278 500 588 610 852
Noncash stock-based
compensation.......... 21 11 57 152 737 743
------- ------- ------- ------- ------- -------
Total operating
expenses........... 1,513 1,222 2,181 2,344 3,403 4,575
------- ------- ------- ------- ------- -------
Loss from operations.... (1,284) (1,056) (2,003) (2,091) (3,049) (4,071)
Other income (expense).. (1) (49) (302) (13) 54 403
------- ------- ------- ------- ------- -------
Net loss................ $(1,285) $(1,105) $(2,305) $(2,104) $(2,995) $(3,668)
======= ======= ======= ======= ======= =======
</TABLE>
Our quarterly revenue has increased each quarter since December 31, 1998 due
to a combination of factors. We have expanded our subscriber base, increased
our direct sales and marketing efforts and entered into strategic alliances
with several organizations that maintain strong healthcare community
relationships. Our operating expenses have varied quarter to quarter and
generally reflect increased spending on developing, selling, marketing and
supporting our services to establish our market presence.
We expect to experience significant fluctuations in our future quarterly
operating results due to a variety of factors, many of which are outside our
control, including:
. demand for our services and applications;
. introduction or enhancement of services and applications by us and our
competitors;
. market acceptance of our new services and applications and those of our
competitors;
. price reductions by us or our competitors or changes in how services and
applications are priced;
. the mix of services and applications sold by us, in particular the
number of large implementations we may have in any given quarter, and
our competitors;
. the amount and timing of operating costs and capital expenditures
related to expansion of our business, operations and infrastructure;
. technical difficulties with respect to the use of our services; and
. general economic conditions and economic conditions specifically related
to the internet.
It is often difficult to forecast the effect these factors, or any
combination thereof, would have on our results of operations for any given
quarter. We believe that our quarterly revenue, expenses and operating results
could vary significantly in the future, and that period-to-period comparisons
should not be relied upon as indications of future performance.
Historically, we have received a significant portion of our revenue from a
limited number of subscribers. We believe that a subscriber's decision to
purchase our services is relatively discretionary and, for large-scale
22
<PAGE>
users, generally involves a significant commitment of financial resources for
connecting and integrating to our network. Therefore, any downturn in the
economy or in the business of potential subscribers could negatively impact our
revenue and quarterly results of operations.
Due to the foregoing factors, in some future quarters our operating results
may fall below the expectations of securities analysts and investors, which
would likely cause the price of our common stock to decrease.
Liquidity and Capital Resources
Since inception, we have funded our operations and met our capital
requirements primarily through the private sales of equity securities and the
use of short-term and long-term debt and equipment leases. As of December 31,
1999 we had cash and cash equivalents of $35.9 million.
We have had significant negative cash flows from operating activities in each
annual period to date. Net cash used in operating activities for 1997, 1998 and
1999 was $1.7 million, $4.1 million and $7.5 million. Net cash used in
operating activities in each of these periods was primarily the result of
operating losses, partially offset by increases in net current liabilities. We
anticipate that we will continue to incur increasing operating losses as we
expand our operations and develop additional services.
Investments in property and equipment were $482,000, $591,000 and $1.7
million in 1997, 1998 and 1999. During 1998 we also invested $683,000 in
connection with the acquisitions of MedLynx and Peregrin Medical Review. We
anticipate that we will continue to increase investments in property and
equipment and make strategic acquisitions consistent with our anticipated
growth and regional expansion.
Net cash flows provided by financing activities were $5.8 million for the
year ended December 31, 1997, $2.5 million for the year ended December 31, 1998
and $44.2 million for the year ended December 31, 1999. Net cash provided by
financing activities in each year primarily consisted of net cash proceeds from
the private issuance of common and preferred stock and long-term borrowings for
equipment purchases.
In July 1998, we entered into a $1.5 million equipment term loan facility
with Imperial Bank, payable in monthly installments through July 2002 and
bearing interest at prime plus 1.5%. As of December 31, 1999, $968,906 was
outstanding under this equipment term loan and no additional borrowings were
available. In September 1999, we entered into an additional $1.0 million
equipment term loan facility with Imperial Bank bearing interest at prime plus
0.75%. There were no borrowings outstanding under this loan as of December 31,
1999.
During 1999, we entered into term loan arrangements with Imperial Bank and
Phoenix Growth Capital payable in monthly installments through September 2002.
The term loans bear interest at prime plus 1.5%, which equaled 10% and 13.5% at
December 31, 1999, respectively. As of December 31, 1999, $303,000 and $429,000
were outstanding under the Imperial Bank and Phoenix Growth Capital loans,
respectively. As of December 31, 1999, no additional borrowings are available
under the Imperial Bank term loan. There is $1.6 million available under the
Phoenix Growth Capital term loan.
Aggregate maturities of long-term borrowings will be $831,000 in 2000,
$857,000 in 2001 and $537,000 in 2002.
Aggregate rental expense for all operating leases will be $587,000 in 2000,
$651,000 in 2001, $658,000 in 2002 and $601,000 in 2003.
We currently anticipate that the net proceeds of this offering, together with
our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next 18 months.
We may raise additional funds prior to the expiration of this period. If we
raise additional funds through the issuance of equity, equity related or debt
securities, these securities may have rights, preferences or privileges senior
to those rights of our common stock and our common stockholders may experience
additional dilution. We cannot be certain that additional financing will be
available to us on favorable terms when required, or at all.
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<PAGE>
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. We adopted SOP 98-1 on January
1, 1999 and there was no significant impact on our financial position or
operating results upon adoption.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
market value. Changes in the fair market value of derivatives are recorded each
period in current earnings or other comprehensive income. We do not expect that
the adoption of SFAS No. 133 will have a material impact on our financial
statements because we do not currently hold any derivative instruments.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 did not impact the way we currently recognize revenue.
Year 2000 Issues
The impact of the Year 2000 on our technology systems to date has been
insignificant. The total cost associated with our Year 2000 remediation effort
has not been material and is not expected to be material in future periods. On
and after January 1, 2000, our subscribers were able to access our online
networks and use our services without any material interruptions.
In addition, we depend on a number of third-party vendors to provide
technology systems and services. While we believe that our material third-party
systems and services are Year 2000 compliant, we cannot be sure that we will
not experience any problems with these systems and services during 2000. We
also cannot provide any assurance that governmental agencies,
telecommunications companies, internet access companies and others outside of
our control will not experience any future Year 2000 problems.
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<PAGE>
BUSINESS
Overview
We are a leading provider of business-to-business services to local
healthcare communities through our online network that connects physician
practices with other healthcare participants. Our online services enable
physician practices, hospitals, payors, laboratories and imaging centers to
exchange clinical and administrative information. We offer a comprehensive
suite of services to automate the daily workflow and communication needs of
healthcare participants. We have designed our solution to facilitate the
exchange of healthcare information among local healthcare participants. Our
services allow users to verify patient insurance coverage, manage and track
patient referrals, receive laboratory and hospital reports, order supplies and
access clinical reference materials.
We currently operate three statewide networks in Washington, Oregon and
Nevada, providing services to over 4,100 physicians. As of January 31, 2000,
our services were being used by 3,751 physicians and 31 hospitals in Washington
and Oregon, which represents over 20% of the physicians and hospitals in these
two states. In addition, our relationships with payors provide our subscribers
access to over 70% of the commercially insured patients in Washington and
Oregon. We recently acquired a network of subscribers in Nevada that enables us
to serve an additional 400 physicians and five hospitals.
Industry Background
The physician practice is the focal point of the healthcare delivery system.
In 1999, expenditures for the U.S. healthcare system totaled $1.1 trillion.
Practicing physicians influence directly or indirectly 80% of all healthcare
expenditures, including prescriptions, referrals, diagnostic tests and hospital
admissions. These services require physician practices to regularly interact
with numerous healthcare participants, including hospitals, payors and
laboratories. The business-to-business communication among these healthcare
participants involves billions of transactions annually and requires the
employment of approximately two million office workers to support this exchange
of information, resulting in significant administrative costs.
Healthcare services are delivered locally. A vast majority of healthcare
transactions occur between organizations within a local geographic market or
healthcare community and involve exchanging information that is particularly
relevant to the healthcare participants in that market. Participants in each
healthcare community rely on a continuous flow of confidential information to
provide quality patient care and manage their businesses and practices. The
sheer number of participants in a healthcare community creates a high volume of
information exchange.
. Physician Practices. There were approximately 620,000 practicing
physicians in the United States as of December 1998. Physician practices
are dispersed across healthcare communities to serve the needs of
patients in local markets. According to the American Medical
Association, over 70% of U.S. physician practices are comprised of six
or fewer physicians. Physician practices have increasing business-to-
business communication needs as they require information from other
healthcare participants to treat their patients and are responsible for
verifying patient insurance coverage, referring patients for specialty
care or hospitalization, and ordering diagnostic tests, surgical
procedures, prescription drugs and medical supplies.
. Hospitals. There were over 6,000 hospitals in the United States as of
December 1998. Hospitals have significant information needs and must
communicate daily with physician practices, payors, laboratories,
imaging centers and other healthcare suppliers. Hospitals are
responsible for verifying patient insurance coverage, fulfilling
physician orders for patient care and purchasing medical supplies. In
addition, hospitals must deliver patient discharge summaries, operating
and emergency room reports and diagnostic test results to the physician
practices.
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<PAGE>
. Payors. There were over 1,100 health plans in the United States as of
December 1999. Payors are responsible for reimbursing healthcare
participants for providing patient care. Payors administer a highly
complex set of rules and procedures related to patient eligibility and
reimbursement. Consequently, payors employ numerous administrative
workers to communicate these rules and procedures to healthcare
participants and respond to inquiries.
. Laboratories, Imaging Centers and Pharmacies. There were over 52,000
laboratories, imaging centers and retail pharmacies in the United States
as of 1997. To process test and prescription orders and deliver test
results, laboratories, imaging centers and pharmacies must frequently
communicate with physician practices, hospitals and payors.
The large number of healthcare participants, the absence of a common
transaction standard and the lack of a trusted third party network connecting
healthcare participants has inhibited efficient and cost effective
communication. Healthcare participants rely heavily on paper or phone-based
processes and isolated information systems to share data, which can result in
errors and delays in verifying patient insurance coverage, authorizing patient
referrals, reporting test results and reimbursing for patient care. Because
healthcare participants are not networked, they often lack timely access to
relevant patient information, which may result in the delivery of unnecessary
or unauthorized patient care, redundant tests and procedures and excessive
administrative costs. During 1998, an estimated $250 billion, or 25% of every
healthcare dollar, was wasted due to administrative inefficiencies.
The open architecture, accessibility and growing acceptance of the internet
make it an increasingly important means of information exchange for business-
to-business interaction. Until recently, the costs of constructing a system for
effective communication and exchange of information among healthcare
participants have been prohibitive. Internet technology provides a platform to
create a system that can automate workflow, make complex information exchange
processes more efficient, lower transaction costs and improve workplace
productivity and, therefore, provide better quality healthcare.
Our Solution
We offer a comprehensive suite of services to automate the daily workflow and
communication needs of healthcare participants to assist them in managing their
businesses and practices more efficiently. We designed our solution to
facilitate the local exchange of healthcare information.
Our solution offers the following benefits to healthcare participants:
. Physician Practices. By using our solution to quickly and accurately
verify patient insurance coverage at the time care is provided,
physician practices can decrease patient claim denials and delayed
reimbursement payments from payors. By coordinating patient referrals
and hospitalizations online, physician practices can minimize the delays
and labor costs associated with paper or phone-based processes. Our
services also provide immediate online access to diagnostic test results
and hospital reports.
. Hospitals. By using our solution to verify patient insurance coverage
and payor authorization for specific medical procedures, hospitals can
reduce patient claim denials and costly billing errors. In addition, our
system allows hospitals to quickly and cost effectively deliver patient
medical reports and diagnostic test results to physician practices
online instead of using mail, courier services or facsimile.
. Payors. By using our solution, payors can interact efficiently with
other healthcare participants and ensure compliance with their rules and
procedures for treatment and reimbursement.
. Laboratories and Imaging Centers. By using our solution, laboratories
and imaging centers can deliver patient diagnostic test results quickly
and cost-effectively to physician practices and hospitals. Our services
allow laboratories and imaging centers to communicate with payors to
verify patient insurance coverage, improve accuracy of reports and
facilitate more timely reimbursement for their services.
26
<PAGE>
Our Strategy
We intend to be the leading provider of business-to-business services to
local healthcare communities through our online network that connects physician
practices with other healthcare participants. Our growth strategy consists of
the following key elements:
Drive Penetration within Local Healthcare Communities and Regional
Markets. We target influential healthcare participants in each local healthcare
community to accelerate adoption of our services throughout the community.
Adoption by these participants quickly provides us with a high level of
credibility in the local healthcare community. We believe the value and utility
of our network increases as we continue to attract additional healthcare
participants within the local healthcare community. This network effect
provides strong incentives to non-subscribing participants to join our network,
resulting in an accelerated adoption rate for our services within each
healthcare community as the efficiencies generated by our network become
apparent. Operating success in one healthcare community accelerates the
adoption of our services in adjacent communities within a regional market.
Expand into New Communities and Regional Markets. We approach new healthcare
communities and regional markets by replicating our successful community-based
business model. We expect to leverage our relationships with healthcare
participants to expand into other healthcare communities and regional markets
where they have a significant business presence. We recently acquired networks
with substantial subscriber bases in both Oregon and Nevada to accelerate our
expansion into these regional markets. We will continue to pursue strategic
acquisitions and alliances to facilitate rapid geographic expansion.
Establish Strong Market Reputation for Pointshare and our Services. Our
success in Washington and Oregon has established our credibility and provides
us with significant relationships that we can reference to support our entry
into new markets. As of January 31, our services were being used by 3,751
physicians and 31 hospitals in Washington and Oregon, which represents over 20%
of the physicians and hospitals in these two states. Our relationships with
payors provide our subscribers access to over 70% of the commercially insured
patients in Washington and Oregon. We have strategic alliances with the Oregon
Medical Association, Oregon Association of Hospitals and Health Systems,
Washington State Medical Association and Washington State Hospital Association.
We will pursue similar strategic alliances with other leading community and
state healthcare organizations to endorse and promote our services to their
members. We believe our strong market reputation will facilitate entry into new
markets and increase the rate of adoption for our services within our existing
markets.
Enhance and Broaden our Service Offering. We plan to offer new online
services and continually enhance our existing services to address our
subscribers' business needs, increase subscriber usage of our services and
attract new subscribers. For example, we intend to provide online
prescription-writing and refill authorization services, laboratory test
ordering services and other complementary product and service offerings. We
intend to continue to partner with additional providers of complementary
services to offer a comprehensive solution for our subscribers. We believe that
extending the breadth and depth of our network services will be attractive to
healthcare participants and further increase the value of our services. We may
also selectively acquire products and services that complement our existing
service offering.
Expand our e-Commerce Service Offering. We intend to further develop
PointStore, our e-commerce offering. Our online solution represents the initial
point of entry for our subscribers and we believe it provides a unique sales
channel to deliver e-commerce products and services to our physician practices
and other healthcare participants. We intend to establish additional
relationships with manufacturers and distributors as well as e-commerce
intermediaries. We believe our concentrated online subscriber base will be
attractive to healthcare vendors and will offer our subscribers an opportunity
to obtain favorable pricing.
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<PAGE>
Our Services
Our network services address the information exchange needs of the local
healthcare community. We have developed and implemented application services
that facilitate communication and provide significant benefits to physician
practices and other healthcare participants.
Service Description Benefits
VeriPoint Online verification of patient . Reduces labor costs to
insurance coverage verify patient insurance
coverage
. Reduces billing errors
and claim denials
- --------------------------------------------------------------------------------
ReferralPoint Online coordination of patient . Improves coordination of
referrals and hospitalizations patient care
. Reduces referrals to
ineligible healthcare
participants
. Reduces labor costs
associated with referrals
- --------------------------------------------------------------------------------
DeliveryPoint Online delivery of diagnostic . Reduces time for delivery
test results and hospital of test results
reports . Reduces administrative
and delivery costs
- --------------------------------------------------------------------------------
ContactPoint Online directory of physicians . Allows real-time location
and other healthcare of and communication with
participants healthcare participants
- --------------------------------------------------------------------------------
PointStore Online purchasing of medical . Improves purchasing
and office supplies process
. Allows savings from e-
commerce discounts
- --------------------------------------------------------------------------------
DiscoveryPoint Online access to relevant . Provides easy-to-access
medical information, current medical and other
continuing medical education information
and news on the world wide web
- --------------------------------------------------------------------------------
VeriPoint provides online access to patient insurance coverage information
that enables our subscribers to verify insurance coverage prior to providing
medical treatment. We contract directly with commercial and government health
insurers and managed care organizations to deliver our service. As of January
31, 2000, our relationships with payors in Washington and Oregon provided our
subscribers access to over 70% of the commercially insured patients in these
two states. We have been providing VeriPoint since March 1998.
ReferralPoint allows healthcare participants, including physician practices,
hospitals and payors to exchange patient referral information online. We
designed our service for direct physician-to-physician referrals and physician-
to-hospital interactions to facilitate in-patient and out-patient services. We
have integrated patient eligibility data from our VeriPoint service into
ReferralPoint. In addition, patient reports and clinical information, such as
diagnostic test results, can be transmitted with each referral. We have been
providing ReferralPoint since January 1999.
DeliveryPoint facilitates the delivery of patient test results and reports
from labs, imaging centers and hospitals to physician practices. DeliveryPoint
collects patient test results and reports from a variety of healthcare
participants, and then automatically sorts, formats and delivers the
information to the designated healthcare participant in the format they
specify, such as e-mail, facsimile, electronic medical record or directly to a
printer. We designed DeliveryPoint to allow physician practices to transmit
reports to ReferralPoint. We have been providing DeliveryPoint since March
1999.
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ContactPoint is an online, interactive directory service that allows users to
search for healthcare participants and then communicate with them directly. We
designed ContactPoint to be easy-to-use, with multiple search and browse
functions, including searching by provider's name, medical specialty, address,
participating health plans, languages spoken and other relevant information.
ContactPoint also provides subscribers a direct link to correspond online with
other healthcare participants and ReferralPoint. We have been providing
ContactPoint since September 1998.
PointStore allows users to purchase medical and office supplies online from a
variety of suppliers. Online procurement may allow physician practices and
other healthcare participants to spend less time searching for supplies and
benefit from cost savings inherent in discounts from e-commerce vendors. We
have been providing PointStore since September 1998.
DiscoveryPoint offers access to a large number of online medical reference
and educational web sites. DiscoveryPoint complements our existing services by
providing subscribers access to medical reference material, continuing
education programs and news relevant to their medical practice and personal
interests. We have been providing DiscoveryPoint since September 1998.
Strategic Alliances
We actively seek strategic alliances with organizations that maintain strong
healthcare community relationships. We currently have the following strategic
alliances:
Washington State Medical Association (WSMA). We entered into a co-marketing
arrangement with WSMA in September 1999 to sponsor and promote our services to
WSMA members and co-sponsor educational seminars. We pay WSMA a sponsorship fee
for each WSMA member who subscribes to our service. The WSMA agreement is
effective through September 2000 and renews automatically on an annual basis.
Washington State Hospital Association (WSHA). We entered into a co-marketing
agreement with Washington Hospital Services, Inc. (WHS), a wholly-owned
subsidiary of WSHA, in October 1998. Under this agreement, WHS agrees to
sponsor and promote our network services to WSHA members, including members
outside Washington state. We pay WHS a sponsorship fee for each WSHA member who
subscribes to our service. The WSHA agreement is effective through June 2004
and renews automatically on an annual basis.
Oregon Medical Association (OMA). We entered into an exclusive agreement with
OMA in December 1998 to sponsor and promote our services to Oregon physicians.
In addition, OMA provides directory information and general assistance to
support our service offering to healthcare participants in Oregon. We pay OMA a
sponsorship fee for each Oregon physician who subscribes to our service. The
OMA agreement is effective through December 2003 and renews automatically on an
annual basis.
Oregon Association of Hospitals and Health Systems (OAHHS). We entered into
an exclusive co-marketing arrangement with OAHHS in January 2000 to sponsor and
promote our services to OAHHS members and co-sponsor educational seminars. We
pay OAHHS a sponsorship fee for each member hospital that subscribes to our
service. The OAHHS agreement is effective through January 2005 and renews
automatically on an annual basis.
Operations
Our operations are organized regionally and supported nationally. We manage
our operations in local healthcare communities from our regional offices. Our
regional offices are responsible for sales, implementation management, account
management, regional marketing, installation, training and support. By
maintaining these offices, we are able to provide more personalized, local
service and support, thereby permitting us to maximize sales opportunities and
penetrate our markets.
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<PAGE>
Sales and Marketing
Our sales and marketing approach is designed to help physician practices and
other healthcare participants understand both the business and technical
benefits of our solution. Our direct sales force of 15 employees targets
healthcare participants in each of our healthcare communities. Our sales and
marketing efforts focus on the importance of information exchange and
communication within the local healthcare community and are directed at
attaining a critical mass of participation from physician practices, hospitals,
payors, laboratories and imaging centers.
We conduct a variety of marketing programs to educate healthcare
participants, create awareness and attract new subscribers to our service. To
achieve these goals, we leverage our existing subscriber base, engage in
marketing activities, such as direct marketing, trade shows, speaking
engagements and co-marketing relationships with hospitals and physician
associations. We also conduct comprehensive public relations programs that
include establishing and maintaining relationships with key trade press,
business press and industry analysts.
Our Subscribers
Our target subscribers are physician practices and other healthcare
participants, including hospitals, laboratories, imaging centers and payors. A
small number of subscribers account for a high percentage of our revenue
primarily as a result of initial one-time network installation and
implementation fees charged to these larger subscribers. For the year ended
December 31, 1999, two of our subscribers accounted for 29% and 10% of our
revenue. For the year ended December 31, 1998, two of our subscribers accounted
for 45% and 26% of our revenue. We expect that a small number of subscribers
will continue to account for a high percentage of our revenue for at least the
next twelve months. The loss of a major subscriber, or the failure to attract
additional subscribers requiring large scale installation and implementation
services, could harm our business.
Network and Technology
Our networks employ a modular, distributed application architecture capable
of accommodating independent, geographically dispersed healthcare communities.
We use a multi-tiered architecture common to online applications that includes:
. an industry standard web browser, such as Microsoft Internet Explorer or
Netscape Navigator;
. a web-based application server; and
. database servers.
This software architecture maximizes performance, flexibility and development
speed while also reducing the cost of installing new software, upgrades,
support and training.
Our central Network Operations Center, referred to as the NOC, is located in
the Westin Building in downtown Seattle, Washington. This site is strategic
because it offers interconnection capabilities with over 65 communications
companies, including local exchange carriers, competitive access
providers/inter-exchange carriers, long-distance carriers and major internet
backbone providers. The NOC is the central point in our network and provides
administrative efficiencies, scalability and connectivity between the network
hubs of physician practices and other healthcare participants, our corporate
headquarters and the internet. We have arrangements with several
telecommunications companies that provide redundant operations and backup
services to safeguard against a disruption of service.
Healthcare information is highly confidential. We employ technical safeguards
to protect the privacy of sensitive medical records including using multiple
security layers and proven security methodologies, including system access-
controls, firewalls, proxy servers, router filtering and application access
controls.
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Customer Service, Training and Network Support
We believe effective customer support is essential to maintaining our
existing subscriber base as well as achieving wide acceptance of our online
information services. We provide a wide range of customer support services
through a staff of customer service and helpdesk personnel that can be accessed
by telephone or email. We offer 24 hour online support functions seven days a
week. We also employ technical support personnel who work with our direct sales
force, implementation teams and subscribers to quickly troubleshoot technical
problems.
We provide our subscribers with a complete implementation service. We assist
our subscribers in building out their existing internal networks or creating a
new network to connect to our community-based network. Our networking services
include site evaluation, network design and installation, systems integration,
hardware purchasing and technical training programs.
We have arrangements with several telecommunications companies to offer our
subscribers a variety of connectivity options through either full-time access
or dial-up access. Full-time access means continuous and unlimited, high-speed
access using digital connections such as frame relay, ISDN, xDSL and other high
speed telecommunication options.
Intellectual Property
Pointshare, VeriPoint, ReferralPoint, DeliveryPoint, ContactPoint,
DiscoveryPoint, CommunityPoint, PointStore, the phrase "Healing takes time.
Information shouldn't" and the Pointshare corporate logo are our trademarks and
service marks, and we have filed for trademark or servicemark registration.
Our ability to successfully compete is substantially dependent upon our
internally developed technology and intellectual property, which we protect
through a combination of copyright, trade secret and trademark law, and
contractual obligations We may not be able to adequately protect our
proprietary rights. Unauthorized parties may attempt to obtain and use our
proprietary information. Policing unauthorized use of our proprietary
information is difficult, and we cannot be certain that the steps we have taken
will prevent misappropriation.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. There is
substantial risk of litigation regarding intellectual property rights in our
industry. A successful claim of technology infringement against us and our
failure or inability to license the infringed or similar technology could harm
our business.
Competition
Our industry is intensely competitive, rapidly evolving and subject to
significant technological change. We compete with numerous companies, including
online business-to-business services companies, companies providing electronic
data interchange services to healthcare participants and companies providing
physician practice management systems.
We believe there are few competitors that currently offer a comprehensive
solution that addresses the relevant information exchange needs of local
healthcare communities comparable to ours. However, several organizations offer
services that overlap with some components of our solution and may become
increasingly competitive with us in the future. In addition, Healtheon/WebMD
Corporation, a national business-to-consumer and business-to-business
healthcare services company, has recently acquired several companies offering
various components of our solution, which when combined, further strengthen
their application and service offerings. It is likely that we will compete for
subscribers with Healtheon/WebMD in new regional markets that we enter.
Healtheon's recent acquisitions may also make it more difficult for us to
transact business with, or offer the products or services of, service providers
who are acquired by, or enter into relationships with, Healtheon/WebMD.
31
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We believe that the principal competitive factors in attracting and retaining
subscribers are:
. the number of healthcare participants using the services in the local
market;
. the functionality and ease-of-use of the services;
. the breadth of the services;
. the ability to integrate with disparate systems;
. the quality of the services; and
. the cost of the services.
Many companies that offer applications or services that compete with one or
more of our services have greater financial, technical, product development,
marketing and other resources than we have. These organizations may be better
known and may have more subscribers than we have. In order to succeed, we
believe we must gain significant market share for our service in our markets
before our competitors introduce alternative applications and services with
features similar to ours. If we fail to do so, we may be unable to compete
effectively in those markets.
Government Regulations
Participants in the healthcare industry are subject to frequently changing
and often confusing regulation at federal, state and local levels. Providers,
payors, and plans are also subject to a variety of laws and regulations that
could affect their business relationships with us. Federal and state laws
regulating health insurance, health maintenance organizations and similar
organizations, as well as employee benefit plans, are nonuniform and cover a
broad array of subjects, including confidentiality, financial relationships
with vendors, mandated benefits, grievance and appeal procedures and others.
Some federal and state so-called "fraud and abuse" laws may also limit or
prohibit some financial relationships between us and our subscribers, including
physician practices, hospitals, laboratories, and pharmacies.
The internet and its associated technologies are also subject to changing
government regulation. Many existing laws and regulations, when enacted, did
not anticipate the methods of healthcare business-to-business commerce we are
developing. Nonetheless, we believe that these laws and regulations may affect
the following aspects of our services: patient medical record confidentiality
and disclosure; electronic transmission of patient-identifiable information
among healthcare participants; use of software to diagnose, cure, treat,
mitigate or prevent disease; health maintenance organizations, payors,
providers, or employee benefit plans; relationships and referral patterns among
healthcare participants; and internet-related issues, including security,
privacy, encryption, pricing, content, intellectual property rights,
contracting and selling over the internet, distribution, scope of professional
licensure and characteristics and quality of services. In particular,
forthcoming federal regulations concerning "administrative simplification" of
healthcare data will require us to adopt uniform formats and security measures
concerning the information we communicate on behalf of our subscribers and
contractors. These and other regulations may entail significant costs, although
we are developing our technology platform to be compatible with the developing
standards.
Privacy
State laws aimed at protecting the privacy of confidential patient health
information are many and varied, and states frequently adopt new laws in this
area. Although most state health information privacy laws apply only to
specific healthcare participants, some of these laws also directly apply to
businesses such as ours that handle health information for treatment or claims
processing purposes, and some state laws extend their applicability to entities
that obtain confidential health information from heathcare participants
directly subject to the law. Violations of these laws may result in civil
and/or criminal penalties. While we intend to comply with all applicable laws,
we cannot predict how interpretations of existing law or changes in the law may
affect our
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<PAGE>
business, and compliance may be time consuming and expensive. The ways in which
these laws may affect our operations could include the following:
. Some state health privacy laws may directly regulate entities such as
Pointshare that transmit confidential health information;
. Some state laws directly regulating healthcare participants may extend
the confidentiality protections to information transmitted by those
entities to another entity, such as Pointshare;
. State laws enacted before the use of the internet in healthcare
transactions was contemplated may be interpreted to apply to internet
transactions; and
. Some state laws specifically restrict the disclosure of certain types of
particularly sensitive health information, and if healthcare participants
fail to obtain the necessary consents or otherwise comply with these
restrictions, we could be liable for the improper transmission of this
information.
While we cannot assure you that we would prevail if challenged, we believe
that in general our ways of doing business should not be the subject of
enforcement proceedings or lead to liability under these laws. The
confidentiality of health information is a high priority for us, and we have
policies and security measures in place to protect against unauthorized access
to the information and to ensure that such information is handled
appropriately. In addition, we are reviewing our contracts with subscribers and
other contractors to determine whether additional provisions should be added to
further ensure compliance with all applicable health information privacy laws.
Although the Secretary of the U.S. Department of Health and Human Services has
proposed regulations dealing with privacy of electronically transmitted health
information as required by the Health Insurance Portability and Patient
Protection Act of 1996, known as HIPPA, these regulations are not currently in
effect, and may be changed substantially before they are finalized; thus, at
present there is no federal law securing or regulating the privacy of
confidential health information of a patient. We intend to monitor the
development of the federal law and regulations, to adapt our business to comply
with requirements that may become applicable in the future.
Antikickback laws
Certain provisions of the Social Security Act, commonly referred to as the
Medicare/Medicaid antikickback law, prohibit the offer, payment, solicitation,
or receipt of anything of value to induce or in return
for the referral of, Medicare, Medicaid and other federal healthcare program
patients, or to induce or in return for the purchase, lease, or order (or
arranging for or recommending the purchase, lease or order) of products or
services that are covered by these programs. The antikickback law is broad in
scope and has been broadly interpreted by its principal administrative
enforcement agency, the Office of Inspector General of the U.S. Department of
Health and Human Services, known as the OIG, and by courts in many
jurisdictions. Read literally, the statute places at risk many legitimate
business arrangements, potentially subjecting these arrangements to lengthy,
expensive investigations and prosecutions initiated by federal officials. Many
states have similar laws that often apply regardless of whether federal funds
may be involved.
Violation of the antikickback law is a felony, punishable by significant
fines, imprisonment, and exclusion from participation in Medicare, Medicaid,
and other federal healthcare programs. Apart from its criminal penalties, the
law allows the OIG to impose the civil monetary penalty and exclusion remedies
in an administrative proceeding. Under a recent administrative ruling, the
exclusion remedy may be applied to companies such as ours that furnish services
to participating healthcare providers.
Since we are a provider of communication and other administrative services to
healthcare participants, we could be seen as positioned to influence physician
or hospital referrals or choices of healthcare products or services, especially
to the extent that vendors of healthcare products or services to physicians or
hospitals pay fees to us in connection with sale of their products or services
or for being listed on our website. We have (and may have in the future)
arrangements with healthcare participants and vendors under which the
participant or
33
<PAGE>
vendor receives a link on our website and compensates us based upon the volume
of business generated through use of the link by our subscribers. Among other
arrangements that have been questioned under the antikickback law, a ruling by
the OIG suggests that commission sales arrangements for products covered under
Medicare may be subject to scrutiny for violation of the law where the
marketing agent's compensation is determined on a commission basis (or some
basis that takes into account the volume of product sold). While acknowledging
that many such arrangements paying for marketing and advertising activities by
persons who are not heathcare participants would not merit enforcement under
the law, the OIG has identified several characteristics of arrangements between
sellers, sales agents and purchasers that it believes may be associated with
increased potential for violating the antikickback law, including, among other
things:
. compensation based on a percentage of sales, which gives the marketing
agent a financial incentive to increase referrals through its marketing
services; and
. direct contact between the marketing agent and physicians in a position
to order or recommend items.
Thus, our financial arrangements with heathcare participants could be
scrutinized and challenged under these broad laws. However, to date neither
courts nor the OIG have considered the applicability of the antikickback law or
related state laws to the specific business relationships that exist between us
and our subscribers and vendors.
While we cannot assure you that we would prevail if challenged, we believe
that our agreements with healthcare participants and vendors should not be
found to violate the antikickback law, because they are designed to provide us
with compensation for legitimate and needed services actually performed in
exchange for compensation representing the fair market value of those services.
Moreover, although our service enables physicians and hospitals to purchase
some medical products online, we are merely a conduit for information
concerning the sellers and the products. None of our arrangements with
heathcare participants require physicians or hospitals to purchase particular
healthcare products, and we are not a healthcare provider in a position to
exercise influence over our subscribers to make such purchases.
False Claim Laws. We offer our subscribers a third-party product known as
CodeCorrect that assists our subscribers in selecting appropriate reimbursement
codes for some of the services provided to patients. As a result, we may be
subject to state and federal laws that govern the submission of claims for
reimbursement of medical services. These laws generally prohibit an individual
or entity from knowingly presenting a claim (or causing a claim to be
presented) for payment from Medicare, Medicaid, or other third-party payors
that is false or fraudulent, or is for an item or service that was not provided
as claimed. The standard for a "knowing" violation typically does not include
simple inadvertence or honest error, but typically does include conduct that
amounts to a reckless disregard for whether accurate information is presented
or provided.
Penalties under these statutes include substantial civil and criminal fines,
exclusion from the Medicare and Medicaid programs, and imprisonment. One of the
most prominent of these laws is the federal civil false claims act, known as
the FCA, which may be enforced by the federal government directly or by a qui
tam (private citizen "whistleblower") plaintiff on the government's behalf.
Under the FCA, the government, if successful, is permitted to recover
substantial monetary penalties as well as an amount equal to three times actual
damages, and any qui tam plaintiff is entitled to a share of these proceeds. In
recent cases, some courts have allowed qui tam plaintiffs and prosecutors to
bring cases under the FCA based on the theory that any claim for payment
submitted for a service resulting from a referral that would be unlawful under
the antikickback law constitutes a false claim.
The laws and regulations defining the parameters of proper third party payor
billing are frequently unclear and in many cases have not been subjected to
extensive judicial or agency interpretation. Billing errors can occur despite
the best efforts of the third party who designed and developed the CodeCorrect
product to prevent them. While we cannot assure you that we would prevail if
challenged, we believe that since we are only a communications conduit through
which a third party offers its own proprietary product to our subscribers, and
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<PAGE>
we do not alter in any manner the content of the product, it is not likely that
we would be viewed as having "caused to be presented" claims prepared by
heathcare participants using the CodeCorrect product.
The U.S. Food and Drug Administration. The FDA regulates some computer
applications and software as medical devices. We do not believe that any of our
services or applications that transmit medical information are subject to
regulation by the FDA as medical devices. However, the FDA's regulations and
policies on the regulation of software products and the transmission of medical
information are evolving. In the future, some of our applications or services
could be regulated by the FDA as medical devices. To the extent that any of our
applications or services are regulated by the FDA as medical devices, we would
be subject to various laws, regulations and policies enforced by the FDA and
other governmental authorities that include both premarket and postmarket
requirements and restrictions on promotion. Complying with FDA regulations
would be time consuming, burdensome and expensive and could negatively affect
our ability to continue providing some applications or services, or to
introduce new applications or services in a timely manner. Noncompliance with
applicable FDA requirements can result in an enforcement action by the FDA
including warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals, and criminal prosecution.
Changes in existing regulatory requirements or failure to comply with current
or future requirements or adoption of new requirements could negatively impact
our business.
Employees
As of January 31, 2000, we had 115 full time employees. None of our employees
are represented by a labor union. We believe our relationship with our
employees to be good.
Facilities
Our principal executive and corporate offices, development and customer
support operations are located in Bellevue Washington, in approximately 23,000
square feet of office space, under a lease that expires in February 2005. We
also maintain regional offices and network operations centers in Washington,
Oregon and California under leases that expire in 2000 through 2004. We believe
we will be able to obtain additional facilities that will be adequate to meet
our needs in our current geographic markets.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following table provides information regarding our executive officers,
key employees and directors as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<C> <C> <S>
Timothy J. Kilgallon................ 40 President, Chief Executive Officer
and Director
R. Scott Wiley...................... 37 Executive Vice President, Chief
Operating Officer
Kirk A. Collamer.................... 47 Executive Vice President, Chief
Financial Officer
Dennis P. Schmuland, M.D. .......... 43 Vice President, Chief Medical
Officer
Kevin M. Hileman.................... 43 Vice President, Territory
Development
Craig T. Davenport.................. 47 Chairman of the Board
Robert C. Bellas, Jr. (1)........... 56 Director
Cabot Brown (2)..................... 38 Director
Steven J. Dennis (1)(2)............. 54 Director
Alan Dishlip (2).................... 48 Director
John D. Stobo, Jr. (1).............. 34 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Timothy J. Kilgallon has served as our president, chief executive officer and
a director since July 1997. From 1988 to 1996, Mr. Kilgallon served in several
different capacities at Medaphis Corporation, a healthcare management services
company, including president of two divisions, chief information officer, chief
financial officer and general counsel. Mr. Kilgallon holds a B.A. from Boston
College and a J.D. from Washington and Lee University.
R. Scott Wiley has served as our executive vice president and chief operating
officer since April 1999. From October 1997 to April 1999, Mr. Wiley served as
our vice president of operations and development. From 1992 to October 1997,
Mr. Wiley served as vice president of Western United States Operations for
Integrated Medical Systems, now known as Kinetra, LLC, a healthcare networking
service recently acquired by Healtheon/WebMD. Mr. Wiley holds a B.A. from
Brigham Young University.
Kirk A. Collamer has served as our executive vice president and chief
financial officer since December 1999. From February 1997 to February 2000, Mr.
Collamer served as vice president and chief financial officer of Coinstar,
Inc., a coin recycling company. From March 1995 to February 1997, Mr. Collamer
served as chief financial officer of Muzak, Inc., a business music network
services provider. Prior to joining Muzak, Mr. Collamer served in various
positions at Ameritech Corporation, a telecommunications company, including
serving as vice president, finance, and controller for various subsidiaries.
Mr. Collamer holds a B.A. from Michigan State University and an M.B.A. from
Vanderbilt University.
Dennis P. Schmuland, M.D., our founder, has served as our vice president and
chief medical officer since July 1997. From July 1995 to July 1997, he served
as our president and chief executive officer. In 1984, Dr. Schmuland co-founded
Family Medicine of Redmond, a group private practice clinic, and practiced
there until 1996. Dr. Schmuland is board certified in Family Practice and is an
Affiliate Professor at the University of Washington School of Medicine and a
Fellow of the American Academy of Family Physicians. Dr. Schmuland holds a B.A.
and a B.S. from Seattle Pacific University and an M.D. from the University of
Washington School of Medicine.
Kevin M. Hileman has served as our vice president, territory development
since December 1999. From March 1996 to December 1999, Mr. Hileman served as
our vice president, marketing. From 1994 to 1996,
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Mr. Hileman was a healthcare information management consultant for various
hospitals and physician organizations in the Pacific Northwest. Mr. Hileman
holds a B.A. from Walsh College and an M.B.A from Western Washington
University.
Craig T. Davenport has served as one of our directors since April 1999 and
has served as our chairman of the board since May 1999. From 1993 to the
present, Mr. Davenport has served as managing partner for the D.W. Group, a
private investment company. From May 1997 to October 1998, Mr. Davenport served
as interim chief executive officer and a director of Sapient Health Network, an
Internet provider of healthcare information for consumers that merged with a
predecessor of Healtheon/WebMD. Mr. Davenport also serves as a director of
several privately held companies. Mr. Davenport holds a B.G.S. from Ohio
University.
Robert C. Bellas, Jr. has served as one of our directors since July 1997. He
has been a general partner of Morgenthaler Ventures, a venture capital firm,
since 1984. Mr. Bellas serves on the boards of several privately held
companies. He also serves as a director of the Western Association of Venture
Capitalists, an association of venture capital firms. Mr. Bellas holds a B.S.
from the United States Naval Academy and an M.B.A. from Stanford University.
Cabot Brown has served as one of our directors since September 1999. Since
January 1996, Mr. Brown has served as a managing director of Seven Hills
Partners, LLC, a private equity firm formerly known as Brown, McMillan & Co.,
which he co-founded in January 1996. Mr. Brown served as a managing director of
Volpe, Welty & Company, an investment banking firm, from 1989 to 1995. Mr.
Brown serves as a director of several privately held companies. Mr. Brown holds
an A.B. from Harvard College and an M.B.A. from the Harvard Graduate School of
Business Administration.
Steven J. Dennis has served as one of our directors since October 1996. From
August 1997 to the present, Mr. Dennis has served as a director of Solomon
Software, Inc., a financial software firm, and from August 1997 to February
2000, Mr. Dennis served as vice president and general manager of the Project
Management Group for Solomon Software. Prior to August 1997, Mr. Dennis was the
chairman of the board of Smith, Dennis & Gaylord (SD&G), a software firm he
founded in 1973 and which was acquired by Solomon Software in August 1997. Mr.
Dennis founded SD&G Healthcare Systems, an information systems company, in
1988. ADAC Laboratories acquired SD&G in 1993, and from November 1993 to
January 1996 Mr. Dennis was, at different times, president of ADAC SD&G
Healthcare Systems and Vice President of Radiology Operations of ADAC
Healthcare Information Systems. Mr. Dennis also serves as a director of another
privately held company. Mr. Dennis holds a B.S. from Rensselaer Polytechnic
Institute.
Alan Dishlip has served as one of our directors since January 1999. Since
December 1997, Mr. Dishlip has been a general partner of Utah Venture Partners
II, L.P., a venture capital firm, which is the general partner of Utah Ventures
II, L.P. From 1995 to December 1997, Mr. Dishlip was senior vice president of
FIRSTCORP, a venture-leasing firm. Prior to 1995, Mr. Dishlip was a partner of
Shaw Venture Partners, a venture capital firm. Mr. Dishlip also serves as a
director of several privately held companies. Mr. Dishlip holds a B.B.A. from
the University of Iowa.
John D. Stobo, Jr. has served as one of our directors since September 1999.
Since November 1998, Mr. Stobo has been a managing member of ABS Partners III,
LLC, which is the general partner of ABS Capital Partners III, L.P. From
December 1993 to November 1998, Mr. Stobo was a principal of ABS Capital
Partners and related entities. Prior to joining ABS Capital Partners, Mr. Stobo
worked in the health care investment banking group at Alex. Brown & Sons
Incorporated, an investment banking firm. Mr. Stobo serves as a director of
several privately-held companies. Mr. Stobo holds a B.A. from University of
California, San Diego, and an M.B.A. from Cornell University.
Board Composition
Our bylaws currently provide for a board of directors consisting of eight
directors. Mr. Bellas, Mr. Dishlip and Mr. Stobo were elected to the board of
directors pursuant to a voting agreement among Pointshare and
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<PAGE>
some of its principal stockholders. The voting agreement will terminate upon
completion of this offering. Each director is elected for a period of one year
at our annual meeting of stockholders and serves until the next annual meeting
or until his or her successor is duly elected and qualified. Each of our
current directors will continue to serve on the board of directors upon
completion of this offering.
Executive officers are appointed by the board of directors and serve until
their successors have been duly elected and qualified. There are no family
relationships among any of the directors, officers or key employees of
Pointshare.
Board Compensation
Our directors are entitled to compensation for services approved by the board
of directors, including expenses of attendance at each regular or special
meeting of the board of directors and at any meeting of a committee of the
board of directors. Directors receive an initial grant of an option to purchase
shares of common stock and annually receive a subsequent option to purchase
shares of common stock under our 1998 directors' stock option plan. Our
directors are generally eligible to participate in our 1999 stock option plan
and our 2000 employee stock purchase plan.
Under the 1998 directors' stock option plan, incumbant non-employee directors
as of May 5, 1998 and newly appointed or elected non-employee directors after
that date receive an initial grant of options to purchase 25,000 shares of
common stock. On the date of each annual stockholders' meeting, each
nonemployee director who has served on our board of directors for at least six
months will be granted an additional option to purchase 10,000 shares of common
stock. Initial options granted under the 1998 directors stock option plan vest
at the following rates:
. for those who were directors as of May 5, 1998 and were granted options
on May 5, 1998, 50% vested immediately and the remainder on May 5, 2000;
. for directors appointed or elected after May 5, 1998 and before February
16, 2000, 25% vested immediately at grant, 25% on the first anniversary
of the date of grant and the remaining 50% on the second anniversary of
the date of grant; and
. for initial grants to directors appointed or elected after February 16,
2000, one-third of the shares will vest on the first, second and third
anniversaries of the grant date.
Subsequent annual grants in all cases vest 100% on the first anniversary of the
grant date. The exercise price of all stock options granted under the
directors' stock option plan will be equal to the fair market value of a share
of our common stock on the date of grant of an option. See "Benefit Plans--2000
Directors' Stock Option Plan."
Board Committees
At the date of this offering, the compensation committee will consist of Mr.
Bellas, Mr. Dennis and Mr. Stobo. The compensation committee:
. reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to our officers; and
. establishes and reviews general policies relating to the compensation
and benefits of all of our employees.
The audit committee currently consists of Mr. Brown, Mr. Dennis and Mr.
Dishlip. The audit committee:
. reviews and monitors our internal accounting procedures, corporate
financial reporting, external and internal audits, the results and scope
of the annual audit and other services provided by our independent
auditors; and
. makes recommendations to the board of directors regarding the selection
of independent auditors.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of our board of directors are
currently Mr. Bellas, Mr. Davenport and Mr. Stobo. At the date of the offering,
Mr. Dennis will replace Mr. Davenport on the compensation committee. None of
the members of the compensation committee has at any time been one of our
officers or employees, other than Mr. Davenport, who has served as our Chairman
of the Board since May 1999. We have issued and sold in private placement
transactions shares of preferred stock to Morgenthaler Venture Partners IV. Mr.
Bellas is a general partner of Morgenthaler Management Partners IV which is the
general partner of Morgenthaler Venture Partners IV. We have issued and sold in
private placement transactions shares of preferred stock to ABS Capital
Partners III, L.P. Mr. Stobo is a managing member of ABS Partners III, LLC, the
general partner of ABS Capital Partners III, L.P. Mr. Davenport has entered
into a consulting agreement with us. No executive officer of Pointshare serves
as a member of the board of directors or compensation committee of an entity
that has one or more executive officers serving on our board of directors or
compensation committee. See "Related Party Transactions."
Employment Contracts and Change of Control Arrangements
Employment and Restricted Stock Purchase Agreement of Timothy J. Kilgallon.
In July 1997, and as amended in June 1999, we entered into an employment
agreement with Mr. Kilgallon, our president, chief executive officer and a
director. Pursuant to the employment agreement, we hold a repurchase option in
the event of termination of Mr. Kilgallon's employment under some circumstances
on 750,000 shares of common stock that lapses for 187,500 shares one year from
the date of the agreement and approximately 15,625 per month thereafter. If we
experience a change of control, our right to repurchase lapses as to the
remaining unvested shares. In the event of termination of Mr. Kilgallon's
employment other than for cause, Mr. Kilgallon is entitled to his salary and
benefits and to continued vesting for 12 months after termination.
Employment and Restricted Stock Purchase Agreement of Dennis P. Schmuland,
M.D. In July 1997, we entered into an employment agreement with Dr. Schmuland,
our vice president and chief medical officer. Pursuant to the employment
agreement, in the event Dr. Schmuland is terminated for other than good cause,
he is entitled to 12 months salary and benefits.
Employment Agreement of R. Scott Wiley. In April 1999, we entered into an
employment agreement with Mr. Wiley, our chief operating officer. Pursuant to
the employment agreement, in the event we terminate Mr. Wiley other than for
cause, Mr. Wiley is entitled to six months salary and benefits and to continued
vesting for 12 months after termination.
Acquisition of MedLynx, LLC; Employment of Kelly Jorgensen. Effective March
18, 1998, we purchased the assets of MedLynx. In connection with the
acquisition of MedLynx, Kelly Jorgensen, the founder of MedLynx, received
522,000 shares of our common stock. Mr. Jorgensen was our vice president of
sales from March 1998 until August 1999 and, thereafter, was our executive
director of sales until March 1, 2000. We terminated Mr. Jorgensen's employment
on March 1, 2000. In connection with this termination, Mr. Jorgensen received a
severance payment in an amount equal to 10 months' salary, and we released our
repurchase option on the 522,000 shares of common stock held by Mr. Jorgensen.
Proceeding Involving Ex-Officer
In October 1999, Kelly Jorgensen was indicted in the United States District
Court for the Western District of Washington on charges of mail fraud, health
care fraud and conspiracy to commit mail fraud and health care fraud. These
charges relate to Mr. Jorgensen's operation of a medical billing business that
he owned and sold in 1997, the year before he joined Pointshare. See "Related
Party Transactions--Loans to Officers."
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<PAGE>
Executive Compensation
The following table sets forth compensation awarded to, earned by, or paid to
our chief executive officer, and our four other most highly compensated
officers whose total cash compensation exceeded $100,000 during the year ended
December 31, 1999. Throughout this prospectus, we refer to the following
officers as named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation
---------------- Securities
Fiscal Bonus Underlying All Other
Name and Principal Position Year Salary (1) Options Compensation
--------------------------- ------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Timothy J. Kilgallon........ 1999 $190,000 $80,447 1,000,000 $26,455
President and Chief 1998 144,000 -- -- 53,222
Executive Officer (2)
1997 84,000 76,162 -- 10,500
Dennis P. Schmuland, MD..... 1999 165,000 66,000 -- --
Vice President, Chief 1998 156,000 -- -- 6,000
Medical Officer (3)
1997 130,000 75,000 -- 3,000
R. Scott Wiley.............. 1999 155,523 62,209 200,000 --
Executive Vice President, 1998 140,000 50,000 -- --
Chief Operating Officer 1997 26,026 -- -- --
Kevin M. Hileman............ 1999 125,000 50,000 -- --
Vice President, Territory 1998 120,000 -- -- --
Development
1997 100,500 -- -- --
Kelly R. Jorgensen.......... 1999 120,000 48,000 -- 13,680
Executive Director, Sales 1998 94,615 -- -- 11,400
(4)
James D. Farrar............. 1999 110,000 44,000 125,000 27,500
Regional Vice President,
Washington (5)
</TABLE>
- --------
(1) Bonus represents the amount earned by the employee during the year ended
December 31, 1999 and paid in January 2000.
(2) Includes $16,907 of other compensation consisting of forgiveness of a note
issued by Mr. Kilgallon to us and $9,548 of other compensation for
reimbursement of tax liabilities associated with the forgiveness of the
note during the year ended December 31, 1999. Includes $40,566 in deferred
compensation for the year ended December 31, 1998 and $12,656 of other
compensation for reimbursement of tax liabilities associated with
forgiveness of the note during the year ended December 31, 1998.
(3) Includes $6,000 automobile allowance for the year ended December 31, 1998
and $3,000 automobile allowance for the year ended December 31, 1997.
(4) Resigned as vice president of sales effective August 1999 and was employed
as executive director, sales until March 1, 2000, at which time his
employment was terminated. See "Management--Proceeding Involving Ex-
Officer.". Includes $13,680 in deferred compensation for the year ended
December 31, 1999 and $11,400 in deferred compensation for the year ended
December 31, 1998.
(5) Includes $27,500 in relocation payments.
Option Grants
The following table describes certain information regarding stock options
granted to each of the named executive officers in the fiscal year ended
December 31, 1999, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 5% and
10%, compounded annually from the deemed fair market value on the date of grant
determined by us for accounting purposes.
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These assumed rates of appreciation comply with the rules of the Securities and
Exchange Commission and do not represent our estimate of future stock prices.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of our common stock. In addition, the deemed value as of the date
of grant was determined after the date of grant solely for financial accounting
purposes taking into consideration, with the benefit of hindsight, various
factors including application and service introductions, our operating results
and cash position, competitive developments, management team developments and
the prices at which we issued preferred stock. No stock appreciation rights
were granted to these individuals during the year.
In the fiscal year ended December 31, 1999, we granted options to purchase up
to an aggregate of 3,291,573 shares to employees, directors and consultants.
All options were granted under our 1996 stock option plan at exercise prices at
the fair market value of our common stock on the date of grant, as determined
in good faith by the board of directors. All options have a term of ten years.
Optionees may pay the exercise price by cash, check, promissory note or
delivery of already-owned shares of our common stock. All options are
exercisable as determined by the plan administrator.
All options to be granted under the 1996 stock option plan may be exercised
immediately upon grant and prior to full vesting, subject to the optionee's
entering into a restricted stock purchase agreement with us with respect to any
unvested shares. Under such agreement, the optionee grants us an option to
repurchase any unvested shares at their original purchase price in the event
the optionee's employment or consulting relationship with us is terminated. Our
right of repurchase lapses as the shares vest in a series of equal monthly or
annual installments in accordance with the vesting schedule of the exercised
options.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Shares Percentage of Total Price Appreciation for
Underlying Options Granted to Exercise Option Term
Options Employees Price Per Expiration -----------------------
Name Granted in Last Fiscal Year Share Date 5% 10%
---- ---------- ------------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Timothy J. Kilgallon.... 700,000 21.3% $0.125 6/29/2009 $ 2,407,315 $ 3,885,076
300,000 9.1 0.275 12/19/2009 1,872,174 3,029,991
Dennis P. Schmuland,
MD..................... -- -- -- -- -- --
R. Scott Wiley.......... 75,000 2.3 0.125 1/19/2009 234,959 233,788
50,000 1.5 0.125 5/18/2009 156,639 253,124
75,000 2.3 0.275 12/14/2009 468,043 757,498
Kevin M. Hileman........ -- -- -- -- -- --
Kelly R. Jorgensen...... -- -- -- -- -- --
James D. Farrar......... 75,000 2.3 0.125 1/19/2009 143,334 233,788
50,000 1.5 0.125 6/29/2009 171,951 277,505
</TABLE>
Option Exercises and Holdings
No options were exercised by the named executive officers during the year
ended December 31, 1999. All options were granted under our 1996 stock option
plan.
The following table describes for the named executive officers their
exercisable and unexercisable options held by them as of December 31, 1999.
The value of unexercised in-the-money options at fiscal year end set forth
below is based on the deemed fair market value per share, less the per share
exercise price, multiplied by the number of shares issuable upon exercise of
the option.
41
<PAGE>
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Number of Underlying Unexercised the- Money Options at
Shares Options at Fiscal Year End Fiscal Year End
Acquired on Value -------------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy J. Kilgallon.... -- -- 1,000,000 -- $3,830,000 --
Dennis P. Schmuland,
MD..................... -- -- -- -- -- --
R. Scott Wiley.......... -- -- 400,000 -- $1,547,750 --
Kevin M. Hileman........ -- -- 300,000 -- $1,176,000 --
Kelly R. Jorgensen...... -- -- -- -- -- --
James D. Farrar......... -- -- 125,000 -- $ 484,375 --
</TABLE>
Stock Plans
1996 Stock Option Plan
Our 1996 stock option plan was adopted by the board of directors on October
23, 1996, originally approved by the stockholders on December 1, 1996 and
amended and restated by the board of directors on May 5, 1998 and approved by
the stockholders on June 5, 1998. As of December 31, 1999, 4,750,000 shares of
common stock were reserved for issuance under the 1996 stock option plan,
options to purchase approximately 4,074,075 shares at a weighted average
exercise price of approximately $0.17 were outstanding, an aggregate of 83,332
shares had been exercised and an aggregate of 592,593 shares were available for
future grant under the 1996 plan. In February 2000, our board of directors
increased the shares reserved for issuance under the 1996 stock option plan to
5,250,000.
The 1996 Plan provides for the grant of incentive stock options under the
Internal Revenue Code of 1986, as amended (the Code) to employees and employee
directors and nonstatutory stock options to employees, nonemployee directors
and consultants. The 1996 stock option plan is administered by the compensation
committee, which determines recipients and types of awards to be granted,
including the exercise price, number of shares subject to the award and the
exercisability thereof.
The terms of stock options granted under the 1996 stock option plan may not
exceed ten years. The exercise price of options granted under the 1996 Plan is
determined by the board of directors, provided that the exercise price of an
incentive stock option cannot be less than 100% of the fair market value of the
common stock on the date of the option grant and the exercise price of a
nonstatutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of the option grant. Options granted under the
1996 stock option plan vest at the rate specified in the applicable option
agreement. Generally, the options vest and become exercisable over four years
at the rate of 25% on the first anniversary of the date of grant and the
remaining balance monthly thereafter. No option may be transferred by the
optionee other than by will or the laws of descent or distribution. An optionee
whose relationship with Pointshare ceases for any reason (other than by death
or permanent and total disability) may exercise options in the three-month
period following such cessation (unless such options terminate or expire sooner
by their terms) or in such longer or shorter period specified in the option
agreement. Options may be exercised for up to 12 months after an optionee's
relationship with Pointshare or related corporations ceases due to permanent
disability (unless such options terminate or expire sooner by their terms), and
options may be exercised for up to six (6) months after an optionee's
relationship with Pointshare or related corporations ceases due to non-
permanent disability or death (unless such options expire or terminate sooner
by their terms).
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Pointshare or any affiliate of Pointshare,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of grant. The aggregate fair market
value, determined based on the value at the time of grant, of the shares of
common stock
42
<PAGE>
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all of our equity incentive
plans) may not exceed $100,000. At the discretion of the board of directors,
options may be immediately exercisable, whether vested or not, subject to a
repurchase option in favor of Pointshare of any unvested shares if such
optionee's employment or relationship with Pointshare were to terminate.
In the event a change of control transaction occurs involving Pointshare,
each optionee can exercise their vested options anytime prior to the change of
control transaction. If an employee will remain employed by Pointshare through
consummation of the change of control transaction, all unvested options shall
become fully vested upon consummation of the transaction.
2000 Stock Plan
The 2000 stock plan was adopted by the board of directors in February 2000.
We will be submitting it for approval by the stockholders prior to the closing
of this offering. We have reserved a total of 6,500,000 shares for issuance
under the plan. Pointshare has not issued any options or other stock awards
under the 2000 stock plan to date. The 2000 stock plan provides for the grant
of incentive stock options to employees and directors who are employees, and
the grant of non statutory stock options and stock purchase rights to
employees, non-employee directors and consultants. The compensation committee
currently administers the 2000 stock plan. The administrator of the 2000 stock
plan will determine number, vesting schedule, and exercise price for options,
or conditions for stock purchase rights granted under the 2000 stock plan,
provided, however, an individual employee may not receive aggregate option
grants and stock purchase rights with respect to more than 2,500,000 shares in
any fiscal year, and the exercise price of incentive stock options must be at
least equal to the fair market value of the common stock on the date of grant
or, in the case of a 10% shareholder, at least equal to 110% of the fair market
value of the common stock on the date of grant. Payment of the exercise price
or purchase price may be made in cash or other consideration as determined by
the administrator. In the event a participant is terminated from service for
Pointshare in circumstances that may constitute cause, the participant's right
to exercise any award is suspended until the administrator determines whether
cause existed, and if so, the participant's rights with respect to the award
are forfeited. In the event of a sale of all or substantially all of the assets
of Pointshare, or the merger or consolidation of Pointshare with or into
another corporation, options and stock purchase rights will be assumed or
substituted with equivalent rights by the successor company, or if not assumed
or substituted will vest 100% and be exercisable immediately prior to the
consummation of the transaction. If options and stock purchase rights are
assumed or substituted with equivalent rights and a participant's employment is
involuntarily terminated without cause, the participant will vest in shares
subject to an option or shares subject to repurchase rights which would have
vested in the 24 months following the termination if the participant had
continued in service for such 24 months.
The board of directors may amend or terminate the 2000 stock plan provided
that no action that impairs the rights of any holder of an outstanding option
or purchase rights may be taken without the holder's consent. In addition, we
will obtain requisite stockholder approval for any action requiring stockholder
approval under applicable law. The 2000 stock plan will terminate in February
2010 unless the board of directors terminates it earlier.
1998 Directors Stock Option Plan
Our 1998 directors stock option plan was adopted by the board of directors on
May 5, 1998 and the stockholders on June 5, 1998. As of December 31, 1999,
300,000 shares of common stock were reserved for issuance under the 1998
directors stock option plan. Directors are given an initial grant as well as a
subsequent annual grant. At December 31, 1999, options to purchase 170,000
shares at a weighted average exercise price of approximately $0.16 were
outstanding, an aggregate of 70,000 shares had been exercised and an aggregate
of 60,000 shares were available for future grant under the 1998 directors stock
option plan. In February 2000, our board of directors increased the shares of
common stock reserved for issuance under the 1998 directors
43
<PAGE>
stock option plan to 700,000. The 1998 directors stock option plan will
terminate in May 2008 unless sooner terminated by the board of directors.
The 1998 directors stock option plan provides for the grant of nonstatutory
stock options under the Code to nonemployee directors. The 1998 directors stock
option plan is administered by the compensation committee, which determines
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof.
The terms of stock options granted under the 1998 directors stock option plan
generally may not exceed ten years. The exercise price of options granted under
the 1998 directors stock option plan is determined by the board of directors,
provided that the exercise price of a stock option cannot be less than 100% of
the fair market value of the common stock on the date of the option grant.
Incumbent directors as of May 5, 1998 and newly appointed or elected directors
after that date receive an initial grant of 25,000 shares, and thereafter
subsequent annual grants of 10,000 shares. Initial options granted under the
1998 directors stock option plan vest at the following rates:
. for those who were directors as of May 5, 1998 and were granted options
on May 5, 1998, 50% vested immediately and the remainder on May 5,
2000;
. for directors appointed or elected after May 5, 1998 and before
February 16, 2000, 25% vested immediately at grant, 25% on the first
anniversary of the date of grant and the remaining 50% on the second
anniversary of the date of grant; and
. for directors appointed or elected after February 16, 2000, one-third of
the shares will vest on the first, second and third anniversaries of the
grant date.
Subsequent annual grants in all cases vest 100% on the first anniversary of
the grant date. No stock option may be transferred by the optionee other than
by will or the laws of descent or distribution or pursuant to a domestic
relations order (as defined by the Code). Options may be exercised for up to 90
days after the date the optionee ceases to be one of our directors, provided
that options may be exercised for up to 12 months after an optionee's
relationship with us or related corporations ceases due to disability or up to
6 months after an optionee's relationship with us or related corporations
ceases due to death (unless such options terminate or expire sooner by their
terms).
In the event a change of control transaction occurs involving Pointshare each
optionee can exercise their vested options anytime prior to the change of
control transaction. If the optionee's status as a director continues through
consummation of the change of control transaction, all unvested options shall
become fully vested upon consummation of the transaction, and may be exercised
prior to and contingent on the consummation of the transaction.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by the board of directors
in February, 2000 and will be submitted for approval by our stockholders prior
to completion of this offering. A total of 500,000 shares of common stock has
been reserved for issuance under the 2000 employee stock purchase plan, none of
which have been issued as of the date of this offering. The number of shares
reserved for issuance under the 2000 employee stock purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 1% of
our outstanding common stock on the last day of the immediately preceding
fiscal year, 500,000 shares or a lesser number of shares as the board of
directors determines. The 2000 employee stock purchase plan becomes effective
upon the date of this offering. Unless terminated earlier by the board of
directors, the 2000 employee stock purchase plan will terminate in February,
2020.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will be implemented by a series of
overlapping offering periods of approximately 24 months'
44
<PAGE>
duration, with new offering periods (other than the first offering period)
commencing on May 1 and November 1 of each year. Each offering period will
generally consist of four consecutive purchase periods of six months' duration,
at the end of which an automatic purchase will be made for participants. The
initial offering period is expected to commence on the date of this offering
and end on April 30, 2002; the initial purchase period is expected to begin on
the date of this offering and end on October 31, 2000, with subsequent purchase
periods ending on April 30, 2001, October 31, 2001 and April 30, 2002. The 2000
employee stock purchase plan will be administered by the board of directors or
by a committee appointed by the board. Our employees (including officers and
employee directors), or of any majority-owned subsidiary designated by the
board, are eligible to participate in the 2000 employee stock purchase plan if
they are customarily employed by us or a designated subsidiary for at least 20
hours per week and more than five months per year. The 2000 employee stock
purchase plan permits eligible employees to purchase common stock through
payroll deductions at a rate of not more than 20% of an employee's
compensation. The purchase price is equal to the lower of 85% of the fair
market value of the common stock at the beginning of each offering period or at
the end of each purchase period, subject to certain adjustments as provided in
the plan. Employees may end their participation in the 2000 employee stock
purchase plan at any time during an offering period, and participation ends
automatically on termination of employment. In addition, if the fair market
value on an offering date is less than the fair market value on an offering
date for an offering period in progress, participants in the offering period in
progress are automatically withdrawn from that offering period and enrolled in
the new offering period with the lower offering date fair market value. An
employee is not eligible to participate in the 2000 employee stock purchase
plan if immediately after the grant of an option to purchase stock under the
plan such employee would own stock and/or hold outstanding options to purchase
stock equaling 5% or more of the total voting power or value of all classes of
our stock or stock of our subsidiaries, or if such option would permit an
employee's rights to purchase stock under the 2000 employee stock purchase plan
at a rate that exceeds $25,000 of fair market value of such stock for each
calendar year in which the option is outstanding. If the fair market value of
the common stock on a purchase date is less than the fair market value at the
beginning of the offering period, each participant in that offering period
shall automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new 24-month offering period beginning on
the first business day following the purchase date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
employee stock purchase plan will be assumed or an equivalent right substituted
by our acquiror. If our acquiror did not agree to assume or substitute stock
purchase rights, any offering period and purchase period then in progress would
be shortened and a new exercise date occurring prior to the closing of the
transaction would be set. Outstanding awards will adjust in the event of a
stock split, stock dividend or other similar change in our capital stock. Our
board of directors has the power to amend or terminate the 2000 employee stock
purchase plan and to change or terminate offering periods as long as such
action does not adversely affect any outstanding rights to employee stock
purchase stock thereunder. However, the board of directors may amend or
terminate the 2000 employee stock purchase plan or an offering period even if
it would adversely affect outstanding options in order to avoid our incurring
adverse accounting charges.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
45
<PAGE>
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director or officer of
Pointshare, any subsidiary of Pointshare or any other company or enterprise to
which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
46
<PAGE>
RELATED PARTY TRANSACTIONS
Benefits to Related Parties in Private Placement Transactions
Since our inception in 1995, we have issued and sold shares of our capital
stock and warrants to purchase our capital stock, not including capital stock
or warrants to purchase capital stock issued to our creditors or pursuant to
acquisition transactions, as follows:
. a total of 2,498,000 shares of common stock at a price of $0.03 per
share in April 1996;
. a total of 300,000 shares of common stock at a price of $1.00 per share
from June to October 1996;
. a total of 2,000 shares of common stock at a price of $1.00 per share in
January 1997;
. a total of 60,000 shares of common stock at a price of $1.25 per share
in February 1997;
. a total of 2,860,000 shares of common stock outstanding were converted
into 2,950,500 shares of subordinated convertible preferred stock in
July 1997;
. warrants to purchase up to 250,000 shares of common stock at an exercise
price of $0.08 per share in connection with certain promissory notes
convertible into shares of Series A preferred stock in June 1997;
. a total of 750,000 shares of common stock at a price of $0.08 per share
in July 1997;
. a total of 7,125,000 shares of Series A preferred stock at a price of
$0.80 per share in July 1997;
. a total of 5,785,515 shares of Series B preferred stock at a price of
$1.25 per share in January 1999;
. warrants to purchase up to 258,904 shares of common stock at an exercise
price of $0.08 per share issued in connection with promissory notes
convertible into shares of Series B preferred stock in January 1999;
. a total of 14,635,693 shares of Series C preferred stock at a price of
$2.75 per share in September 1999;
. a total of 146,357 shares of Series C were issued to the investment bank
that represented the Company during the Series C private placement; and
. a total of 1,205,000 shares of Series D preferred stock at a price of
$5.00 per share in February 2000.
All shares of our preferred stock will convert into common stock on a 1-for-1
basis upon the closing of this offering. The following table summarizes the
shares of capital stock purchased by executive officers, directors and 5%
stockholders and their affiliates in these private placement transactions
although this table does not necessarily reflect the currently outstanding
securities:
<TABLE>
<CAPTION>
Subordinated
Convertible Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred Preferred Warrant
Investor (1) Stock Stock Stock Stock Stock Stock Shares
------------ ------- ------------ --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Morgenthaler Venture
Partners IV, L.P. (2).. -- -- 2,500,000 1,480,000 727,273 -- 132,781
ABS Capital Partners
III, L.P. (2).......... -- -- -- -- 3,636,364 -- --
Cardinal Health
Partners, L.P. (2)..... -- -- 1,250,000 680,000 727,273 -- 50,765
Dennis P. Schmuland,
M.D. (2)............... -- 2,255,200 -- -- -- -- --
Utah Ventures II, L.P.
(2).................... -- -- -- 1,600,000 454,545 -- --
Domain Partners III,
L.P. (2)............... -- -- 1,250,000 631,578 -- -- 66,391
Biotechnology
Investments
Limited (2)............ -- -- 1,250,000 631,579 -- -- 66,391
Timothy Kilgallon (2)... 750,000 -- -- -- -- -- 125,000
Seven Hills Partners,
LLC. (2)............... -- -- 750,000 282,000 1,672,728 -- --
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together
for the purposes of this chart. See "Principal Stockholders" for a chart
of beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.
47
<PAGE>
Affiliate Relationships
Robert C. Bellas, Jr., one of our directors, is a general partner of
Morgenthaler Management Partners IV, which is a general partner of Morgenthaler
Venture Partners IV. John D. Stobo, one of our directors, is a managing member
of ABS Partners III, LLC, which is the general partner of ABS Capital Partners
III, L.P. Alan Dishlip, one of our directors, is a general partner of Utah
Venture Partners II, which is a general partner of Utah Ventures II. Cabot
Brown, one of our directors, is a managing member of Seven Hills Partners, LLC,
formerly known as Brown, McMillan & Co., which is the general partner of Brown
McMillan IV, L.P. and BMC HK Partners, L.P.
Transactions with Officers and Directors
Consulting Agreement with Craig T. Davenport. In April 1999, we entered into
a consulting agreement with Mr. Davenport, who has served as one of our
directors since April 1999 and served as chairman of the board since May 1999.
We amended and restated this agreement in February 2000. Pursuant to the
agreement, Mr. Davenport provides consulting services in return for a monthly
fee of $5,000. We have also granted Mr. Davenport options to purchase a total
of 175,000 shares of our common stock in connection with his consulting
services.
Loans to Officers
In January 2000, we issued and sold a full recourse promissory note in the
principal amount of $170,000 bearing 6.21% interest annually to Timothy J.
Kilgallon. We issued the note in connection with the exercise of
Mr. Kilgallon's options. The note is secured by a pledge of the shares of
common stock underlying the exercised options. $87,500 of the principal amount
and interest of Mr. Kilgallon's note is due and payable in June 2004, with the
remaining $82,500 in principal amount and interest due in December 2004.
In January 2000, we issued and sold a full recourse promissory note in the
principal amount of $82,500 bearing 6.21% interest annually to Kirk Collamer.
We issued the note in connection with the exercise of Mr. Collamer's options.
The note is secured by a pledge of the shares of common stock underlying the
exercised options. The principal amount and interest of Mr. Collamer's note is
due and payable in November 2004.
In November 1999, we issued and sold a full recourse promissory note in the
principal amount of $100,000 bearing 6% interest annually to Kelly Jorgensen.
The note is secured by the pledge of the 522,000 shares of common stock held by
Mr. Jorgensen. The note is due on the earlier of (a) November 30, 2001, (b) an
event of any default under the loan agreement or (c) the date of any sale,
conveyance, assignment, alienation or any other form of transfer of
Mr. Jorgensen's pledged common stock. Mr. Jorgensen resigned as our vice
president of sales in August 1999 and served as our executive director of sales
until March 1, 2000. In October 1999, Kelly Jorgensen was indicted in the
United States District Court for the Western District of Washington on
healthcare fraud charges relating to his operation of a business that he owned
and sold in 1997, the year before he joined Pointshare. A primary purpose of
the loan extended by us to Mr. Jorgensen was to provide funds for his defense
in this matter. On March 1, 2000, we terminated Mr. Jorgensen's employment. See
"Management--Proceeding Involving Ex-Officer."
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of December 31, 1999 assuming conversion of all
outstanding shares of preferred stock into common stock and as adjusted to
reflect the sale of shares of common stock offered by Pointshare in this
offering, as to:
. each person or entity (or group of affiliated persons or entities) known
by us to own beneficially more than 5% of our common stock;
. each of our officers named in the summary compensation table;
. each of our directors; and
. all of our directors and named officers as a group.
Except as indicated in the footnotes to this table and under applicable
community property laws, to our knowledge, the persons named in the table have
sole voting power and investment power with respect to all shares of common
stock. As of December 31, 1999, there were 34,019,733 shares of common stock
outstanding, assuming the sale of 1,205,000 shares of Series D convertible
preferred stock, the conversion of all outstanding shares of convertible
preferred stock into common stock, the exercise of warrants to purchase 292,086
shares of our common stock that will expire if not exercised prior to this
offering, and shares of common stock outstanding after this offering.
For the purposes of calculating percent ownership, for any individual who
beneficially owns shares represented by exercisable options, these shares are
counted in the denominator for that person, but not for any other person.
Options held by our named officers and directors are immediately exercisable
and are reflected as outstanding in this table. These shares are subject to a
repurchase option by us which lapses as the shares vest. Warrants held by some
entities holding beneficially 5% of our common stock are immediately
exercisable and are reflected as outstanding under this table. Unless otherwise
indicated, the address of each of the individuals named below is:
c/o Pointshare Corporation, 1300 114th Avenue SE, Suite 100, Bellevue,
Washington 98004.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares ------------------------
Beneficially Prior to This After This
Name and Address of Beneficial Owner Owned Offering Offering
------------------------------------ ------------ ------------- ----------
<S> <C> <C> <C>
Morgenthaler Venture Partners IV (1)..... 4,875,054 14.3% %
2730 Sand Hill Road, Suite 280
Menlo Park, CA 94025
Robert C. Bellas, Jr. (1)................ 4,875,054 14.3
ABS Capital Partners III, L.P. (2)....... 3,661,364 10.8
101 California Street, 47th Floor
San Francisco, CA 94111
John D. Stobo, Jr. (2)................... 3,661,364 10.8
Seven Hills Partners, LLC (3)............ 2,729,728 8.0
930 Montgomery Street, Suite 301
San Francisco, CA 94133
Cabot Brown (3).......................... 2,729,728 8.0
Cardinal Health Partners, L.P. (4)....... 2,708,038 7.9
221 Nassau Street
Princeton, NJ 08542
Dennis P. Schmuland...................... 2,238,325 6.6
Utah Ventures II, L.P. (5)............... 2,079,545 6.1
10700 SW Beaverton Hillsdale Highway,
Suite 548
Beaverton, OR 97005
Alan Dishlip (5)......................... 2,079,545 6.1
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares ------------------------
Beneficially Prior to This After This
Name and Address of Beneficial Owner Owned Offering Offering
------------------------------------ ------------ ------------- ----------
<S> <C> <C> <C>
Domain Partners III, L.P. (6).......... 1,982,969 5.8% %
One Palmer Square, Suite 515
Princeton, N.J. 08542
Biotechnology Investments Limited (7).. 1,947,970 5.7
St. Peter Port House
Sausmarez Street
St. Peter Port, Guernsey GY1 3PH
Great Britain
Timothy J. Kilgallon (8)............... 1,875,000 5.4
Kelly R. Jorgensen (9)................. 522,000 1.5
R. Scott Wiley (10).................... 400,000 1.2
Kirk A. Collamer (11).................. 300,000 *
Kevin M. Hileman (12).................. 300,000 *
Craig T. Davenport (13)................ 200,000 *
James D. Farrar (14)................... 125,000 *
Steven J. Dennis (15).................. 91,250 *
All 13 named officers and directors as
a group (16).......................... 19,397,266 52.9% %
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Consists of 4,707,273 shares, 132,781 shares subject to warrants held of
record by Morgenthaler Venture Partners IV and 35,000 shares subject to
options held of record by Mr. Bellas, one of our directors. The shares
subject to options are exercisable within 60 days of December 31, 1999,
at which date 25,000 shares subject to options are fully vested. Mr.
Bellas is a general partner of Morgenthaler Management Partners IV, which
is a general partner of Morgenthaler Venture Partners IV. Mr. Bellas
disclaims beneficial ownership of the shares held by this entity except
to the extent of his pecuniary interest in them.
(2) Represents 3,636,364 shares held of record by ABS Capital Partners III,
L.P. and 25,000 shares subject to options held of record by Mr. Stobo,
one of our directors, as nominee of ABS Capital Partners III, L.P. The
shares subject to options are exercisable within 60 days of December 31,
1999, at which date 6,250 shares subject to options are fully vested. Mr.
Stobo is a managing member of ABS Partners III, LLC, which is the general
partner of ABS Capital Partners III, L.P. Mr. Stobo disclaims beneficial
ownership of the shares held by this entity except to the extent of his
pecuniary interest in them.
(3) Represents 1,032,000 shares held of record by BMC HK Partners, L.P., and
1,672,728 shares and 25,000 shares subject to options held of record by
Brown McMillan IV, L.P. The shares subject to options are exercisable
within 60 days of December 31, 1999, at which date 6,250 shares subject
to options are fully vested. Mr. Brown, one of our directors, is a
managing director of Seven Hills Partners, LLC, formerly known as Brown,
McMillan & Co., which is the general partner of Brown McMillan IV, L.P.
and BMC HK Partners, L.P. Mr. Brown disclaims beneficial ownership in the
shares held by these entities except to the extent of his pecuniary
interest therein.
(4) Represents 2,657,273 shares and 50,765 shares subject to warrants held of
record by Cardinal Health Partners, L.P.
(5) Represents 2,054,545 shares held of record by Utah Ventures II and 25,000
shares subject to options held of record by Mr. Dishlip, one of our
directors, as nominee of Utah Ventures II. The shares subject to options
are exercisable within 60 days of December 31, 1999, at which date 12,500
shares subject to
50
<PAGE>
options are fully vested. Mr. Dishlip is a general partner of Utah
Venture Partners II, which is a general partner of Utah Ventures II. Mr.
Dishlip disclaims beneficial ownership in the shares held by this entity
except to the extent of his pecuniary interest in them.
(6) Represents 1,818,660 shares and 64,171 shares subject to warrants held
of record by Domain Partners III, L.P., 62,918 shares and 2,220 shares
subject to warrants held of record by DP III Associates, L.P. and 35,000
shares held of record by Richard S. Schneider, Ph.D. Mr. Schneider, who
served as one of our directors until September 1999, is a general
partner of One Palmer Squares Associates III, L.P., which is a general
partner of Domain Partners III, L.P. and DP III Associates, L.P.
(7) Represents 1,881,579 shares and 66,391 shares subject to warrants held
of record by Old Court Limited, the nominee for Biotechnology
Investments Limited.
(8) Represents 875,000 shares and 1,000,000 shares subject to options held
of record by Mr. Kilgallon. The shares subject to options are
exercisable within 60 days of December 31, 1999, at which date
250,000 shares subject to options are fully vested and an additional
200,000 shares subject to options will vest upon the closing of this
offering.
(9) Mr. Jorgensen was our vice president of sales from March 1998 to
September 1999 and, thereafter, our executive director of sales until
March 1, 2000. Mr. Jorgensen's employment was terminated on March 1,
2000. See "Management--Proceeding Involving Ex-Officer."
(10) Represents 400,000 shares subject to options exercisable within 60 days
of December 31, 1999, at which date 124,479 shares subject to options
are fully vested.
(11) Represents 300,000 shares subject to options exercisable within 60 days
of December 31, 1999, at which date no shares subject to options are
fully vested.
(12) Represents 300,000 shares subject to options exercisable within 60 days
of December 31, 1999, at which date 217,708 shares subject to options
are fully vested.
(13) Represents 200,000 shares subject to options exercisable within 60 days
of December 31, 1999, at which date 81,250 shares subject to options are
fully vested and an additional 25,000 shares subject to options will
vest upon closing of this offering.
(14) Represents 125,000 shares subject to options exercisable within 60 days
of December 31, 1999, at which date 18,750 shares subject to options are
fully vested.
(15) Includes 60,000 shares subject to options exercisable within 60 days of
December 31, 1999, at which date 50,000 shares subject to options are
fully vested.
(16) Includes 2,495,000 shares subject to options beneficially held of record
by directors and named officers exercisable within 60 days of December
31, 1999 and 164,031 shares subject to warrants beneficially held of
record by directors and officers.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
As of the close of this offering, our authorized capital stock will consist
of 200,000,000 shares of common stock, par value $0.001 per share, and
10,000,000 shares of preferred stock, par value $0.001 per share.
Common Stock
As of December 31, 1999, there were 34,019,733 shares of common stock
outstanding, assuming the sale of 1,205,000 shares of Series D convertible
preferred stock, the conversion of all outstanding shares of convertible
preferred stock into common stock and the exercise of warrants to purchase
292,086 shares of our common stock that will expire if not exercised prior to
this offering.
The holders of common stock are entitled to one vote per share on all matters
to be voted on by the stockholders. There are no cumulative voting rights.
Subject to preferences that may be applicable to any outstanding preferred
stock, the holders of common stock are entitled to receive dividends, if any,
as may be declared by the board of directors out of funds legally available for
dividends. In the event of a liquidation, dissolution or winding up of
Pointshare, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
preferred stock, if any, then outstanding. The common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without vote or action of the
stockholders, to issue one or more series and to designate the rights,
preferences and privileges of each series, any or all of which may be greater
than the rights of the common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change in control of
Pointshare without further action by the stockholders. We may consider using a
portion of these shares of preferred stock in connection with the potential
adoption of a preferred shares rights agreement as more fully described below
under "Anti-takeover Provisions." We have no other present plans to issue any
shares of preferred stock.
Warrants
As of December 31, 1999, warrants were outstanding to purchase an aggregate
of 633,836 shares of common stock with exercise prices ranging from $0.08 and
$1.25 per share. Of these, warrants to purchase 292,086 shares of common stock
will automatically terminate upon completion of this offering. Of the warrants
to purchase 341,750 shares of common stock still outstanding after the closing
of this offering, the terms of those warrants are as follows:
. a warrant to purchase 160,000 shares of common stock at an exercise
price of $0.08 will terminate on the earlier of a merger or other
reorganization or July 2002;
. a warrant to purchase 31,250 shares of common stock at an exercise price
of $0.08 will terminate in July 2002;
. a warrant to purchase 15,103 shares of common stock at an exercise price
of $0.08 will terminate in July 2002;
. a warrant to purchase 31,250 shares of common stock at an exercise price
of $0.08 will terminate in July 2002;
52
<PAGE>
. a warrant to purchase 15,625 shares of common stock at an exercise price
of $0.08 will terminate in July 2002;
. a warrant to purchase 522 shares of common stock at an exercise price of
$0.08 will terminate in July 2002;
. a warrant to purchase 36,000 shares of common stock at an exercise price
of $1.25 will terminate on the earlier of August 2009 or the fifth
anniversary of the closing of this offering; and
. a warrant to purchase 52,000 shares of common stock at an exercise price
of $1.25 will terminate on the earlier of August 2009 or the fifth
anniversary of the closing of this offering.
Registration Rights
As of December 31, 1999, the holders of approximately 29,239,750 shares of
common stock, including shares of common stock issuable upon exercise of
warrants, are entitled to certain rights with respect to registration of such
shares under the Securities Act. We refer to these shares as the "registrable
securities," although some of these shares that are held by holders of shares
of our common stock are only considered to be registrable securities for
purposes of participation in registrations undertaken by us. These rights are
provided under the terms of an agreement between us and the holders of these
securities. Under these registration rights, beginning on the earlier of July
1, 2002, or six months after the effective date of this offering, holders of at
least 40% of the then-outstanding registrable securities may require by a
written request that we register their shares for public resale provided that
the value of the securities to be registered is at least $15,000,000, net of
underwriting discounts and commissions. We are obligated to effect no more that
two of these registrations requested by the holders of registrable securities.
In addition, any holder or holders of then-outstanding registrable securities
may require that we register their shares for public resale on Form S-3 or
similar short-form registration, provided we are eligible to use Form S-3 or
similar short-form registration statement and that the value of the securities
to be registered is at least $1,000,000. In the event Pointshare elects to
register any of its shares of common stock in a public offering, the holders of
registrable securities are entitled to include their shares of common stock in
the registration, subject to the ability of the underwriters to limit the
number of shares included in this offering. We are required to pay all expenses
in connection with any of these registration other than underwriting discounts
and commissions. All registration rights will terminate five years after the
date of this offering or, with respect to each holder of registrable
securities, at the time as the holder is entitled to sell all of its shares in
any three month period under Rule 144 of the Securities Act.
Anti-Takeover Provisions
Provisions of Delaware and Washington law and our certificate of
incorporation and bylaws could make more difficult the acquisition of
Pointshare by a third party and the removal of incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of us to first negotiate with
us. We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
53
<PAGE>
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder
at an annual or special meeting of stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
In addition, upon completion of this offering, we will have in place the
following provisions which may have the effect of delaying or preventing
changes in control of Pointshare:
. we will have provisions in our charter documents that will limit the
ability of our stockholders to call meetings of the stockholders;
. we will eliminate the ability of our stockholders to take action by
written consent; and
. we will have authorized 10,000,000 shares of preferred stock that,
without further vote or action by the stockholders, may be issued by the
board of directors to impede the success of any attempt to change
control of Pointshare.
The laws of the State of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, the WBCA prohibits a "target corporation,"
with certain exceptions, from engaging in certain "significant business
transactions" with a person or group of persons who beneficially own 10% or
more of the voting securities of the target corporation (an acquiring person)
for a period of five years after such acquisition unless the transaction or
acquisition of such shares is approved by a majority of the members of the
target corporation's board of directors prior to the time of acquisition.
Such prohibited transactions include, among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive disproportionate benefit as a
stockholder.
After the five-year period, a significant business transaction may take place
as long as it complies with certain fair price provisions of the statute.
A target corporation includes a foreign corporation if:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act;
. the corporation's principal executive office is located in Washington;
. any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of
record by Washington residents, or (c) 1,000 or more of its stockholders
of record are Washington residents;
54
<PAGE>
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. a majority of the corporation's tangible assets are located in
Washington or the corporation has more than $50.0 million of tangible
assets located in Washington.
A corporation may not "opt out" of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition of
a target corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change in control.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Pointshare. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Pointshare.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services LLC. The Transfer Agent's address is 520 Pike Street,
Suite 1220, Seattle, WA 98101, and its telephone number is (206) 674-3030.
Listing
We will apply for quotation of our common stock on The Nasdaq National Market
under the symbol "PSHR".
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale, as described below,
sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and
impair our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares of
common stock. Of these shares, the shares sold in this offering, plus
any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act (generally, officers, directors or 10% stockholders).
The remaining 34,019,733 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of the restricted shares
in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Credit Suisse First Boston
Corporation, the representative of the underwriters. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until such agreements expire or are waived by
Credit Suisse First Boston Corporation. Credit Suisse First Boston Corporation
may, in its sole discretion at any time without notice, release all or any
portion of the shares restricted by lock-up agreements. Taking into account the
lock-up agreements, and if Credit Suisse First Boston Corporation does not
release stockholders from these agreements, the following shares will be
eligible for sale in the public market at the following times:
. beginning on the effective date of this prospectus, only the shares sold
in this offering will be immediately available for sale in the public
market;
. beginning 180 days after the effective date, approximately 903,332
shares will be eligible for sale pursuant to Rule 701 and approximately
17,129,351 additional shares will be eligible for sale pursuant to Rule
144, of which 6,036,336 shares are held by affiliates; and
. an additional 14,727,504 shares will be eligible for sale pursuant to
Rule 144 after September 2000, an additional 54,546 shares will be
eligible for sale pursuant to Rule 144 after November 2000 and an
additional 1,205,000 shares will be eligible for sale pursuant to Rule
144 after February 2001. Shares eligible to be sold by affiliates
pursuant to Rule 144 are subject to volume restrictions as described
below.
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person, or persons whose shares are aggregated, who
has beneficially owned restricted securities for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of the following:
. one percent of the number of shares of common stock then outstanding
(which will equal approximately shares immediately after the
offering); or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
56
<PAGE>
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements, and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate 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, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with some of the restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. In addition,
we intend to file registration statements under the Securities Act as promptly
as possible after the effective date to register shares to be issued pursuant
to our employee benefit plans. As a result, any options exercised under the
1996 stock option plan, the 1998 directors option plan, or any other benefit
plan after the effectiveness of such registration statement will also be freely
tradable in the public market, except that shares held by affiliates will still
be subject to the volume limitation, manner of sale, notice and public
information requirements of Rule 144 unless otherwise resalable under Rule 701.
As of December 31, 1999, there were outstanding options for the purchase of
4,244,075 shares of our common stock under our employee benefit plans.
57
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Thomas Weisel
Partners LLC, J.C. Bradford & Co. and William Blair & Company L.L.C., are
acting as representatives, the following respective number of shares of common
stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Thomas Weisel Partners LLC.........................................
J.C. Bradford & Co. ...............................................
William Blair & Company, L.L.C. ...................................
------
Total............................................................
======
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock in the offering if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an
underwriter defaults, the purchase commitments of non-defaulting underwriters
may be increased or the offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata
basis up to additional shares at the initial offering price less the
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters
and the selling group members may allow a discount of $ per share on sales
to other broker/dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions paid
by us.................. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge disposition or
filing without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
for issuances pursuant to the exercise of employee stock options outstanding on
the date hereof and the filing of a registration statement on Form S-8 covering
shares of common stock reserved for issuance under our compensation plans.
58
<PAGE>
Our officers and directors and all of our stockholders have agreed that they
will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any
of the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to shares of common stock for our customers, business
partners and other parties, including friends and family of key employees of
Pointshare. The number of shares available for sale to the general public will
be reduced to the extent that these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We will apply to list our common stock on The Nasdaq National Market under
the symbol "PSHR."
Prior to this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between us
and the representatives. The principal factors to be considered in determining
the public offering price include the following:
. the information included in this prospectus and otherwise available to
the representatives;
. market conditions for initial public offerings;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives, on behalf of the underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
59
<PAGE>
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has acted as a lead or co-manager on
numerous public offerings of equity securities. Thomas Weisel Partners does not
have any material relationship with us or any of our officers, directors or
other controlling persons, except with respect to its contractual relationship
with us pursuant to the underwriting agreement entered into in connection with
this offering.
60
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to us and the dealer from whom the purchase
confirmation is received that (i) such purchaser is entitled under applicable
provincial securities laws to purchase such common stock without the benefit of
a prospectus qualified under such securities laws, (ii) where required by law,
that such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario Securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgement obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
61
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Venture Law Group, A Professional Corporation, Kirkland, Washington, and for
the underwriters by Shearman & Sterling, Menlo Park, California. As of the date
of this prospectus, investment partnerships associated with Venture Law Group
own an aggregate of 20,364 shares of our preferred stock, and individual
attorneys of Venture Law Group beneficially own 8,891 shares of our preferred
stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999 and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We've included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given in their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by us. This prospectus, which constitutes a part of the
registration statement, does not contain all the information set forth in the
registration statement and the exhibits and schedules filed as a part of the
registration statement. For further information about us and our common stock,
we refer you to the registration statement and to the exhibits and schedules
filed as a part of the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected by anyone
without charge at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of prescribed fees. Information on the operation of the Public
Reference Room can be obtained by calling 1-800-SEC-0330. The SEC maintains a
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
62
<PAGE>
POINTSHARE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Pointshare Corporation
We have audited the accompanying balance sheets of Pointshare Corporation as
of December 31, 1998 and 1999 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pointshare Corporation at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Seattle, Washington
January 21, 2000
F-2
<PAGE>
POINTSHARE CORPORATION
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
----------------- December 31,
1998 1999 1999
------- -------- -------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 905 $ 35,912
Accounts receivable, less allowance for
doubtful accounts of
$0 in 1998 and $13 in 1999................. 116 340
Prepaid expenses............................ 103 243
Other current assets........................ -- 55
------- --------
Total current assets.......................... 1,124 36,550
Furniture and equipment, net.................. 868 2,062
Goodwill, net................................. 704 650
Other assets.................................. 69 486
------- --------
Total assets.................................. $ 2,765 $ 39,748
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 436 $ 585
Accrued liabilities......................... 200 1,034
Deferred revenue............................ 24 77
Convertible short-term notes payable........ 1,500 --
Current portion of long-term debt........... 164 831
------- --------
Total current liabilities..................... 2,324 2,527
Long-term debt, less current portion.......... 1,015 1,394
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value:
35,000,000 shares authorized; 10,075,500
and 30,643,065 shares issued and
outstanding at December 31, 1998 and 1999,
respectively, none pro forma (aggregate
preference in liquidation of $53,878)...... 10 31 $ --
Common stock, $0.001 par value: 20,000,000
shares authorized; 1,794,604 and 1,879,582
shares issued and outstanding at December
31, 1998 and 1999, respectively (32,522,647
shares pro forma).......................... 2 2 33
Additional paid-in capital.................. 6,184 59,450 59,450
Deferred stock-based compensation........... (66) (5,880) (5,880)
Accumulated deficit......................... (6,704) (17,776) (17,776)
------- -------- --------
Total stockholders' equity (deficit)...... (574) 35,827 $ 35,827
------- -------- ========
Total liabilities and stockholders'
equity................................... $ 2,765 $ 39,748
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
POINTSHARE CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
--------- ------- ---------
<S> <C> <C> <C>
Revenue:
Subscription fees............................ $ 68 $ 203 $ 507
Installation, implementation and other....... 33 303 782
--------- ------- ---------
Total revenue.............................. 101 506 1,289
Operating expenses:
Telecommunications and connectivity.......... 47 408 1,124
Customer service............................. 313 1,254 3,482
Development.................................. 432 1,312 2,116
Sales and marketing.......................... 271 845 1,542
General and administrative................... 1,004 1,272 2,550
Non-cash stock-based compensation............ 11 43 1,689
--------- ------- ---------
Total operating expenses................... 2,078 5,134 12,503
--------- ------- ---------
Loss from operations........................... (1,977) (4,628) (11,214)
Other income (expense):
Interest income.............................. 75 101 661
Interest expense............................. (11) (102) (519)
--------- ------- ---------
Total other income (expense)................... 64 (1) 142
--------- ------- ---------
Net loss....................................... $ (1,913) $(4,629) $ (11,072)
========= ======= =========
Basic and diluted net loss per share........... $ (1.32) $ (9.69) $ (9.75)
========= ======= =========
Shares used in calculation of basic and diluted
net loss per share............................ 1,449,782 477,700 1,135,534
========= ======= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
POINTSHARE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Deferred Total
----------------- ------------------ Paid-In Stock-Based Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
---------- ------ ---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... -- $-- 2,798,000 $ 370 $ -- $ -- $ (162) $ 208
Issuance of common
stock................. -- -- 93,250 77 2 -- -- 79
Issuance of Series A
Preferred stock, net
of stock issuance
costs of $105......... 7,125,000 7 -- -- 5,588 -- -- 5,595
Conversion of common
stock to subordinated
convertible
preferred............. 2,950,500 3 (2,860,000) (447) 444 -- -- --
Deferred compensation
for common stock
issued for services... -- -- 1,000,000 1 79 (79) -- 1
Amortization of
deferred
compensation.......... -- -- -- -- -- 11 -- 11
Net loss............... -- -- -- -- -- -- (1,913) (1,913)
---------- ---- ---------- ----- ------- ------- -------- --------
Balance at December 31,
1997................... 10,075,500 10 1,031,250 1 6,113 (68) (2,075) 3,981
Issuance of common
stock................. -- -- 193,354 -- 15 -- -- 15
Fair market value of
warrants issued....... -- -- -- -- 11 -- -- 11
Common stock and
deferred compensation
recorded in connection
with acquisition of
business.............. -- -- 570,000 1 45 (41) -- 5
Amortization of
deferred
compensation.......... -- -- -- -- -- 43 -- 43
Net loss............... -- -- -- -- -- -- (4,629) (4,629)
---------- ---- ---------- ----- ------- ------- -------- --------
Balance at December 31,
1998................... 10,075,500 10 1,794,604 2 6,184 (66) (6,704) (574)
Issuance of common
stock................. -- -- 84,978 -- 8 -- -- 8
Issuance of Series B
Preferred stock, net
of stock issuance
costs of $44.......... 5,785,515 6 -- -- 7,182 -- -- 7,188
Issuance of Series C
Preferred stock, net
of stock issuance
costs of $3,065....... 14,782,050 15 -- -- 37,571 -- -- 37,586
Fair market value of
warrants and options
issued for services... -- -- -- -- 1,002 -- -- 1,002
Deferred stock-based
compensation.......... -- -- -- -- 7,503 (7,503) -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 1,689 -- 1,689
Net loss............... -- -- -- -- -- -- (11,072) (11,072)
---------- ---- ---------- ----- ------- ------- -------- --------
Balance at December 31,
1999................... 30,643,065 $ 31 1,879,582 $ 2 $59,450 $(5,880) $(17,776) $ 35,827
========== ==== ========== ===== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
POINTSHARE CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss....................................... $(1,913) $(4,629) $(11,072)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense........ 79 324 779
Noncash stock-based compensation expense..... 13 49 2,433
Change in operating assets and liabilities:
Accounts receivable........................ (56) (12) (224)
Prepaid expenses........................... (17) (86) (140)
Other assets............................... (35) (23) (320)
Accounts payable........................... 41 280 149
Accrued liabilities........................ 116 37 834
Deferred revenue........................... 53 (51) 53
-------- -------- ---------
Net cash used in operating activities.......... (1,719) (4,111) (7,508)
Investing activities:
Purchases of furniture and equipment........... (482) (591) (1,711)
Acquisitions, net of cash acquired............. -- (683) 6
-------- -------- ---------
Net cash used in investing activities.......... (482) (1,274) (1,705)
Financing activities:
Proceeds from notes payable equipment
financing..................................... 218 676 799
Proceeds from notes payable acquisition
financing..................................... -- 337 350
Proceeds from note payable..................... 25 -- --
Principal payments related to note payable..... (100) (53) (303)
Principal payments related to capital leases... -- -- (13)
Proceeds from bridge financing................. 200 1,500 --
Repayment of bridge financing.................. (200) -- (1,500)
Proceeds from sale of preferred stock, net of
issuance costs................................ 5,595 -- 44,774
Proceeds from sale of common stock and exercise
of warrants................................... 78 20 113
-------- -------- ---------
Net cash provided by financing activities...... 5,816 2,480 44,220
-------- -------- ---------
Net increase (decrease) in cash................ 3,615 (2,905) 35,007
Cash and cash equivalents at beginning of
year.......................................... 195 3,810 905
-------- -------- ---------
Cash and cash equivalents at end of year....... $ 3,810 $ 905 $ 35,912
======== ======== =========
Supplementary disclosures of cash flow
information:
Cash paid during the year for interest......... $ 10 $ 55 $ 195
======== ======== =========
Noncash investing and financing activities:
Stock issued in connection with acquisition of
MedLynx, LLC.................................. $ -- $ 46 $ --
======== ======== =========
Computer and office equipment acquired under
capital lease obligations..................... $ -- $ -- $ 214
======== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
Pointshare is an Internet technology-based provider of secure, private,
business-to-business e-commerce and online information services for local
healthcare communities. The Company has developed and implemented a proprietary
system that facilitates communication among and accessibility to the variety of
healthcare participants in local communities, such as physician practices,
hospitals, payors, laboratories, imaging centers and suppliers.
Cash and Cash Equivalents
Cash and cash equivalents represent short-term investments consisting of
commercial paper and money market funds carried at fair market value, which
approximates cost. The Company considers all short-term investments purchased
with remaining maturities of three months or less to be cash equivalents.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is provided on the
straight-line basis for financial statement purposes and accelerated methods
for federal income tax purposes over estimated useful lives ranging from 3 to 5
years. Expenditures for maintenance and repairs are expensed as incurred.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. Goodwill is being amortized on a straight-line basis over 15
years.
Long-Lived Assets
In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internal and external,
that may suggest impairment. To date, no such impairment has been indicated.
Should there be an impairment in the future, the Company will measure the
amount of the impairment based on undiscounted expected future cash flows from
the impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using assumptions and projections appropriate and
customary at the time.
Software Development Costs
Software development costs are incurred in the development or enhancement of
software utilized in providing the Company's services. Software development
costs incurred after the establishment of technological feasibility for each
product or process have been immaterial, and accordingly have been expensed as
incurred.
Advertising
Advertising costs are expensed as incurred. No advertising expenses were
incurred in 1997. Advertising expense was $93,000 in 1998 and $98,000 in 1999.
Income Taxes
SFAS No. 109, "Accounting for Income Taxes," requires the recognition of
deferred taxes for temporary differences in the basis of assets and liabilities
for book and tax purposes. If it is more likely than not that some
F-7
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
portion of a deferred tax asset will not be realized, a valuation allowance is
recognized. A full valuation allowance was established against the Company's
deferred tax assets.
Revenue Recognition
The Company generates revenues from services that include providing access to
its on-line information network and performing installation and implementation
and other consulting services. Subscription-based revenue for its on-line
information network is generated on a per-user basis and is recognized monthly
as the services are provided. Installation and implementation revenues
generally consist of fees associated with building out customers' existing
internal networks or creating new networks, and typically include hardware,
implementation and installation. Revenues for implementation are recognized
when the hardware is delivered or over the period of time the work is
performed, generally two to three months. Revenues from consulting services,
which consist primarily of training and other miscellaneous services, are
recognized upon completion of the services. Cash received in excess of revenue
recognized relating to such services has been recorded as deferred revenue in
the accompanying balance sheets.
Net Loss Per Share
Net loss per share is calculated using the weighted-average number of common
shares outstanding less the number of shares subject to repurchase. Common
stock that the Company has the right to repurchase and shares associated with
outstanding stock options, warrants and convertible preferred stock are not
included in the calculation of diluted loss per share because they are
antidilutive.
Fair Value of Financial Instruments
At December 31, 1999, the Company had the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and long-term debt. The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities
approximates their fair value based on the liquidity of these financial
instruments or based on their short-term nature. The carrying value of debt
approximates fair value based on the market interest rates available to the
Company for debt of similar risk and maturities.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of its holdings of cash and cash
equivalents. Banking and investing with credit-worthy financial institutions
mitigates risks associated with cash and cash equivalents.
Two customers in each of the three years in the period ended December 31,
1999 accounted for more than 10% of the revenues. The concentration of credit
risk in accounts receivable arising from the limited customer base is mitigated
by the Company's credit evaluations of its customers' financial condition. The
Company generally does not require collateral from its customers and to date,
bad debt write offs have been immaterial.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by SFAS No. 123 "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense related to
the Company's employee stock options is measured based on the intrinsic value
of the stock option. SFAS No. 123 requires companies that continue to follow
APB No. 25 to provide pro forma disclosure of the impact of applying the fair
value method of SFAS No. 123. The Company recognizes compensation expense for
options granted to non-employees in accordance with the
F-8
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
provisions of SFAS No. 123 and the Emerging Issues Task Force consensus Issue
96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services,"
which require using a Black-Scholes option pricing model and remeasuring such
stock options to the current fair market value until the performance date has
been reached.
Deferred stock-based compensation consists of amounts recorded when the
exercise price of an option or the sales price of restricted stock was lower
than the subsequently determined deemed fair value for financial reporting
purposes. Deferred stock-based compensation is amortized over the vesting
period of the underlying option.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Comprehensive Income (Loss)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company adopted SFAS No. 130 on January 1,
1998. The Company had no items of other comprehensive income or loss during the
periods presented.
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The Company
adopted SFAS No. 131 on January 1, 1998. The Company operates in one operating
segment.
2. Balance Sheet Accounts
Furniture and Equipment
Furniture and equipment at December 31, 1998 and 1999 consists of:
<TABLE>
<CAPTION>
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Computer and office equipment............................... $ 788 $2,200
Software.................................................... 309 588
Furniture................................................... 87 201
Leasehold improvements...................................... 65 181
------ ------
1,249 3,170
Less accumulated depreciation............................... 381 1,108
------ ------
$ 868 $2,062
====== ======
</TABLE>
F-9
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Balance Sheet Accounts--(continued)
At December 31, 1999, equipment with a cost of $238,000 and a net book value
of $199,000 is capitalized under lease arrangements. Amortization is included
with depreciation expense in the accompanying financial statements.
Notes Receivable
At December 31, 1999, included in other assets is a $100,000 note receivable
due from an officer of the Company. The note bears interest at 6.0% and
compounds on an annual basis. Principal and interest are due on November 30,
2001.
Accrued Liabilities
Accrued liabilities at December 31, 1998 and 1999 consists of:
<TABLE>
<CAPTION>
1998 1999
---- ------
(In
thousands)
<S> <C> <C>
Employee compensation and benefits............................ $160 $ 997
Sales tax on deferred and other revenue....................... 1 20
Interest payable on bridge loans.............................. 30 --
Interest payable on long-term debt............................ 9 17
---- ------
Total....................................................... $200 $1,034
==== ======
</TABLE>
3. Acquisitions
Effective March 18, 1998, the Company purchased the net assets of MedLynx,
LLC for $318,000 in cash and 57,000 shares of common stock valued at $5,000.
The transaction has been accounted for as a purchase and accordingly, the
purchase price has been allocated based on the fair value of assets acquired
and liabilities assumed. The excess of the purchase price over the net tangible
assets and intangible assets acquired has been allocated to goodwill. In
addition, 513,000 shares of common stock were issued to the founder of MedLynx
and are subject to continuing employment by the holder. Accordingly, the fair
value of these shares, $41,000, has been recorded as deferred compensation and
is being amortized over the vesting period of three years using a grading
vesting method. At December 31, 1999, 199,500 shares are subject to repurchase.
Effective December 10, 1998, the Company purchased the net assets related to
the Omen Network owned by Peregrin Medical Review, Inc. for $365,000 in cash.
The transaction was accounted for as a purchase and accordingly, the purchase
price has been allocated based on the fair value of assets acquired and
liabilities assumed. The excess of the purchase price over the net tangible
assets and intangible assets acquired has been allocated to goodwill.
Accumulated amortization of goodwill was $21,000 in 1998 and $48,000 in 1999.
4. Convertible Short-Term Notes Payable
In July 1997, the Company repaid convertible short-term notes payable to
stockholders totaling $200,000, plus accrued interest of $2,497. In addition,
the Company issued to the promissory note holders 250,000 warrants to purchase
common stock at $.08 per share. The warrants vested immediately and expire
June 10, 2002. During 1997 and 1998 31,250 and 125,000 warrants, respectively,
were exercised. As of December 31, 1999, 93,750 warrants remain outstanding.
F-10
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Convertible Short-Term Notes Payable--(continued)
In November 1998, the Company issued convertible short-term promissory notes
payable to certain stockholders totaling $1,500,000, with an interest rate of
8%, due upon the earlier of the next equity financing or March 31, 1999. In
January 1999, the Company repaid the notes plus accrued interest of $21,000
with the proceeds from the sale of Series B Convertible Preferred Stock
("Series B"). In addition, in January 1999, the Company issued to the
promissory note holders 258,904 warrants to purchase common stock at $.08 per
share. The $308,000 fair value of the warrants was determined based on the
Black-Scholes pricing model based upon a deemed fair value of the underlying
common stock of $1.25 per share, a risk free interest rate of 6%, a dividend
yield rate of 0%, volatility of 0.6 and an expected life of 5 years, and has
been charged to interest expense in 1999. The warrants vested immediately and
expire November 10, 2003. At December 31, 1999, no warrants have been
exercised.
5. Long-Term Debt
Long-term debt at December 31, 1998 and 1999 consists of:
<TABLE>
<CAPTION>
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Equipment term loan......................................... $1,179 $1,292
Other term loans............................................ -- 732
Capitalized lease obligations............................... -- 201
------ ------
Total long-term debt........................................ 1,179 2,225
Less current portion........................................ 164 831
------ ------
Long-term debt, less current portion........................ $1,015 $1,394
====== ======
</TABLE>
Equipment Term Loan
The equipment term loan is payable to Imperial Bank ("Imperial"), is
collateralized by a blanket lien against corporate assets and is payable in
monthly installments through July 2002. The term loan bears interest at prime
plus 1.5% (10% at December 31, 1999). There are no additional borrowings
available as of December 31, 1999 under this term loan.
In September 1999, the Company entered into an additional $1,000,000
equipment term loan facility with Imperial. The additional term loan facility
bears interest at prime plus 0.75%. This term loan is also collateralized by a
blanket lien against corporate assets. There were no borrowings outstanding
under this term loan as of December 31, 1999.
Other Term Loans
During 1999, the Company entered into term loan arrangements with Imperial
and Phoenix Growth Capital ("Phoenix") payable in monthly installments through
September 2002. The term loans bear interest at prime plus 1.5% (10% at
December 31, 1999) and 13.5%, respectively. The term loan payable to Imperial
is collateralized by a blanket lien against corporate assets. The term loans
payable to Phoenix are collateralized by the computer and office equipment. At
December 31, 1999, $303,000 and $429,000 were outstanding under the Imperial
and Phoenix loans, respectively. Monthly payments totaling $11,667 are due on
the Imperial loan through February 2002. Monthly payments totaling $14,712 are
due on the Phoenix loans through September 2002, with a balloon payment
totaling $51,000 due in September 2002. As of December 31, 1999, no additional
borrowings are available under the Imperial term loan. There is $1,571,000
available under the Phoenix term loan arrangement.
F-11
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Long-Term Debt--(continued)
In connection with the Phoenix term loan agreement, the Company issued
Phoenix a warrant to purchase 88,000 shares of Series B preferred stock at
$1.25 per share. The warrant is exercisable for a period no greater than 10
years or the Company's completion of an initial public offering, whichever
occurs first. The Company assigned the warrant a fair value of $196,000, based
upon the Black Scholes pricing model, using an underlying value of the stock of
$2.56 per share, a risk-free interest rate of 6%, a dividend yield rate of 0%,
volatility of 0.6 and an expected life of 10 years. The resulting discount on
the term loan is being amortized over the life of the loan using the effective
interest method.
Capitalized Lease Obligations
During 1999, the Company entered into capitalized lease arrangements with
Cisco Capital payable in monthly installments through December 2002. The lease
obligations bear interest at 12.3%, and are collateralized by the related
computer and office equipment.
Revolving Line of Credit
During 1998, the Company entered into a Revolving Line of Credit Agreement
("Line of Credit") in the amount of $250,000 with Imperial. The borrowing rate
is prime plus 0.75% (9.25% at December 31, 1999). This Line of Credit is also
collateralized by a blanket lien against the assets of the Company. Under this
agreement, the Company can borrow up to 75% of customer accounts receivable
balances, within certain limitations. There were no borrowings outstanding
under this Line of Credit as of December 31, 1999.
The provisions of the term loans and the Line of Credit with Imperial
contain, among others, covenants for maintaining defined levels of working
capital, net worth, and various financial ratios, including debt to equity. The
Company was in compliance with these covenants as of December 31, 1999. In
connection with the financing agreements with Imperial, in 1998, the Company
issued a warrant to purchase 25,000 shares of common stock at $0.08 per share.
The warrant is exercisable for 5 years. The value of the warrant was
immaterial. In 1999, the Company issued to Imperial a warrant to purchase 3,182
shares of Series B preferred stock at $1.25 per share. The value of the warrant
of $6,000 is being amortized over the term of the agreement.
Aggregate maturities of long-term borrowings over the next three years are as
follows: 2000--$831,000; 2001--$857,000; 2002--$537,000.
6. Commitments
The Company had operating leases principally for facilities and office
equipment. These leases expire at various dates through the year 2004. Future
minimum lease payments required under operating lease agreements that had
initial or remaining non-cancelable terms in excess of one year at December 31,
1999 are summarized below:
<TABLE>
<CAPTION>
Year Ending December 31
----------------------- (In thousands)
<S> <C>
2000........................................................ $ 587
2001........................................................ 651
2002........................................................ 658
2003........................................................ 601
2004........................................................ 552
------
Total minimum lease payments.............................. $3,049
======
</TABLE>
Aggregate rental expense for all operating leases was $85,000 in 1997,
$222,000 in 1998 and $327,000 in 1999.
F-12
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Major Customers
Percentages of revenue from major customers are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------ -------------
Revenues % Revenues % Revenues %
-------- ---- -------- --- -------- ----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Customer A........................ $22 21% $226 45% $131 10%
Customer B........................ -- -- 131 26% 374 29%
Customer C........................ 65 65% 42 8% -- --
</TABLE>
8. Income Taxes
The Company had net operating loss carryforwards of approximately $15.1
million as of December 31, 1999 available to offset future taxable income. The
Company also has research and development credits of approximately $13,000,
which may be carried forward, subject to certain limitations, to offset future
tax liabilities. Utilization of net operating loss carryforwards may be subject
to certain limitations under Section 382 of the Internal Revenue Code. The
carryforwards begin to expire in 2010.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $2,266 $5,135
Research and development tax credit carryforward.............. 12 13
Accruals on financial statements in excess of tax returns..... 31 74
Stock compensation issued to non-employees.................... 8 855
------ ------
2,317 6,077
Valuation allowance for deferred tax assets................... (2,280) (6,038)
------ ------
37 39
Deferred tax liabilities:
Tax-over-book depreciation.................................... 24 28
Other assets.................................................. 13 11
------ ------
37 39
------ ------
Net deferred tax assets......................................... $ -- $ --
====== ======
</TABLE>
The valuation allowance for deferred tax assets increased approximately
$1,588,000 during 1998 and $3,758,000 in 1999.
9. Stockholders' Equity
Convertible Preferred Stock
During the year ended December 31, 1996, the Company issued 2,498,000 shares
of common stock to its two founders in exchange for $70,000 in cash and
services rendered.
During the year ended December 31, 1996, the Company sold an additional
300,000 shares of common stock to investors at $1.00 per share.
F-13
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stockholders' Equity--(continued)
In January 1997, the Company issued 2,000 shares of common stock to a
consultant in exchange for services performed which were valued at $2,000.
In February 1997, the Company issued 60,000 shares of common stock to an
investor at $1.25 per share.
In connection with the Series A Convertible Preferred Stock ("Series A")
financing in July 1997, the 2,860,000 shares of common stock referred to above
were converted into 2,950,500 shares of Subordinated Convertible Preferred
Stock ("Subordinated Preferred Stock").
In July and August 1997, the Company issued 7,125,000 shares of Series A at
$0.80 per share.
In January 1999, the Company issued 5,785,515 shares of Series B Convertible
Preferred Stock ("Series B") at $1.25 per share.
In September and October 1999, the Company issued 14,635,693 shares of Series
C Convertible Preferred Stock ("Series C") at $2.75 per share. In addition,
146,357 shares of Series C were issued to the investment bank that represented
the Company during the fundraising process.
Each share of preferred stock and Subordinated Preferred Stock is convertible
on a one for one basis to common stock at the option of the holder, subject to
adjustment in certain instances or automatically upon registration of the
Company's common stock pursuant to a public offering under the Securities Act
of 1933 ("an Offering"). The preferred stock and Subordinated Preferred Stock
would be converted upon an offering at a price of not less than $5.50 per share
with aggregate proceeds of not less than $25,000,000, or by written consent of
the majority of the holders of the preferred stock and Subordinated Preferred
Stock.
The holder of each share of preferred stock and Subordinated Preferred Stock
has the right to one vote for each share of common stock into which such
preferred stock can be converted. Preferred stockholders have the same voting
rights and powers as common stockholders. Holders of the Company's preferred
stock, Subordinated Preferred Stock, and warrants have registration rights.
The holders of shares of preferred stock are entitled to receive dividends
prior to any payment on the common stock or any other junior equity security of
the Company, at the rate of $0.064 per Series A share per annum, $0.10 per
Series B share per annum, and $0.22 per Series C share per annum. Dividends are
not cumulative and are payable when and if declared by the Board of Directors.
In the event of a liquidation of the Company, the holders of Series C will
receive a liquidation preference of up to $2.75 per share, plus declared and
unpaid dividends. Upon satisfaction of the preferences of the Series C, the
holders of Series A and Series B will receive an amount per share equal to
$0.80 and $1.25 respectively, plus declared and unpaid dividends. Upon
satisfaction of the preferences of the Series A and Series B, the holders of
Subordinated Preferred Stock will receive an amount per share of $0.10. Upon
completion of preference distributions to the Preferred and Subordinated
preferred stockholders, any remaining amounts will be distributed among the
Series A preferred, Series B preferred, Series C preferred, Subordinated
preferred and common stock, on a pro-rata, as-if converted basis.
F-14
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stockholders' Equity--(continued)
The following is a summary of the terms and conditions for each series of
outstanding convertible preferred stock as of December 31, 1999:
<TABLE>
<CAPTION>
Approximate Annual
Aggregate Dividend
Shares Shares Liquidation Rate--
Designated Outstanding Value Non-Cumulative
---------- ----------- ----------- --------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Series A................. 7,125,000 7,125,000 $ 5,700 $0.064
Series B................. 7,200,000 5,785,515 7,232 0.100
Series C................. 15,000,000 14,782,050 40,651 0.220
Subordinated Preferred
Stock................... 2,950,500 2,950,500 295 none
</TABLE>
Warrants
During 1997, the Company issued warrants to a consultant for services
rendered with an exercise price of $0.08 per share to purchase 160,000 shares
of common stock. The warrants are exercisable through July 2002. The value of
the warrants were immaterial.
At December 31, 1998 and 1999, there were 278,750 and 633,836 warrants
outstanding, all of which were exercisable.
Stock Option Plans
The Company has an employee stock option plan ("the 1996 Plan") under which
it may issue qualified or nonqualified options for the purchase of up to
4,750,000 shares. Options granted under the 1996 Plan generally vest and become
exercisable over four years, at the rate of 25% after 12 months from the date
of grant and 2.08% each month thereafter. The options expire 10 years from the
date of grant or 90 days subsequent to termination of employment. Stock options
are issued at the estimated fair market value at the date of grant as
determined by the compensation committee of the board of directors.
In May 1998, the board of directors approved the 1998 Directors' Stock Option
Plan ("the Directors' Plan"). A total of 300,000 shares of common stock have
been reserved for issuance under the plan. The Directors' Plan provides for a
nonqualified stock option grant to purchase 25,000 shares of common stock to
directors on the date the individual becomes a non-employee director.
Thereafter, each non-employee director shall automatically be granted an option
to purchase 10,000 shares on each anniversary date of the Directors' Plan
effective date, provided that on such date the individual has served on the
board for at least six months prior to the anniversary date. Options vest over
periods ranging from immediately to two years. The options expire 10 years from
the date of grant, or 90 days subsequent to termination of status as a
director.
Under both plans, options are immediately exercisable. However, shares issued
upon exercise of options that are unvested are restricted and subject to
repurchase by the Company upon termination of employment or services and such
restrictions lapse over the original vesting schedule.
F-15
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stockholders' Equity--(continued)
Stock option activity under both plans for each of the three years with the
period ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
December 31,
1997 December 31, 1998 December 31, 1999
----------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. 310,000 $0.08 913,897 $0.08 1,182,975 $0.08
Granted................. 663,897 0.08 408,000 0.08 3,291,573 0.20
Exercised............... -- -- (68,354) 0.08 (84,978) 0.10
Canceled................ (60,000) 0.08 (70,568) 0.08 (145,495) 0.16
------- --------- ---------
Balance at end of
period................. 913,897 0.08 1,182,975 0.08 4,244,075 0.17
======= ========= =========
Exercisable and vested
at end of period....... 139,397 402,129 822,751
======= ========= =========
Shares of common stock
available for future
grant under the plan... 652,593
=========
Weighted average fair
value of options
granted during period.. 663,897 $0.08 408,000 $0.08 3,291,573 $0.20
</TABLE>
The weighted average remaining contractual life and weighted average exercise
price of options outstanding and options exercisable at December 31, 1999 for
selected exercise price range is as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------
Weighted
Average
Remaining Exercisable
Contractual and
Exercise Life (in Vested
Prices Shares years) Shares
-------- --------- ----------- -----------
<S> <C> <C> <C>
$0.08 1,067,002 7.60 665,145
$0.125 1,484,100 9.37 131,333
$0.275 1,692,973 9.87 26,273
--------- -------
4,244,075 9.12 822,751
========= =======
</TABLE>
Pro forma net loss information is required by SFAS 123, computed as if the
Company had accounted for its employee stock options granted under the fair
value method of that statement. The fair value for these options was estimated
at the date of grant using the minimum value method with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield............................ 0% 0% 0%
Risk-free interest rate............................ 6.1% 5.3% 5.5%
Expected life...................................... 4 years 4 years 4 years
</TABLE>
F-16
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stockholders' Equity--(continued)
Had the Company valued its stock options according to the fair value
provisions of SFAS 123, pro forma net loss and pro forma net loss per share
would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported................................. $(1,913) $(4,629) $(11,072)
======= ======= ========
Pro forma for SFAS 123...................... $(1,918) $(4,638) $(11,099)
======= ======= ========
Basic and diluted net loss per share:
As reported................................. $ (1.32) $ (9.69) $ (9.75)
======= ======= ========
Pro forma for SFAS 123...................... $ (1.32) $ (9.71) $ (9.77)
======= ======= ========
</TABLE>
During 1999, the Company also granted 201,273 common stock options to
consultants, of which 101,273 were fully vested. Options granted to consultants
are revalued as they vest in accordance with SFAS 123 and EITF 96-18 using a
Black-Scholes model and the following weighted-average assumptions for 1999:
estimated volatility of 0.7, risk-free interest rate of 6.0%, no dividend
yield; and an expected life of the option equal to the full term, generally
five or ten years from the date of grant. The resulting values are charged to
expense as they are earned.
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation was
recorded when the exercise price of an option or the sales price of restricted
stock was lower than the subsequently determined deemed fair value for
financial reporting purposes of the underlying common stock. The Company
recorded aggregate deferred stock-based compensation of $7,503,000 in 1999 and
will amortize the deferred stock-based compensation on an accelerated basis
over the vesting period of the underlying options. Amortization of deferred
stock-based compensation was $1,689,000 in 1999. Additional deferred
compensation of approximately $2,051,000 is expected to be recorded based on
the subsequently determined deemed fair value of common stock options granted
to employees during January and February of 2000.
Stock Agreements
In July 1997, the Company entered into a four year employment agreement with
its president and chief executive officer (CEO), which among other things,
allowed the CEO to purchase 750,000 shares of common stock at $0.08 per share,
the fair value as determined by the board of directors. The shares are subject
to a repurchase right by the Company, which right lapses 25% after the first
year and 2.08% per month thereafter. The CEO paid $750 in cash and executed a
full-recourse note for the balance of $59,000. The note bears interest at 6.65%
per year. From the outset, the Company intended to forgive the note over the
four year employment period based on the CEO's continued employment. The
Company also is advancing the CEO amounts to fund his federal tax liabilities
associated with the forgiveness of the loan. The total value of the loan of
$107,000, including interest, was initially recorded in the balance sheet as a
deferred charge of $48,000 ($18,000 at December 31, 1999) and deferred
compensation of $59,000 ($22,000 at December 31, 1999), with offsetting entries
to common stock and executive deferred compensation payable ($40,000 unfunded
at December 31, 1999). The value of the loan is being amortized over the four
year employment agreement. Compensation expense relating to the loan was
$13,000, $27,000 and $27,000 in 1997, 1998 and 1999, respectively. As of
December 31, 1999, 281,250 shares remain subject to repurchase.
F-17
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stockholders' Equity--(continued)
In November 1997, the Company entered into a two year agreement with a
consulting firm. The agreement allowed the consulting firm to purchase 250,000
shares of common stock at $0.08 per share, the fair value as determined by the
board of directors. One half of the shares were subject to a repurchase right
by the Company, which right lapsed quarterly over the two year consulting
period (vesting period). The purchase of the stock was financed with a full
recourse note. Interest was 7% and required quarterly interest payments. From
the outset, the Company intended to forgive the principal amount of the note,
accordingly, the note has been classified in the accompanying balance sheet as
deferred compensation and is being charged to expense over the vesting period.
However, since the stock was issued to a non employee, the Company has
continued to remeasure the value of the stock subject to repurchase based on
the deemed fair value of the stock. During the years ended December 31, 1997,
1998 and 1999, $3,000, $10,000 and $123,000, respectively, has been charged to
expense. As of December 31, 1999, no shares remain subject to repurchase.
In connection with the Series A Preferred Stock financing, the Company
entered into a stock restriction agreement with one of its founders. Such
agreement grants certain repurchase rights for 1,804,160 shares of Subordinated
Preferred Stock upon termination of services with the Company at $0.01 per
share. Shares subject to the repurchase rights lapse at the rate of 2.08% per
month from July 17, 1997. The agreement also provides for transfer restrictions
and rights of first offer to the Company for shares not subject to the
repurchase option. In September 1999, all remaining shares subject to the
repurchase right were released back to the founder.
Common Stock Reserved
At December 31,1999, the Company had the following shares of common stock
reserved for future issuance for the conversion of the following securities:
<TABLE>
<CAPTION>
Shares
Security 1999
-------- ----------
<S> <C>
Series A Convertible Preferred Stock............................. 7,125,000
Series B Convertible Preferred Stock............................. 5,785,515
Series C Convertible Preferred Stock............................. 14,782,050
Subordinated Convertible Preferred Stock......................... 2,950,500
Warrants to purchase common stock................................ 542,654
Warrants to purchase preferred stock............................. 91,182
Stock option plans............................................... 4,896,668
----------
Total common shares reserved for future purchase............... 36,173,569
==========
</TABLE>
10. Benefit Plans
401(k) Plan
The Company sponsors a salary deferral 401(k) plan for its employees.
Eligible employees are permitted to contribute to the 401(k) plan through
payroll deductions within statutory and plan limits. Contributions from the
Company are made at the discretion of the Board of Directors. To date, the
Company has made no contributions to the plan.
F-18
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Net Loss per Share
The following table sets forth the computation of basic and diluted loss per
share and pro forma basic and diluted loss per share for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1997 1998 1999
--------- --------- ----------
(In Thousands, Except Share
Data)
<S> <C> <C> <C>
Numerator:
Net loss.................................. $ (1,913) $ (4,629) $ (11,072)
========= ========= ==========
Denominator:
Weighted-average common shares
outstanding.............................. 1,469,313 1,194,210 1,830,003
Less: weighted-average shares subject to
repurchase agreements.................... 19,531 716,510 694,469
--------- --------- ----------
Denominator for basic and diluted
calculation................................ 1,449,782 477,700 1,135,534
========= =========
Weighted-average effect of pro forma
conversion of preferred stock.............. 20,625,714
----------
Denominator for pro forma basic and diluted
(unaudited)................................ 21,761,248
==========
Net loss per share:
Basic and diluted......................... $ (1.32) $ (9.69) $ (9.75)
========= ========= ==========
Pro forma basic and diluted (unaudited)... $ (0.51)
==========
</TABLE>
Pro forma net loss per share is calculated using the weighted-average number
of common shares outstanding less shares subject to repurchase, including the
pro forma effects of the automatic conversion of all outstanding preferred
stock into shares of common stock effective upon closing of the Company's
initial public offering as if such conversion had occurred at the original date
of issuance.
At December 31, 1997, 1998, and 1999, 2,167,647, 2,849,725, and 6,265,911,
respectively, shares of common stock subject to repurchase, stock options and
warrants were excluded from the computation of diluted net loss per share, as
their impact was antidilutive. In addition, at December 31, 1997, 1998, and
1999, 10,075,500, 10,075,500 and 30,643,065, respectively, shares of preferred
stock were excluded from the computation of diluted net loss per share, as
their impact was antidilutive. If the Company had reported net income, the
calculation of earnings per share would have included the dilutive effect of
these common stock equivalents using the treasury stock method.
12. Subsequent Events (unaudited)
Initial Public Offering
On February 16, 2000, the board of directors authorized the Company to file a
registration statement with the Securities and Exchange Commission for the
purpose of an initial public offering of the Company's common stock. Upon the
completion of this offering, all of the Company's outstanding preferred stock
will automatically convert into shares of common stock. Unaudited pro
forma stockholders' equity, as adjusted for the assumed conversion of the
preferred stock, is set forth on the balance sheet.
Change in Authorized Shares
On February 16, 2000 the board of directors increased the authorized shares
of common stock to 200,000,000 shares and of preferred stock to 10,000,000
shares. This change in authorized shares will be effective prior to the closing
of this offering.
F-19
<PAGE>
POINTSHARE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Subsequent Events (unaudited)--(continued)
Stock Option Plans
In February 2000, the board of directors increased the shares reserved for
issuance under the 1996 Plan to 5,250,000 shares and increased the shares
reserved for issuance under the Directors' Plan to 700,000 shares.
During January and February 2000, employees exercised 4,235,371 options for
4,235,371 shares of common stock in consideration for $973,000. Full-recourse
promissory notes totaling $932,000 were executed by certain employees to cover
the cost of the exercise price. The notes bear interest at 6.21%, compound on
an annual basis, and are secured by a pledge of the shares of common stock
underlying the exercised options. Principal and interest are due on the one
year anniversary of the full vesting of the option grants. Non-employees
exercised options for 175,000 shares of common stock in consideration for
$22,000.
In February 2000, the board of directors adopted the 2000 Stock Option Plan
("2000 Plan"). Under the 2000 Plan, 6,500,000 shares of common stock have been
reserved. No shares have been granted under the 2000 Plan to date.
2000 Employee Stock Purchase Plan
In February 2000, the board of directors adopted the 2000 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 500,000 shares of common stock
have been reserved for issuance under the Purchase Plan. The Purchase Plan
permits eligible employees to purchase common stock at a discount, but only
through payroll deductions, during consecutive 24-month offering periods. Each
offering period will be divided into four consecutive six-month purchase
periods. The price at which stock is purchased under the Purchase Plan is equal
to 85% of the fair value of the common stock on the first day of the offering
period or the last day of the purchase period, whichever is lower. The initial
offering period will commence on the effective date of the Company's initial
public offering. In addition, the Purchase Plan provides for annual increases
in the number of shares available for issuance under the Purchase Plan on the
first day of each fiscal year beginning with 2001, equal to the lesser of 1% of
the outstanding shares of common stock on the last day of the preceding fiscal
year, 500,000 shares, or a lesser amount as determined by the board of
directors.
Issuance of Series D Preferred Stock
On February 29, 2000, the Company consummated the sale of Series D
convertible preferred stock ("Series D") at $5.00 per share resulting in gross
proceeds of $6,025,000. The Series D is convertible into one share of common
stock and has preferences, liquidation and voting rights similar to those of
the Series C preferred stock.
Acquisition of Health Trade Links, Inc.
Effective February 1, 2000, the Company purchased the common stock of Health
Trade Links, Inc. for $156,000 in cash, 136,364 shares of common stock, and
136,364 warrants to purchase common stock at $8.25 per share. The transaction
will be accounted for as a purchase and accordingly, the purchase price will be
allocated based on the fair value of assets acquired and liabilities assumed.
The excess of the purchase price over the net tangible assets and intangible
assets acquired will be allocated to goodwill.
F-20
<PAGE>
Inside Back Cover
At the top of the page, a heading "Pointshare brings the business of healthcare
online."
A screen shot of Pointshare's VeriPoint service offering page on it's web site
with the caption "VeriPoint provides online access to patient insurance
coverage."
A screen shot of Pointshare's ReferralPoint service offering page on it's web
site with the caption "ReferralPoint allows healthcare participants to exchange
patient referral information online."
A screen shot of Pointshare's DeliveryPoint service offering page on it's web
site with the caption "DeliveryPoint facilitates the delivery of patient test
results and reports from labs, imaging centers and hospitals to physician
practices."
A screen shot of Pointshare's ContactPoint service offering page on it's web
site with the caption "ContactPoint is an online, interactive directory service
that allows users to search for healthcare participants and then communicate
with them directly."
A screen shot of Pointshare's PointStore service offering page on it's web site
with the caption "PointStore allows users to purchase medical and office
supplies online from a variety of suppliers."
A screen shot of Pointshare's DiscoveryPoint service offering page on its' web
site with the caption "DiscoveryPoint offers access to a large number of online
medical reference and educational web sites."
At the bottom of the page, the Pointshare logo.
<PAGE>
[Logo of Pointshare]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Pointshare in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee............................................ $
NASD filing fee.................................................
Nasdaq National Market listing fee..............................
Printing and engraving expenses.................................
Legal fees and expenses.........................................
Accounting fees and expenses....................................
Blue Sky qualification fees and expenses........................
Transfer Agent and Registrar fees...............................
Miscellaneous fees and expenses.................................
-------
Total.........................................................
=======
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article VII of
Pointshare's certificate of incorporation and sections 6.1 and 6.2 of Article
IX of Pointshare's bylaws provide for indemnification of its directors,
officers, employees and other agents to the maximum extent permitted by the
Delaware General Corporation Law. In addition, Pointshare has entered into
indemnification agreements with its directors and officers. The indemnification
agreements may require Pointshare, among other things, to indemnify its
directors against certain liabilities that may arise by reason of their status
or service as directors (other than liabilities arising from willful misconduct
of culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' insurance if available on reasonable terms. The underwriting
agreement (Exhibit 1.1 hereto) also provides for cross indemnification among
Pointshare and the underwriters with respect to certain matters, including
matters arising under the Securities Act of 1933.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception in 1995, Pointshare has issued and sold (without payment
of any selling commission to any person) the following unregistered securities:
1. In April 1996, Pointshare issued and sold 2,498,000 shares of common
stock to two individuals at a price of $0.03 per share for an
aggregate purchase price of $70,000 plus contributed services in the
amount of $7,284.
2. From June to October 1996, Pointshare issued and sold 300,000 shares
of common stock to several individuals at a price of $1.00 per share
for an aggregate purchase price of $300,000.
3. In January 1997, Pointshare issued and sold 2,000 shares of common
stock to a consultant at a price in exchange for services valued at
$2,000 or $1.00 per share
4. In February 1997, Pointshare issued and sold 60,000 shares of common
stock to an individual at a price of $1.25 per share for an aggregate
purchase price of $75,000.
II-1
<PAGE>
5. In June 1997, Pointshare issued warrants to purchase up to 250,000
shares of common stock at an exercise price of $0.08 per share in
connection with promissory notes convertible into shares of
Pointshare's next equity offering. These warrants have an aggregate
exercise price of $17,500.
6. In July 1997, the 2,860,000 shares of common stock then outstanding
were converted into 2,950,500 shares of subordinated convertible
preferred stock in connection with Pointshare's reincorporation from
Washington into Delaware.
7. In July 1997, Pointshare issued and sold 750,000 shares of common
stock at a price of $0.08 per share for an aggregate purchase price of
$60,000.
8. In July 1997, Pointshare issued and sold 7,125,000 shares of Series A
preferred stock at a price of $0.80 per share for an aggregate
purchase price of $5,700,000.
9. In January 1999, Pointshare issued and sold 5,785,515 shares of Series
B preferred stock at a price of $1.25 for an aggregate of $7,231,893.
10. In January 1999, Pointshare issued warrants to purchase up to 258,904
shares of common stock at an exercise price of $0.08 per share issued
in connection with promissory notes convertible into shares of Series
B preferred stock. These warrants have an aggregate exercise price of
$20,712.
11. In September 1999, Pointshare issued and sold 14,635,693 shares of
Series C preferred stock at a price of $2.75 per share for an
aggregate purchase price of $40,248,155.
12. In February 2000, Pointshare issued and sold 1,205,000 shares of
Series D preferred stock at a price of $5.00 per share for an
aggregate purchase price of $6,025,000.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(11) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends where affixed to the
securities issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about Pointshare .
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Asset Purchase Agreement dated March 17, 1998 between the Registrant
and MedLynx LLC.
2.2* Asset Purchase Agreement dated December 9, 1998 between the Registrant
and Peregrin Medical Review, Inc.
3.1* Amended and Restated Certificate of Incorporation of Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
3.3* Bylaws of the Registrant, as amended.
4.1* Form of the Registrant's common stock certificate.
4.2* Amended and Restated Investors' Rights Agreement dated February 29,
2000 between the Registrant and certain stockholders.
4.3* Form of Common Stock Purchase Warrant issued by the Registrant in
favor of certain investors.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
4.4* Preferred Stock Purchase Warrant dated August 26, 1999 issued by the
Registrant in favor of Phoenix Leasing Incorporated.
4.5* Common Stock Purchase Warrant dated February 1, 2000 issued by the
Registrant in favor of Health Trade Links, Inc.
4.6* Common Stock Purchase warrant dated February 1, 2000 issued by the
Registrant in favor of Washoe Professional Center.
4.7* Preferred Stock Purchase Warrant dated July 28, 1999 issued by the
Registrant in favor of Imperial Bancorp.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.2* 1996 Stock Plan.
10.3* 2000 Stock Plan.
10.4* 1998 Directors' Stock Option Plan.
10.5* 2000 Employee Stock Purchase Plan.
10.6*+ Alliance Agreement dated October 6, 1998 between the Registrant and
Washington Hospital Services, Inc.
10.7*+ Addendum Agreement dated June 3, 1999 between the Registrant and
Washington Hospital Services, Inc.
10.8*+ WSMA - Pointshare General Terms dated September 27, 1999 between the
Registrant and Washington State Medical Association.
10.9*+ Alliance Agreement dated December 9, 1998 between the Registrant and
Oregon Medical Association.
10.10*+ OAHHS - Pointshare Alliance General Terms dated January 12, 2000
between the Registrant and Oregon Association of Hospitals and Health
Plans.
10.11* Fourth Amendment to Lease dated February 21, 2000 between the
Registrant and Spieker Properties, L.P.
10.12* Sublease dated July 13, 1997 between the Registrant and Baugh
Industrial Contractors Inc.
10.13* Agreement of Lease dated March 26, 1999 between MedLynx L.L.C. and
Sixth and Virginia Properties.
10.14* Loan and Security Agreement dated September 22, 1997 between the
Registrant and Imperial Bank.
10.15* Loan and Security Agreement dated July 18, 1998 between the Registrant
and Imperial Bank.
10.16* First Amendment and Waiver to Loan and Security Agreement dated
January 6, 1999 between the Registrant and Imperial Bank.
10.17* Loan commitment dated June 28, 1999 between the Registrant and
Imperial Bank.
10.18* Senior Loan and Security Agreement No. 6269 dated June 30, 1999
between the Registrant and Phoenix Leasing Incorporated.
10.19* Employment Agreement dated July 18, 1997 between the Registrant and
Timothy J. Kilgallon.
10.20* First Addendum to Employment Agreement dated June 29, 1999 between the
Registrant and Timothy J. Kilgallon.
10.21* Second Addendum to Employment Agreement dated February 8, 2000 between
the Registrant and Timothy J. Kilgallon.
10.22* Employment Agreement dated April 30, 1999 between the Registrant and
R. Scott Wiley.
10.23* Employment Agreement dated July 18, 1997 between the Registrant and
Dennis P. Schmuland, MD.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
10.24* Amendment to Employment Agreement dated September 14, 1999 between the
Registrant and Dennis P. Schmuland, MD.
10.25* Consulting Agreement dated April 5, 1999 between the Registrant and
Craig T. Davenport.
10.26* Amendment to Consulting Agreement dated June 29, 1999 between the
Registrant and Craig T. Davenport.
10.27* Promissory Noted dated July 17, 1997 issued by Timothy J. Kilgallon in
favor of the Registrant.
10.28* Promissory Note dated December 2, 1999 issued by Kelly R. Jorgenson in
favor of the Registrant.
10.29* Promissory Noted dated January 14, 2000 issued by Kirk A. Collamer in
favor of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Venture Law Group (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment is being requested as to certain portions of this
Exhibit. Such confidential portions are being provided separately to the
Securities and Exchange Commission.
(b) Financial Statement Schedules
All financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the Registrant or the related notes to the financial statements.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against 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 Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Bellevue, State of Washington, on March 3, 2000.
Pointshare Corporation
/s/ Timothy J. Kilgallon
By: _________________________________
Timothy J. Kilgallon
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Timothy J. Kilgallon and Kirk Collamer, and each
one of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments), and any and all
registration statements filed pursuant to Rule 462 under the Securities Act of
1933, as amended, in connection with or related to the offering contemplated by
this registration statement and its amendments, if any, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. This Power of Attorney may be signed in
several counterparts.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form S-1 has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Timothy J. Kilgallon President, Chief Executive March 3, 2000
______________________________________ Officer and Director
Timothy J. Kilgallon (Principal Executive
Officer)
/s/ Kirk Collamer Chief Financial Officer March 3, 2000
______________________________________ (Principal Financial and
Kirk Collamer Accounting Officer)
/s/ Craig T. Davenport Director March 3, 2000
______________________________________
Craig T. Davenport
/s/ Robert C. Bellas, Jr. Director March 3, 2000
______________________________________
Robert C. Bellas, Jr.
/s/ Cabot Brown Director March 3, 2000
______________________________________
Cabot Brown
/s/ Steven J. Dennis Director March 3, 2000
______________________________________
Steven J. Dennis
/s/ Alan Dishlip Director March 3, 2000
______________________________________
Alan Dishlip
/s/ John D. Stobo, Jr. Director March 3, 2000
______________________________________
John D. Stobo, Jr.
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Asset Purchase Agreement dated March 17, 1998 between the Registrant
and MedLynx LLC.
2.2* Asset Purchase Agreement dated December 9, 1998 between the Registrant
and Peregrin Medical Review, Inc.
3.1* Amended and Restated Certificate of Incorporation of Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
3.3* Bylaws of the Registrant, as amended.
4.1* Form of the Registrant's common stock certificate.
4.2* Amended and Restated Investors' Rights Agreement dated February 29,
2000 between the Registrant and certain stockholders.
4.3* Form of Common Stock Purchase Warrant issued by the Registrant in
favor of certain investors.
4.4* Preferred Stock Purchase Warrant dated August 26, 1999 issued by the
Registrant in favor of Phoenix Leasing Incorporated.
4.5* Common Stock Purchase Warrant dated February 1, 2000 issued by the
Registrant in favor of Health Trade Links, Inc.
4.6* Common Stock Purchase warrant dated February 1, 2000 issued by the
Registrant in favor of Washoe Professional Center.
4.7* Preferred Stock Purchase Warrant dated July 28, 1999 issued by the
Registrant in favor of Imperial Bancorp.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.2* 1996 Stock Plan.
10.3* 2000 Stock Plan.
10.4* 1998 Directors' Stock Option Plan.
10.5* 2000 Employee Stock Purchase Plan.
10.6*+ Alliance Agreement dated October 6, 1998 between the Registrant and
Washington Hospital Services, Inc.
10.7*+ Addendum Agreement dated June 3, 1999 between the Registrant and
Washington Hospital Services, Inc.
10.8*+ WSMA - Pointshare General Terms dated September 27, 1999 between the
Registrant and Washington State Medical Association.
10.9*+ Alliance Agreement dated December 9, 1998 between the Registrant and
Oregon Medical Association.
10.10*+ OAHHS - Pointshare Alliance General Terms dated January 12, 2000
between the Registrant and Oregon Association of Hospitals and Health
Plans.
10.11* Fourth Amendment to Lease dated February 21, 2000 between the
Registrant and Spieker Properties, L.P.
10.12* Sublease dated July 13, 1997 between the Registrant and Baugh
Industrial Contractors Inc.
10.13* Agreement of Lease dated March 26, 1999 between MedLynx L.L.C. and
Sixth and Virginia Properties.
10.14* Loan and Security Agreement dated September 22, 1997 between the
Registrant and Imperial Bank.
10.15* Loan and Security Agreement dated July 18, 1998 between the Registrant
and Imperial Bank.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
10.16* First Amendment and Waiver to Loan and Security Agreement dated
January 6, 1999 between the Registrant and Imperial Bank.
10.17* Loan commitment dated June 28, 1999 between the Registrant and
Imperial Bank.
10.18* Senior Loan and Security Agreement No. 6269 dated June 30, 1999
between the Registrant and Phoenix Leasing Incorporated.
10.19* Employment Agreement dated July 18, 1997 between the Registrant and
Timothy J. Kilgallon.
10.20* First Addendum to Employment Agreement dated June 29, 1999 between the
Registrant and Timothy J. Kilgallon.
10.21* Second Addendum to Employment Agreement dated February 8, 2000 between
the Registrant and Timothy J. Kilgallon.
10.22* Employment Agreement dated April 30, 1999 between the Registrant and
R. Scott Wiley.
10.23* Employment Agreement dated July 18, 1997 between the Registrant and
Dennis P. Schmuland, MD.
10.24* Amendment to Employment Agreement dated September 14, 1999 between the
Registrant and Dennis P. Schmuland, MD.
10.25* Consulting Agreement dated April 5, 1999 between the Registrant and
Craig T. Davenport.
10.26* Amendment to Consulting Agreement dated June 29, 1999 between the
Registrant and Craig T. Davenport.
10.27* Promissory Noted dated July 17, 1997 issued by Timothy J. Kilgallon in
favor of the Registrant.
10.28* Promissory Note dated December 2, 1999 issued by Kelly R. Jorgenson in
favor of the Registrant.
10.29* Promissory Noted dated January 14, 2000 issued by Kirk A. Collamer in
favor of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Venture Law Group (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment is being requested as to certain portions of this
Exhibit. Such confidential portions are being provided separately to the
Securities and Exchange Commission.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated January 21, 2000,
in the Registration Statement (Form S-1) and related Prospectus of Pointshare
Corporation for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Seattle, Washington
February 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 3,810 905 35,912
<SECURITIES> 0 0 0
<RECEIVABLES> 98 116 340
<ALLOWANCES> 0 0 (13)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 3,925 1,124 36,550
<PP&E> 527 868 2,062
<DEPRECIATION> 78 303 731
<TOTAL-ASSETS> 4,487 2,765 39,748
<CURRENT-LIABILITIES> (343) (2,324) (2,527)
<BONDS> 0 0 0
0 0 0
(6,042) (6,042) (50,816)
<COMMON> (79) (99) (107)
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> (4,487) (2,765) (39,748)
<SALES> 101 506 1,289
<TOTAL-REVENUES> 101 506 1,289
<CGS> 0 0 0
<TOTAL-COSTS> (2,078) (5,134) (12,503)
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 11 (102) 519
<INCOME-PRETAX> 0 0 0
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,913) (4,629) (11,072)
<EPS-BASIC> (1.32) (9.69) (9.75)
<EPS-DILUTED> 0 0 0
</TABLE>
