<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 2000
REGISTRATION NO. 333-30636
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDSITE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 13-3982605
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
60 EAST 13TH STREET, 3RD FLOOR
NEW YORK, NEW YORK 10003
(212) 253-6913
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SUNDEEP BHAN
CHIEF EXECUTIVE OFFICER
MEDSITE.COM, INC.
60 EAST 13TH STREET, 3RD FLOOR
NEW YORK, NEW YORK 10003
(212) 253-6913
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JEFFREY D. SAPER, ESQ. KRIS F. HEINZELMAN, ESQ.
SELIM DAY, ESQ. CRAVATH, SWAINE & MOORE
WILSON SONSINI GOODRICH & ROSATI 825 EIGHTH AVENUE
PROFESSIONAL CORPORATION WORLDWIDE PLAZA
650 PAGE MILL ROAD NEW YORK, NEW YORK 10019-7475
PALO ALTO, CALIFORNIA 94304-1050 (212) 474-1000
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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 PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(1)(2) REGISTRATION FEE(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.000033
per share....................... 10,350,000 $12.00 $124,200,000.00 $32,789.00
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) $26,400 was previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 APRIL 4, 2000
9,000,000 Shares
[LOGO]
MEDSITE.COM, INC.
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $10.00 and $12.00 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "MSTE".
The underwriters have an option to purchase a maximum of 1,350,000
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MEDSITE.COM
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the 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 of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
E*OFFERING
The date of this prospectus is , 2000.
<PAGE> 3
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 18
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 20
SELECTED FINANCIAL DATA............... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 22
UNAUDITED PRO FORMA FINANCIAL DATA.... 28
BUSINESS.............................. 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT............................ 41
RELATED PARTY TRANSACTIONS............ 51
PRINCIPAL STOCKHOLDERS................ 54
DESCRIPTION OF CAPITAL STOCK.......... 56
SHARES ELIGIBLE FOR FUTURE SALE....... 58
UNITED STATES TAX CONSEQUENCES TO
NON-U.S. HOLDERS.................... 60
UNDERWRITING.......................... 63
NOTICE TO CANADIAN RESIDENTS.......... 66
LEGAL MATTERS......................... 67
EXPERTS............................... 67
WHERE YOU CAN FIND MORE INFORMATION... 67
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 IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
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 DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you should
consider before buying shares in this offering. You should read this entire
prospectus carefully, including the risk factors and financial statements.
MEDSITE.COM
Medsite.com is a provider of online business-to-business e-commerce,
information and communication products and services to the physician. We design
our products and services to meet the needs of physicians throughout their
careers, beginning in medical school, extending through residency and continuing
into clinical practice. The relationship we build with our customers enables us
to offer pharmaceutical, managed care, medical device and other healthcare
companies with an attractive means of reaching physicians.
There are approximately 620,000 physicians who provide patient care in the
United States. We believe physicians are the focal point of the healthcare
industry as they directly or indirectly influence an estimated 80% of healthcare
expenditures. In 1999, healthcare expenditures in the United States totaled an
estimated $1.1 trillion, representing the largest segment of our gross domestic
product. Physicians' business needs are diverse and include purchasing medical
and office supplies, obtaining medical information and educational materials and
communicating effectively with their colleagues and patients. Physicians
prescribe drugs and order medical procedures, and pharmaceutical companies and
other medical manufacturers and service companies seek to educate and influence
the physician.
Physicians can purchase online from us a comprehensive selection of medical
supplies, books and other practice needs through our e-commerce offerings. Our
information management tools help physicians filter and organize the stream of
medical data required to stay current with medical practices, including
information from medical journals, medical databases, continuing medical
education providers and news sources. Our communication products and services
assist physicians in communicating with their patients and colleagues using the
internet.
We have created an online distribution network to reach the physician
through our agreements with medical websites, universities, medical associations
and healthcare organizations. We offer our products and services through
Medsite.com, which is linked to over 200 other healthcare websites including
co-branded websites operated by the American Medical Association, the American
Medical Students Association, ePhysician, Healtheon/WebMD, Medscape and
Physicians' Online, among other websites.
Our objective is to be both an online destination site for the physician
and a marketing channel for pharmaceutical and other healthcare companies to
reach the physician. Key elements of our strategy include:
- assessing the physician's needs and providing products and services that
address those needs,
- making additional products and services available to physicians through
www.medsite.com and other websites,
- forming alliances with businesses to provide fulfillment for our direct
sales to physicians, and aggregating the buying power of our physician
customers to realize lower costs of goods for us and our physician
customers and
- increasing our sales by expanding pharmaceutical company sponsorship of
physicians' purchases from us and enabling pharmaceutical companies to
reach physicians online.
In December 1999, we acquired Total Health Products, a company that sells
medical supplies and books to physicians. In January 2000, we acquired American
Medical Communications, Inc., a creator of medical education information. We
intend to continue the offline operations of Total Health and American Medical
as we integrate their businesses with our online business.
3
<PAGE> 5
Although we derived approximately 85% of our revenue in 1999 from the sale
of medical books, recently we expanded our revenues from supplies and other
offerings through the acquisitions of Total Health and American Medical and
expanded our online product and service offerings to increase and diversify the
sources of our revenue. After giving effect to our recent acquisition of Total
Health as though it had occurred on January 1, 1999, approximately 45% and 54%
of our revenue in 1999 came from medical supplies and medical books,
respectively.
We have a history of significant losses including approximately $19.2
million for the year ended December 31, 1999 and anticipate incurring future
losses which may be substantial. If physicians do not continue to purchase
products and services through our website, our business may suffer. Internet
e-commerce is an emerging and highly competitive marketplace with relatively low
barriers to entry. If we are unsuccessful in implementing our business strategy,
we may not be able to increase our sales or become profitable.
We were organized as a New York limited liability company in November 1995.
In November 1997, we reorganized as a Delaware corporation. Our principal
executive offices are located at 60 East 13th Street, 5th Floor, New York, New
York 10003, and our telephone number is (212) 253-6913. Our world wide web
address is www.medsite.com. The information on our website is not part of this
prospectus.
Medsite, Medcite, Medsite University and The Physician's Home on the
internet are our trademarks. Other trademarks or service marks appearing in this
prospectus are trademarks or service marks of the companies that use them.
4
<PAGE> 6
THE OFFERING
Common stock offered.......... 9,000,000 shares
Common stock to be outstanding
after this offering........... 60,310,749 shares
Use of proceeds............... We intend to use the proceeds from this
offering for general corporate purposes, sales
and marketing, technical and support services,
product development and working capital. We
also may use a portion to acquire complementary
businesses.
Proposed Nasdaq National
Market symbol................. MSTE
The share amounts in this table are based on shares outstanding as of
December 31, 1999. This table excludes:
- 4,875,000 shares of common stock reserved for issuance under our 1999
stock plan as of December 31, 1999, 4,767,000 of which are subject to
outstanding options,
- 7,500,000 shares of common stock reserved for issuance under our 2000
stock plan as of February 8, 2000, none of which are subject to
outstanding options,
- 2,250,000 shares of common stock available for issuance under our 2000
employee stock purchase plan,
- 375,000 shares of common stock available for issuance under our 2000
director option plan,
- 992,133 shares of common stock reserved that are issuable on the exercise
of outstanding warrants, at a per share weighted average exercise price
of $2.07, and
- the issuance of 690,000 shares of our common stock in connection with
acquisitions we have completed since December 31, 1999, including our
acquisition of American Medical.
------------------------
Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
- 10,316,788 shares of convertible preferred stock which will convert into
25,039,053 shares of our common stock immediately before completion of
this offering,
- the issuance of 690,000 shares of common stock in connection with
acquisitions we have completed since December 31, 1999, including our
acquisition of American Medical,
- no exercise of the underwriters' over-allotment option,
- the filing of our amended and restated certificate of incorporation upon
completion of this offering, and
- the effectiveness of a three-for-two stock split of our common stock
immediately prior to the effective date of this prospectus.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999 PRO FORMA
----- ------- -------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $ 297 $ 1,417 $ 8,893 $ 21,694
Cost of sales...................................... 90 1,300 8,883 17,714
----- ------- -------- --------
Gross profit....................................... 207 117 10 3,980
--------
Operating expenses:
General and administrative....................... 439 1,288 7,117 12,419
Sales and marketing.............................. 115 541 7,174 7,671
Product and technology development............... 66 172 1,371 1,371
Depreciation and amortization.................... -- 14 833 3,284
----- ------- -------- --------
Total operating expenses......................... 620 2,015 16,495 24,745
----- ------- -------- --------
Loss from operations............................... (413) (1,898) (16,485) (20,765)
Interest income (expense), net..................... (17) (38) 337 (3)
----- ------- -------- --------
Net loss........................................... (430) (1,936) (16,148) (20,768)
Accreted dividends on preferred stock.............. -- -- (3,013) (3,013)
----- ------- -------- --------
Net loss attributable to common stockholders....... $(430) $(1,936) $(19,161) $(23,781)
===== ======= ======== ========
Net loss per share attributable
to common stockholders, basic and diluted........ -- $ (0.10) $ (0.79) $ (0.92)
========
Weighted-average shares outstanding................ -- 18,769 24,144 25,794
========
Pro forma net loss per share basic and diluted
(unaudited)......................................
Shares used in computing pro forma net loss per
share, basic and diluted (unaudited).............
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short term investments.......... $33,714 $124,434
Restricted cash equivalents................................. 1,503 1,503
Working capital............................................. 30,922 121,642
Total assets................................................ 58,892 149,612
Redeemable convertible preferred stock...................... 55,500 --
Stockholders' equity (deficit).............................. (7,206) 139,014
</TABLE>
The preceding balance sheet data is shown on an actual and a pro forma as
adjusted basis to give effect to the sale of shares 9,000,000 of common stock by
Medsite.com in this offering at an assumed initial public offering price of
$11.00 per share, after deducting the estimated underwriting discounts and
commissions and offering expenses.
The pro forma financial information reflects the effects of our acquisition
of Total Health, recorded under the purchase method of accounting as if it had
occurred on January 1, 1999. Adjustments to the Pro Forma Statement of
Operations are comprised of:
(a) an increase in amortization expense of $2.3 million for the
amortization of the excess of purchase price over the estimated fair
value of net assets acquired over a five-year period, and
(b) a decrease in interest income of approximately $257,000 for the year
associated with approximately $5.6 million of cash and investments used
to partially fund the purchase price of Total Health.
The pro forma net loss per share is computed on the basis described in Note
1 of our consolidated financial statements.
The pro forma weighted average common shares outstanding reflects the net
increase as a result of our acquisition of Total Health.
6
<PAGE> 8
RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the risks and uncertainties described below and the other information in this
prospectus, including the financial statements and related notes, before
deciding to invest in shares of our common stock. If any of the following risks
or uncertainties actually occurs, our business, financial condition and
operating results would likely suffer. In that event, the market price of our
common stock could decline and you could lose all or part of the money you paid
to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF SIGNIFICANT LOSSES, WE EXPECT CONTINUING LOSSES WHICH MAY
BE SUBSTANTIAL AND WE MAY NEVER ACHIEVE PROFITABILITY.
We have a history of significant losses. For the year ended December 31,
1999, we incurred net losses of approximately $19.1 million and had an
accumulated deficit of approximately $21.1 million. We expect to continue to
incur net losses which may be substantial for the foreseeable future and we may
never become profitable. We cannot assure you that our revenues will continue to
grow or that we will achieve or maintain profitability in the future. In
addition, our recent acquisitions of Total Health and American Medical will
result in goodwill amortization of approximately $3.6 million for the year 2000.
As our business evolves, we expect to introduce new products and services
which will likely result in significantly increased product development, sales
and marketing and administrative expenses. Consequently, we will need to
significantly increase our revenues to achieve and maintain profitability.
WE HAVE A LIMITED HISTORY OF OPERATING OUR BUSINESS UNDER OUR CURRENT MODEL AND
ANY PREDICTIONS ABOUT OUR FUTURE REVENUES AND EXPENSES MAY NOT BE AS ACCURATE AS
THEY WOULD BE IF WE HAD A LONGER HISTORY OF OPERATING OUR BUSINESS AS CURRENTLY
CONDUCTED.
Our limited history of operating our current business, which includes our
inventory and fulfillment operations, makes predicting our future revenues and
expenses more difficult than if we had a longer history of operating our
business than we currently do. From our inception in November 1995 until
September 1997, we were in the business of selling medical software. In February
1997, we launched our website www.medsite.com to enable the purchase of our
software over the internet. In September 1997, we enhanced Medsite with Medsite
Books and began generating revenue from the sale of medical books and software
over the internet. In February 1998, Medsite Mail was added as a web-based
e-mail service for Medsite users. During 1999, we began offering additional
products and services, entered into additional fulfillment arrangements, added
our own inventory and fulfillment operations through our acquisition of Total
Health in December 1999, and broadened our distribution channels.
IF PHYSICIANS DO NOT ADOPT THE INTERNET TO FULFILL THEIR TRADITIONAL NEEDS FOR
INFORMATION, SERVICES AND PRODUCTS, WE WILL BE UNABLE TO GENERATE REVENUES AND
MAY BE UNABLE TO CONTINUE OUR OPERATIONS.
Our success depends upon achieving significant market acceptance of our
products and services by physicians. Failure to achieve or maintain market
acceptance of Medsite.com or the internet in general would result in a loss of
revenues. Physicians may not accept Medsite.com or the internet as a replacement
for traditional sources of healthcare products and services. The internet may
not become a viable channel for these products and services because:
- physicians may not be willing to transmit their confidential data, such
as credit card numbers, over the internet because of fears that
unauthorized internet users will obtain access to their information and
misuse it,
- physicians may not be willing to use the internet for purchases because
of fears that their internet purchasing data can be collected and used
without their consent,
7
<PAGE> 9
- physicians may not be willing to use the internet if they experience
delays related to telecommunications connectivity or internet-related
system failures, such as the failure of our website, or if they prefer to
use traditional channels to purchase products and services, and
- internet service providers may impose or increase access fees, which
could deter our customers and prospective customers from visiting our
website.
IF WE ARE UNABLE TO SELL OUR PRODUCTS AND SERVICES TO PHYSICIANS, WE WILL BE
UNABLE TO GENERATE REVENUES AND UNABLE TO CONTINUE OPERATIONS.
We have developed our business to sell products and services primarily to
physicians and our ability to generate revenues is highly dependent on our sales
to physicians. If we are unable to build and maintain a customer base of
physicians, we may be unable to increase our revenues or continue our
operations. Failure to maintain a customer base of physicians may result from:
- our inability to provide services that physicians need,
- our failure to offer new services that physicians need and want,
- our inability to market our brand name to a broad audience of physicians,
- our inability to maintain an easily accessible and easily navigable
online interface, or
- increased competition.
IF WE ARE UNABLE TO COMPLETE THE INTEGRATION OF TOTAL HEALTH WITH OUR ONLINE
BUSINESS, WE MAY NOT BE ABLE TO REALIZE THE FULL BENEFITS OF OPERATING PRIMARILY
AS AN INTERNET COMPANY.
Total Health, which we acquired in December 1999, generated revenues of
approximately $12.8 million for the eleven months ended November 30, 1999 from
the sale of medical supplies and books to physicians. Although we have begun to
integrate Total Health with our online business, if we fail to complete this
integration, we will be unable to attract Total Health's customers to our online
business to cross-sell our products to these customers and increase our
revenues. Currently, through our Total Health subsidiary, we issue paper
certificates to physicians that are paid for by pharmaceutical companies as
incentives for participation in pharmaceutical company sponsored events.
Certificates can also be issued over the internet, and all certificates, whether
issued in paper or in electronic form, can be redeemed for merchandise through
our website. When physicians visit our website to redeem their certificates, we
intend to promote and sell to them additional products and services.
The loss of a major customer of our Total Health subsidiary could result in
lower than expected revenues. In 1999, two Total Health customers accounted for
approximately 56% of Total Health's revenues, and in 1998, two customers
accounted for approximately 75% of Total Health's revenues. We expect that a
small number of customers will continue to account for a high percentage of our
Total Health subsidiary's revenues for the forseeable future.
WE DEPEND ON THE PHARMACEUTICAL INDUSTRY TO INCREASE OUR REVENUES.
Historically, we have not recognized significant revenue directly from
pharmaceutical companies. However, we are currently offering directly to
pharmaceutical companies products and services that will enable us to generate
additional revenues. In addition, we recently acquired Total Health, a company
that derives revenue through medical supply and book sales to physicians
subsidized by marketing organizations working on behalf of pharmaceutical
companies. These marketing organizations organize and manage physician-attended
seminars and conferences for pharmaceutical companies that market their products
at these seminars. We believe that our current Total Health business is
indirectly dependent on the willingness of pharmaceutical companies to market
their products to physicians at these conferences and seminars. Also, we believe
our future prospects will be heavily dependent on marketing expenditures by
8
<PAGE> 10
pharmaceutical companies. Some of the potential adverse developments in the
pharmaceutical industry that could affect our revenues include:
- public or private marketing initiatives or reforms designed to regulate
or modify the manner in which pharmaceutical companies promote their
products or
- regulatory or legislative developments that discourage or prohibit
pharmaceutical companies' promotional activities.
To the extent any of the above occurs, pharmaceutical companies may not
continue to market their products to physicians at seminars and meetings and we
would be unable to realize a benefit from our PharmaDirect program.
IF WE ARE UNABLE TO FULLY IMPLEMENT OUR PHARMADIRECT PROGRAM, WE MAY NOT BE ABLE
TO INCREASE OUR SALES TO PHYSICIANS AND OUR BUSINESS PROSPECTS MAY DIMINISH.
Our plan for future growth in revenue will require expansion of our
PharmaDirect program. The acquisition of Total Health and American Medical are
designed to expand our PharmaDirect offerings. However, if pharmaceutical
companies fail to purchase our products and services, we will not be able to
implement our current business plan and our prospects will diminish.
Through our PharmaDirect program, we offer pharmaceutical companies an
opportunity to present product information to physicians either online or at
events, such as seminars or conferences, that are paid for by pharmaceutical
companies. Pharmaceutical companies can subsidize physician usage of our online
products including medical education products acquired through American Medical.
Pharmaceutical companies can also provide product information to targeted
physicians over our website. We provide certificates to physicians as an
incentive to review this information. Physicians redeem these certificates as
well as paper certificates received at pharmaceutical company sponsored
conferences and seminars, both of which are paid for by pharmaceutical
companies, against products and services provided by Medsite.
OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY VARY, WHICH MAY CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
Though our revenues have not historically fluctuated, our quarterly
revenues and operating results may fluctuate in future periods because of a
number of factors, such as our ability to completely integrate Total Health's
business with our current online business and our increased fixed costs
attributable to maintaining the inventory or operations we acquired with Total
Health. A substantial portion of our current and future costs is fixed.
Substantially all of our sales and marketing, general and administrative and
product development costs are fixed and will not vary with changes in sales. We
may be unable to adjust our expenses in a period to compensate for revenues that
are lower than we expect.
OUR MEDSITE BRANDS MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY FOR US TO
CONTINUE TO INCREASE OUR CUSTOMER BASE.
We believe that broad recognition and favorable perception of the Medsite
brands are essential to our future success. If we fail to achieve this
recognition and perception, we may not be able to attract customers. Successful
positioning of Medsite will largely depend on:
- the success of our advertising and promotional efforts,
- our ability to enhance our existing strategic marketing relationships and
- our ability to continue to provide high-quality products and services for
physicians.
We incurred sales and marketing expenses of approximately $7.2 million
during the year ended December 31, 1999. To increase awareness of the Medsite
brands, we expect to spend significantly more on sales and marketing in the
future. If our brand enhancement strategy is unsuccessful, these expenses may
never be recovered, and we may be unable to increase future revenues.
9
<PAGE> 11
IF WE FAIL TO PROTECT OUR BRAND, WE MAY CONFRONT DIFFICULTIES IN MARKETING OUR
PRODUCTS AND SERVICES.
We rely on trademark law to protect our brand. Third parties may assert
infringement or other intellectual property claims against us. These factors
could hinder our ability to market our products and services.
IF OUR CUSTOMERS DO NOT PROVIDE US WITH ACCURATE INFORMATION ABOUT THEMSELVES,
OUR PHARMADIRECT PROGRAM MAY BE LESS ATTRACTIVE TO PHARMACEUTICAL COMPANIES.
If we are unable to identify our customers, our PharmaDirect program may be
less attractive to pharmaceutical companies, and our revenues may decline. We
identify our customers as physicians, residents and students based on
information customers supply to us at the time of purchase, though this
information may not be accurate.
IF WE CANNOT MANAGE OUR EXPECTED GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY
OFFER OUR PRODUCTS AND SERVICES AND IMPLEMENT OUR BUSINESS PLAN.
Since we began operations, we have significantly increased the size of our
operations. Our sales have increased from $1.4 million in 1998 to $8.9 million
in 1999. In addition, in December 1999, we acquired Total Health, which had
revenues of approximately $12.8 million for the eleven months ending November
30, 1999. This growth has placed, and we expect that any future growth we
experience will continue to place, a significant strain on our management,
systems and resources. If we cannot manage our expected growth, we may be unable
to successfully offer our products and services and implement our business plan.
To manage anticipated growth of our operations, we must:
- improve existing and implement new operational, financial and management
information controls, reporting systems and procedures,
- expand, train and manage our employee base, and
- maintain close coordination among our technical, finance, marketing,
sales and editorial staffs.
IF OUR NETWORK INFRASTRUCTURE IS INSUFFICIENT TO MANAGE OUR WEBSITE TRAFFIC, WE
MAY LOSE CUSTOMERS, FAIL TO ATTRACT NEW CUSTOMERS AND LOSE REVENUE.
Our operations depend on our network infrastructure capacity to manage
existing and increased customer traffic through our websites. Since we expect
product and service sales over the internet to constitute most of our future
sales, we will need to increase the volume of traffic over our websites to
increase our revenue. If our network infrastructure has insufficient capacity to
manage increased customer traffic, we will be unable to increase our online
sales and our revenues will not increase. In addition, this expansion could
cause systems interruptions or degradations in customer service. Any of these
problems could result in bad publicity, reduced revenues or damage to our
reputation.
IF WE CANNOT ATTRACT AND RETAIN KEY PERSONNEL, WE MAY BE UNABLE TO EXECUTE OUR
BUSINESS STRATEGY.
Our future success will depend on our ability to attract and retain highly
skilled personnel. Our executive offices are located in an area of New York City
commonly referred to as the Silicon Alley, where we face extreme competition for
professionals from other internet companies as well as from more traditional
occupations. We have increased the number of our employees from 15 on December
31, 1998 to 165 on December 31, 1999. To expand our operations, we will need to
continue to hire new employees during the next 12 months. Although we cannot
predict the number of employees we will need to hire, we may need to increase
our employee base by as much or more than our increase from 1998 to 1999. If we
fail to identify, attract, retain and motivate highly skilled personnel, we may
be unable to successfully introduce new products or services or otherwise
implement our business strategy.
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WE MAY FAIL TO IMPLEMENT OUR ACQUISITION STRATEGY, WHICH WOULD PREVENT US FROM
EXPANDING OUR PRODUCT AND SERVICE OFFERINGS AND COULD RESULT IN LOWER REVENUES.
We recently acquired two medical companies, Total Health and American
Medical, and we may make additional acquisitions or investments in the future.
The process of integrating acquisitions is complex and will place significant
demands on our management, technical, financial and other resources, which could
lead to higher than anticipated costs or lower than expected revenues. The
successful integration of these acquisitions is critical to our future success.
Some of the factors that will affect our ability to successfully integrate an
acquired company include:
- our ability to assimilate the personnel and operations of the acquired
company,
- our ability to retain the personnel of the acquired company and
- the extent to which newly acquired services or technologies are
incompatible with and must be integrated into our existing services and
marketing, sales and support efforts.
In addition, if we finance the acquisitions by issuing equity securities,
this could dilute our existing stockholders. Any amortization of goodwill or
other assets, or other charges resulting from the costs of these acquisitions,
could adversely affect our operating results. The acquisition of Total Health
resulted in goodwill of $12.3 million, which is being amortized on a
straight-line basis over five years starting in December 1999. The acquisition
of American Medical resulted in goodwill of $5.8 million, which is being
amortized on a straight-line basis over five years starting in January 2000.
WE DEPEND ON THIRD PARTIES TO SUPPLY AND FULFILL GOODS PURCHASED ON OUR WEBSITE
TO OUR CUSTOMERS. IF THE COST OF GOODS TO US CHANGE, OR IF OUR SUPPLIERS DO NOT
PERFORM ADEQUATELY, OUR MARGINS OR REPUTATION MAY BE HARMED.
If our third-party suppliers increase their prices of the goods and
services we purchase from them, our margins may be harmed. We currently do not
maintain a significant inventory. We rely on third parties to maintain our
inventories and to fulfill those goods to purchasers. Since January 2000,
approximately 43% of our consolidated revenue was derived from the sale of
products we fulfilled through third parties. In particular, we depend on
Matthews Medical, a distributor of medical text books, software and supplies in
which we recently made an equity investment, to supply our medical books,
software and supplies. In 1999, Matthews Medical supplied substantially all of
the medical books, software and supplies we sold. Our business could be
significantly disrupted if our suppliers failed to deliver goods to our
customers. If for any reason our suppliers are unable or unwilling to supply
goods to our customers in sufficient quantities and in a timely manner, or if
our agreements with these suppliers are terminated, we may not be able to secure
alternative means of fulfillment on acceptable terms in a timely manner, or at
all.
Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. If our distributors' systems
fail or are unable to scale or adapt to changing needs, or if we cannot
integrate information systems with any new distributors, we may not have
adequate, accurate or timely inventory or financial information. We also rely on
third-party carriers for shipments to and from distribution facilities. We are
therefore subject to the risks, including employee strikes and inclement
weather, associated with our distributors and of our carriers' ability to
provide product fulfillment and delivery services to meet our distribution and
shipping needs. Failure to deliver products to our customers in a timely and
accurate manner would harm our reputation, the Medsite brand and our results of
operations.
IF WE ARE UNABLE TO SAFEGUARD CONFIDENTIAL INFORMATION, OUR REPUTATION MAY BE
HARMED AND WE MAY BE EXPOSED TO LIABILITY.
Our systems infrastructure is hosted with an offsite service provider. We
cannot assure you that we will be able to prevent unauthorized individuals from
gaining access to data stored by our service provider. If any compromise or
breach of security were to occur, it could harm our reputation and expose us to
liability. Any unauthorized access to our servers could result in the
misappropriation of confidential
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<PAGE> 13
customer information or cause interruptions in our services. It is also possible
that one of our employees could attempt to misuse confidential customer
information, exposing us to liability.
WE COULD BE LIABLE FOR PRODUCT LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES
PURCHASED THROUGH OUR WEBSITE, WHICH COULD RESULT IN PROTRACTED AND COSTLY
LITIGATION AND LIABILITY.
Many of the products obtained by customers through our system may be used
to treat patients, including medical equipment and supplies, prescription drugs,
non-prescription drugs and dietary supplements. Any defects or other performance
problems of these products could result in injury to these patients. A product
liability claim brought against us could expose us to substantial liability and,
even if not successful, would likely be time consuming and costly, would divert
management attention from the operation of our business, and could seriously
harm our business. Any insurance coverage we have may not be applicable to such
a claim. Even if our insurance is applicable, the amount of coverage may be
inadequate.
THE INFORMATION ON OUR WEBSITE MAY EXPOSE US TO CLAIMS FOR NEGLIGENCE OR
COPYRIGHT AND TRADEMARK INFRINGEMENT, WHICH COULD RESULT IN SUBSTANTIAL COSTS
AND LIABILITIES.
Our website contains information concerning the products offered by
suppliers, including information, product descriptions, specifications and
pricing. This information is provided by suppliers and we generally do not
independently verify this information. If any of this information is erroneous,
such as pricing inaccuracies or mislabeling, we could potentially face liability
for negligence, our public relations could suffer and we could lose customers.
In addition, we could also potentially face liability for copyright or trademark
infringement if the suppliers of our medical education do not comply with
copyright and trademark law. A successful claim could subject us to significant
liability that would harm our reputation and financial results. Even the
successful defense of a claim could divert the attention of our management and
damage our brand perception and reputation.
WE RELY ON OUR SUPPLIERS AND THEIR CARRIERS TO COMPLY WITH GOVERNMENT
REGULATIONS REGARDING THE SALE AND DISTRIBUTION OF REGULATED PRODUCTS, AND THEIR
FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL CIVIL AND CRIMINAL LIABILITY.
Many of the products offered through our website are subject to direct
regulation by governmental agencies. We rely upon our suppliers to meet all
packaging, distribution, labeling, hazard and health information notice,
record-keeping and licensing requirements applicable to transactions conducted
on our system. We may be subject to liability for violations of these
regulations regardless of our actual involvement in a violation. We cannot
assure you that our suppliers or their carriers will comply with all applicable
government regulations. We could be fined or exposed to civil or criminal
liability for any violations which could have a negative impact on our business
or financial results.
WE MAY NEED TO OBTAIN ADDITIONAL FINANCING WHICH MAY BE UNAVAILABLE OR, IF IT IS
AVAILABLE, MAY RESULT IN A REDUCTION IN PERCENTAGE OWNERSHIP OF OUR EXISTING
STOCKHOLDERS.
The proceeds of this offering are expected to be sufficient to meet our
cash requirements for at least the next twelve to eighteen months. However, we
may need to raise additional funds in order to:
- finance unanticipated working capital requirements,
- develop or enhance our technological infrastructure and our existing
services,
- fund strategic relationships,
- respond to competitive pressures, or
- acquire complementary businesses, technologies, products or services.
Additional financing may not be available on terms favorable to us, or at
all. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our expansion, take advantage of
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<PAGE> 14
unanticipated opportunities, develop or enhance technology or services or
otherwise respond to competitive pressures would be significantly limited. If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our then-existing stockholders will be reduced, and
these securities may have rights, preferences or privileges senior to those of
our existing stockholders.
WE HAVE LIMITED EXPERIENCE WITH INTERNATIONAL OPERATIONS, WHICH MAY RESULT IN
OUR INABILITY TO SUCCEED ON AN INTERNATIONAL LEVEL.
Historically, we have not conducted international operations. However, in
1999, we derived approximately 13% of our revenues from non-U.S. sources. To
increase this source of revenue, we are considering strategies of expanding
international operations. We cannot assure you that the international markets,
if any, to which we expand will accept our product and service offerings.
Further, we have had limited experience in developing localized versions of our
online services and in marketing and operating our online services
internationally. We may incur significant cost associated with any international
expansion. We may be unable to generate revenue commensurate with these
expenses, which could increase our losses and hinder profitability.
RISKS RELATED TO HEALTHCARE REFORM AND REGULATION
OUR FAILURE TO ENSURE COMPLIANCE WITH GOVERNMENT HEALTHCARE REGULATIONS COULD
NEGATIVELY AFFECT OUR OPERATING RESULTS.
The healthcare industry is heavily regulated. Various laws, regulations and
guidelines promulgated by government, industry and professional bodies affect
the provision, licensing, labeling, marketing, promotion and reimbursement of
healthcare services and products, including pharmaceutical products.
The Medicare/Medicaid Antikickback law, and similar state laws, prohibit
offering, soliciting, paying or receiving remuneration in return for the
referral of patients whose care will be paid for by Medicare, Medicaid or other
government programs. We have financial arrangements with pharmaceutical
companies to provide these companies with direct marketing access to our
physician customer base which we refer to as our PharmaDirect program. These
pharmaceutical companies may subsidize purchases by physicians of products and
services from us. Although we have attempted to structure our PharmaDirect
program to comply with these laws, we cannot assure that the regulatory
authorities might not determine otherwise.
The "Stark" law prohibits Medicare and Medicaid referrals for designated
healthcare services by physicians to other healthcare providers in which the
physicians or their family members have ownership or other compensation
arrangements. We believe that any physician ownership in Medsite complies with
the statutory exceptions included in the Stark law.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
included a new general prohibition against committing any scheme to defraud any
health care benefit program, including private payors. Violations of this
statute can result in criminal penalties and fines.
If we are found to have failed to comply with any of these laws, we could
suffer criminal and civil penalties that could be significant.
We are also subject to extensive regulation relating to the confidentiality
and release of patient records and additional legislation governing the
distribution of medical records has been proposed at both the federal and state
level. In addition, the Department of Health and Human Services recently issued
proposed regulations in accordance with HIPAA, which, when finalized, will
govern the protection and disclosure of patient confidential information. We
intend to comply with these proposed regulations. If these regulations change,
we could be forced to use additional resources and may encounter delays in
revising our operations and applications. The implementation of the security
requirements and other measures required by the regulations may be costly and
impact our revenues.
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<PAGE> 15
All of these laws have been applied to the marketing and promotional
practices of pharmaceutical companies, to payments to physicians for services
and to other benefits to physicians. To the extent that our business practices
are found to implicate any of these laws, we may need to modify our contracts,
including financial, marketing and continuing medical education contracts as
well as our contracts with physicians, including any physicians who perform
services for us. It is possible that additional laws, regulations or guidelines
could be adopted in the future, or existing laws may be modified.
HEALTHCARE REFORMS AND ADDITIONAL REGULATION COULD REDUCE THE OVERALL HEALTHCARE
EXPENDITURES WHICH MAY AFFECT OUR ABILITY TO GENERATE REVENUES.
Healthcare reform measures have been considered by Congress and other
federal and state bodies during recent years. The intent of the proposals
generally has been to reduce the growth of total healthcare expenditures and
expand healthcare coverage for the uninsured. Implementation of government
healthcare reform may adversely affect physician and other healthcare
professional spending as well as promotional and marketing expenditures by
pharmaceutical companies, which could reduce our opportunities for growth.
Although we do not receive reimbursement for our services directly from federal
program payors, our revenue is affected by overall industry spending and a
reduction in this spending could have an indirect negative effect on our
business and our ability to increase our revenues through our PharmaDirect
program.
IF THE REGULATION OF CONTINUING EDUCATION AND TRAINING FOR PHYSICIANS AND OTHER
HEALTHCARE PROFESSIONALS RESULTS IN A REDUCTION IN REQUIRED CREDIT HOURS, OUR
ABILITY TO GENERATE REVENUES WILL BE REDUCED.
Any reduction in the regulation of continuing education and training in the
healthcare industry may adversely affect our business. Our business is dependent
in part on required continuing education and training for healthcare
professionals and other healthcare workers resulting from regulations of state
and federal agencies, state licensing boards and professional organizations. In
1999, we derived less than 1% of our revenues from our medical education
offerings. Any change in these regulations which reduce the requirements for
continuing education and training for the healthcare industry could harm our
business.
RISKS RELATED TO ONLINE COMMERCE
COMPETITION IN OUR INDUSTRY IS INTENSE AND, IF WE ARE UNABLE TO COMPETE
EFFECTIVELY, WE WILL BE UNABLE TO GENERATE REVENUES AND CONTINUE OPERATIONS.
The market for internet products and services is new, rapidly evolving and
intensely competitive. We expect this competition will increase significantly.
Our financial results and the price of our common stock would be adversely
affected if we are unable to compete successfully. We compete with many internet
providers of healthcare products and services as well as with traditional
suppliers of healthcare information, products and services. We expect
competition will intensify in the future. Barriers to entry are low, and current
and new competitors may be able to launch new websites at a relatively low cost.
We compete directly and indirectly for physicians and service and product
suppliers with:
- companies and organizations maintaining online services or websites
targeted to physicians or the healthcare industry,
- vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging,
- companies and organizations maintaining internet search and retrieval
services and other high-traffic websites,
- publishers and distributors of traditional media, including those that
target to medical professionals, many of which have established or may
establish websites, and
- university and traditional book stores that sell medical books.
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<PAGE> 16
Competition for members, users and product suppliers as well as in the
e-commerce market, is intense and is expected to increase significantly.
Currently, we compete with medical websites such as Healtheon/WebMD. We also
compete with online medical supply stores, bookstores and other e-commerce
websites such as Allscripts, Neoforma, Medibuy and amazon.com. In addition, we
offer our products and services through other websites, some of whom may compete
with us in the future. To the extent we have existing relationships with
websites that elect to compete with us in the future, we may not be able to
continue to distribute our products and services through these websites.
Currently, we have agreements with websites such as Healtheon/WebMD, Medscape
and Physicians' Online.
NEW REGULATION OF AND UNCERTAINTIES REGARDING THE APPLICATION OF EXISTING LAWS
AND REGULATIONS TO E-COMMERCE AND THE INTERNET COULD PROHIBIT, LIMIT OR INCREASE
THE COSTS OF RUNNING OUR BUSINESS.
Any new law or regulation pertaining to the internet, or the application or
interpretation or existing laws, could decrease demand for our products and
services, increase our costs of doing business or otherwise have a material
adverse effect on our financial results or prospects.
In particular, the United States or other nations may adopt legislation
aimed at protecting the privacy of internet users. Privacy-related legislation
could require us to modify our operations or technology infrastructure, which
could necessitate the development, acquisition or license of additional
technology. Currently, privacy law in the United States consists of disparate
state and federal statutes regulating specific industries that collect personal
data. Most of them predate and therefore do not specifically address online
activities. However, European nations are now implementing a European Union
Directive on Data Protection regulating the transmission and storage of personal
information and data. In addition, a number of comprehensive legislative and
regulatory privacy proposals are now under consideration by federal, state and
local governments in the United States.
TAXATION OF ONLINE COMMERCE COULD REDUCE DEMAND FOR OUR SERVICES AND INCREASE
OUR ADMINISTRATIVE EXPENSES.
Some states are reviewing the appropriate tax treatment of e-commerce, and
any new local, state or federal tax regulations may subject us, our suppliers or
our customers to additional state sales and income taxes. The imposition of
additional sales taxes on transactions conducted through our website could make
our service less valuable to customers and suppliers and reduce transaction
volume. This effect would harm our revenues. In addition, the collection and
payment of such taxes may cause us or our customers to incur significant
administrative effort and expense.
In addition, federal legislation imposing limitations on the ability of
states to tax internet access was enacted in 1998. The Internet Tax Freedom Act,
as this legislation is known, exempts specific transactions conducted over the
internet from multiple or discriminatory state and local taxation through
October 21, 2001. It is possible that this legislation will not be renewed when
it terminates. Failure to renew this legislation could allow state and local
governments to impose taxes on particular transactions, and these taxes could
decrease the demand for our services or increase our costs of operations.
SECURITY BREACHES ON OUR SYSTEM OR OTHER INTERNET-BASED SYSTEMS COULD DAMAGE OUR
REPUTATION OR RESULT IN LIABILITY TO US.
Despite our security measures, we may be vulnerable to breaches in the
security of our computer infrastructure. Security breaches on our system or
other internet-based systems could reduce customer confidence in our websites
leading to reduced usage and lower revenues. The secure transmission of
confidential information over the internet is essential in maintaining
confidence in our websites and will be increasingly important as we expand our
customer-oriented offerings. Consumers generally are concerned with security and
privacy on the internet and any publicized security problems could inhibit the
growth of the internet and, therefore, our services.
In addition, if third parties were able to penetrate our network security
or otherwise misappropriate our customers' personal information we could be
subject to liability, including lawsuits. Any lawsuit would be costly, divert
the attention of our management and damage our reputation.
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WE ARE EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD, WHICH MAY REDUCE
COLLECTIONS AND DISCOURAGE ONLINE TRANSACTIONS.
In 1999, we derived 79% of our revenue from transactions paid with credit
cards. If we fail to adequately control fraudulent credit card transactions, our
revenues and results of operations would be harmed because we do not carry
insurance against this risk. Under current credit card practices, we are liable
for fraudulent credit card transactions because we do not obtain a cardholder's
signature. Although we expect that, with our acquisition of Total Health, the
percentage of our revenue generated from transactions paid with credit cards
will decrease as the percentage of revenues from corporate accounts increases,
we expect the aggregate number of credit card purchases to increase as more
customers purchase products through our website. In this event, our exposure to
the risk of credit card fraud will also increase.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE
INTERNET WHICH IS BEYOND OUR CONTROL. IF THE INTERNET IS NOT DEVELOPED, WE MAY
BE UNABLE TO IMPLEMENT OUR BUSINESS PLAN.
The success of our business will depend on others for the ongoing
development and maintenance of the internet infrastructure, including the
maintenance of a reliable network with the necessary speed, data capacity and
security, as well as timely development of complementary products like high
speed modems, for providing reliable internet access and services. Because
global commerce on the internet and the online exchange of information is new
and evolving, we cannot predict whether the internet will prove to be a viable
commercial marketplace in the long term. The success of our business is
dependent on the continued improvement of the internet as a convenient means of
interaction and commerce, as well as an efficient medium for the purchase and
sale of healthcare supplies. If the internet does not develop into an efficient
medium for these transactions, our business and financial condition and results
of operations will be harmed.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. This initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of common stock, you may not be able to
resell those shares at or above the initial public offering price. The market
price of our common stock may fluctuate significantly in response to:
- actual or anticipated fluctuations in our annual and quarterly operating
results,
- variations in our operating results that may cause us to exceed or fail
to meet analysts' or investors' expectations,
- our announcements of significant technical innovations, contracts,
acquisitions, alliances, joint ventures or capital commitments,
- additions or departures of key personnel, and
- future sale of equity or debt securities.
The market price of our common stock could also be impacted by forces
outside of our control, such as:
- changes in market valuations of other technology companies,
- changes in financial estimates by securities analysts,
- our competitors' announcements of new or enhanced products or services,
contracts, acquisitions, partnerships, joint ventures or capital
commitments, and
- general economic, industry and market conditions.
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<PAGE> 18
In addition, the stock market has experienced extreme volatility that often
has been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our performance. In
the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
You should read the "Underwriting" section for a more complete discussion
of the factors that were considered in determining the initial public offering
price of our common stock.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. In addition, the sale of these
shares could impair our ability to raise capital through the sale of additional
stock. Based on shares outstanding as of December 31, 1999, following this
offering, we will have 60,310,749 shares of common stock outstanding, of which
33,728,055 shares will become available for sale 180 days after the date of this
prospectus upon the expiration of lock-up agreements, subject to the
restrictions imposed by the federal securities laws. When the lock-up period
expires, or if the underwriters consent to an earlier sale, these holders will
be able to sell their shares in the public market. The underwriters of this
offering have informed us that they have no current intention to waive the
lock-up restrictions. In some recent initial public offerings, the underwriters
of those offerings have waived lock-up restrictions to avoid the possible sale
of shares subject to lock-ups in a short period of time after expiration of the
lock-up. We do not know if the underwriters of our offering will waive the
lock-up restriction for this or any other reason. The availability of shares for
sale after this 180-day period could result in additional sales of our stock in
a relatively short time period and may cause the price of our stock to decline
significantly. In addition, another 17,582,694 shares will be available for
sale, subject to federal securities laws restrictions, upon the expiration of
various one-year holding periods after the expiration of the lock-up period.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $8.90 in the net tangible book value per
share of our common stock from the price you pay for our common stock. For
additional information on this calculation, see "Dilution."
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING, AND WE MAY
NOT USE THESE PROCEEDS EFFECTIVELY.
Our management has broad discretion in the use of the net proceeds of this
offering and could spend the net proceeds in ways that do not yield a favorable
return or to which stockholders object. We may also use the proceeds to acquire
complementary businesses or technologies, although no such acquisitions are
currently planned.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will" and "would" or similar
words. You should read statements that contain these words carefully because
they discuss our future expectations, contain projections of our future results
of operations or our future financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The important factors listed
above, as well as any cautionary language in this prospectus, provides examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this prospectus
could have an adverse effect on our business, results of operations and
financial position.
USE OF PROCEEDS
Our net proceeds from the sale of the 9,000,000 shares of common stock we
are offering in this prospectus at an assumed public offering price of $11.00
per share, are estimated to be $90.7 million, or $104.5 million if the
underwriters' over-allotment option is exercised in full and after deducting the
underwriting discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including working capital. These uses are expected to
include approximately $35 to $40 million to expand our sales and marketing
efforts and technical support services as well as approximately $10 million of
expenses associated with our product development and approximately $2 million to
build out and furnish our new office space, which we expect to occupy in
September 2000. Pending use of the net proceeds of this offering, we intend to
invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently intend to retain all future earnings, if any, for use in the operation
and expansion of our business and do not anticipate declaring or paying cash
dividends for the foreseeable future.
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CAPITALIZATION
The following table sets forth the following information:
- the actual capitalization of Medsite.com as of December 31, 1999;
- the pro forma capitalization of Medsite.com after giving effect to the
conversion of all outstanding shares of convertible preferred stock into
25,039,043 shares of common stock; and
- the pro forma as adjusted capitalization to give effect to the sale of
9,000,000 shares of common stock at an assumed initial public offering
price of $11.00 per share in this offering, less underwriting discounts
and commissions and estimated offering expenses payable by Medsite.com.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Lease obligations payable less current portion... $ 171,704 $ 171,704 $ 171,704
Redeemable Convertible Preferred Stock:
Series A Convertible Preferred Stock; $.0001
par value; 3,000 shares authorized; 3,000
shares issued and outstanding, actual; 0
shares issued and outstanding, pro forma and
pro forma as adjusted....................... 3,000,000 -- --
Series B1 Convertible Preferred Stock; $.0001
par value; 9,500,000 shares authorized;
9,113,788 shares issued and outstanding,
actual; 0 shares issued and outstanding, pro
forma and pro forma as adjusted............. 46,500,428 -- --
Series B2 Convertible Preferred Stock; $.0001
par value; 1,200,000 shares authorized;
1,200,000 shares issued and outstanding,
actual; 0 shares issued and outstanding, pro
forma and pro forma as adjusted............. 6,000,000 -- --
------------ ------------ ------------
Total Redeemable Convertible Preferred Stock..... 55,500,428 -- --
------------ ------------ ------------
Stockholders' equity (deficit):
Common Stock; $.000033 par value; 75,000,000
shares authorized, 26,271,696 shares issued
and outstanding, actual; 51,310,749 shares
issued and outstanding, pro forma 60,310,749
shares issued and outstanding, pro forma as
adjusted.................................... 876 1,710 2,007
Additional paid in capital..................... 13,889,914 66,376,508 157,096,211
Accumulated deficit............................ (21,097,062) (18,084,062) (18,084,062)
------------ ------------ ------------
Total stockholders' equity (deficit)........ (7,206,272) 48,294,156 139,014,156
------------ ------------ ------------
Total capitalization...................... $ 48,465,860 $ 48,465,860 $139,185,860
============ ============ ============
</TABLE>
This tables excludes:
- 4,875,000 shares of common stock that were reserved for issuance on the
exercise of stock options under our stock option plan as of December 31,
1999, 4,767,000 of which were outstanding at such date at a per share
weighted average exercise price of $3.30;
- 7,500,000 shares of common stock reserved for issuance under our 2000
stock plan,
- 2,250,000 shares of common stock reserved for issuance under our 2000
employee stock purchase plan,
- 375,000 shares of common stock reserved for issuance under our 2000
director option plan,
- 992,133 shares of common stock that are issuable upon the exercise of
outstanding warrants, and
- 690,000 shares of common stock issued in connection with acquisitions we
have completed since December 31, 1999.
19
<PAGE> 21
DILUTION
The pro forma net tangible book value as of December 31, 1999 was $36.1
million or approximately $0.70 per share of common stock. Pro forma net tangible
book value represents the amount of our total tangible assets less total
liabilities, divided by the total number of shares of common stock outstanding.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately following this offering.
After giving effect to our sale of the 9,000,000 shares of common stock
offered by this prospectus and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of December 31, 1999 would have been $126.9
million, or approximately $2.10 per share. This represents an immediate increase
in net tangible book value of $1.40 per share to existing stockholders and an
immediate dilution in net tangible book value of $8.90 per share to new
investors. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $0.70
Increase per share attributable to new investors.......... 1.40
Pro forma net tangible book value per share after the
offering.................................................. 2.10
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.90
======
</TABLE>
The following table sets forth, 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 the new investors, before deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us, at the assumed
public offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 51,310,749 85.1% $ 71,538,191 41.9% $ 1.39
New investors............... 9,000,000 14.9% 99,000,000 58.1% 11.00
----------- ---- ------------ -----
Total....................... 60,310,749 100% $170,538,191 100%
=========== ==== ============ =====
</TABLE>
This table assumes no exercise of outstanding options. See Note 12 to the
Financial Statements. The exercise of outstanding options would increase the
dilutive effect to new investors.
If the underwriters' over-allotment option is exercised in full, the
following will occur:
- the number of shares of common stock held by existing stockholders will
decrease to approximately 85% of the total number of shares of our common
stock outstanding after the offering and
- the number of shares held by new investors will be increased to
10,350,000 or approximately 15% of the total number of shares of our
common stock outstanding after this offering.
20
<PAGE> 22
SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the selected balance sheet data as of December 31, 1997,
1998 and 1999 have been derived from our audited financial statements included
elsewhere in this prospectus. The statement of operations data for the period
from November 24, 1995 (date of inception) to December 31, 1995 and the year
ended December 31, 1996 and the balance sheet data at December 31, 1995 and 1996
have been derived from financial statements not included in this prospectus. In
the opinion of management the statement of operations data from November 24,
1995 (date of inception) to December 31, 1995 and the year ended December 31,
1996 and the balance sheet data as of December 31, 1995 and 1996 have been
prepared on the same basis as the audited financial statements appearing on this
prospectus and include all necessary adjustments, consisting only of normal
recurring adjustments we believe to be necessary for a fair presentation of the
data. The historical results are not necessarily indicative of results to be
expected for any future period. The data should be read in conjunction with the
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 24, 1995 YEAR ENDED DECEMBER 31,
(INCEPTION) TO ----------------------------------
DECEMBER 31, 1995 1996 1997 1998 1999
----------------- ----- ----- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.................................... $-- $ 137 $ 297 $ 1,417 $ 8,893
Cost of sales................................ -- 80 91 1,300 8,883
--- ----- ----- ------- --------
Gross profit................................. -- 57 206 117 10
Operating expenses:
General and administrative................. -- 299 439 1,288 7,117
Sales and marketing........................ -- -- 115 541 7,174
Product and technology development......... -- -- 66 172 1,371
Depreciation and amortization.............. -- -- -- 14 833
--- ----- ----- ------- --------
Total operating expenses..................... -- 299 620 2,015 16,495
--- ----- ----- ------- --------
Operating loss............................... -- (242) (414) (1,898) (16,485)
Interest income (expense), net............... -- (1) (17) (38) 337
--- ----- ----- ------- --------
Net loss..................................... -- (243) (431) (1,936) (16,148)
Accreted dividends on preferred stock........ -- -- -- -- (3,013)
--- ----- ----- ------- --------
Net loss attributable to common
stockholders............................... $ $(243) $(431) $(1,936) $(19,161)
=== ===== ===== ======= ========
Net loss per common share attributable to
common stockholders, basic and diluted..... n/a n/a n/a $ (0.10) $ (0.79)
Weighted average common shares outstanding... n/a n/a n/a 18,769 24,144
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and short term
investments................................. $ -- $ 20 $ 10 $ 29 $33,714
Restricted cash equivalents................... -- -- -- -- 1,503
Working capital (deficit)..................... -- (23) (429) (1,538) 30,922
Total assets.................................. -- 141 80 309 58,892
Redeemable convertible preferred stock........ -- -- -- -- 55,500
Total stockholders' (deficit)................. -- (143) (562) (1,591) (7,206)
</TABLE>
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with our financial statements and related
notes. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of factors including
those discussed in "Risk Factors" starting on page 7 and elsewhere in this
prospectus.
OVERVIEW
We were initially organized in 1995 and commenced active operations in 1996
as a developer and distributor of medical software. In February 1997, we
launched our website www.medsite.com to enable the purchase of our software over
the internet. In September 1997, we enhanced Medsite with Medsite Books and
began generating revenue from the sale of medical books and software over the
internet. In February 1998, Medsite Mail was added as a web-based e-mail service
for Medsite users.
Since November 1999, we significantly expanded our product and service
offerings. These expanded offerings include a comprehensive selection of medical
books, software supplies and additional services to provide physicians access to
medical information and to manage communications over the internet. We derived
approximately 85% of our revenue in 1999 from the sale of medical books. In
December 1999, we acquired Total Health, a medical supply and book company,
which in 1999 derived approximately 75% of its revenue from the sale of medical
supplies and approximately 25% from the sale of medical books. After giving
effect to our recent acquisition of Total Health as though it had occurred on
January 1, 1999, approximately 45% and 54% of our revenue in 1999 came from
medical supplies and medical books, respectively. In addition, we recently began
offering new information and communication products and services. These new
products and services, each of which we expect will generate revenue for us,
include an expanded offering of online medical supplies, an online service to
assist physicians in completing managed care and other healthcare credentialing
applications, information products enabling physicians to access clinical
information contained in medical journals and established clinical databases,
continuing medical education courses, co-branded credit cards and medical
transcription services. Revenues from these new information and communication
products were insignificant in 1999, although we expect sales of our information
and communication products and services to grow as a percentage of total sales.
Through our PharmaDirect program, pharmaceutical companies can subsidize
physician usage of our online products including medical education products
developed by American Medical. Pharmaceutical companies can also provide product
information to targeted physicians over our website. Pharmaceutical companies
pay us for development of these information programs and revenue is recognized
on a percentage-of-completion basis as the programs are prepared for online
distribution. We provide certificates to physicians as an incentive to review
this pharmaceutical product information. Physicians redeem these certificates
and paper certificates received at pharmaceutical company sponsored conferences
and seminars, both of which are paid for by pharmaceutical companies, against
products and services sold by Medsite. We recognize revenue at the time the
certificate is returned to us and goods are shipped to the physician-customer.
Pharmaceutical companies also pay us for consulting services provided in
connection with these programs designed to provide online information programs.
Revenue from consulting services is recognized when the service is provided.
Customer orders are processed at Medsite and we either charge the
customer's credit card, invoice monthly for corporate accounts, or for our
PharmaDirect program, accept certificates for redemption for goods and services.
The purchaser is charged when the product is shipped. For subscription-based
services, the purchaser is billed when the service is initiated.
When a customer places an order, we either fulfill the order from our own
inventory or purchase the product or service from our suppliers at a
pre-negotiated price. For customer orders that involve subscription-based
services, we distribute the services through our website.
22
<PAGE> 24
Approximately 84% of our consolidated revenue during 1999 was derived from
the sale of products we purchased through a third party fulfillment arrangement
with Matthews Medical. In 2000, for our year-to-date sales through mid-March
approximately 43% of our consolidated revenue was derived from the sale of
products we purchased through Matthews Medical. Under our agreement with
Matthews Medical, we purchase medical books, software and supplies for sale to
our customers. Our agreement does not include minimum purchase obligations and
provides that either party may terminate the agreement on 60 days' notice.
We have pursued an aggressive customer acquisition program, offering
promotional discounts such as free or discounted shipping, and coupons to
targeted groups of customers. We may realize a net loss when we offer
promotional discounts, coupons or free shipping. This may occur when sales are
made from our own inventory or using third party fulfillment arrangements. Our
gross margins on orders filled from our own inventory are generally higher than
our gross margins on orders we fulfill through third party arrangements. Product
returns are generally allowed within 10 to 30 days, depending on the product, if
goods are returned in their original condition.
Net sales includes primarily revenues from product and service sales. For
product sales, we recognize revenue when the customer takes title to the goods.
The revenue recognized is the item sales price plus outbound shipping costs less
returns, promotional discounts and coupons. For service transactions, we
recognize revenue as the sales price of the service provided to the purchaser.
If the service is subscription-based, the revenue and associated costs are
amortized over the life of the subscription.
Cost of sales consists of the cost of products sold to customers and
related shipping costs. Payments for goods and services purchased are made based
on standard terms with vendors. Cost of sales are recognized consistently with
the revenue recognition of the associated products or services.
Marketing and sales expenses consist of advertising and promotional
expenditures, distribution expenses, including order processing and fulfillment
charges, payroll and related expenses for personnel engaged in marketing,
merchandising product management and customer service, sales commissions and
allocated overhead. Additionally, out of pocket costs for promotional programs
such as free shipping or free books are recorded as sales and marketing
expenses.
We pay sales commissions and bonuses to certain employees based on the
achievement of specified sales levels. Also, we enter into agreements with
websites, universities and healthcare organizations, which typically provide
that the organization include in their website an internet link to a
Medsite-operated website. We pay a commission to these organizations for our
sales through their websites.
Product and technology development expenses consist of payroll, related
expenses of personnel engaged in maintaining and expanding our website
functionality and updating website information and allocated overhead.
General and administrative expenses consist of payroll and related expenses
for executive, administrative, and human resources personnel, professional
services expenses and general corporate expenses.
Depreciation and amortization expenses consist of depreciation and
amortization of property and equipment, assets acquired under capital leases,
leasehold improvements, intangible assets, capitalized software development and
goodwill.
RECENT DEVELOPMENTS
In December 1999, we acquired Total Health for an aggregate purchase price
of approximately $11.7 million consisting of approximately $5.6 million in cash,
of which approximately $1.5 million has been placed in escrow and will be
released if certain performance obligations are met, and 1.65 million shares of
our common stock. Based on an analysis of our customer data base, we have sold
products or services to over 100,000 physicians, including residents. We intend
to transition most of Total Health's physicians to our online business. In the
acquisition, we obtained our current inventory and fulfillment facilities. Our
financial statements for the year ended December 31, 1999 reflect only one month
of combined operations with Total Health. Total Health accounted for
approximately $1.5 million of net sales in 1999. In 1999, approximately 16% of
our sales were fulfilled from our own inventory, which we acquired through our
23
<PAGE> 25
purchase of Total Health. We expect the percentage of sales fulfilled from our
inventory to increase in 2000, which will include the operations of Total Health
for the full year. We expect to periodically evaluate our fulfillment options to
utilize the most effective combination of in-house and third party fulfillment.
In January 2000, we acquired American Medical, a creator of medical education
information, for an aggregate purchase price of approximately $5.3 million
consisting of 630,000 shares of our common stock. American Medical, which had
losses of approximately $1.2 million in 1999, derives its revenue from
developing for third parties medical education which we include on our website
with a statement that creation of the information was sponsored by a third
party. American Medical also sells prepackaged medical programming. We intend to
incorporate American Medical's business as part of our information product and
service offerings.
Because of these recent acquisitions and other factors, we do not believe
that our historical financial results are necessarily indicative of results to
be expected for future periods. In particular, we expect that revenues derived
from Total Health's operations may significantly impact our results of
operations for the foreseeable future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998.
Net sales. Net sales increased from $1.4 million for the year ended
December 31, 1998 to $8.9 million for the year ended December 31, 1999. The
increase in net sales is primarily due to an increase of approximately $5.5
million in Medsite's medical book sales and approximately $500,000 in sales of
medical supplies, information products and advertising revenue on our website.
In addition, Total Health had sales in December 1999 of approximately $1.5
million attributable to medical supply and book sales.
Cost of Sales and Gross Margins. Cost of sales increased from $1.3 million
for the year ended December 31, 1998 to $8.9 million for the year ended December
31, 1999. This increase is primarily due to the increased unit volume of medical
books sold and shipped. In addition, Total Health's cost of sales in December
1999 was approximately $900,000. Cost of sales increased as a percentage of net
sales from 91.7% for the year ended December 31, 1998 to 99.9% for the year
ended December 31, 1999. In 1999, promotions, discounts and coupons amounted to
approximately 19% of gross sales, when gross sales are calculated before taking
into account the resulting discount on product price. We expect to continue or
increase our use of these promotions, discounts and coupons for the foreseeable
future to continue building our customer base. This use of promotions, discounts
and coupons may decrease our gross margins and, as a result, may hinder our
ability to become profitable.
We expect the cost of sales to increase in absolute dollar terms as our
sales volume increases, and expect our gross margin to improve as sales from our
own inventory increase because of our acquisition of Total Health and as our use
of discounts and coupon programs becomes a lower percentage of sales. We expect
our gross margin will fluctuate based on a number of factors that will be
significantly influenced by our pricing strategy. We set the price of our
products and services based on factors such as competitive conditions in the
marketplace, customer demand and the total cost of our products, which includes
shipping cost, cost of goods sold and general and administrative expense, as
well as the use of promotions, discounts and coupons utilized to attract
customers. In addition, our gross margin will be affected by the mix of products
and services we sell.
Marketing and Sales. Marketing and sales expenses increased from $540,802
for the year ended December 31, 1998 to $7.2 million for the year ended December
31, 1999. The increase was primarily due to growth in our direct sales force,
marketing staff and customer service staff from ten people at the end of 1998 to
107 people at the end of 1999, as well as an increase in promotional spending
targeted at building our brand, increasing our client base and growing sales. We
expect an increase in the absolute dollars spent for marketing and sales
resulting from continued aggressive promotion of our products and services. We
expect that this increase will be attributable to the execution of our expanded
integrated promotion, sales and marketing program, focused on increasing
physician awareness of the Medsite brand to increase purchases of our products
and services. Currently we have no plans to launch any new specifically
identifiable marketing or advertising campaigns. To the extent that our business
grows in the future, we
24
<PAGE> 26
expect increased costs related to customer service and product management
activities. Marketing and sales expenses may vary considerably from quarter to
quarter, depending on the timing of promotional activities and advertising.
Product and Technology Development. Product and technology development
expenses increased from $172,020 for the year ended December 31, 1998 to $1.4
million for the year ended December 31, 1999. During 1999, we capitalized $2.0
million of product development costs. To expand the products and services
available on our website, we increased the number of employees from three people
at the end of 1998 to 33 people at the end of 1999, and utilized contract
programmers and consultants in this effort. This resulted in an increase from
1998 to 1999 in salaries and wages costs of approximately $400,000 and an
increase in contract programming and consulting costs of approximately $2.6
million. We believe that continued investment in product development is critical
to achieving our objectives and expect product development costs to increase in
absolute dollars. We expect our technology development cost to consist of
salaries and wages for employees and consultants to maintain our current
website. We may need to purchase additional servers to accommodate the volume of
our website traffic if our customer base grows. The internet is rapidly
developing and we may need to increase our expenditures to adopt new technology
to remain competitive.
General and Administrative. General and administrative expenses increased
from $1.3 million for the year ended December 31, 1998 to $7.1 million for the
year ended December 31, 1999. This increase was primarily due to the increase in
the number of employees, from two at the end of 1998 to 25 at the end of 1999,
necessary to develop and manage our acquisition and financing activities,
accounting and administrative operations, and employee recruitment and training.
We expect general and administrative expenses to increase in absolute dollars in
the future as we continue to expand our staff and incur additional costs related
to anticipated growth of the business.
Depreciation and Amortization. Depreciation and amortization expense
increased from $14,141 for the year ended December 31, 1998 to $832,961 for the
year ended December 31, 1999. The increase was due to increased expenditures on
office equipment, software and furniture and fixtures necessary to support our
growth. In addition, the acquisition of Total Health resulted in goodwill of
$12.3 million, which is being amortized over five years starting in December
1999. We expect to amortize $2.5 million of this amount in 2000. We expect
expenditures for property and equipment to increase in the future, as we build
out our newly leased office space, acquire additional computer equipment, and
acquire furniture and equipment for additional staff. We expect that the costs
associated with our newly leased office space will be approximately $2 million
over the next year.
Income Taxes. No provision for federal and state income taxes was recorded
as we incurred net operating losses in each of the past three years. As of
December 31, 1999, we had approximately $17.9 million of federal and state net
operating loss carryforwards which expire in varying amounts beginning in 2018.
Due to the uncertainty regarding the ultimate utilization of the net operating
loss carryforwards, we have not recorded any benefit for losses and a valuation
allowance has been recorded for the entire amount of the net deferred tax asset.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997.
Net sales. Net sales increased from $297,330 for the year ended December
31, 1997 to $1.4 million for the year ended December 31, 1998. The increase is
primarily due to customer purchases of medical books following the launch of our
website.
Cost of Sales and Gross Margins. Cost of sales increased from $90,600 for
the year ended December 31, 1997 to $1.3 for the year ended December 31, 1998.
This increase is primarily due to increased unit sales volume of medical books
following the launch of our website. Comparison of cost of sales as a percentage
of net sales is not meaningful, as the our business during the year ended
December 31, 1997 was primarily development and distribution of computer
software, and during the year ended December 31, 1998, was the sale of medical
books.
25
<PAGE> 27
Marketing and Sales. Marketing and sales expenses increased from $114,450
for the year ended December 31, 1997, to $540,802 for the year ended December
31, 1998. This increase is primarily due to increased promotional expenditures.
Product and Technology Development. Product and technology development
expenses increased from $66,065 for the year ended December 31, 1997 to $172,020
for the year ended December 31, 1998. This increase is due primarily to costs
related to the development of our product offering for our website.
General and Administrative. General and administrative expenses increased
from $439,170 for the year ended December 31, 1997 to $1.3 million for the year
ended December 31, 1998. This increase was primarily due an increase in the
number of people hired to perform administrative activities required by the
growth of our business.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the four
quarters in the year ending December 31, 1999. The information for each of these
quarters is unaudited and has been prepared on the same basis as our audited
financial statements appearing elsewhere in this prospectus. In the opinion of
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results when read in conjunction with our audited financial statements and
related notes. We have experienced, and expect to continue to experience,
fluctuations in operating results from quarter to quarter. Historical operating
results are not necessarily indicative of the results that may be expected for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 906 $ 1,444 $ 2,419 $ 4,123
Cost of sales................................ 832 1,413 2,713 3,925
------- ------- ------- -------
Gross profit................................. 74 31 (294) 198
General and administrative................. 683 1,230 2,819 2,384
Sales and marketing........................ 339 1,126 2,490 3,220
Product and technology development......... 82 263 511 515
Depreciation & amortization................ 8 144 262 419
------- ------- ------- -------
Total operating expenses..................... 1,112 2,763 6,082 6,538
Loss from operations......................... (1,038) (2,732) (6,376) (6,340)
Interest, net................................ 17 22 (66) 364
------- ------- ------- -------
Net loss..................................... $(1,021) $(2,710) $(6,442) $(5,976)
======= ======= ======= =======
</TABLE>
Due to our acquisition of Total Health and other factors, we do not believe
historical quarterly results are indicative of expected future performance. In
particular, we expect increased revenue due to acquisitions as well as internal
growth. In addition, we do not believe the trend in quarterly operating expenses
are indicative of expected future results. We expect operating expenses to
increase significantly in future periods as we add personnel and purchase
equipment and services necessary to support future growth in our business.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $29,353 at December 31, 1998 and $32.3
million at December 31, 1999. During 1998 and 1999, we financed our operations
through the private issuance of equity securities and convertible notes which
have been converted to equity securities.
Net cash used in operating activities was $861,416 for the year ended
December 31, 1998 and $12.1 million for the year ended December 31, 1999. Net
cash used in operations consists primarily of net losses during each year,
resulting from significant initial discounts, promotions and coupons used to
grow our customer base, and expenditures to establish and expand our offerings
on our website. In addition, accounts receivable increased $3.9 million from
December 31, 1998 to December 31, 1999, primarily due
26
<PAGE> 28
to the acquisition of Total Health in December 1999. Total Health had net
receivables of $3.6 million on the date of acquisition. This resulted in
outstanding receivables at December 31, 1999 representing 45% of consolidated
revenue for the year ended December 31, 1999. This percentage is not
representative of expected future results, since only one month of Total Health
revenue is included in consolidated results of operations for the year ended
December 31, 1999. When compared to pro forma revenue for the same period, which
includes results of Total Health for the full year, outstanding receivables at
December 31, 1999 represent 19% of revenue.
Net cash used in investing activities was $55,160 for the year ended
December 31, 1998. Net cash used in investing activities was $14.0 million for
the year ended December 31, 1999 and consisted of approximately $7.6 million for
the acquisition of Total Health and repayment of $2.0 million of Total Health's
bank debt, approximately $4.7 million of capital expenditures for computers,
software, furniture and equipment to support growth in personnel and the
investment of approximately $1.4 million of the cash proceeds from financing
activities in short term debt securities. Subsequent to December 31, 1999, we
completed the acquisition of AMC for total consideration of 630,000 shares of
our common stock. Cash flows used in investing activities could increase if we
use our cash to make future acquisitions.
Net cash flows provided by financing activities were $935,786 for the year
ended December 31, 1998 and $58.4 million for the year ended December 31, 1999.
During 1999 we issued shares of our common stock for net proceeds of $3.5
million, 8% convertible promissory notes, which subsequently converted in to
shares of our series B2 preferred stock for net proceeds of $6.0 million, series
A convertible preferred stock for net proceeds of $2.5 million, and series B1
convertible preferred stock for net proceeds of $46.9 million.
Our principal commitments as of December 31, 1999 consist of obligations
under capital and operating leases for the rental of office space and computer
equipment aggregating $21.7 million over the next ten years. We have no material
commitments for capital expenditures, but we anticipate a substantial increase
in capital expenditures for equipment, including computer equipment, furniture
and leasehold improvements for the additional office space we leased in December
1999 and to support expected growth in operations, infrastructure and personnel.
We believe cash and short term investments on hand are sufficient to meet
commitments and to fund our operations as currently conducted for the next
twelve months without raising funds from this offering. However, we are in the
process of expanding our business and our customer base. To continue this
expansion, we will need the funds from this offering. We currently anticipate
that funds available, together with the net proceeds of this offering, will be
sufficient to fund discretionary capital expenditures, acquisitions and
additional infrastructure resulting from the expected growth of the our business
for the next twelve to eighteen months. We may need to raise additional funds
prior to the expiration of such period. If we raise additional funds through the
issuance of equity, equity related or debt securities, such 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 1999. We do not currently
hold derivative instruments or engage in hedging activities.
27
<PAGE> 29
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information is based on the
historical financial statements of Medsite and Total Health as of and for the
year ended December 31, 1999. The statement of operations data and other
financial data have been prepared as if the Total Health acquisition had
occurred on January 1, 1999. The pro forma financial information does not
purport to represent what our financial condition or results of operations
actually would have been for the date or periods presented had the transaction
occurred on the date indicated or to indicate the financial results for future
periods. The pro forma financial information should be read in conjunction with
the historical financial statements of Medsite and Total Health included
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
1999 NOVEMBER 30, 1999
MEDSITE TOTAL HEALTH(1) ADJUSTMENTS PRO FORMA
------------ ----------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 8,893 $12,801 $ -- $ 21,694
Cost of sales............................ 8,883 8,831 -- 17,714
-------- ------- ------- --------
Gross profit............................. 10 3,970 -- 3,980
-------- ------- ------- --------
Operating Expenses:
General and administrative............. 7,117 5,302 -- 12,419
Sales and marketing.................... 7,174 497 -- 7,671
Product and technology development..... 1,371 -- -- 1,371
Depreciation and amortization.......... 833 189 2,262(2) 3,284
-------- ------- ------- --------
Total operating expenses............ 16,495 5,988 2,262 24,745
-------- ------- ------- --------
Loss from operations..................... (16,485) (2,018) (2,262) (20,765)
Income (expense), net.................. 337 (83) (257)(2) (3)
-------- ------- ------- --------
Net loss................................. (16,148) (2,101) (2,519) (20,768)
Accreted dividends on preferred stock.... (3,013) -- -- (3,013)
-------- ------- ------- --------
Net loss attributable to common
stockholders........................... $(19,161) $(2,101) $(2,519) $(23,781)
======== ======= ======= ========
Net loss per share, attributable to
common stockholders, basic and
diluted(3)............................. $ (0.79) $ (0.92)
======== ========
Weighted average number of shares
outstanding............................ 24,144 1,650(4) 25,794
======== ======= ========
</TABLE>
- ---------------
(1) On December 1, 1999, we acquired all of the outstanding common stock of
Total Health for total consideration of $11.7 million, $5.6 million in cash,
of which approximately $1.5 million has been placed in escrow and will be
released if certain performance obligations are met, and 1.65 million shares
of common stock.
(2) Reflects the effects of our acquisition of Total Health, recorded under the
purchase method of accounting as if it had occurred on January 1, 1999.
Comprised of:
(a) an increase in amortization expense of $2.3 million for the
amortization of the excess of purchase price over the estimated fair
value of net assets acquired over a five-year period prorated for the
eleven-month period prior to the acquisition, and
(b) a decrease in interest income of approximately $257,000 for the year
associated with approximately $5.6 million of cash and investments used
to partially fund the purchase price of Total Health.
(3) Net loss per share is computed on the basis described in Note 1 of our
consolidated financial statements.
(4) Reflects the net increase in weighted average common shares outstanding as a
result of our acquisition of Total Health.
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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We have financial instruments that are subject to interest rate risk,
principally short-term investments. Historically, we have not experienced
material gains or losses due to interest rate changes when selling short-term
investments and typically hold these securities until maturity. Based on our
current holdings of short-term investments, our exposure to interest rate risk
is not material.
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<PAGE> 31
BUSINESS
OVERVIEW
Medsite.com is a provider of online business-to-business e-commerce,
information and communication products and services to the physician. We design
our products and services to increase physicians' productivity and to complement
their daily routines and behavioral patterns. We tailor our products and
services to meet the needs of physicians throughout their careers, beginning in
medical school, extending through residency and continuing into clinical
practice. The relationship we build with our customers also enables us to offer
pharmaceutical, managed care, medical device and other healthcare companies an
attractive means of reaching physicians.
We address physician needs for e-commerce, information and communication
products and services. Our e-commerce products and services enable physicians to
conveniently purchase from us a comprehensive selection of medical supplies,
books and other practice needs online. Our information management tools help
physicians filter and organize the stream of medical data required to stay
current with medical practices, including information from medical journals,
medical data bases, continuing medical education providers and news sources. Our
communication products and services assist physicians in communicating with
their patients and colleagues using the internet.
We have created an online distribution network through agreements with
medical websites, universities, medical associations and healthcare
organizations. We offer our products and services through Medsite.com, which is
linked to over 200 other healthcare websites including co-branded websites
operated by the American Medical Association, the American Medical Students
Association, ePhysician, Healtheon/WebMD, Medscape and Physicians' Online, among
other websites. In return, we pay a commission for products we sell from
referrals through these websites. This enables us to reach physicians visiting
other websites on the internet.
INDUSTRY BACKGROUND
Healthcare Industry Overview
We believe that the physician is the focal point in the healthcare
industry. Based on data from the American Medical Association, there are
approximately 620,000 physicians who provide patient care in the United States.
These physicians directly or indirectly influenced an estimated 80% of
healthcare expenditures. The Health Care Financing Administration estimates that
healthcare expenditures in the United States totaled approximately $1.1 trillion
in 1999, representing the largest segment of our gross domestic product.
Physicians are an attractive customer segment because of their significant
influence over healthcare expenditures and their need for products and services.
These needs are diverse and include purchasing medical and office supplies for
their practices, obtaining medical information and educational materials, and
communicating effectively with their colleagues and patients. Physicians
prescribe drugs and order medical procedures, and pharmaceutical companies and
other medical manufacturers and service companies seek to educate and influence
the physician.
The $32 billion domestic market for physician medical supplies, as
estimated by the Health Care Financing Administration, consists of traditional
products including bandages, latex gloves, thermometers, syringes and small
equipment. The cost-effective procurement of these products is important to
managing a physician's practice expenses.
Physicians, medical students and healthcare professionals spend $1.4
billion annually purchasing books, software and medical journals, according to
Management Practice, Inc. We believe this segment, as well as the larger overall
market for medical education and information, is highly fragmented because most
purchases are made through traditional channels of distribution, including
physical stores, offline publications, such as medical journals and CD-ROMs, and
by attending conferences and seminars. Each
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year, government regulations and accrediting organizations require physicians to
satisfy continuing medical education requirements.
Pharmaceutical companies spent over $10 billion in 1999 on promotional and
educational activities that targeted the physicians in the United States,
according to Scott-Levin, a pharmaceutical market research consulting firm. Data
from Scott-Levin indicates that approximately $6.2 billion of these expenditures
were spent on 61 million face-to-face product sales meetings, a process in which
a sales representative visits a physician and describes the therapeutic benefits
and adverse effects of new or existing drugs. In addition to these physician
product sales meetings, pharmaceutical companies spent over $2.1 billion on
traditional advertising means, such as print ads in medical journals, sponsored
meetings and events.
The Internet and its Applicability to the Physician
The internet is increasingly being used as a business-to-business solution
to streamline existing business practices, improve productivity and reduce
costs. Physicians have recognized the power and applicability of the internet to
provide tools to address their e-commerce, information and communication needs.
Based on publicly available data from the American Medical Association, the
proportion of physicians using the internet has nearly doubled from 1997 to
1999.
- e-Commerce. The traditional medical office purchase order process
usually involves searching through paper catalogs, placing and tracking
orders by telephone or facsimile, and receiving frequent, time-consuming
visits from medical supply representatives. The internet enables
physicians to streamline and automate the procurement process and access
a broad product offering from a single website. For example, physicians
can review internet based catalogs to find products that suit their needs
and can generate tailored product lists that make return visits to the
relevant websites more personalized.
- Information. Healthcare is an information-intensive industry. The sheer
volume of medical information and the time constraints facing physicians
make it difficult for them to stay current and quickly and efficiently
access the information that is most relevant to their practices and their
patients. The internet provides tools that enable physicians to
conveniently access, filter and organize the stream of data specific to
their needs from many different sources including medical journals,
medical databases and medical education and news services. Specifically,
internet search tools can isolate and collect medical information from
large data bases seconds after a physician requests it.
- Communication. The exchange of information among physicians, their
colleagues and patients is essential to provide quality treatment to
patients. Information exchange is typically a labor-intensive process
that is done in person or by telephone, facsimile or mail. The internet
permits physicians, patients and other healthcare constituents to
instantaneously and conveniently communicate with each other. Physicians
can use web-based email accounts to exchange data instantly with patients
and colleagues from any device that has internet access. For example, a
physician treating a patient at a hospital can receive, review and
forward a medical report to the patient or another physician through
email.
The internet also provides a new marketing and sales channel for
pharmaceutical companies and other healthcare organizations to reach the
physician in an efficient and direct manner. For example, these companies can
use the internet to target physicians by medical specialty and, through
technologically sophisticated data collection and analysis, measure the
effectiveness of their sales efforts and quickly revise them in response to this
prompt feedback.
OUR OPPORTUNITY
The emergence of the internet and the potential benefits of online
business-to-business solutions for physicians have highlighted many of the
inefficiencies inherent in the physician's practice. The internet has
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given rise to a broad but fragmented array of healthcare e-commerce, information
and communication websites. Time and economic pressures facing physicians
compound the need for a one-stop online destination site addressing all of these
needs. In addition, one website with access to a large physician base also
provides pharmaceutical, managed care, medical device and other healthcare
companies with the opportunity to market directly to this targeted audience.
We believe there is an opportunity for Medsite.com to become the
physician's one-stop destination on the internet by providing goods and services
to physicians that satisfy their e-commerce, information and communication
needs.
We offer a suite of web-based products and services that we designed to
address physicians' e-commerce, information and communication needs. Our
e-commerce products and services include Medsite Supplies, our online medical
supply store, Medsite Books, our online bookstore and Medsite Filer, an online
medical service that helps physicians complete applications for managed care
organizations.
Our information products and services include Medsite Clinical Medline, a
product designed to facilitate searches on a database maintained by the National
Library of Medicine, Medsite ISI Journal Tracker, a service which enables
physicians access to information published in medical journals, Medsite
University, an online source of medical education, and Medsite Money, a
financial information center. In addition, we offer Medsite Mail, an email
service for medical professionals, and Medsite Calendar, a scheduling tool, as
part of our communication products.
We sell our products and services to our customers directly through our
website, through agreements with other websites and through our PharmaDirect
program. We intend to aggregate our physicians orders and projected orders and
use this aggregated buying power to lower our costs of goods and services to us
and our customers. Through our agreements with other websites, universities and
healthcare organizations, we sell our products and services through internet
links on their websites in exchange for a sales commission paid to these
organizations. Through our PharmaDirect program, pharmaceutical companies can
subsidize the use of our products and services, such as the ISI Journal tracker
or medical education courses offered on Medsite. We also sell our products and
services through certificates that are paid for by pharmaceutical companies and
are redeemed by physicians on our website.
STRATEGY
We seek to be the leading online destination site for the physician and the
preferred sales and marketing channel for pharmaceutical and other healthcare
companies to reach the physician. Key elements of our business strategy include
the following:
Focus on Physicians' Needs
We seek to grow our revenues by increasing sales of our products and
services to physicians. To achieve this goal, we have designed our website to
attract and maintain a loyal physician audience by actively assessing their
needs and offering personalized products and services under the Medsite brand.
We are designing our products and services to provide physicians with an online
alternative to fulfilling their professional needs throughout their careers,
beginning in medical school, extending through residency and continuing into
clinical practice.
Enhance the Relationship Between Physicians and Pharmaceutical Companies
We seek to expand our PharmaDirect program which allows us to generate
revenues by facilitating the interaction between pharmaceutical companies and
physicians. Our PharmaDirect program currently provides:
- physicians with cost reductions in product and service purchases and a
convenient way to learn about pharmaceutical products, and
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- pharmaceutical companies with a convenient and cost effective medium to
target product specific information to physicians and to obtain marketing
data.
We currently have PharmaDirect programs with major pharmaceutical
companies, including Roche Diagnostics, SmithKline Beecham and Wyeth-Ayerst. We
seek to expand these programs by forming relationships with additional
pharmaceutical companies as well as medical device companies and other
healthcare organizations.
Pursue Relationships to Increase Access to Physicians
We intend to pursue relationships with online and offline healthcare
organizations to expand our physician reach, lower our customer acquisition
cost, increase our revenues and promote our brand as the online destination site
for the physician. Medical books and software from Medsite Books, for example,
are offered on over 200 medical websites, universities and healthcare
organizations. We seek to expand the scope of the existing relationships we have
with companies and healthcare organizations, including the American Medical
Association, American Medical Student Association, Healtheon/WebMD, Medscape and
Physicians' Online. In addition, using internet technology, we intend to
aggregate our physicians' orders and projected orders and form online group
purchasing communities. We seek to use this aggregated demand to lower our cost
of goods and services and pass savings on to these online purchasing
communities. In addition, we intend to expand our international distribution
channels by forming relationships with international companies and
organizations.
Expand Our Product and Service Offerings
We intend to selectively augment our existing offerings with new products
and services through internal development, relationships with third parties or
by acquisition. We have entered into an agreement with Reuters Health
Information under which we currently offer co-branded Reuters Medical News on
our website. The agreement also provides that we will co-develop news and
information-related products and services. Medsite and McGraw Hill have entered
into a three-year distribution agreement where Medsite will offer a co-branded
version of McGraw Hill's Harrison's Online, an online version of Harrison's
specialized professional medical information. In addition, we have entered into
technology license agreements to enable us to provide web-based transcription
services. We intend to attract our customers to our website and cross-promote to
these customers our online products and services.
Enhance Our Business Through Strategic Acquisitions
We intend to continue to acquire companies that enhance our business. In
December 1999, we acquired Total Health, to increase both the number of
pharmaceutical companies using PharmaDirect and our overall customer base. In
January 2000, we acquired American Medical, a medical education company with
existing relationships with pharmaceutical companies, in order to strengthen our
relationship with pharmaceutical companies and increase the breadth and quality
of our medical education product offerings. We intend to continue to identify
and acquire companies with potential for expanded growth through leveraging the
internet that meet one or more of the following criteria:
- diversify our product and service offerings to physicians,
- increase our access to additional physicians or
- strengthen our relationship with pharmaceutical companies.
PRODUCTS AND SERVICES
We offer a suite of web-based products and services that are designed to
address physicians' e-commerce, information and communication needs.
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e-Commerce
We provide our business-to-business e-commerce offerings as part of our
website. We currently derive revenue from all of our e-commerce offerings. Our
e-commerce offerings include:
Medsite Supplies. Medsite Supplies, which we launched in March 1999, is
part of our website and enables physicians to purchase their office and medical
supplies online. Currently, we sell over 3,000 products commonly used in
physicians' offices, ranging from gauze pads and disposable gloves to surgical
instruments and diagnostic equipment.
Medsite Supplies provides a detailed listing, the current price and
available stock for all the products we sell in addition to a picture and
detailed description for a majority of our products. We designed Medsite
Supplies to be easy to use with multiple search and browse functions, including
searching by product category, specific product criteria or manufacturer.
Medsite Supplies also includes features that enable physicians to browse the
list of new items from manufacturers, view the best selling products and access
a particular manufacturer's product showcase. Through our fulfillment
arrangements, more than 95% of our supply orders are shipped within two business
days of order receipt.
Medsite Books and Software. We operate Medsite Books, which we launched in
September 1997 and which we believe is the largest medical bookstore either on
or off the internet. Medsite Books, which is part of our website, offers more
than 50,000 medical books and software titles for physicians, residents and
medical students. By comparison, we believe traditional medical bookstores
typically offer between 4,000 and 6,000 titles. We offer Medsite Books on over
200 websites, including university and healthcare organization websites. Our
agreements generally provide that these organizations include on their websites
an internet link to a branded or co-branded Medsite operated website. We pay a
commission to these organizations for our sales through their websites.
We provide our customers with detailed information for all of our books.
For our popular titles, we provide additional information, including the table
of contents, introduction, contributing authors, excerpts, back cover comments,
pictures and descriptions. Our customers review and rate these titles on a
five-star scale which we then post for all of our customers. We also provide the
availability, shipping time and return policy for all titles available for sale.
Through our fulfillment arrangements, more than 85% of our book orders are
shipped within one business day of order receipt. At the end of 1999, we had
customers in over 125 countries.
Medsite Filer. Medsite Filer, which we launched in March 2000, is a
secure, online service designed to save physicians' time by helping to reduce
the number of managed care plan application forms they complete. Physicians must
fill out an application form for a managed care plan in order to receive payment
for services rendered to patients participating in that plan. Physicians
participating in multiple managed care plans are required by each managed care
plan to complete an application form which contains a significant number of
questions. Many of the questions on these application forms are the same, but
because each plan has a different form, physicians must fill out one form for
each plan in which they wish to participate. Medsite Filer enables a physician
to complete one form with a comprehensive list of questions common to most
managed care plan application forms. Medsite Filer then generates the
appropriate forms that meet the filing requirements of each managed care plan,
eliminating the need for physicians to fill out multiple forms.
Information
Our suite of information management tools is designed to help physicians
filter and organize medical information from a number of sources, including
publishers of medical information and websites. We currently derive revenue from
all of our information products except for Medsite Clinical Medline. Our
information products include:
Medsite Clinical Medline. Medsite Clinical Medline, which we launched in
December 1999, also known as Medcite Clinical Medline, is a search engine
provided free of charge to the student, resident or physician seeking medical
information online. This product enables the user to retrieve information such
as
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recent references and abstracts, as well as archive information from the last
ten years from the National Library of Medicine's MEDLINE database, which is
widely available for free. Medsite Clinical Medline is designed to enhance
physicians' ability to search the database by allowing them to customize their
searches by specific medical specialty or individual journals. Once a search is
complete, the physician can save search results, receive automated updates by
email on selected medical research, and send these updates to a distribution
list of colleagues.
Medsite ISI Journal Tracker. The Medsite ISI Journal Tracker, which we
launched in February 2000, is a subscription service that allows physicians to
receive summaries of 25 journals of their choice from over 3,000 medical
publications. The summaries we make available are prepared by the Institute for
Scientific Information, a data base company. The subscriber receives an email of
the table of contents and abstracts for each selected journal as often as new
issues are published. Journal Tracker also allows the user to purchase full-text
versions of specific articles.
Medsite University. Medsite University, which we launched in October 1999,
is an online source for medical education, including accredited Continuing
Medical Education, or CME. Generally, state licensing boards, professional
organizations, insurers, and employers each require, to varying degrees, that
physicians accumulate a minimum number of CME credits to maintain their license
to practice medicine. Medsite University provides CME courses online. Our
customers access these online courses through a Medsite website operated by
Healthstream, Inc. We recognize the cost of the continuing medical education
course to the physician as revenue when the course is completed and pay
Healthstream monthly for providing its services. Our recent acquisition of
American Medical expands our library of online CME courses and enables us to
create customized medical information sponsored by pharmaceutical and other
healthcare companies.
Interactive Grand Rounds. Interactive Grand Rounds, which was launched in
January 1999, is a online educational product that targets physicians by
specialty and is offered to physicians free of charge. We generate revenue from
third party sources that sponsor each program. We create information through
agreements with physician experts who serve as guest editors. Each Interactive
Grand Rounds program is developed in cooperation with a nationally recognized
medical journal.
Medsite Money. Medsite Money, which we launched in May 1999, provides a
suite of financial services. Key services include a Medsite credit card
co-branded with MBNA, medical equipment leasing with Media Capital, and a
financial information page called My Medsite Money. In cooperation with News
Alert, a leading aggregator of financial information, My Medsite Money provides
personalization features that enable users to monitor their own stock portfolios
and to receive emails of news relevant to their medical practices or personal
interests. MBNA pays us a flat fee for every Medsite credit card approved and a
percentage of the card holders' purchases. Our agreement with Media Capital is a
one-year revenue-sharing agreement that terminates in May 2000. Our agreement
with News Alert is a one-year agreement under which News Alert provides us news
information services in exchange for a fixed monthly fee. This agreement
terminates in April 2001. Although we did not generate revenue from Medsite
Money in 1999, we will begin recognizing revenue from our MBNA agreement in
2000.
Communication
Our communications products and services allow physicians to efficiently
communicate with their colleagues and patients and keep track of their schedules
from any location with internet access. We currently do not derive revenue from
our communications offerings. Our communications offerings include:
Medsite MedMail. Medsite MedMail is an online email service for medical
professionals that we launched in February 1998. Physicians can create
personalized features on Medsite MedMail, including the ability to receive
medical and financial news and stock prices by email. We are developing services
such as voicemail and pager messaging to help address the medical community's
need for messaging and communication.
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Medsite Calendar. Medsite Calendar, a scheduling tool for the medical
community which we launched in November 1999, features a suite of services to
organize schedules and appointments including a calendar of worldwide medical
events, a personal calendar and a marketing tool for event organizers. The
medical event calendar is a resource that allows the physician to research,
locate and register for any medical event, conference or meeting of interest.
The calendar accesses a database of 3,200 events hosted in over 50 countries.
Medsite Calendar provides automated notification messages when information is
updated. Event organizers can use Medsite Event Calendar to market and publicize
their events by posting relevant information on their upcoming events.
COMMERCIAL RELATIONSHIPS
We enter into contracts with websites, healthcare organizations,
universities and medical goods and services companies to diversify our products
and services and to expand our physician reach. We have key relationships with:
Matthews Medical. Matthews Medical is a distributor of medical supplies,
software and text books. In July 1998, we entered into a non-exclusive agreement
that made Matthews Medical our fulfillment vendor for medical books. We purchase
books, software and supplies from Matthews Medical and resell those books,
software and supplies to our customers. Matthews Medical delivers all of our
products in packaging bearing the Medsite logo. Our agreement with Matthews
Medical does not include minimum purchase obligations and provides that either
party may terminate the agreement on 60 days notice. We recently acquired a 19%
equity interest in Mathews Medical.
American Medical Students Association. The American Medical Students
Association, or AMSA, is an independent association of physicians-in-training.
In September 1998, we entered into an exclusive agreement with the American
Medical Students Association that provides for Medsite Books to be the online
medical bookstore for the American Medical Students Association. We also sell
medical software and supplies through their website. The agreement also provides
that both parties will not enter into any similar agreement with competing
organizations who provide similar services to the medical student market. In
addition, the agreement provides that we will offer the American Medical
Students Association free impressions of banner advertising. The agreement has a
term of three years and neither party can terminate without cause. If the
agreement is not renewed upon termination, we have agreed to pay the American
Medical Students Association a commission on the products we sell for the two
years following termination to customers referred to us by the American Medical
Students Association during the agreement's term.
Medscape. Medscape's website provides medical information to healthcare
professionals. In October 1998, we entered into an exclusive agreement to design
and operate a co-branded online book and software store accessible from
Medscape's website. The agreement has a term of three years and automatically
renews for one-year terms unless either party gives written notice of
termination.
Physicians' Online. Physicians' Online, a wholly-owned subsidiary of
Mediconsult.com, Inc., operates a website that provides medical content to
healthcare professionals. In April 1998, we entered into an exclusive agreement
to design and operate an online books and software store for Physicians' Online
accessible from the Physicians' Online website. The agreement expires in May
2000 and is renewable for an additional one-year term.
In addition, each of our agreements with the American Medical Students
Association, Medscape and Physicians' Online provide that these organizations
include in their websites an internet link enabling their website visitors to
access our online books, software or supplies store. We pay these organizations
a commission based either on a predetermined fixed fee or on the sales we
complete with their customer referrals.
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SALES, MARKETING AND CUSTOMER SUPPORT
We employ a variety of methods to promote the Medsite brand and to attract
new physicians, including advertising, direct sales, promotional programs and
public relations.
We advertise in professional journals, websites and other publications that
target physicians. We use direct marketing programs to reach individual
physicians, either through traditional direct mail or emarketing techniques. We
engage in direct, in-person marketing of our products and services to physicians
at trade shows and industry conferences. We maintain a dedicated event
department and currently intend to staff a Medsite.com booth at over 60 medical
meetings and conferences in 2000, including twelve sessions as a co-sponsor of
Intel-American Medical Association Internet Health training seminars.
We use promotional programs to encourage physicians to make initial and
repeat purchases. Our marketing programs include coupons or discounts on
purchases, first-time buyer promotions and free shipping promotions. Since
physicians register on Medsite by specialty, we can customize our marketing
programs to offer products and services that best serve the needs of our
customers.
Our internal public relations department provides support in managing our
branding and promotions program. We seek to reach physicians and other medical
professionals through our broadcast and print media marketing programs.
We believe that a high level of customer service and support and a positive
online experience is important to retaining our existing physician customers and
ensuring repeat purchases of goods and services. Our primary form of customer
support is web based. On our website, we have email support and an extensive
list of answers to frequently asked questions. In addition, we maintain two
telephone customer support centers that operate from 8:00 a.m. to 10:00 p.m.
Eastern Standard Time to assist physicians with their purchases of goods or
services and to provide after-sales support, including product returns.
As of December 31, 1999, we had 107 sales, marketing and customer support
personnel.
CUSTOMERS
Our primary customers are physicians, including residents and students.
Total Health's primary customers are physicians and companies engaged in
organizing and managing seminars and meetings. No individual or entity accounted
for more than 10% of our 1999 revenues.
PRODUCT AND TECHNOLOGY DEVELOPMENT
Our business is supported by a reliable, expandable and secure system
platform. This platform includes website management, advanced searching tools,
customer account management, transaction processing, order management,
purchasing, payment services and a variety of marketing applications. Our system
enables us to accept and validate our customer orders, organize, place and
manage orders with our vendors, receive products and manage shipment information
of products.
We have developed proprietary software to augment those that we have
licensed from vendors, such as Microsoft, Cybersource and Allaire Corporation.
To date, we have focused our internal development efforts on creating and
enhancing our proprietary software. Our advanced searching tools, customer
account management, order collection and back-end systems are all proprietary to
Medsite.com. Our system is designed to include an open application-programming
interface that provides real-time connectivity to our suppliers. The employment
of multiple web servers, application servers and database servers allows our
systems to be resilient and redundant.
During 1999, the Company expensed approximately $1.4 million of product
development costs under SOP 98-1, costs that were incurred for the development
of project plans and for ongoing updates to our site graphics. During 1999, the
Company capitalized $2.0 million of product development costs under SOP 98-1
which were incurred for the development of new products and the development of
added functionality to existing products. During 1998 and 1997, the Company
expensed $172,020 and $66,065 of
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product development costs under SFAS No. 86, respectively. Substantially all of
these SFAS No. 86-related costs were incurred for feasibility studies.
We have implemented a variety of features to ensure the security and
integrity of transaction communication through our system. For example:
- we use secure socket layer, or SSL, an internet security technology, at
appropriate points in the transaction flow to protect customer
information during transactions,
- our customer information is encrypted to provide a high degree of
security,
- our employees do not have access to customer information, except as
necessary to perform customer support functions, and
- we use standard secure login and password systems to authenticate
customers.
In addition, we have both on-site and off-site stand-by systems for rapid
disaster recovery. Our systems infrastructure is hosted at Global Center, a
Global Crossings Company, in New York City, which utilizes communication
infrastructure from multiple providers and provides 24-hour monitoring and
engineering support.
COMPETITION
We face competition in attracting physicians to our website and in selling
our products and services. We compete with companies and organizations,
including traditional off-line companies such as catalogue and sales-force based
medical distributors, book retailers, continuing medical education programs and
conferences and symposia. We also face significant online competition from
healthcare-related websites, including medical professional websites and book
retailers. In addition, companies with whom we currently have relationships,
including Medscape, Physicians' Online and Healtheon/WebMD, may compete with us
or terminate our agreements with them. We believe that competition for our
customers and sources of revenue will continue to increase.
Some of our current and potential competitors may have competitive
advantages compared to us, including:
- greater resources to devote to the development, promotion and sale of
their services,
- greater financial, technical and marketing resources,
- greater brand recognition and larger marketing budgets, and
- larger customer and user bases.
We believe that the principal competitive factors in obtaining and
retaining customers are the attractiveness of our products and services to
physicians, depth and breadth of our products and services, our ability to
convert web traffic into revenue, and brand recognition. Other important factors
include the ease of use, the quality of service and the cost of our products and
services. We believe that the principal competitive factors that will continue
to attract companies into our market include the number of physicians and
medical professionals who use the internet and healthcare expenditures in the
United States. Competition is likely to increase significantly as new companies
enter the market and current competitors expand their services. There can be no
assurance that we will be able to compete successfully against current and
future competitors or that the competitive pressures we face will not seriously
harm our business.
GOVERNMENT REGULATION
Many aspects of the healthcare supplies industry are subject to regulation
by federal, state and local government agencies. Many of the healthcare supplies
offered by sellers who use our system are subject to compliance with laws and
regulations, including operating and security standards for the sellers and
their distribution centers, and regulation by agencies including the Food and
Drug Administration, the Drug
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<PAGE> 40
Enforcement Agency, the Occupational Safety and Health Administration state
boards of pharmacy and, in some areas, state boards of health. We rely upon
sellers who use our services to meet all packaging, distribution, labeling,
hazard and health information notices to buyers, record keeping and licensing
requirements applicable to transactions conducted through our system. We cannot
guarantee that the sellers are in compliance with applicable laws and
regulations. If sellers have failed, or fail in the future to adequately comply
with any of the relevant laws or regulations and we are found in any way to be
legally responsible, we could be subject to governmental penalties or fines, as
well as private lawsuits to enforce these laws and regulations. Any damage
awards, injunctions, penalties or fines resulting from any of those actions
could harm our business.
The federal government has recently issued proposed regulations in
accordance with the Health Insurance Portability and Accountability Act which,
when finalized, will govern the protection and disclosure of patient
confidential information. In addition, due to the increasing popularity and use
of the internet, it is possible that a number of laws and regulations may be
adopted or interpreted in the United States and abroad with particular
applicability to the internet. It is also possible that new laws and regulations
may be adopted or interpreted by the Untied States and foreign governments to
address the sale and distribution of healthcare supplies using the internet. It
is possible that governments will enact legislation that may be applicable to us
in areas including content, products distribution, network security, encryption,
the use of measures for data and privacy protection, electronic authentication
or "digital" signatures, illegal and harmful content, access charges and
re-transmission activities. The applicability to the internet of existing laws
governing issues like property ownership, content, taxation, defamation,
personal privacy, product liability and environmental protection, as well as the
necessity for governmental permits, labeling, certifications and the need to
supply information to relevant parties, is uncertain. Most of these laws were
adopted before the widespread use and commercialization of the internet and, as
a result, do not contemplate or address the unique issues of the internet and
related technologies. Any export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the internet, increase our cost of doing business or increase our
liability exposure. Any of these factors could harm our business.
We intend to enter into financial relationships with providers of
healthcare services, including physicians and pharmaceutical manufacturers, and
such relationships are subject to federal and state healthcare regulations. The
Medicare/Medicaid Anti-Kickback law prohibits the offering, soliciting, paying
or receiving of remuneration in return for the referral of patients whose care
will be paid by Medicare, Medicaid or certain other federal health care
programs. Violations of the Medicare/Medicaid Anti-Kickback law may be
punishable by criminal and civil fines, exclusion from federal healthcare
programs, and damages up to three times the total dollar amount involved. In
addition, some states have adopted similar prohibitions, which can often be
broader than the Medicare/Medicaid Anti-Kickback law.
The Office of Inspector General of the Department of Health and Human
Services has been authorized to publish regulations outlining activities and
business relationships that would be deemed not to violate the Medicare/Medicaid
Anti-Kickback law. These regulations are known as "safe harbor" regulations.
However, the failure of a particular activity to comply with the safe harbor
regulations does not mean that the activity violates the Medicare/Medicaid
Anti-Kickback law.
Although we believe that our relationships with physicians and other
healthcare providers have been structured in light of the safe harbor
regulations, we cannot assure you that regulatory authorities will not determine
otherwise. If that happens, we would be subject to criminal and civil penalties
and/or exclusion from participating in Medicare, Medicaid or other healthcare
programs. Such a finding could have a material adverse effect on our business.
In addition to the Medicare/Medicaid Anti-Kickback law, the "Stark Law"
prohibits physicians from referring Medicare and Medicaid patients to health
care entities in which they or any of their immediate family members have
ownership or other financial interests. These types of referrals are commonly
known as "self referrals." Sanctions for violating the Stark Law include civil
money penalties, assessments equal to twice the dollar value of each service and
exclusion from the Medicare and Medicaid programs. There
39
<PAGE> 41
are certain exceptions to the Stark Law and we have structured our financial
relationships with physicians to comply with these exceptions. However, we
cannot assure that the regulatory agency may determine that our relationships
with physicians violate the Stark Law. If that happens, we would be subject to
civil penalties and/or exclusion from participating in Medicare, Medicaid or
other healthcare programs. Such a finding could have a material adverse effect
on our business.
PROPRIETARY RIGHTS
There are limited technological barriers to entry into the business of
providing online healthcare e-commerce, information and communication products
and services. Consequently, others can develop, market and sell products and
services or use technologies similar to those used by us.
We rely on a combination of copyright, trademark, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also use proprietary know-how and
trade secrets and employ various methods to protect our trade secrets and
know-how. We currently do not have any patents protecting our technology. We
cannot assure you that our intellectual property measures will be sufficient to
prevent misappropriation of our technology.
EMPLOYEES
As of December 31, 1999, we had a total of 165 full-time employees. Of
these, 107 were engaged in sales, marketing and business development, 33 were
engaged in technical development and support and 25 were engaged in finance and
administration. Our future performance depends in significant part upon the
continued service of our key technical, sales and senior management personnel.
Our future success also depends on our continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and we may not be able to retain our key
personnel in the future. None of our employees is a member of a labor union or
is covered by a collective bargaining agreement and we have never experienced a
work stoppage. We believe that our relations with our employees are
satisfactory.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. We may in
the future be a party to litigation arising in the course of our business. These
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
FACILITIES
Our principal executive offices are located in New York, New York, where we
lease approximately 65,000 square feet under the terms of a lease that expires
in June 2002. We also lease satellite offices in New York, New York and
Bloomfield, New Jersey. We believe that these facilities are adequate for our
present and anticipated levels of operations for the foreseeable future.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our executive
officers, key employees and directors as of March 31, 2000:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- ---- --------
<S> <C> <C>
Sundeep Bhan........................ 27 President, Chief Executive Officer and Chairman of
the Board
Gregory Scott....................... 46 Executive Vice President, Chief Financial Officer
and Secretary
Sameer Shariff...................... 28 Executive Vice President, Sales
Sanjay Pingle....................... 28 Executive Vice President, Product Development
Douglas Mack........................ 39 Senior Vice President, e-Commerce
Thomas Feitel....................... 47 Senior Vice President, Corporate Marketing
Vincent Friedewald, Jr., M.D........ 58 Senior Vice President, Medical Editor
Walter H. Barandiaran (1)(2)........ 47 Director
Mitchell Blutt, M.D.(1)(2).......... 42 Director
Gary Stein (1)...................... 32 Director
</TABLE>
<TABLE>
<CAPTION>
KEY EMPLOYEES AGE POSITION
- ------------- ---- --------
<S> <C> <C>
Sharon F. Callahan.................. 38 Senior Vice President, Pharmaceutical and Healthcare
Marketing
John Eastman........................ 44 Senior Vice President, Information
Joanne Brown Lee.................... 47 Senior Vice President, Administration and Treasurer
James Mench......................... 41 Senior Vice President, Finance
Douglas A. Present.................. 35 Senior Vice President, Business to Business Markets
K.J. Singh, M.D..................... 44 Senior Vice President, Communication
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
EXECUTIVE OFFICERS AND DIRECTORS
Sundeep Bhan has served as our Chief Executive Officer since November 1997
and as Chairman of our Board of Directors since January 1997. From January 1995
to December 1996, Mr. Bhan served as President of Oblisk Interactive, L.L.C., a
healthcare software company that he founded. From January 1994 to January 1995,
he served as a Project Manager for Intermedia Software, a software company, Mr.
Bhan has also served as a director of Matthews Medical, a distributor of medical
books, supplies and software since March 2000. Mr. Bhan holds a B.A. in
communications from the Annenberg School of Communications of the University of
Pennsylvania with a concentration in business from the Wharton School of the
University of Pennsylvania.
Gregory Scott has served as our Executive Vice President, Chief Financial
Officer since August 1999. From November 1995 to August 1999, Mr. Scott served
as the Chief Financial Officer of Prudential Healthcare Group. From August 1993
to November 1995, Mr. Scott was the Chief Financial Officer, Executive Vice
President and a director of Prudential Securities, Inc. Mr. Scott holds an A.B.
from Colgate University and an M.B.A. from the University of Michigan.
Sameer Shariff has served as our Executive Vice President, Sales since
January 1997. From January 1997 to February 2000, Mr. Shariff served as a member
of our board of directors. From January 1995 to December 1996, Mr. Shariff
served as Vice President, Sales and Marketing of Oblisk Interactive, L.L.C., a
healthcare software company. Mr. Shariff holds a B.S. in economics from the
Wharton School of the University of Pennsylvania.
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<PAGE> 43
Sanjay Pingle has served as our Executive Vice President, Product
Development since January 1997. From November 1997 to February 2000, Mr. Pingle
served as a member of our board of directors. From January 1995 to December
1996, Mr. Pingle was Vice President, Marketing and Product Development at Oblisk
Interactive, L.L.C., a healthcare software company. From August 1993 to December
1994, Mr. Pingle was a senior consultant at Kaiser Associates, a consulting
firm. Mr. Pingle holds a B.S. in economics from the Wharton School of the
University of Pennsylvania.
Douglas Mack has served as our Senior Vice President, e-Commerce since
December 1999. From April 1988 to December 1999, Mr. Mack was the President of
Total Health Products, Inc., a medical supply fulfillment company. Mr. Mack
holds a B.A. from Connecticut College and an M.B.A. from the University of
Chicago.
Thomas Feitel has served as our Senior Vice President, Corporate Marketing
since September 1999. From May 1989 to March 1999, Mr. Feitel held a variety of
marketing management positions at Schering-Plough, a pharmaceutical company,
including Vice President of Marketing. From August 1983 to May 1989, Mr. Feitel
served as Brand Manager of Quaker Oats, Inc. for Life Cereal and Gatorade Thirst
Quencher. Mr. Feitel holds a B.A. in English from Yale University and an M.B.A.
from Columbia University.
Vincent Friedewald, Jr., M.D., has served as our Senior Vice President,
Medical Editor since January 2000. From January 1995 to January 2000, Dr.
Friedewald served as Executive Producer of American Medical Communications,
Inc., a medical education company. From 1988 to 1998, Dr. Friedewald also served
as Chairman of the Board of American Medical Communications, Inc. Dr. Friedewald
holds a B.S. from the University of Notre Dame and an M.D. from Southwestern
Medical School of the University of Texas.
Walter H. Barandiaran has served as a member of our board of directors
since February 1999. Mr. Barandiaran holds this position as a representative on
the board for our class A preferred stockholders pursuant to our investor rights
agreement. Mr. Barandiaran is a Managing Partner of The Argentum Group, a
private venture capital investment firm, a position he has held since 1987.
Since February 1990, Mr. Barandiaran has been a general partner of Argentum
Capital Partners, L.P. and since April 1997, Mr. Barandiaran has been a general
partner of Argentum Capital Partners II, L.P. He also serves on the boards of
several private companies. Mr. Barandiaran holds a B.A. from Baruch College,
City University of New York and attended New York University's Stern School of
Business.
Mitchell Blutt, M.D. has served as a member of our board of directors since
December 1999. Mr. Blutt holds this position as a representative on the board
for CB Capital, L.P., an affiliate of Chase Capital Partners and a class B
preferred stockholder, pursuant to our investor rights agreement. Since 1992,
Dr. Blutt has been the Executive Partner of Chase Capital Partners L.P., a
venture capital investment firm. Dr. Blutt also serves as an adjunct Assistant
Professor of Medicine at The New York Hospital, Cornell Medical Center. Dr.
Blutt serves on the board of directors of Hanger Orthopedic Group Inc., Fisher
Scientific International, Inc. and La Petite Academy, Inc. Dr. Blutt also serves
on the board of several private companies and is a member of the board of
trustees of the University of Pennsylvania. Dr. Blutt holds a B.A. in
psychology, an M.D. and an M.B.A. from the University of Pennsylvania.
Gary Stein has served as a member of our board of directors since December
1999. Mr. Stein holds this position as a representative on the board for Morgan
Stanley Dean Witter Venture Partners IV, L.P., a class B1 preferred stockholder,
pursuant to our investor rights agreement. Mr. Stein is a Vice President of
Morgan Stanley & Co. Incorporated, and the corporate managing member of Morgan
Stanley Dean Witter Venture Partners IV, L.P. Mr. Stein has been employed by
Morgan Stanley Dean Witter since August 1997. From August 1992 to August 1997,
Mr. Stein was a Senior Associate at Patricof & Co. Ventures, a venture capital
investment firm. Mr. Stein serves on the board of directors of Allscripts, Inc.,
an internet healthcare company. Mr. Stein holds a B.S. in economics from the
Wharton School of the University of Pennsylvania and an M.B.A. from Columbia
University.
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<PAGE> 44
KEY EMPLOYEES
Sharon F. Callahan has served as our Senior Vice President, Pharmaceutical
and Healthcare Marketing since February 2000. From July 1991 to February 2000,
Ms. Callahan served in positions of increasing responsibility for SCP
Communications, Inc., a company engaged in medical communications, medical
publishing and clinical trials, as Senior Manager and ultimately as Corporate
Vice President and General Manager. Ms. Callahan holds a B.A. from Wheaton
College.
John Eastman has served as our Senior Vice President, Information since
June 1999. From February 1996 to May 1999, Mr. Eastman was founder and President
of Teton Ventures, a medical publishing consulting firm. Mr. Eastman holds a
B.S., J.D. and an M.B.A. from Southern Methodist University.
Joanne Brown Lee has served as our Senior Vice President, Administration
and Treasurer since September 1999. From July 1974 to August 1999, Ms. Brown Lee
served as Vice President and Treasurer of the Prudential Healthcare division of
Prudential Insurance Company of America. Ms. Brown Lee holds a B.S. from
Montclair State University.
James Mench has served as our Senior Vice President, Finance since January
2000. From September 1988 to December 1999, Mr. Mench was Vice President,
Finance at Prudential Insurance Company of America. Mr. Mench holds a B.A. in
economics from Rutgers University.
Douglas A. Present has served as our Senior Vice President, Business to
Business Markets, since February 2000. From August 1999 to February 2000, Mr.
Present was President and Chief Operating Officer for ProMedCo-HV, a wholly
owned subsidiary of ProMedCo Management Corporation, a medical services company.
From January 1995 to July 1999, he served as President and Chief Operating
Officer for Primergy, Inc. which was acquired by ProMedCo. Mr. Present holds a
B.S. in marketing from the School of Management of Syracuse University and an
M.B.A. from the Wharton School of the University of Pennsylvania.
K.J. Singh, M.D. has served as our Senior Vice President, Communication
since January 2000. From April 1998 to January 2000, Dr. Singh was an Engagement
Manager of McKinsey & Co., a management consulting firm. From March 1997 to
April 1998, Dr. Singh served as Coordinator, Business Redesign at Glaxo
Wellcome, a pharmaceutical company. From June 1996 to October 1996, Mr. Singh
was a resident in Internal Medicine at the New York University Medical Center.
Dr. Singh holds a B.A. and a Master of Philosophy degree from Oxford University,
an M.D. from Columbia University and an M.B.A. from the Sloan School of the
Massachusetts Institute of Technology.
BOARD COMPOSITION
We currently have authorized seven directors. Our certificate of
incorporation provides for a classified board of directors consisting of three
classes of directors, each serving staggered three-year terms. As a result, a
portion of the board of directors will be elected each year. To implement the
classified structure, prior to the consummation of the offering, one of the
nominees will be elected to a one-year term, one will be elected to a two-year
term and two will be elected to three-year terms. Thereafter, directors will be
elected for three-year terms. Mr. Stein has been designated a Class I director
whose term expires at the 2000 annual meeting of stockholders. Dr. Blutt has
been designated a Class II director whose term expires at the 2001 annual
meeting of stockholders. Mr. Barandiaran and Mr. Bhan have been designated Class
III directors whose term expires at the 2002 annual meeting of stockholders. We
intend to add two outside directors to the board of directors in the near
future. There are no family relationships among any of our directors, officers
or key employees.
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
Our audit committee reviews, acts on and reports to our board of directors
with respect to various auditing and accounting matters, including the selection
of our independent accountants, the scope of our annual audits, fees to be paid
to the independent accountants, the performance of our independent accountants
and our accounting practices. We require that our audit committee have a minimum
of three
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<PAGE> 45
members and be comprised only of independent directors. A director will not be
considered independent if he or she has:
- been employed by us or an affiliate of ours in the past three years,
- accepted any compensation from us or our affiliate in excess of $60,000
during the previous fiscal year, other than for board service, retirement
plan benefits or nondiscretionary compensation,
- an immediate family member who is, or has been in the past three years,
employed by us or an affiliate as an executive officer,
- been a partner, controlling stockholder or an executive officer for any
for-profit business to which we made, or from which we received, payments
that exceed the greater of 5% of our consolidated gross revenues for that
year or $200,000, in any of the past three years, other than payments
solely for investments in our securities, or
- been employed as an executive of another entity where any of our
executives serve on that entity's compensation committee.
In addition, we require that at least one member of our audit committee
have past experience in finance or accounting.
Mr. Barandiaran, Dr. Blutt and Mr. Stein meet these requirements and are
the members of our audit committee.
Our compensation committee establishes salaries, incentives and other forms
of compensation for officers and other employees. This committee also
administers our incentive compensation and benefit plans. Mr. Barandiaran and
Dr. Blutt are the members of the compensation committee.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from us for their
services as members of our board of directors except for reimbursement of
reasonable expenses incurred in connection with serving as a director. In 1999,
our directors did not receive any cash compensation or option grants. Directors
who are employees of Medsite are eligible to participate in our 2000 stock plan
and our 2000 employee stock purchase plan. Directors who are not employees of
Medsite are eligible to participate in our 2000 director option plan. Our 2000
director option plan generally provides for an automatic initial grant of
options to purchase 30,000 shares of our common stock to each non-employee
director on the later to occur of February 15, 2000, the effective date of the
plan, or the date on which a person first becomes a non-employee director.
Initial grants of an option to purchase 30,000 shares were made to Mr.
Barandiaran, Dr. Blutt and Mr. Stein as of the effective date. After the initial
grant, a non-employee director will be granted a subsequent option to purchase
7,500 shares of our common stock each year on the date of our annual meeting of
stockholders, if on that date he or she has served as a director for at least
six months. The option grants have a term of ten years. Each initial option
grant will vest as to 25% of the shares issuable under the option on each
anniversary of its date of grant and each subsequent option grant will vest as
to 100% of the shares issuable under the grant on the fourth anniversary of its
date of grant. The exercise price of all options will be 100% of the fair market
value per share of our common stock on its date of grant. For an additional
description of these option plans, please refer to our discussion under
"-- Compensation Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is an officer or employee
of Medsite. No interlocking relationship exists between our board of directors
or compensation committee and the board of directors or compensation committee
of any other company, nor has such an interlocking relationship existed in the
past.
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<PAGE> 46
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned for services
rendered to us in all capacities for the fiscal year ended December 31, 1999 by
our Chief Executive Officer and the four next most highly compensated executive
officers who earned more than aggregate cash compensation of $100,000 during the
fiscal year ended December 31, 1999 (collectively, our "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
--------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION OPTIONS COMPENSATION($)
- --------------------------- --------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Sundeep Bhan................ $220,883 $36,000 -- 108,000 --
President and Chief
Executive Officer
Gregory Scott............... 78,846 -- -- 937,500 --
Executive Vice President,
Chief Financial Officer
Sanjay Pingle............... 170,833 28,000 -- 84,000 --
Executive Vice President,
Product Development
Sameer Shariff.............. 170,833 28,000 -- 84,000 --
Executive Vice President,
Sales
Rajnish Kapoor.............. 170,833 7,000 -- 84,000 --
Executive Vice President,
Operations
</TABLE>
Mr. Scott was hired as an executive officer in August 1999 and is currently
compensated at an annual rate of $200,000. Mr. Kapoor terminated his employment
with us as of February 2000. All bonuses reflect 1998 bonus paid in 1999.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Mr. Bhan, our Chief Executive Officer, is party to an employment agreement
dated as of January 29, 1999. Under this agreement, we agreed to pay Mr. Bhan an
annual salary of $200,000, which was raised to $250,000 in August 1999. Mr. Bhan
is also eligible to receive a bonus of up to 25% of his salary. If Mr. Bhan is
terminated without cause, he will be entitled to receive continued payment of
his base salary for up to one year as severance. The initial term of this
agreement is two years. The agreement automatically renews for additional terms
of one year unless we or Mr. Bhan provide written notice of election not to
renew.
Mr. Pingle, our Executive Vice President, Product Development, is party to
an employment agreement dated as of January 29, 1999. Under this agreement, we
agreed to pay Mr. Pingle an annual salary of $150,000, which was raised to
$200,000 in August 1999. Mr. Pingle is also eligible to receive a bonus of up to
25% of his salary. If Mr. Pingle is terminated without cause, he will be
entitled to receive continued payment of his base salary for up to one year as
severance. The initial term of this agreement is two years. The agreement
automatically renews for additional terms of one year unless we or Mr. Pingle
provide written notice of election not to renew.
Mr. Shariff, our Executive Vice President, Sales, is party to an employment
agreement, dated as of January 29, 1999. Under this agreement, we agreed to pay
Mr. Shariff an annual salary of $150,000, which was raised to $200,000 in August
1999. Mr. Shariff is also eligible to receive a bonus of up to 25% of his
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<PAGE> 47
salary. If Mr. Shariff is terminated without cause, he will be entitled to
receive continued payment of his base salary for up to one year as severance.
The initial term of this agreement is two years. The agreement automatically
renews for additional terms of one year unless we or Mr. Shariff provide written
notice of election not to renew.
Mr. Kapoor, our former Executive Vice President, Operations, was party to
an employment agreement dated as of January 29, 1999. Under this agreement, we
agreed to pay Mr. Kapoor an annual salary of $150,000, which was raised to
$200,000 in August 1999. Mr. Kapoor was also eligible to receive a bonus of up
to 25% of his salary. Mr. Kapoor terminated his employment with us and his
employment agreement as of February 4, 2000. No payments are due to Mr. Kapoor
under this agreement. The initial term of this agreement was two years.
Mr. Scott, our Chief Financial Officer, is party to an employment agreement
dated as of August 12, 1999. Under the agreement, we agreed to pay Mr. Scott an
annual salary of $200,000 for three years with automatic renewal for additional
one year terms unless notice is given 30 days prior to the expiration of the
current term. We also granted him an option to purchase 937,500 shares of our
common stock. The shares issuable under this option will vest over a five year
period with 20% vesting on the anniversary of the date of the agreement. If Mr.
Scott's agreement is not renewed within the first five years of the date of the
agreement, if Mr. Scott is terminated without cause, or in the event of a change
of control, 100% of the shares subject to the option will vest immediately. If
Mr. Scott is terminated without cause and he signs a release of claims, he will
be entitled to receive continued payments of his base salary for the longer of
the remaining term of the agreement or twelve months. If within twelve months of
a change of control, Mr. Scott terminates his employment voluntarily or is
terminated without cause, he will be entitled to a lump-sum payment equal to
twelve months salary. A change of control is defined as a merger or
consolidation in which we are not the surviving corporation, a liquidation or
the sale or disposition of all or substantially all of our assets. The initial
term of this agreement is three years. The agreement automatically renews for
additional terms of one year unless we or Mr. Scott provide written notice of
election not to renew.
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents the grants of stock options to each of the
named officers under our 1999 stock option plan during the fiscal year ended
December 31, 1999, including the potential realizable value of the options at
assumed 5% and 10% annual rates over the 10 year term, compounded annually.
These rates of return are mandated by the rules of the Securities and Exchange
commission and do not represent our estimate or projection of our future stock
prices. Actual gains, if any, on stock option exercises will be dependent on the
future performance of our common stock.
The information regarding such options granted to named executive officers
as a percentage of total options granted to employees in the fiscal year, as
disclosed in the table, is based upon options to purchase on aggregate of
4,767,000 shares of common stock that were granted to all employees and
directors as a group, including named executive officers, in the fiscal year
ended December 31, 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL RATE
----------------------------------------------------------- OF STOCK PRICE
NUMBER OF PERCENTAGE OF APPRECIATION FOR OPTION
SECURITIES TOTAL OPTIONS TERM
UNDERLYING GRANTED TO --------------------------
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---------- ------------- -------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory Scott........ 937,500 19.7% $3.33 8/12/09 530,719 1,030,219
</TABLE>
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<PAGE> 48
FISCAL YEAR-END OPTION VALUES
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the named
executive officers as of December 31, 1999. No options were exercised by the
named executive officers during the year ended December 31, 1999.
The values are based on the deemed fair market value as of December 31,
1999, minus the exercise price, multiplied by the number of shares underlying
the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT A
AT DECEMBER 31, 1999 DECEMBER 31, 1999
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Sundeep Bhan............................ 43,200 64,800 $112,000 $ 172,800
Sanjay Pingle........................... 33,600 50,400 89,600 134,400
Sameer Shariff.......................... 33,600 50,400 89,600 134,400
Rajnish Kapoor.......................... 33,600 50,400 89,600 134,400
Gregory Scott........................... 0 937,500 0 1,250,000
</TABLE>
COMPENSATION PLANS
1999 Stock Option Plan
Our 1999 stock option plan provides for the granting to employees including
officers and employee directors, of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code and for the granting to employees,
directors and consultants of nonstatutory stock options. As of December 31,
1999, 4,875,000 shares were authorized under the plan, 4,767,000 shares were
subject to outstanding options and approximately 108,000 shares remain available
for future grant. No further option grants will be made under the 1999 stock
option plan after the completion of this offering.
2000 Stock Plan
Our 2000 stock plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 2000 stock plan was originally adopted by our board of
directors in February 2000 and is subject to stockholder approval. Unless
terminated sooner, the 2000 stock plan will terminate automatically ten years
from the date of obtaining stockholder approval.
A total of 7,500,000 shares of our common stock has been reserved for
issuance under this plan. In addition, annual increases will be added on the
first day of our fiscal year beginning in 2001, equal to the lesser of 3,000,000
shares, 3% of the outstanding shares or an amount determined by our board of
directors. There have been no options granted under the 2000 stock plan prior to
the completion of this offering.
The administrator of our 2000 stock plan has the power to determine, among
other things:
- the terms of the options or stock purchase right granted, including the
exercise price of the option or stock purchase right,
- the number of shares issuable under each option or stock purchase right,
- the exercisability of each option or stock purchase right, and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
In addition, the administrator has the authority to amend, suspend or
terminate the 2000 stock plan, so long as no such action affects any shares of
common stock previously issued and sold or any option previously granted under
the 2000 stock plan. During any fiscal year, each optionee may be granted
options
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<PAGE> 49
to purchase a maximum of 2,250,000 shares. In addition, in connection with an
optionee's initial employment with us, such optionee may be granted an option
covering an additional 2,250,000 shares.
Options and stock purchase rights granted under our 2000 stock plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by such optionee.
Options granted under the 2000 stock plan must generally be exercised within
three months after the end of optionee's status as an employee, director or
consultant of Medsite, or within twelve months after such optionee's termination
by death or disability, but in no event later than the expiration of the
option's term.
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement grants us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with us for any reason, including death or
disability. The purchase price for shares repurchased under the restricted stock
purchase agreement must be the original price paid by the purchaser and may be
paid by cancellation of any indebtedness of the purchaser to us. The repurchase
option lapses at a rate determined by the administrator.
The exercise price of all incentive stock options granted under the 2000
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 2000 stock plan is determined by the
administrator, but for nonstatutory stock options intended to qualify as
"performance-based compensation" under Section 162(m) of the Internal Revenue
Code, the exercise price must be at least equal to the fair market value of our
common stock on the date of grant. For any participant who owns stock possessing
more than 10% of the voting power of all classes of our outstanding capital
stock the exercise price of any incentive stock option granted must be at least
equal to 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The terms of all other
options granted under the 2000 stock plan may not exceed ten years.
The 2000 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right shall be assumed or an equivalent option substituted for by the
successor corporation. If the outstanding and stock purchase rights are not
assumed or substituted for by the successor corporation, the optionees will
become fully vested in and have the right to exercise such options or stock
purchase rights. If an option or stock purchase right becomes fully vested and
exercisable upon a merger or sale of assets, the administrator must notify the
optionee that the option or stock purchase right is fully exercisable for a
period of 15 days from the date of the notice, and the option or stock purchase
right will terminate upon the expiration of the 15 day period.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by our board of directors
in February 2000 and is subject to approval by our stockholders. A total of
2,250,000 shares of our common stock has been reserved for issuance under the
2000 employee stock purchase plan, plus annual increases beginning on the first
day of our fiscal year beginning in 2001 equal to the lesser of 1,500,000
shares, 1% of the outstanding shares on such date or an amount determined by our
board of directors. As of the date of this prospectus, no shares have been
issued under the 2000 employee stock purchase plan.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains consecutive, overlapping,
twelve month offering periods. Each offering period includes two six-month
purchase periods. The offering periods generally start on the first trading day
on or after May 15 and November 15 of each year, except for the first such
offering period which commences on the first trading day on or after the
effective date of this offering and ends on the last trading day on or before
November 14, 2000 or May 14, 2000.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However,
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<PAGE> 50
employees may not be granted an option to purchase stock under the 2000 employee
stock purchase plan if they either:
- immediately after grant, own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- hold rights to purchase stock under our employee stock purchase plans
which accrue at a rate which exceed $25,000 worth of stock for each
calendar year.
The 2000 employee stock purchase plan permits participants to purchase our
common stock through payroll deductions of up to 15% of the participant's
compensation. Compensation is defined as the participant's base straight time
gross earnings and commissions but exclusive of payments for overtime, profit
sharing payments, shift premium payments, incentive compensation, incentive
payments and bonuses. The maximum number of shares a participant may purchase
during a single purchase period is 15,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 purchase plan is generally 85% of the lower of the fair
market value of the common stock either:
- at the beginning of the offering period, or
- at the end of the purchase period.
If the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, the participants will
be withdrawn from the current offering period following exercise and
automatically re-enrolled in a new offering period. The new offering period will
use the lower fair market value as of the first date of the new offering period
to determine the purchase price for future purchase periods. Participants may
end their participation at any time during an offering period, and they will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with Medsite.
Rights granted under the 2000 employee stock purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the 2000 employee stock purchase
plan. The 2000 employee stock purchase plan provides that, if we merge with or
into another corporation or there is a sale of substantially all of our assets,
each outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set.
The 2000 employee stock purchase plan will terminate in 2010. Our board of
directors has the authority to amend or terminate the 2000 employee stock
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 2000 employee stock purchase plan.
2000 Director Option Plan
Non-employee directors are entitled to participate in our 2000 director
option plan. The 2000 director option plan was adopted by our board of directors
in February 2000 and is subject to approval by our stockholders. The 2000
director option plan has a term of ten years, unless terminated sooner by our
board of directors. A total of 375,000 shares of our common stock have been
reserved for issuance under the 2000 director option plan. In addition, annual
increases will be added to this plan on the first day of our fiscal year
beginning in 2001, equal to the number of options granted under the plan during
the prior fiscal year.
The 2000 director option plan generally provides for an automatic initial
grant of an option to purchase 30,000 shares of our common stock to each
non-employee director on the date which the later of the following events occur:
- the effective date of the 2000 director option plan, or
- the date when a person first becomes a non-employee director.
After the initial grant, a non-employee director will be granted a
subsequent option to purchase 7,500 shares of our common stock each year on the
date of our annual meeting of stockholders, if on such date
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<PAGE> 51
he or she has served on our board of directors for at least six months. Each
initial option grant and each subsequent option grant shall have a term of 10
years. Each initial option grant will vest as to 25% of the shares issuable
under the option on each anniversary of its date of grant and each subsequent
option grant will vest as to 100% of the shares issuable under the option on the
fourth anniversary of its date of grant. The exercise prices of all options will
be 100% of the fair market value per share of our common stock on the date of
grant.
The 2000 director option plan provides that if we merge with or into
another corporation, or sell substantially all of our assets, the successor
corporation shall assume each option or substitute an equivalent option. If
following such assumption or substitution, the optionee's status as a director
is terminated other than upon voluntary resignation, each option will become
fully vested and exercisable generally for a period of three months from the
date of termination. If outstanding options are not assumed or substituted for
by the successor corporation, each option will become fully vested and
exercisable for a period of thirty days from the date our board of directors
notifies the optionee of the option's full exercisability, after which period
the option shall terminate. Options granted under the 2000 director option plan
must be exercised within three months of the end of the optionee's tenure as our
director, or within twelve months after such director's termination by death or
disability, but in no event later than the expiration of the option's ten year
term. No option granted under the 2000 director option plan is transferable by
the optionee other than by will or the laws of descent and distribution, and
each option is exercisable, during the lifetime of the optionee, only by the
optionee.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
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
redemption, or
- any transaction from which the director derived an improper personal
benefit.
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 other officers and
employees and our 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 executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for certain expenses including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in the right of Medsite arising out of
such person's services as a director or executive officer of ours, any
subsidiary of ours 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 executive officers.
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<PAGE> 52
RELATED PARTY TRANSACTIONS
PREFERRED STOCK SALES
Class A Convertible Preferred Stock
In February 1999, we sold shares of our class A preferred stock convertible
into an aggregate of 9,568,360 shares of common stock at a price of
approximately $0.31 per share, to raise capital to finance our operations. We
received aggregate proceeds of $3,000,000 from the sale of our class A
preferred. Each share of class A preferred stock will convert into approximately
3,189 shares of common stock immediately prior to the closing of this offering.
The following 5% stockholders purchased shares in the financing:
<TABLE>
<CAPTION>
NUMBER OF
COMMON EQUIVALENT AGGREGATE
PURCHASER SHARES CONSIDERATION
- --------- ----------------- -------------
<S> <C> <C>
Argentum Capital Partners II, L.P. .................. 4,784,180 $1,500,000
Medsite ACP II Limited Partners, L.P. ............... 4,784,180 $1,500,000
</TABLE>
The entities listed in the table above are the beneficial owners of the
number of shares listed opposite their name and hold voting and investment power
with respect to these shares. The share numbers and price per share above
reflect the two-for-one stock split of our capital stock effected in March 1999
and the three-for-two stock split of our capital stock immediately prior to the
effectiveness of this offering. Pursuant to our investor rights agreement, the
holders of our class A preferred stock are entitled to elect two directors, one
position of which is currently filled by Walter Barandiaran. Mr. Barandiaran is
Managing Partner of The Argentum Group, an affiliate of Argentum Capital
Partners II, L.P. and Medsite ACP II Limited Partners, L.P.
Class B Convertible Preferred Stock
In October 1999, we sold shares of our class B1 preferred stock convertible
into an aggregate of 8,308,632 shares of common stock at a price of
approximately $3.67 per share, to raise capital to finance our operations. We
received aggregate proceeds of $30,464,984 from this sale of our class B1
preferred. Each share of class B1 preferred stock will convert into one share of
common stock immediately prior to the closing of this offering. The following 5%
stockholders purchased shares in the financing:
<TABLE>
<CAPTION>
NUMBER OF
COMMON EQUIVALENT AGGREGATE
PURCHASER SHARES CONSIDERATION
- --------- ----------------- -------------
<S> <C> <C>
Argentum Capital Partners II, L.P. .................. 272,727 $ 999,999
CB Capital L.P., an affiliate of Chase Capital
Partners........................................... 1,090,909 4,000,002
</TABLE>
The entities listed in the table above are the beneficial owners of the
number of shares listed opposite their name and hold voting and investment power
with respect to these shares.
In December 1999, we sold shares of our class B1 preferred stock
convertible into an aggregate of 5,362,060 shares of common stock at a price of
approximately $3.67 per share, to raise capital to finance our operations. We
received aggregate proceeds of $19,660,894 from this sale of class B1 preferred.
The following 5% stockholders purchased shares in the financing:
<TABLE>
<CAPTION>
NUMBER OF
COMMON EQUIVALENT AGGREGATE
PURCHASER SHARES CONSIDERATION
- --------- ----------------- -------------
<S> <C> <C>
CB Capital L.P., an affiliate of Chase Capital
Partners........................................... 1,636,363 $6,000,000
Morgan Stanley Dean Witter Venture Partners IV,
L.P................................................ 1,636,363 6,000,000
</TABLE>
The entities listed in the table above are the beneficial owners of the
number of shares listed opposite their name and hold voting and investment power
with respect to these shares.
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<PAGE> 53
Pursuant to our investor rights agreement, CB Capital L.P. and Morgan
Stanley Dean Witter Venture Partners IV, L.P. are each entitled to elect one
director to our board. CB Capital has elected Mitchell Blutt, M.D. and Morgan
Stanley has elected Gary Stein. Dr. Blutt is an executive partner at Chase
Capital Partners, L.P. a venture capital investment firm affiliated with CB
Capital L.P. Mr. Stein is a Vice President of Morgan Stanley & Co. Incorporated.
Investor Rights Agreement
We have entered into an agreement with the preferred stockholders described
above, as well as all other holders of class B1 preferred stock, holders of our
class B2 preferred stock, our founders and the former stockholder of Total
Health pursuant to which these stockholders will have registration rights with
respect to their shares of common stock following this offering. Set forth below
is a summary of these registration rights.
Demand Registrations. At any time on or after the earlier of June 10, 2001
or six months following the closing date of the initial public offering of our
common stock, the holders of registration rights may request us to register
shares of common stock subject to our right, upon advice of our underwriters, to
reduce the number of shares proposed to be registered. We will be obligated to
effect only four registrations pursuant to such a request by holders of
registration rights. If shares requested to be included in a registration must
be excluded due to limitations on the number of shares to be registered on
behalf of the selling stockholders pursuant to the underwriters' advice, the
shares registered on behalf of the selling stockholders will be allocated among
all holders of shares with rights to be included in the registration on the
basis of the number of shares with these rights held by these stockholders.
Piggyback Registration Rights. The holders who have registration rights
have unlimited rights to request that shares be included in any
company-initiated registration of common stock other than registrations of
employee benefit plans or business combinations subject to Rule 145 under the
Securities Act. The former shareholders of American Medical are party to a
separate rights agreement which grants them these piggyback rights in addition
to the stockholders listed above. The underwriters may, for marketing reasons,
exclude all or part of the shares requested to be registered on behalf of all
stockholders having the right to request inclusion in such registration. In
addition, we have the right to terminate any registration we initiated prior to
its effectiveness regardless of any request for inclusion by any stockholders.
Form S-3 Registrations. After we have qualified for registration on Form
S-3 which will not be available until at least 12 months after we become a
publicly reporting company, holders of registration rights may request in
writing that we effect up to two registrations a year of their shares on Form
S-3 as long as the gross offering price of the shares to be so registered in
each such registration exceeds $1,000,000. If the registration is to be an
underwritten public offering, the underwriters may reduce for marketing reasons
the number of shares to be registered on behalf of all stockholders having the
right to request inclusion in that registration. We are not obligated to effect
a registration on Form S-3 prior to expiration of 180 days following
effectiveness of the most recent registration requested by the holders.
Transferability. The registration rights are transferable upon notice by
the holder to us of the transfer, so long as the transfer complies with
securities laws, the transferee acquires at least the equivalent of 375,000
shares of our common stock and the transferee agrees to be bound by the terms of
our investor rights agreement.
Termination. The registration rights will terminate five years after the
date of our initial public offering.
Other Transactions
In October 1999 and December 1999, we sold an aggregate of 1,503,174 shares
of our class B1 preferred to Reuters Holding Switzerland S.A. in connection with
an agreement with Reuters to co-brand Reuters' health news content through our
website.
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<PAGE> 54
In December 1999, we sold 150,000 shares of our common stock to Post Kennel
Investors, LLC at a purchase price of $3.33 per share. Gregory Scott, our Chief
Financial Officer, is the sole managing member of Post Kennel Investors, LLC and
may be deemed to beneficially own all of the 150,000 shares of our common stock
held by that entity.
In connection with our acquisition of Total Health in December 1999, we
issued aggregate consideration of approximately $5.6 million in cash, $1.5
million of which is held in escrow, and 1,650,000 shares of our common stock,
409,090 of which are held in escrow, to Douglas Mack, our Executive Vice
President, e-Commerce, in exchange for his interest as sole stockholder of Total
Health. The escrow amounts, less any claims, will be fully released to Mr. Mack
on or by May 2001. The value of the aggregate consideration received by Mr. Mack
was approximately $11.7 million, based on the fair market value of our common
stock at the time of the acquisition. Mr. Mack is the former President of Total
Health.
For information regarding agreements between us and some of our executive
officers, please see "Management -- Employment Contracts and Change of Control
Arrangements."
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 1999, by:
- each person known by us to be the beneficial owner of more than 5% of our
outstanding common stock,
- each of our executive officers and directors, and
- all of our executive officers and directors as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o Medsite.com, 60 East 13th Street, 3rd Floor, New York, New York 10003.
The table includes all shares of common stock issuable within 60 days of
December 31, 1999 upon the exercise of options and other rights beneficially
owned by the indicated stockholders on that date. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and includes voting and investment power with respect to the shares.
To our knowledge, except under applicable community property laws or as
otherwise indicated, the persons named in the table have sole voting and sole
investment control with respect to all shares beneficially owned.
The applicable percentage of ownership for each stockholder is based on
51,310,749 shares of common stock outstanding as of December 31, 1999, together
with applicable options for that stockholder. Shares of common stock issuable
upon exercise of options and other rights beneficially owned are deemed
outstanding for the purpose of computing the percentage ownership of the person
holding those options and other rights, but are not deemed outstanding for
computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
--------------------
NUMBER OF SHARES PRIOR TO AFTER
OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ----- ------------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with The Argentum Group............... 9,841,087 19.0% 16.6%
405 Lexington Avenue, 54th Floor
New York, New York, 10174
CB Capital L.P. an affiliate of Chase Capital Partners.... 2,727,273 5.3% 4.6%
380 Madison Avenue, 12th Floor
New York, New York 10017
Sundeep Bhan.............................................. 4,357,260 8.8% 7.6%
Gregory Scott............................................. 150,000 * *
Sameer Shariff............................................ 4,357,260 8.8% 7.6%
Sanjay Pingle............................................. 4,357,260 8.8% 7.6%
Rajnish Kapoor............................................ 4,357,260 8.8% 7.6%
Douglas Mack.............................................. 1,650,000 3.2% 2.8%
Thomas Feitel............................................. -- * *
Vincent Friedewald, Jr. M.D. ............................. -- * *
Walter H. Barandiaran..................................... 9,841,087 19.0% 16.6%
Mitchell Blutt, M.D....................................... 2,727,273 5.3% 4.6%
Gary Stein................................................ 1,636,363 3.2% 2.8%
All executive officers and directors as a group (11
persons)................................................ 33,433,763 66.3% 57.4%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
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<PAGE> 56
The shares listed above for entities affiliated with The Argentum Group
consist of 5,056,906 shares held by Argentum Capital Partners II, L.P. and
4,784,179 shares held by Medsite ACP II Limited Partners, L.P.
The shares listed above for Mr. Scott include all shares beneficially owned
by Post Kennel Investors, LLC.
The shares listed above for Mr. Mack include 409,090 shares which are held
in escrow pursuant to our acquisition of Total Health.
On January 12, 2000, we issued Dr. Friedewald 126,000 shares of our common
stock and options to purchase 150,000 shares of our common stock. These options
vest as to 20% of the shares issuable on each anniversary of its date of grant.
The shares listed above for Mr. Barandiaran include all shares beneficially
owned by the entities affiliated with The Argentum Group.
The shares listed above for Dr. Blutt include all shares beneficially owned
by CB Capital L.P.
The shares listed above for Mr. Stein include all shares beneficially owned
by Morgan Stanley Dean Witter Venture Partners IV, L.P.
Mr. Barandiaran, Dr. Blutt and Mr. Stein disclaim beneficial ownership of
the shares held by these entities except to the extent of their pecuniary
interest in these entities.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our amended and restated certificate of incorporation, which will be filed
prior to the closing of this offering, authorizes the issuance of up to
225,000,000 shares of common stock, par value $0.000033 per share and 75,000,000
shares of preferred stock, par value $0.0001 per share, the rights and
preferences of which may be established by our board of directors. As of
December 31, 1999, there were 51,310,749 shares of common stock outstanding,
assuming the conversion of all outstanding shares of preferred stock, which were
held of record by 135 stockholders.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of Medsite, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The holders of
common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
Upon the consummation of this offering, the outstanding shares of our class
A, class B1 and class B2 convertible preferred stock will automatically convert
into common stock. Upon completion of this offering, the board of directors will
have authority, pursuant to our articles of incorporation and without further
action by the stockholders, to issue up to 50,000,000 shares of preferred stock
in one or more series. The board of directors may also determine or alter for
each series the voting powers, designations, preferences, special rights,
qualifications, limitations or restrictions as permitted by law. The board of
directors may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of the common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect of delaying,
deferring or preventing a change in control of Medsite and may adversely affect
the market price of our common stock and the voting and other rights of the
holders of common stock. There will be no shares of preferred stock outstanding
upon the consummation of this offering, and we have no current plans to issue
any shares of preferred stock.
REGISTRATION RIGHTS
As of December 31, 1999, the holders of 26,464,053 shares of our common
stock and warrants to purchase our common stock, or their transferees, are
entitled to rights with respect to the registration of these shares under the
Securities Act. These rights are provided under the terms of an agreement
between us and the holders of these securities. If we register any of our common
stock either for our own account or for the account of other security holders,
these holders are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the number of
shares included in the offering. We will be responsible for paying all
registration expenses, and the holders selling their shares will be responsible
for paying all selling expenses.
See "Related Party Transactions -- Investor Rights Agreement" for more
information about the registration rights we have granted in connection with our
equity financings and our acquisitions of Total Health and American Medical.
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<PAGE> 58
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws summarized below could make more difficult our acquisition by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent officers
and directors. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control to first negotiate with us. We believe that
the benefits of increased protection of our potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposal to acquire or restructure
us outweighs the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an improvement of
their terms.
Stockholder Meetings
Under our restated certificate of incorporation and restated bylaws, the
board of directors, the Chairman of the Board and the President may call special
meetings of stockholders but the stockholders may not call a special meeting. In
addition, our restated certificate of incorporation and restated 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.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our restated bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. 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, with some exceptions, the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, 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. The existence of this provision would
be expected to have an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including discouraging attempts
that might result in a premium over the market price for the shares of common
stock held by stockholders.
Undesignated Preferred Stock
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
Medsite. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Boston Equiserve.
NASDAQ NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq National Market
under the trading symbol "MSTE".
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SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market
following this offering, the market price of our common stock could fall
dramatically. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate.
The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities law and by certain
"lock-up" agreements that our stockholders have entered into with the
underwriters. These lock-up restrictions are subject to waiver by the
underwriters in their sole discretion. The underwriters of this offering have
informed us that they have no present intention to waive the lock-up
restrictions. For a description of these "lock-up" agreements, please see
"Underwriting."
Upon completion of this offering, we will have outstanding 60,310,749
shares of common stock (based upon shares outstanding as of December 31, 1999),
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after December 31, 1999. Taking into account the lock-up
agreements and assuming the underwriters of this offering do not release
stockholders from these agreements, based on shares outstanding as of December
31, 1999, the following shares will be eligible for sale in the public market at
the following times:
- beginning on the date of this prospectus, only the shares sold in the
offering will be immediately available for sale in the public market;
- beginning 180 days after the date of this prospectus, approximately
33,728,055 shares will be eligible for sale pursuant to Rules 144 and 701
of the Securities Act;
- an additional 17,582,694 shares will become eligible for sale under Rule
144 upon the expiration of various one-year holding periods after the
expiration of the lock-up period.
Any common stock that has been purchased or may be purchased in this
offering by our "affiliates," as defined in Rule 144 of the Securities Act, will
be subject to the volume and other selling limitations under Rule 144 of the
Securities Act. All of the shares eligible for sale at the 180th day after the
date of this prospectus or afterward will be subject initially to certain volume
and other limitations under Rule 144 of the Securities Act.
In general, under Rule 144, a stockholder, including one of our affiliates,
who has beneficially owned his or her restricted securities for at least one
year is entitled to sell, within any three-month period commencing 90 days after
the date of this prospectus, a number of shares that does not exceed the greater
of 1% of the then outstanding shares of our common stock (approximately 603,107
shares immediately after this offering) or the aggregate weekly trading volume
in our common stock during the four calendar weeks preceding the date on which
notice of such sale was filed under Rule 144, provided certain requirements
concerning availability of public information, manner of sale and notice of sale
are satisfied. In addition, a stockholder that is not one of our affiliates at
any time during the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years is entitled to sell the
shares immediately under Rule 144(k) without compliance with the above described
requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of our common
stock acquired pursuant to the exercise of certain options granted under our
stock plans) are also restricted securities and, beginning 90 days after the
date of this prospectus (subject to the 180-day lock-up agreement described
above), may be sold by stockholders other than our affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its one-year holding period requirement.
On or prior to the 180th day following the date of this prospectus, we
intend to register for resale an additional 13,875,000 shares of common stock
reserved for issuance under our 1999 stock plan, 2000 stock plan, 2000 employee
stock purchase plan and 2000 director option plan. In addition, the holders of
approximately 28,109,955 shares of common stock have the right to require us to
register their shares for
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<PAGE> 60
sale to the public. If these holders cause a large number of shares to be
registered and sold in the public market, our stock price could fall materially.
Prior to this offering, there has been no public market for our common
stock and no prediction can be made as to the effect, if any, that market sales
of shares of common stock or the availability of shares for sale will have on
the market price of our common stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of our common stock in the public market
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
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<PAGE> 61
UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock by a Non-U.S. Holder. As used in this
prospectus, the term "Non-U.S. Holder" is a person who holds our common stock
other than:
- a citizen or resident of the United States,
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the United States,
- an estate the income of which is includable in gross income for United
States federal income tax purposes regardless of its source, or
- a trust subject to the primary supervision of a United States court and
the control of one or more United States persons.
This discussion does not consider:
- state, local or foreign tax consequences,
- specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position in light of their particular
circumstances,
- the tax consequences for the stockholders or beneficiaries of a Non-U.S.
Holder,
- special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, partnerships, banks, insurance companies, dealers in
securities and traders in securities, or
- special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the United States
Internal Revenue Code of 1986, as amended ("the Code"), applicable Treasury
regulations and administrative and judicial interpretations, all as of the date
of this prospectus, and all of which are subject to change, retroactively or
prospectively. The following discussion assumes that our common stock is held as
a capital asset. The following summary is for general information. ACCORDINGLY,
EACH NON-U.S. HOLDER SHOULD CONSULT A TAX ADVISOR REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that dividends
are paid on shares of our common stock, dividends paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding of United States
federal income tax at a 30% rate, or such lower rate as may be provided by an
applicable income tax treaty. Non-U.S. Holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States ("United States
trade or business income"), are generally subject to United States federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to the 30% withholding tax if the Non-U.S. Holder files the
appropriate United States Internal Revenue Service form with the payor. Any
United States trade or business income received by a Non-U.S. Holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as specified by an
applicable income tax treaty.
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Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
2000, a Non-U.S. Holder of our common stock who claims the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements.
A Non-U.S. Holder of our common stock that is eligible for a reduced rate
of United States withholding tax under an income tax treaty may obtain a refund
or credit of any excess amounts withheld by filing an appropriate claim for a
refund with the United States Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of our common stock
unless:
- the gain is United States trade or business income, in which case the
branch profits tax described above may also apply to a corporate Non-U.S.
Holder,
- the Non-U.S. Holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Code, is present
in the United States for more than 182 days in the taxable year of the
disposition and meets certain other requirements,
- the Non-U.S. Holder is subject to tax pursuant to the provisions of the
United States tax law applicable to certain United States expatriates, or
- we are or have been a "United States real property holding corporation"
for United States federal income tax purposes at any time during the
shorter of the five-year period ending on the date of disposition or the
period that the Non-U.S. Holder held our common stock.
Generally, a corporation is a "United States real property holding
corporation" if the fair market value of its "United States real property
interests" equals or exceeds 50% of the sum of the fair market value of its
worldwide real property interests plus its other assets used or held for use in
a trade or business. We believe we have never been, are not currently and are
not likely to become a United States real property holding corporation for
United States federal income tax purposes.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
or other treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the United States Internal Revenue Service and
to each Non-U.S. Holder the amount of dividends paid to that holder and the tax
withheld with respect to those dividends. Copies of the information returns
reporting those dividends and withholding may also be made available to the tax
authorities in the country in which the Non-U.S. Holder is a resident under the
provisions of an applicable income tax treaty or agreement.
Under certain circumstances, United States Treasury Regulations require
information reporting and backup withholding at a rate of 31% on certain
payments on our common stock. Under currently applicable law, Non-U.S. Holders
of our common stock generally will be exempt from these information reporting
requirements and from backup withholding on dividends paid prior to 2001 to an
address outside the United States. For dividends paid after 2000, however, a
Non-U.S. Holder of our common stock that fails to certify its Non-U.S. Holder
status in accordance with applicable United States Treasury Regulations may be
subject to backup withholding at a rate of 31% on payments of dividends.
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The payment of the proceeds of the disposition of our common stock by a
holder to or through the United States office of a broker or through a foreign
branch of a United States broker generally will be subject to information
reporting and backup withholding at a rate of 31% unless the holder either
certifies its status as a Non-U.S. Holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds of the
disposition by a Non-U.S. Holder of our common stock to or through a foreign
office of a foreign broker will not be subject to backup withholding or
information reporting unless the foreign broker is a "United States related
person." In the case of the payment of proceeds from the disposition of our
common stock by or through a foreign office of a broker that is a United States
person or a "United States related person," information reporting, but currently
not backup withholding, on the payment applies unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
foreign status or the broker has documentary evidence in its files that the
holder is a Non-U.S. Holder and the broker has no actual knowledge to the
contrary. For this purpose, a "United States related person" is:
- a "controlled foreign corporation" for United States federal income tax
purposes,
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been
existence, is derived from activities that are effectively connected with
the conduct of a United States trade or business, or
- effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by United States persons, or (B) the partnership is
engaged in a United States trade or business.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a foreign office of a broker that is a United
States person or a United States related person unless certain certification
requirements are satisfied or an exemption is otherwise established and the
broker has no actual knowledge that the holder is a United States person.
Non-U.S. Holders should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to them, including
changes to these rules that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's United States
federal income tax liability, if any, provided that the required information is
furnished to the United States Internal Revenue Service.
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UNDERWRITING
Under the terms of 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, Bear,
Stearns & Co. Inc., CIBC World Markets Corp. and E*OFFERING Corp. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Bear, Stearns & Co. Inc. ...................................
CIBC World Markets Corp. ...................................
E*OFFERING Corp. ...........................................
--------
Total..................................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all 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. The underwriting agreement further
provides that the underwriters' obligations are conditioned upon, among other
items, the effectiveness of the registration statement relating to the common
stock and the delivery of opinions, certificates and letters by our officers,
our counsel, counsel to the underwriters and the auditors of our financial
statements.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,350,000 additional shares at the initial public 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 selling group members may allow a discount of $ per share
on sales to other brokers/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The compensation we will pay to the underwriters will consist solely of the
underwriting discount, which is equal to the public offering price per share of
common stock less the amount the underwriters pay to us per share of common
stock. The underwriters have not received and will not receive from us any other
item of compensation or expense in connection with this offering we believe
would be considered by the National Association of Securities Dealers, Inc. to
be underwriting compensation under its rules of fair practice. The underwriting
fee will be determined based on our negotiations with the underwriters at the
time the initial public offering price of our common stock is determined. We do
not expect the underwriting discount per share of common stock to exceed 7% of
the initial public offering price per share of common stock. The following table
summarizes the compensation and estimated 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>
We are required to pay all expenses in connection with this offering. The
principal components of the offering expenses payable by us will include the
fees and expenses of our accountants and attorneys, the
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fees of our registrar and transfer agent, the cost of printing this prospectus,
The Nasdaq Stock Market listing fees and filing fees paid to the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.
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 of 1933
relating to, any 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
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof or pursuant to our dividend reinvestment plan.
Our officers and directors and our stockholders and optionholders have
agreed that we and 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 any of the
economic consequences of ownership of our common stock, 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.
The underwriters have reserved for sale, at the initial public offering
price, up to 5% of the shares of common stock being offered for employees and
their friends and family, persons having business relationships with us who have
expressed an interest in purchasing common stock in the offering and U.S.
residents selected from a pool of our registered members as of ,
2000 through a directed share program. These persons will have to meet
eligibility requirements of the National Association of Securities Dealers to
purchase shares. The number of shares available for sale to the general public
in the offering will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the 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 have applied to list our common stock on The Nasdaq National Market
under the symbol "MSTE."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters, and does not reflect the market price for our
common stock following the offering. The principal factors to be considered in
determining the public offering price will be:
- 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
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- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The initial public offering price may not correspond to the price at which
our common stock will trade in the public market subsequent to this offering,
and an active trading market for our common stock may not develop or continue
after this offering.
The representatives 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 the common stock in
the open market after the distribution has been completed 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.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would be in the
absence of these transactions. These transactions may be effected on The Nasdaq
National Market and, if commenced, may be discontinued at any time.
A prospectus in electronic format will be made available on the websites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations. E*OFFERING Corp., one of the underwriters of this
offering, will allocate for distribution by E*TRADE Securities, Inc. a portion
of the shares that E*OFFERING is underwriting in this offering. Copies of the
prospectus in electronic format will be made available on internet websites
maintained by E*OFFERING Corp. and E*TRADE Securities, Inc. Customers of E*TRADE
Securities, Inc. who complete and pass an online eligibility profile may place
conditional offers to purchase shares in this offering through E*TRADE's
internet website.
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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 such
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 judgment 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.
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LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Cravath, Swaine & Moore, New York, New York, has represented the
underwriters. Persons associated with Wilson Sonsini Goodrich & Rosati are the
holders of 47,184 shares of our common stock and an option to purchase 225,000
shares of our common stock.
EXPERTS
The consolidated financial statements and schedule of Medsite.com, Inc. and
subsidiary as of December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999 appearing in this prospectus and in this
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The financial statements for Total Health Products, Inc. as of November 30,
1999 and for the eleven months then ended, appearing in this prospectus and
registration statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein in
this prospectus, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements for Total Health Products, Inc. as of December 31,
1998 and 1997 and for the years then ended included in this prospectus and
elsewhere in the registration statement, have been audited by Amper, Politziner
& Mattia P.A., independent auditors, as set forth in their report appearing
elsewhere in this prospectus, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE 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 common stock
offered hereby. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and the exhibits filed as a part thereof, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to us and the common stock offered hereby, reference is
made to the registration statement and to the exhibits filed as a part thereof.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and are
qualified in their entirety by reference to each such contract, agreement or
other document which is filed as an exhibit to the registration statement. The
registration statement, including the exhibits and schedules thereto, may be
inspected without charge at the principal office of the SEC at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, or at the Regional Offices of the
SEC at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Our
SEC filings are also available to the public from the SEC's Web site at
http://www.sec.gov. In addition, such material will be available for inspection
at the offices of The Nasdaq Stock Market, Inc., at 1735 K Street, N.W.,
Washington D.C. 20006. Copies of such material may be obtained by mail from the
Public Reference Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MEDSITE.COM, INC. AND SUBSIDIARY -- AS OF DECEMBER 31, 1999
AND 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998
AND 1997
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' (Deficit)........ F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
TOTAL HEALTH PRODUCTS, INC. -- AS OF NOVEMBER 30, 1999
ELEVEN MONTHS THEN ENDED
Report of Independent Auditors............................ F-18
Balance Sheet............................................. F-19
Statement of Operations................................... F-20
Statement of Stockholder's Deficit........................ F-21
Statement of Cash Flows................................... F-22
Notes to Financial Statements............................. F-23
TOTAL HEALTH PRODUCTS, INC. -- AS OF DECEMBER 31, 1998 AND
1997 AND FOR THE YEARS THEN ENDED
Report of Independent Auditors............................ F-26
Balance Sheets............................................ F-27
Statements of Income and Retained Earnings................ F-28
Statements of Cash Flows.................................. F-29
Notes to Financial Statements............................. F-30
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Medsite.com, Inc.
We have audited the accompanying consolidated balance sheets of
Medsite.com, Inc., and Subsidiary (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
(deficit) 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 consolidated financial position of Medsite.com,
Inc. and Subsidiary as of December 31, 1999 and 1998, and the consolidated
results of their operations and their 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.
ERNST & YOUNG LLP
New York, New York
March 31, 2000 except as to Note 15, as to which the date is May , 2000.
The foregoing report is in the form that will be signed upon the stock split
having been effected as described in Note 15 to the financial statements.
/s/ ERNST & YOUNG LLP
New York, New York
April 4, 2000
F-2
<PAGE> 71
MEDSITE.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 32,298,253 $ 29,353
Restricted cash equivalents............................... 1,503,250 --
Short term investments.................................... 1,415,802 --
Accounts receivable, less allowance of $217,000
in 1999 and $32,000 in 1998............................ 4,045,924 86,609
Inventory................................................. 813,294 --
Prepaid expenses and other current assets................. 1,272,278 111,424
------------ -----------
Total current assets........................................ 41,348,801 227,386
Property and equipment, net................................. 4,190,845 74,265
Intangible assets, net...................................... 12,330,876 --
Other assets................................................ 1,021,680 7,430
------------ -----------
Total assets...................................... $ 58,892,202 $ 309,081
============ ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 4,014,578 $ 743,369
Accrued expenses and other current liabilities............ 3,835,722 633,018
Deferred revenue.......................................... 2,493,029 --
Bridge notes payable...................................... -- 385,030
Lease obligation payable -- current....................... 83,013 4,247
------------ -----------
Total current liabilities................................... 10,426,342 1,765,664
Notes payable............................................... -- 130,000
Lease obligations payable, net of current portion........... 171,704 4,662
Redeemable Convertible Preferred Stock:
Series A Convertible Preferred Stock -- $.0001 par value;
3,000 shares authorized; 3,000 shares issued and
outstanding in 1999.................................... 3,000,000 --
Series B1 Convertible Preferred Stock -- $.0001 par value;
9,500,000 shares authorized; 9,113,788 shares issued
and outstanding in 1999................................ 46,500,428 --
Series B2 Convertible Preferred Stock -- $.0001 par value;
1,200,000 shares authorized; 1,200,000 shares issued
and outstanding in 1999................................ 6,000,000 --
------------ -----------
Total Redeemable Convertible Preferred Stock...... 55,500,428 --
------------ -----------
Stockholders' (deficit):
Common stock -- $.000033 par value; 75,000,000 shares
authorized; 26,271,696 and 20,248,701 shares issued and
outstanding in 1999 and 1998, respectively............. 876 675
Additional paid-in capital................................ 13,889,914 (12,387)
Common stock to be issued................................. -- 355,975
Accumulated (deficit)..................................... (21,097,062) (1,935,508)
------------ -----------
Total stockholders' (deficit)............................... (7,206,272) (1,591,245)
------------ -----------
Total liabilities and stockholders' (deficit)............... $ 58,892,202 $ 309,081
============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 72
MEDSITE.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Net sales............................................. $ 8,892,617 $ 1,416,872 $ 297,330
Cost of sales......................................... 8,882,732 1,299,384 90,600
------------ ----------- ---------
Gross profit.......................................... 9,885 117,488 206,730
------------ ----------- ---------
Operating expenses:
General and administrative.......................... 7,116,665 1,287,662 439,170
Sales and marketing................................. 7,174,214 540,802 114,450
Product and technology development.................. 1,371,328 172,020 66,065
Depreciation and amortization....................... 832,961 14,141 --
------------ ----------- ---------
Total operating expenses.............................. 16,495,168 2,014,625 619,685
------------ ----------- ---------
Loss from operations.................................. (16,485,283) (1,897,137) (412,955)
Interest income (expense), net........................ 336,729 (38,371) (16,898)
------------ ----------- ---------
Net loss.............................................. (16,148,554) (1,935,508) (429,853)
Accreted dividends on preferred stock................. (3,013,000) -- --
------------ ----------- ---------
Net loss attributable to common stockholders.......... $(19,161,554) $(1,935,508) $(429,853)
============ =========== =========
Net loss per share attributable to common
stockholders, basic and diluted..................... $ (0.79) $ (0.10) --
============ =========== =========
Weighted average common shares outstanding............ 24,144,313 18,769,065 --
============ =========== =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 73
MEDSITE.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON
COMMON STOCK ADDITIONAL STOCK
MEMBERS' ------------------- PAID-IN TO ACCUMULATED
DEFICIT SHARES AMOUNT CAPITAL BE ISSUED DEFICIT TOTAL
--------- ---------- ------ ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... $(143,209) -- $ -- $ -- $ -- $ -- $ (143,209)
Imputed interest on convertible
promissory notes............... 11,261 -- -- -- -- -- 11,261
Net loss......................... (429,853) -- -- -- -- -- (429,853)
--------- ------------
Balance at December 31, 1997..... (561,801) -- -- -- -- -- (561,801)
Members' deficit converted to
shareholders' deficit.......... 561,801 19,625,601 654 (562,455) -- -- --
Imputed interest on convertible
promissory notes............... -- -- -- 1,019 -- -- 1,019
Common stock issued for the
conversion of promissory
notes.......................... -- 183,600 6 152,994 -- -- 153,000
Common stock issued.............. -- 290,400 10 241,975 -- -- 241,985
Exercise of options.............. -- 149,100 5 6,375 -- -- 6,380
Common stock to be issued
(254,666 shares)............... -- -- -- -- 355,975 -- 355,975
Issuance of warrants in
connection with bridge notes... -- -- -- 19,752 -- -- 19,752
Compensation related to stock
options........................ -- -- -- 127,953 -- -- 127,953
Net loss......................... -- -- -- -- -- (1,935,508) (1,935,508)
--------- ---------- ---- ----------- --------- ------------ ------------
Balance at December 31, 1998..... -- 20,248,701 675 (12,387) 355,975 (1,935,508) (1,591,245)
Common stock issued.............. -- 2,066,997 69 3,890,906 (355,975) -- 3,535,000
Common stock issued in
satisfaction of accounts
payable........................ -- 2,175,000 73 1,839,927 -- -- 1,840,000
Common stock issued for the
conversion of promissory
notes.......................... -- 130,998 4 129,996 -- -- 130,000
Issuance of Series A Redeemable
Convertible Preferred Stock,
net of issuance costs of
$1,476,547..................... -- -- -- 1,523,453 -- -- 1,523,453
Issuance of warrants in
connection with Series B1
Convertible Preferred Stock.... -- -- -- 433,281 -- -- 433,281
Issuance of Common Stock related
to acquisition of business..... -- 1,650,000 55 6,049,945 -- -- 6,050,000
Compensation related to stock
options........................ -- -- -- 34,793 -- -- 34,793
Net loss......................... -- -- -- -- -- (16,148,554) (16,148,554)
Accreted dividends on preferred
stock.......................... -- -- -- -- -- (3,013,000) (3,013,000)
--------- ---------- ---- ----------- --------- ------------ ------------
Balance at December 31, 1999..... $ -- 26,271,696 $876 $13,889,914 $ -- $(21,097,062) $ (7,206,272)
========= ========== ==== =========== ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 74
MEDSITE.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(16,148,554) $(1,935,508) $(429,853)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 832,961 14,141 6,094
Amortization of deferred financing cost and imputed
interest................................................ -- 16,800 11,261
Bad debt expense.......................................... 184,625 22,869 13,409
Accrued interest on marketable securities................. (15,802) -- --
Stock compensation........................................ 34,793 127,953 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (4,143,940) (75,117) (34,819)
Inventory............................................... (813,294) -- --
Prepaid expenses and other current assets............... (1,162,401) (186,095) 1,698
Other assets............................................ (1,014,250) (6,930) (500)
Accounts payable and accrued expenses................... 7,644,163 1,160,471 68,424
Deferred revenue........................................ 2,493,029 -- --
------------ ----------- ---------
Net cash used in operating activities....................... (12,108,670) (861,416) (364,286)
------------ ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (4,691,662) (55,160) (6,808)
Acquisition of business, net of cash acquired of $135,843... (6,288,699) -- --
Restricted cash related to business acquired................ (1,503,250) -- --
Issuance of note receivable................................. (100,000) -- --
Purchase of marketable securities........................... (1,400,000) -- --
------------ ----------- ---------
Net cash used in investing activities....................... (13,983,611) (55,160) (6,808)
------------ ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series B1 Convertible Preferred
Stock..................................................... 46,920,708 -- --
Proceeds from issuance of 8% Convertible Promissory Notes... 6,000,000 -- --
Proceeds from issuance of Series A Convertible Preferred
Stock..................................................... 2,465,000 -- --
Proceeds from issuance of common stock...................... 3,535,000 241,985 --
Repayment of bridge notes payable........................... (385,030) -- --
Proceeds from exercise of options........................... -- 6,380 --
Proceeds from common stock to be issued..................... -- 355,975 --
Proceeds from bridge notes payable.......................... -- 385,030 --
Proceeds from notes payable................................. -- 215,000 118,500
Repayments of notes payable................................. -- (90,000) --
Repayments of lease obligations............................. (4,247) (3,517) (264)
Increase (decrease) in due to shareholders.................. (170,250) (175,067) 243,167
------------ ----------- ---------
Net cash provided by financing activities................... 58,361,181 935,786 361,403
------------ ----------- ---------
Net increase (decrease) in cash and cash equivalents........ 32,268,900 19,210 (9,691)
Cash and cash equivalents, beginning of year.............. 29,353 10,143 19,834
------------ ----------- ---------
Cash and cash equivalents, end of year...................... $ 32,298,253 $ 29,353 $ 10,143
============ =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 12,890 $ 9,495 $ 5,693
============ =========== =========
NON CASH INVESTING AND FINANCING ACTIVITIES
Common Stock issued for acquisition of business............. $ 6,050,000 $ -- $ --
============ =========== =========
Common Stock issued in satisfaction of accounts payable..... $ 1,840,000 $ -- $ --
============ =========== =========
Warrants issued in connection with Series B1 Convertible
Preferred Stock........................................... $ 433,281 $ -- $ --
============ =========== =========
Warrants issued in connection with Series A Convertible
Preferred Stock........................................... $ 396,778 $ -- $ --
============ =========== =========
Notes payable converted to common stock..................... $ 130,000 $ 153,000 $ --
============ =========== =========
Stock options issued to independent contractors............. $ 34,793 $ -- $ --
============ =========== =========
Warrants issued in connection with bridge notes............. $ -- $ 19,752 $ --
============ =========== =========
Capital lease obligation for equipment...................... $ -- $ -- $ 12,690
============ =========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 75
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION OF BUSINESS
Medsite.com, Inc. (the "Company") is a provider of online
business-to-business e-commerce, information and communication products and
services to the physician principally in the United States. Physicians can
purchase online from the Company a comprehensive selection of medical supplies,
books and other practice needs through our e-commerce offerings. The Company's
information tools help physicians filter and organize medical information from a
number of services. The Company's communication products and services assist
physicians in communicating with their patients and colleagues using the
internet.
The Company was founded in November 1995 as Oblisk Interactive, LLC, a New
York limited liability corporation ("LLC"). During 1997, LLC changed its name to
Medsite Publishing, LLC ("Publishing").
In January 1998, the members of Publishing formed Medsite Publishing, Inc.
("Publishing, Inc."), a Delaware corporation, and merged Publishing into
Publishing, Inc. In connection therewith, Publishing, Inc. issued 19,625,601
shares of its common stock ("Common Stock") in exchange for the membership units
of Publishing. In June 1999, Publishing, Inc. changed its name to Medsite.com,
Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant inter-company balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company's policy is to maintain its uninvested cash at minimum levels.
Unrestricted cash equivalents, which include highly liquid debt instruments
purchased with a maturity of three months or less, were $23.6 million at
December 31, 1999.
INVENTORIES
Inventories, consisting principally of medical supplies, are stated at the
lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets acquired under capital
leases are stated at the present value of the future minimum lease payments.
F-7
<PAGE> 76
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized over
the life of the lease, or the useful life of the improvement, whichever is
shorter. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Office Equipment and Furniture 2 to 5 years
Software 1 to 5 years
Tradeshow Fixtures 3 years
Leasehold Improvements 0.5 to 10 years
</TABLE>
INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over the expected
period to be benefited, which is five years.
The costs of all other intangible assets are amortized over their useful
lives, which is five years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.
NET LOSS PER SHARE
Basic loss per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution from the exercise or conversion
of securities into Common Stock.
Net loss and weighted average shares outstanding used for computing diluted
loss per common share were the same as that used for computing basic loss per
common share for each of the years ended December 31, 1999 and 1998.
The company had the following potentially dilutive common stock equivalents
at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- -------
<S> <C> <C>
Convertible from preferred stock...................... 25,039,043 --
Stock options outstanding............................. 4,767,000 360,000
Warrants outstanding.................................. 1,178,648 516,000
---------- -------
30,984,691 876,000
========== =======
</TABLE>
These common stock equivalents were not included in the computation of diluted
net loss per common share because they were anti-dilutive for the periods
presented.
STOCK-BASED COMPENSATION
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"), under which compensation
expense, if any, is generally based on the difference between the exercise price
of an option, or the amount paid for the award, and the market price or fair
value of the underlying common stock at the date of the award. Stock-based
compensation arrangements involving non-
F-8
<PAGE> 77
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employees are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", under which such
arrangements are accounted for based on the fair value of the option or award.
As required by SFAS 123, the Company discloses pro forma net loss information
reflecting the effect of applying SFAS 123 fair value measurement to employee
arrangements.
ADVERTISING COSTS
Costs incurred in connection with advertising and promotion of the
Company's services and products are expensed as incurred. For the years ended
December 31, 1999 and 1998, advertising expenses amounted to approximately
$901,000 and $192,000, respectively.
REVENUE RECOGNITION
The Company operates in one business segment, which is the sale of products
and services to the medical community. The Company derives revenue from the sale
of medical books and supplies, information and communication services and
advertising impressions on its website.
Medical Books and Supplies: The Company sells medical books and medical
supplies through its website. Customers place orders both online and through
traditional sales channels and either pay for the goods with credit cards or on
account. Once an order is placed, it is processed for shipment through either
the Company's internal fulfillment operation or an outside fulfillment center.
With respect to orders that involve the delivery of products through third party
fulfillment operations, the Company takes legal title to the products purchased
at the date of shipment and relinquishes title to its customers upon delivery.
When title passes to the customer, the Company recognizes the revenue. Included
in medical books and supplies revenue is $380,530, $82,161 and $0 of shipping
revenue for the years ended December 31, 1999, 1998 and 1997, respectively.
Information and Communication Products and Services: Information and
communication products include journal tracking services, continuing medical
education and e-mail and may be sold on either a fee per usage basis or under a
subscription basis that provides for usage of the product or service over a
specified time period. Revenues from these products are recognized when usage
occurs for fee per usage contracts, or ratably over the contracted period for
subscriptions. For the year ended December 31, 1999, such revenues amounted to
approximately $139,000.
Advertising: The Company generates revenues from advertisements on the
Company's website. Advertising revenue, derived from the sale of banner
advertisements and sponsorships, is recognized ratably over the period the
advertising is displayed, provided that no significant Company obligations or
commitments relating to a minimum number of impressions remain and collection of
the resulting receivable is probable. For the year ended December 31, 1999,
advertising revenue amounted to approximately $32,000. There was no significant
advertising revenue for the year ended December 31, 1998.
When the Company's products and services are sold through third party
sponsorships, the Company issues a certificate to the customer, which is paid
for by the sponsoring organization. Revenue received through the sponsoring
organizations is deferred until the customer purchases goods or services from
the Company. Revenue is then recognized based on the specific product or service
purchased.
The amount of revenue recognized for the Company's products and services is
the sales price of the item plus outbound shipping costs less returns,
promotional discounts and coupons.
F-9
<PAGE> 78
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRODUCT AND TECHNOLOGY DEVELOPMENT
Costs incurred in the classification and organization of listings and
information within the website and the development of new products and services
and enhancements to original products and services are charged to expense as
incurred. Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based upon the
Company's product development process, technological feasibility is established
upon the Company's completion of a working model.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP is effective for fiscal years beginning after December
15, 1998.
During 1999, the Company expensed approximately $1.4 million of product
development costs under SOP 98-1, costs that were incurred for the development
of project plans and for ongoing updates to our site graphics. During 1999, the
Company capitalized $2.0 million of product development costs under SOP 98-1
that were incurred for the development of new products and the development of
added functionality to existing products. During 1998 and 1997, the Company
expensed $172,020 and $66,065 of product development costs under SFAS No. 86,
respectively. Substantially all of these SFAS No. 86-related costs were incurred
for feasibility studies.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of temporary cash investments
and accounts receivable. The Company restricts temporary cash investments to
financial institutions with a high credit standing. Two major customers account
for $1.9 million of accounts receivable at December 31, 1999.
There was no concentration of revenues for the years ended December 31,
1999 and 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform with the current year's presentation.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment recognized is measured by the
amount by which the carrying amounts of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less selling costs.
2. SHORT TERM INVESTMENTS
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and classifies them as held to maturity
or available for sale. These investments are diversified among high credit
securities in accordance with the Company's investment policy. Debt securities
that the Company has both the intent and ability to hold to maturity are carried
at amortized cost. Debt securities
F-10
<PAGE> 79
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that the Company does not have the intent or ability to hold to maturity are
classified as available for sale. Securities available for sale are carried at
fair value with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The Company does not invest in securities for
the purpose of trading and as such does not classify any securities as trading.
The cost of debt securities classified as held to maturity are adjusted for
amortization of premiums and accretion of discounts to maturity over the
estimated useful life of the security. Such amortization and accretion are
included in interest income. There were no securities classified as available
for sale as of December 31, 1999 and 1998.
The amortized cost, which approximates fair value, of U.S. corporate debt
securities held to maturity at December 31, 1999 is $1,415,802. All securities
held to maturity at December 31, 1999 are due within one year.
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Office equipment and furniture....................... $1,671,973 $ 94,831
Software............................................. 2,660,149 3,268
Tradeshow fixtures................................... 363,742 --
Leasehold improvements............................... 243,953 --
---------- --------
4,939,817 98,099
Less accumulated depreciation........................ 748,972 23,834
---------- --------
Property and equipment, net.......................... $4,190,845 $ 74,265
========== ========
</TABLE>
4. INTANGIBLE ASSETS
Intangible Assets consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Goodwill.................................................... $12,338,699
Trademarks and servicemarks................................. 100,000
-----------
12,438,699
Less accumulated amortization............................... 107,823
-----------
Intangible assets, net...................................... $12,330,876
===========
</TABLE>
5. NOTES PAYABLE
In 1996, the Company issued a 4.25% convertible promissory note for $34,500
payable on demand and had a $5,000 non-interest bearing convertible promissory
note outstanding. During 1997 and 1998, the Company issued non-interest bearing
convertible promissory notes aggregating $118,500 and $125,000, respectively,
payable on demand. The Company imputed interest in the amount of approximately
$1,000 in 1998 related to these loans. During 1998, notes aggregating $153,000
were converted at the rate of $0.83 per share into 183,600 shares of common
stock. The remainder of these notes were converted in January 1999 at the rate
of $1.00 per share into 130,998 shares of common stock.
F-11
<PAGE> 80
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, the Company issued promissory notes aggregating $90,000,
bearing interest at rates ranging from 30% to 32% and payable on demand. Such
notes were repaid during 1998.
6. BRIDGE NOTES
During 1998, the Company received approximately $385,000 under bridge
notes. These notes bear interest at 10% per annum and were due when the Company
sold preferred shares as part of an investment agreement (see Note 8). The
Company recorded interest expense of approximately $12,000 for the year ended
December 31, 1998 in connection with the bridge notes. Such notes were repaid in
February 1999.
The Company granted warrants to purchase 516,000 shares of Common Stock to
the bridge noteholders (see Note 9).
7. LONG TERM LIABILITIES -- CONVERTIBLE NOTES
In June 1999, the Company issued convertible promissory notes in the amount
of $6 million. These notes bear interest at 8% and are due on June 30, 2000, and
are convertible into shares of the Company's Series B2 preferred stock at a
conversion price equal to $3.33 per share of Common Stock. Such notes were
converted in October 1999 (see Note 8).
8. PREFERRED STOCK
On February 3, 1999, the Company authorized 3,000 shares of $.0001 par
value Series A Redeemable Convertible Preferred Stock ("Series A Stock") and
issued 3,000 shares of the Series A Stock for gross proceeds of $3 million.
Prior to the closing of the Series A Stock and as a condition of the closing,
the Company performed the following:
1) Issued 900,000 shares of Common Stock to a significant supplier in full
satisfaction of $750,000 in payables outstanding as of February 3, 1999.
2) For value received in connection with investment banking services, the
Company issued 1,200,000 shares of Common Stock valued at $840,000 and
warrants to purchase 371,133 shares of Common Stock valued at $101,547,
based on the fair value method, to an investment banking firm. The
resulting equity issuance costs were recorded as an offset to additional
paid-in-capital. The warrants are exercisable for five years at $0.67
per share. This investment banking firm was also paid $300,000 in cash
from the proceeds of the Series A Stock sale (see above).
In October 1999, the Company increased its authorized shares of preferred
stock, par value $0.0001, to 10,703,000 shares. Of the total shares authorized,
3,000 shares are designated as Series A, 9,500,000 shares are designated as
Series B1 and 1,200,000 shares are designated as Series B2.
In October 1999, the Company issued 5,539,088 shares of Series B1
Convertible Preferred Stock for gross proceeds of approximately $30.5 million
and issued 1,200,000 shares of Series B2 Convertible Preferred Stock in exchange
for the $6 million, 8% convertible promissory notes issued in June 1999 (see
Note 7).
In December 1999, the Company issued 3,574,707 shares of Series B1
Convertible Preferred Stock for gross proceeds of approximately $19.7 million.
The Series A, Series B1 and Series B2 are each redeemable after 5 years
should the Company fail to complete an Initial Public Offering or fail to
receive a qualifying offering, as defined. The shares are redeemable at the
greater of fair market value or at their original issue price plus all declared
and unpaid dividends.
F-12
<PAGE> 81
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series A shares are convertible into 9,568,361 common shares. The
Series B1 and B2 shares are convertible into 1.5 common shares for each share of
preferred stock. In accordance with EITF 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," the beneficial conversion feature of $3,000,000 relating to
the Series A Stock was accounted for as a reduction of income attributable to
common stockholders. Because the intrinsic value of the beneficial conversion
feature was greater than the proceeds allocated to the Series A Stock, the
amount assigned to the beneficial conversion feature was limited to $3,000,000
and was recognized immediately since the securities were convertible immediately
by the preferred shareholders.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1999, the Company announced a 2-for-1 stock split for all shares
of its common stock issued and outstanding. All common stock information
included in the accompanying financial statements have been adjusted to reflect
the 2-for-1 stock split.
During 1999, the Company issued 1,684,998 shares of Common Stock for net
proceeds of $3,535,000 at prices ranging from $1.00 to $3.33.
During 1999, the Company issued 2,175,000 shares of Common Stock to vendors
as consideration for services rendered in the amount of $1,840,000.
In December 1999, the Company issued 1,650,000 shares of Common Stock as
consideration for the acquisition of Total Health Products, Inc. (see Note 10).
COMMON STOCK TO BE ISSUED
Common Stock to be issued at December 31, 1998 represents cash received in
advance for 381,999 shares of Common Stock that were issued during 1999.
WARRANTS
As an incentive to the bridge financing (see Note 6), the Company issued
warrants to purchase 300,000 shares of Common Stock at an exercise price of
$0.67 per share, and warrants to purchase 216,000 shares of Common Stock at an
exercise price of $1.00 per share. These warrants can be exercised over a period
of five years. The Company valued the warrants at an aggregate of $19,752 and
recorded such amount as deferred financing costs, which was amortized over the
lives of the underlying notes (through February 1999). The related warrant
agreements include certain anti-dilution rights which were waived by several of
the warrant holders. The issuance of the Series A Stock (Note 8) activated these
anti-dilution rights for those warrant holders who did not waive the
aforementioned rights. Consequently, the Company is required to (i) issue an
additional 227,887 warrants to purchase common stock at an exercise price of
$0.31 per share and (ii) re-price 200,400 of the $0.67 warrants to an exercise
price of $0.31.
In connection with services provided relating to the issuance of Series B1
Convertible Preferred Stock, the Company issued options to purchase 225,000
shares of Common Stock and warrants to purchase 291,515 shares of Common Stock
at an exercise price of $3.33 per share. These options and warrants can be
exercised over a period of five years. The Company valued the options at
$186,000 and the warrants at $247,281, based on the fair value method, and
recorded such amounts as an offset to shareholders' equity.
F-13
<PAGE> 82
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. ACQUISITION
On December 1, 1999, the Company acquired Total Health Products, Inc., a
medical supplies distributor, for total consideration of approximately $11.7
million, $5.6 million in cash and 1.65 million shares of the Common Stock, of
which approximately $1.5 million and 272,727 shares have been placed in escrow
and will be released if certain performance obligations are met. The Company
recorded the acquisition under the purchase method of accounting. The purchase
price has been allocated to the assets acquired, principally (i) accounts
receivable of $3.5 million, (ii) inventory of $726,189 and (iii) fixed assets of
$715,850 and liabilities assumed, principally (i) $3.3 million of accounts
payable, (ii) $2.0 million of loan obligations and (iii) $1.4 million of
deferred revenue, based upon their estimated fair values at the date of
acquisition. The excess purchase price was approximately $12.3 million and will
be amortized on a straight-line basis over a five-year period. The preliminary
allocation of purchase price, which includes goodwill, may change upon final
determination of the fair value of the net assets acquired. The consolidated
results of Medsite.com, Inc. and subsidiary include the results of Total Health
for the period from December 1, 1999 and December 31, 1999. If the acquisition
had occurred on January 1, 1998, (i) unaudited net sales for the years ended
December 31, 1999 and 1998 would have been $21.7 million and $12.6 million,
respectively, (ii) unaudited net loss for the years ended December 31, 1999 and
1998 would have been $(20.7) million and $(4.2) million, respectively (iii)
unaudited net loss per common share for the years ended December 31, 1999 and
1998 would have been $(0.86) and $(0.22), respectively.
11. INCOME TAXES
The Company was an LLC from January 1, 1998 through August 26, 1998, and
was treated as a "pass-through" partnership for income tax purposes. As a
result, the Company's members were responsible for income taxes and no provision
for income taxes was required. On August 27, 1998, the Company terminated the
LLC and merged into a newly incorporated "C" corporation.
The federal tax rates for the years ended December 31, 1999 and 1998 were
35%. The effective tax rates were zero for the years ended December 31, 1999 and
1998 due to the Company incurring net operating losses for which no tax benefit
was recorded.
For Federal income tax purposes, the Company had unused net operating loss
carry-forwards of approximately $17.9 million expiring in 2018 through 2019. The
availability of the net operating loss carry-forwards to offset income in future
years may be restricted as a result of future sales of the Company's stock and
other events.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ---------
<S> <C> <C>
Accounts receivable, principally due to allowance
for doubtful accounts............................ $ 50,000 $ 11,000
Federal net operating loss carry-forwards.......... 6,282,000 214,000
----------- ---------
Total gross deferred tax assets.................. 6,332,000 225,000
Less valuation allowance........................... 6,332,000 225,000
----------- ---------
Net deferred tax assets.......................... $ -- $ --
=========== =========
</TABLE>
F-14
<PAGE> 83
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments. During 1999 and 1998, the
valuation allowance increased by $6.1 million and $225,000, respectively.
12. STOCK OPTION PLAN
During 1998, the Board of Directors approved the 1999 Stock Option Plan
(the "Stock Option Plan") under which "non-qualified" stock options ("NQSOs") to
acquire shares of Common Stock may be granted to employees, directors and
consultants of the Company and "incentive" stock options ("ISOs") to acquire
shares of Common Stock may be granted to employees, including non-employee
directors.
The Stock Option Plan provides for the issuance of up to a maximum of
4,875,000 shares of Common Stock and is currently administered by a committee of
the Board of Directors. Under the Stock Option Plan, the option price of any ISO
may not be less than the fair market value of a share of Common Stock on the
date on which the option is granted. The option price of an NQSO may be less
than the fair market value on the date the NQSO is granted if the Board of
Directors so determines. An ISO may not be granted to a "ten percent
shareholder" (as such term is defined in Section 422A of the Internal Revenue
Code) unless the exercise price is at least 110% of the fair market value of the
Common Stock and the term of the option may not exceed five years from the date
of the grant. The maximum term of each stock option granted to persons other
than ten percent shareholders is ten years from the date of the grant.
The per share weighted average fair value of stock options granted during
1999 and 1998 was $1.24 and $0.23, respectively, on the date of the grant using
a Minimum Value option pricing model with the following assumptions: risk-free
interest yield of 5.5% for 1999 and ranging from 4.6% to 5.7% for 1998, no
dividend yield and an average life of five years.
The Company applies the provisions of APB Opinion No. 25 in accounting for
its Stock Option Plan and, accordingly, no compensation cost has been recognized
for ISOs in the financial statements since the exercise price was equal to or
greater than the fair market value at the date of grant. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss attributable to common
stockholders would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Net loss, as reported............................ $(19,161,554) $(1,935,508)
Net loss, pro forma.............................. $(19,706,200) $(1,949,908)
Net loss per common share, as reported........... $ (0.79) $ (0.10)
Net loss per common share, pro forma............. $ (0.82) $ (0.11)
</TABLE>
During 1999 and 1998, the Company granted NQSOs to certain employees and
outside consultants that immediately vested and are exercisable over five years
from the date of grant. Options to purchase 360,000 shares were granted to
employees at exercise prices at or above the fair value of Common Stock during
1999. Options to purchase 83,100 shares of Common Stock were granted to
employees at exercise prices below the estimated fair value of the Company's
common stock on the date of the grant and 360,000 shares were granted to
employees at exercise prices above the fair value of Common Stock during 1998.
Additionally, the Company granted options to purchase 135,750 and 66,000 shares
of Common Stock to outside consultants during 1999 and 1998, respectively. In
accordance with APB 25 and
F-15
<PAGE> 84
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 123, the Company recorded aggregate compensation expense of approximately
$35,000 and $128,000 for the years ended December 31, 1999 and 1998,
respectively, related to these options.
Option pricing models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Stock option activity under the Stock Option Plan is shown below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER OF
PRICES SHARES
-------- ---------
<S> <C> <C>
Outstanding at January 1, 1998......................... $1.00 360,000
Granted.............................................. $0.01 149,100
Exercised............................................ $0.01 (149,100)
---------
Outstanding at December 31, 1998....................... $1.00 360,000
Granted.............................................. $3.47 5,132,250
Forfeited............................................ $3.33 (725,250)
---------
Outstanding at December 31, 1999....................... $3.30 4,767,000
=========
</TABLE>
The following table summarizes weighted average option exercise price
information:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
- --------------- -------------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.00 to
$3.33....... 3,963,750 7 $3.10 951,750 $2.38
$3.34 to
$4.67....... 803,250 9 $4.30 30,000 $4.67
--------- -------
4,767,000 $3.30 981,750 $2.45
========= =======
</TABLE>
F-16
<PAGE> 85
MEDSITE.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
LEASES
At December 31, 1999, the Company was committed under non-cancelable
operating and capital leases for the rental of office space and computer
equipment. At December 31, 1999, property and equipment included equipment
acquired under capital lease obligations of approximately $220,000.
The Company's future minimum capital and operating lease payments are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- -----------
<S> <C> <C>
2000................................................ $106,260 $ 1,675,438
2001................................................ 101,144 2,252,997
2002................................................ 79,572 2,098,541
2003................................................ -- 2,103,393
2004................................................ -- 2,106,655
Thereafter.......................................... -- 11,485,012
-------- -----------
286,976 $21,722,036
Less interest costs 32,259
--------
$254,717
========
</TABLE>
Rent expense amounted to $100,980 and $30,500 for the years ended December
31, 1999 and 1998, respectively.
EMPLOYMENT CONTRACTS
During 1999, the Company entered into employment agreements with certain of
its officers for an aggregate amount of approximately $3.6 million expiring
through 2002. Such agreements may be terminated by either party without cause as
defined in the agreements. The Company's remaining commitment as of December 31,
1999 under such agreements aggregated approximately $2.1 million.
14. SUBSEQUENT EVENTS
ACQUISITION
On January 12, 2000, the Company acquired American Medical Communications,
Inc., ("AMC") a continuing medical education provider, for 630,000 shares of
Common Stock. The Company recorded the acquisition under the purchase method of
accounting. The purchase price has been allocated to the assets acquired and
liabilities assumed, based upon the estimated fair values at the date of
acquisition. The excess purchase price was approximately $7.6 million and will
be amortized on a straight-line basis over a five-year period.
INITIAL PUBLIC OFFERING
The Company is proposing an initial public offering of its Common Stock.
15. STOCK SPLIT
Prior to the completion of its initial public offering, the Company
effected a stock split at a ratio of three for two. All share and per share
amounts in the financial statements have been adjusted to reflect the
three-for-two stock split, effective on .
F-17
<PAGE> 86
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Total Health Products, Inc.
We have audited the accompanying balance sheet of Total Health Products,
Inc. as of November 30, 1999 and the related statements of operations,
stockholder's deficit, and cash flows for the eleven months then ended. 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 audit.
We conducted our audit 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 audit provides 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 Total Health Products, Inc.
as of November 30, 1999 and the results of its operations and its cash flows for
the eleven months then ended in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG
New York, New York
February 9, 2000
F-18
<PAGE> 87
TOTAL HEALTH PRODUCTS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
NOVEMBER 30,
1999
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 117
Accounts receivable, less allowance of $1,900............. 3,649
Inventories............................................... 726
Prepaid expenses and other current assets................. 107
-------
Total current assets........................................ 4,599
Property and equipment, net................................. 716
-------
Total assets................................................ $ 5,315
=======
LIABILITIES AND STOCKHOLDER'S (DEFICIT)
Current liabilities:
Line of credit............................................ $ 1,750
Accounts payable.......................................... 2,425
Accrued expenses and other current liabilities............ 852
Loan payable, stockholder................................. 258
Deferred revenue.......................................... 1,444
Lease obligation payable -- current....................... 82
-------
Total current liabilities................................... 6,811
Lease obligation payable, net of current portion............ 175
-------
Total liabilities........................................... 6,986
Stockholder's (deficit):
Common stock, no par value, authorized 100 shares, 80
shares issued and outstanding.......................... 1
Accumulated deficit....................................... (1,672)
-------
Total stockholder's (deficit)............................... (1,671)
-------
Total liabilities and stockholder's (deficit)............... $ 5,315
=======
</TABLE>
See accompanying notes
F-19
<PAGE> 88
TOTAL HEALTH PRODUCTS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
NOVEMBER 30,
1999
-------------------
(IN THOUSANDS)
<S> <C>
Net Sales................................................... $12,801
Cost of sales............................................... 8,831
-------
Gross profit................................................ 3,970
Selling, general and administrative expenses................ 5,988
-------
Loss from operations........................................ (2,018)
Interest expense, net....................................... (83)
-------
Net loss.................................................... $(2,101)
=======
</TABLE>
See accompanying notes
F-20
<PAGE> 89
TOTAL HEALTH PRODUCTS, INC.
STATEMENT OF STOCKHOLDER'S (DEFICIT)
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
NOVEMBER 30, 1999
-----------------------------------------------
RETAINED TOTAL
COMMON STOCK EARNINGS/ STOCKHOLDER'S
--------------- ACCUMULATED EQUITY
SHARES AMOUNT (DEFICIT) (DEFICIT)
------ ------ ----------- -------------
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Balance at December 31, 1998..................... 80 $1 $ 579 $ 580
Net loss......................................... (2,101) (2,101)
Dividends paid................................... (150) (150)
-- -- ------- -------
Balance at November 30, 1999..................... 80 $1 $(1,672) $(1,671)
== == ======= =======
</TABLE>
See accompanying notes
F-21
<PAGE> 90
TOTAL HEALTH PRODUCTS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
NOVEMBER 30,
1999
-------------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net loss.................................................... $(2,101)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 188
Bad debt expense.......................................... 1,836
Increase (decrease) in cash attributable to changes in
operating assets and liabilities:
Accounts receivable.................................... (3,682)
Inventories............................................ (57)
Prepaid expenses and other current assets.............. 135
Accounts payable....................................... 1,444
Accrued expenses and other current liabilities......... 714
Deferred revenue....................................... 876
-------
Net cash used in operating activities....................... (647)
-------
Net cash used in investing activities -- purchase of
property and equipment.................................... (411)
Cash flows from financing activities:
Proceeds from line of credit borrowings................... 1,349
Dividends paid............................................ (150)
Principal payments on obligations under capital leases.... (62)
-------
Net cash provided by financing activities................... 1,137
-------
Net increase in cash........................................ 79
Cash, beginning of period................................... 38
-------
Cash, end of period......................................... $ 117
=======
Supplemental disclosure of cash flow information -- cash
paid during period for interest........................... $ 71
=======
</TABLE>
See accompanying notes
F-22
<PAGE> 91
TOTAL HEALTH PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Total Health Products, Inc., the "Company," is located in Bloomfield, New
Jersey and was established in 1988 as an "S" Corporation. The Company's
principal business activity is to sell medical supplies and books to physicians.
The Company issues certificates to doctors through companies which sponsor
seminars for individual doctors to attend. Each doctor in attendance receives a
certificate. The certificates are returned to the Company and a credit to each
doctor's account is then recognized for use toward current or future purchases.
INVENTORIES
Inventories, consisting of medical supplies, are stated at the lower of
cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets ranging from three to seven years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of the carrying
amounts of long-lived assets. A loss is recognized when expected undiscounted
future cash flows are less than the carrying amount of the asset. An impairment
loss is the difference by which the carrying amount of an asset exceeds its fair
value.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products. The
certificates that are received from the doctors are classified as deferred
revenue at the time the Company invoices the respective sponsoring companies,
and operating revenues are credited when shipment occurs.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled approximately $4 for
the 11 month period ended November 30, 1999.
INCOME TAXES
The Company's stockholder has elected "S" Corporation status for federal
and state income tax purposes. As an "S" Corporation, the stockholder is liable
for federal and substantially all state income taxes on the Company's taxable
income and receives the benefit of losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-23
<PAGE> 92
TOTAL HEALTH PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
2. PROPERTY AND EQUIPMENT
Property and equipment as of November 30, 1999 consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
-------------
<S> <C> <C>
Equipment................................................... $ 935 3-7 years
Leasehold improvements...................................... 41 life of lease
Furniture and fixtures...................................... 45 3-5 years
------
1,021
Less accumulated depreciation and amortization.............. 305
------
$ 716
======
</TABLE>
3. LINE OF CREDIT BORROWINGS
The Company has a $1,750 line of credit with a bank. Borrowings under this
line bear interest at the prime rate (8.5% at November 30, 1999) plus 1/4%, are
guaranteed by the Company's stockholder and are collateralized by the Company's
assets. The balance was paid in full in December 1999 in connection with the
sale of the Company (Note 10).
4. OBLIGATIONS UNDER CAPITAL LEASES
At November 30, 1999, property and equipment included equipment acquired
under capital lease obligations of $342 and accumulated amortization includes
$110.
Aggregate future required principal payments at November 30, 1999 are as
follows:
<TABLE>
<S> <C>
Year ending November 30,
2000...................................................... $101
2001...................................................... 101
2002...................................................... 88
----
Total............................................. 290
Less amount representing interest........................... 33
----
Present value of future lease payments...................... 257
Less current portion........................................ 82
----
$175
====
</TABLE>
5. RELATED PARTY TRANSACTIONS
At November 30, 1999, the Company had a loan payable to the stockholder of
$258. The loan bears interest at 12% per annum. Interest expense on this loan
for the 11 months ended November 30, 1999 was $31. The loan is subordinated to
the line of credit borrowing, and was paid in full on December 1, 1999 in
connection with the sale of the Company (Note 10).
6. RETIREMENT PLAN
The Company has a profit sharing plan (the "Plan"), which has a 401(k)
provision that was added in April 1997. The Plan covers all employees who meet
certain eligibility requirements, as indicated in the Plan, and deferral of
compensation under the 401(k) provision is voluntary. Employees who elect to
F-24
<PAGE> 93
TOTAL HEALTH PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
participate are required to defer between 1% and 15% of their eligible
compensation. Prior to the addition of the 401(k) provision, contributions to
the profit sharing plan were made at the discretion of the Board of Directors.
Under the 401(k) provision, the Company is required to make matching
contributions equal to 50% of the first 5% of employee deferred compensation.
Company contributions for 1999 were $20.
7. MAJOR CUSTOMERS AND SUPPLIERS
The Company had sales to two major customers in 1999 aggregating
approximately $9.3 million. These two major customers account for approximately
$3.2 million in accounts receivable for 1999. The Company had purchases of
products for sale from four suppliers in 1999 aggregating $2,900.
8. COMMITMENTS
The Company is obligated under office and warehouse leases expiring between
2002 and 2004. Aggregate future rental payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30
- -----------
<S> <C>
2000........................................................ $71
2001........................................................ 71
2002........................................................ 40
2003........................................................ 30
2004........................................................ 5
</TABLE>
Rent expense for the eleven months ended November 30, 1999 was $71.
9. CONCENTRATION
The Company maintains its cash balances in one financial institution. These
balances are insured by the Federal Deposit Insurance Corporation up to $100.
10. SUBSEQUENT EVENTS
On November 30, 1999, the Company and its shareholders entered an Agreement
and Plan of Merger with Medsite.com, Inc. Under the terms of the agreement, in
December 1999, all shares of the Company were extinguished and the Company was
merged into a subsidiary of Medsite.com, Inc. In connection with this
transaction both the line of credit and the stockholder loan were paid in full.
F-25
<PAGE> 94
REPORT OF INDEPENDENT AUDITORS
Stockholder of
Total Health Products, Inc.
We have audited the accompanying balance sheets of Total Health Products,
Inc. as of December 31, 1998 and 1997, and the related statements of income and
retained earnings, and cash flows for the years then ended. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Total Health Products, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ AMPER, POLITZINER & MATTIA P.A.
Edison, New Jersey
August 13, 1999
F-26
<PAGE> 95
TOTAL HEALTH PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT
FOR SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 38 $ 9
Accounts receivable, less allowance for doubtful accounts
of $65 in 1998 and $100 in 1997........................ 1,803 1,153
Inventory................................................. 669 795
Prepaid expenses and other current assets................. 242 229
------ ------
Total current assets.............................. 2,752 2,186
Equipment, property and purchased software, net............. 494 93
------ ------
$3,246 $2,279
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line of credit borrowings................................. $ 402 $ 179
Obligations under capital leases, current portion......... 77 --
Accounts payable.......................................... 981 1,113
Accrued expenses and other current liabilities............ 138 33
Loan payable, stockholder................................. 258 --
Unearned revenues......................................... 568 327
------ ------
Total current liabilities......................... 2,424 1,652
------ ------
Long-term liability
Obligations under capital leases, less current portion.... 242 --
Loan payable, stockholder................................. -- 258
------ ------
242 258
------ ------
Commitment
Stockholder's equity
Common stock, no par value, authorized 100 shares......... 1 1
80 shares issued and outstanding....................... 579 368
------ ------
Retained earnings......................................... 580 369
------ ------
Total stockholder's equity........................ $3,246 $2,279
====== ======
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 96
TOTAL HEALTH PRODUCTS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $11,128 $11,339
Cost of revenues............................................ 7,562 8,072
------- -------
Gross profit................................................ 3,566 3,267
Selling, general and administrative expenses................ 3,300 2,856
------- -------
Income from operations...................................... 266 411
Interest expense, net....................................... 55 43
------- -------
Net income.................................................. 211 368
Retained earnings, beginning of year........................ 368 --
------- -------
Retained earnings, end of year.............................. $ 579 $ 368
======= =======
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 97
TOTAL HEALTH PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1998 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 211 $ 368
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 34 26
Provision for bad debts................................ 73 48
Increase (decrease) in cash attributable to changes in
operating assets and liabilities:
Accounts receivable.................................. (723) (725)
Inventory............................................ 126 (386)
Prepaid expenses and other current assets............ (14) (179)
Accounts payable..................................... (132) 494
Accrued expenses and other current liabilities....... 105 (38)
Unearned revenues.................................... 241 138
----- -----
Net cash used in operating activities....................... (79) (254)
----- -----
Net cash used in investing activities, purchases of
equipment and software.................................... (93) (65)
----- -----
Cash flows from financing activities
Principal payments on obligations under capital leases.... (22) --
Principal payments on loan payable, stockholder........... -- (63)
Proceeds from line of credit borrowings................... 223 174
----- -----
Net cash provided by financing activities................... 201 111
----- -----
Net increase (decrease) in cash............................. 29 (208)
Cash, beginning of year..................................... 9 217
----- -----
Cash, end of year........................................... $ 38 $ 9
===== =====
Supplemental disclosures of cash flow information, cash paid
during the year for interest.............................. $ 52 $ 43
===== =====
Supplemental disclosures of noncash investing and financing
activities, equipment and software purchased by
obligations under capital leases.......................... $ 319 $ --
===== =====
</TABLE>
See accompanying notes to financial statements
F-29
<PAGE> 98
TOTAL HEALTH PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Total Health Products, Inc., (the "Company,") is located in Bloomfield, New
Jersey and was established in 1988 as a S-Corporation. The Company's principal
business activity is to sell wholesale medical supplies to individual doctors
throughout the United States. The Company issues certificates to doctors through
"Meeting" companies, which sponsor seminars for individual doctors to attend.
Each doctor in attendance receives a certificate from the Company. The
certificates are returned to the Company and a credit to each doctor's account
is then recognized for use toward current or future purchases. The Company is
currently integrating its operations through a newly designed website.
Inventories
Inventories, consisting of medical supplies, are stated at the lower of
cost (first in, first out method) or market.
Equipment, Property and Purchased Software
Equipment, property and purchased software are stated at cost less
accumulated depreciation and amortization. The Company provides for depreciation
and amortization primarily on the declining-balance method as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSETS USEFUL LIVES
- ------ -------------
<S> <C>
Leasehold improvements.................................. life of lease
Equipment............................................... 5-7 Years
Purchased software...................................... 3 Years
</TABLE>
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying
amounts of long-lived assets. A loss is recognized when expected undiscounted
future cash flows are less than the carrying amount of the asset. An impairment
loss is the difference by which the carrying amount of an asset exceeds its fair
value.
Revenue Recognition
The Company recognizes revenue upon shipment of its products. The coupons
that are received from the doctors are classified as unearned revenue at the
time the Company invoices the respective meeting companies, until shipment
occurs.
Advertising Costs
Advertising costs are expensed as incurred and totaled approximately $50
and $5 in 1998 and 1997, respectively.
Income Taxes
The Company's stockholder has elected "S" Corporation status for federal
and state income tax purposes. As a "S" Corporation, the stockholder is liable
for federal and substantially all state income taxes on the Company's taxable
income and receives the benefit of losses.
F-30
<PAGE> 99
TOTAL HEALTH PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. EQUIPMENT, PROPERTY AND PURCHASED SOFTWARE
Details of equipment, property and purchased software as of December 31,
1998 and 1997, are as follows:
<TABLE>
<S> <C> <C>
Equipment............................................. $488 $135
Leasehold improvements................................ 41 41
Purchased software.................................... 82 --
---- ----
611 176
Less accumulated depreciation and amortization........ 117 83
---- ----
$494 $ 93
==== ====
</TABLE>
3. LINE OF CREDIT BORROWINGS
The Company has a $1,250 line of credit with a bank. Borrowings under this
line bears interest at the prime rate (7.75% at December 31, 1998) plus 1/4% and
is guaranteed by the Company's stockholder and is collateralized by the
Company's assets. This line expired on June 30, 1999, and is being renewed on a
monthly basis.
4. OBLIGATIONS UNDER CAPITAL LEASES
At December 31, 1998, equipment and purchased software acquired under
capital lease obligations include $319 and accumulated amortization includes $5.
Aggregate future required lease payments at December 31, 1998, are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1999...................................................... $101
2000...................................................... 101
2001...................................................... 101
2002...................................................... 70
----
Total....................................................... 373
Less amount representing interest........................... 54
----
Present value of future lease payments...................... 319
Less current portion........................................ 77
----
$242
====
</TABLE>
5. RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, the Company had a loan payable to a
stockholder of $258. The loan bears interest at 12% per annum. Interest expense
on this loan for 1998 and 1997 was $31 and $29,
F-31
<PAGE> 100
TOTAL HEALTH PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
respectively. The loan is subordinated to the line of credit borrowing (Note 3).
The loan is expected to be repaid by December 31, 1999.
6. RETIREMENT PLAN
The Company has a profit sharing plan (the "Plan"), which has a 401(k)
provision that was added in April 1997. The Plan covers all employees who meet
certain eligibility requirements, as indicated in the Plan, and deferral of
compensation under the 401(k) provision is voluntary. Employees who elect to
participate are required to defer between 1% and 15% of their eligible
compensation. Prior to the addition of the 401(k) provision, contributions to
the profit sharing plan were made at the discretion of the Board of Directors.
Under the 401(k) provision, the Company is required to make matching
contributions equal to 50% of the first 5% of employee deferred compensation.
Company contributions for 1998 and 1997, were $19 and $13, respectively.
7. MAJOR CUSTOMERS AND SUPPLIERS
The Company had sales to two major customers in 1998 and 1997, aggregating
approximately $7.5 million and $8.5 million, respectively. These two major
customers accounted for approximately $700 and $550 in account receivable
balances for 1998 and 1997, respectively. The Company had purchases of products
for sale from three suppliers in 1998 and 1997, aggregating $2.4 million and
$2.7 million, respectively.
8. COMMITMENT
The Company is obligated under office and warehouse leases expiring between
2002 and 2004. Aggregate future minimum rental payments are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
1999...................................................... $49
2000...................................................... 71
2001...................................................... 71
2002...................................................... 37
2003...................................................... 30
Thereafter.................................................. 3
</TABLE>
Rent expense for 1998 and 1997, was $30 and $29, respectively.
9. CONCENTRATION
The Company maintains its cash balances in one financial institution. These
balances are insured by the Federal Deposit Insurance Corporation up to $100.
10. YEAR 2000 (UNAUDITED)
The Company has completed an assessment of the effect of Year 2000 Issues
on operations. Such assessment included consideration of: hardware, software,
and imbedded systems. A plan has been developed to remedy issues identified in
the assessment. The implementation of this plan provides for the Company to be
year 2000 compliant by the third quarter of 1999. The implementation of this
plan is currently on target and such progress is monitored monthly by the
management. Management estimates that the costs associated with these activities
will not have a material effect on the Company's operations.
F-32
<PAGE> 101
TOTAL HEALTH PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
11. SUBSEQUENT EVENTS
In July 1999, the Company entered into a five-year employment with an
employee, effective January 1, 1999. The agreement provides for, among other
things, a $100 bonus, a salary based upon a gross profit computation and a
payment in the event of sale or merger of the Company.
In June 1999, the stockholder of the Company has expressed an intent to
enter into a proposed transaction subject to the execution of a binding
definitive agreement to sell all of his stock in the Company.
F-33
<PAGE> 102
[LOGO]
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the securities being registered. All amounts shown are estimates except for
the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $ 34,005
NASD filing fee............................................. 10,500
NASDAQ National Market Fees................................. 95,000
Printing and engraving expenses............................. 250,000
Accountant's fees and expenses.............................. 300,000
Legal fees and expenses..................................... 650,000
Miscellaneous............................................... 10,495
----------
Total.................................................. $1,350,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VIII of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has issued and sold the
following unregistered securities:
(1) Between March 1999 and December 31, 1999, the Registrant granted
and issued options to purchase 4,767,000 shares of common stock to
employees and consultants of the registrant under the Registrant's 1999
Stock Plan at exercise prices ranging from $2.00 to $8.33. These securities
have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Rule 701 promulgated under the
Securities Act of 1933. Where Rule 701 has not been available, the
securities have been issued in transactions exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
(2) During 1997, the Registrant issued convertible promissory notes in
an aggregate principal amount of $118,500 to nine investors and during 1998
the Company issued convertible promissory notes in an aggregate principal
amount of $215,000 to five investors. These securities have been issued in
transactions exempt from registration in reliance upon Section 4(2) of the
Securities Act of 1933.
(3) In December 1997, the Registrant granted and issued options to
purchase an aggregate of 360,000 shares of common stock to Sundeep Bhan,
Sameer Shariff, Sanjay Pingle and Rajnish
II-1
<PAGE> 104
Kapoor at an exercise price of $0.44 per share. These options were granted
outside the Registrant's 1999 Stock Plan. These securities have been issued
in transactions exempt from registration under the Securities Act of 1933
in reliance upon Rule 701 promulgated under the Securities Act of 1933.
Where Rule 701 has not been available, the securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
(4) In February 1999, the Registrant issued and sold 3,000 shares of
its class A preferred stock convertible into an aggregate of 9,568,361
shares of common stock to two entities affiliated with Argentum Capital
Partners L.P. for an aggregate purchase price of $3,000,000. These
securities have been issued in transactions exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933 and Rule 506 of Regulation D thereunder.
(5) In March 1999, the Registrant completed a two-for-one stock split
of its outstanding common stock in which each share of common stock was
split into two shares of common stock.
(6) In March 1999, the Registrant issued and sold 200,000 shares of
common stock to Penn Ventures LLC for an aggregate purchase price of
$1,000,000.
(7) In October 1999, the Registrant issued and sold shares of class B1
preferred stock convertible into an aggregate of 8,308,632 shares of common
stock to 41 investors including Reuters Holding Switzerland S.A, CB Capital
L.P., Brookside Partners Fund, L.P., TCW/ICICI India Private Equity AMP
Fund, entities affiliated with Weiss, Peck & Greer, Delmas Business LTD,
Hikari Tsushin, Inc., Argentum Capital Partners II, L.P., Metchem
Engineering SA, Tenet Healthcare Corporation, Merchant Capital Inc.,
Everest Venture Partners II, investors associated with Wilson Sonsini
Goodrich & Rosati, P.C., and thirteen other investors for an aggregate
purchase price of $30,464,984. In connection with this sale of securities,
Registrant paid an advisory fee of approximately $2.8 million and granted a
warrant to purchase 216,515 shares of common stock to Credit Suisse First
Boston Corporation. These securities have been issued in a transaction
exempt from registration in reliance upon Section 4(2) of the Securities
Act of 1933.
(8) In October 1999, the Registrant issued shares of class B2
preferred stock convertible into an aggregate of 1,800,000 shares of common
stock to MEDNUT LLC, Investcare Partners Limited Partnership, Jordex
Resources, Inc. and Aspen Associates LLC in exchange for full cancellation
of $6,000,000 of convertible promissory notes issued by the Registrant in
June 1999. These securities have been issued in a transaction exempt from
registration in reliance upon Section 4(2) of the Securities Act of 1933.
(9) In December 1999, the Registrant issued shares of class B1
preferred stock convertible into an aggregate of 5,362,062 shares of common
stock to CB Capital L.P., Morgan Stanley Dean Witter Venture Partners IV,
L.P., The Goldman Sachs Group, Inc., Reuters Holding Switzerland S.A.,
Brookside Capital Partners Fund, L.P., MEDNUT LLC, Investcare Partners
Limited Partnership, Hikari Tsushin, Inc., Jordex Resources, Inc., Tenet
Healthcare Corporation, entities associated with Weiss, Peck & Greer,
Delmas Business LTD, Metchem Engineering SA, James Tananbaum and Raj Mehra
for an aggregate purchase price of $19,660,894.
(10) In December 1999, the Registrant issued 1,650,000 shares of
common stock to the former stockholder of Total Health Products, Inc. in
connection with the acquisition of Total Health Products, Inc. These
securities have been issued in a transaction exempt from registration in
reliance upon Section 4(2) of the Securities Act of 1933.
(11) In January 2000, the Registrant issued 630,000 shares of common
stock to the former shareholders of American Medical Communications, Inc.
in connection with the acquisition of American Medical Communications, Inc.
These securities have been issued in a transaction exempt from registration
in reliance upon Section 4(2) of the Securities Act of 1933.
II-2
<PAGE> 105
(12) From July 1998 to December 1999 the Registrant issued warrants to
purchase an aggregate of 992,133 shares of common stock to Richard & Linda
Grossfeld, Barry Neuman, Harry Sendzischew, E.W. Boland, Leslie & Josh
Ostrin, Richard Gershman, David Faxon, Roger Lash, Bernard Kolkana Trust,
Robert Reardon, Arthur Midili, Larry Laliberte, Claude Serfillipi, Howard
Seife, William Greason, Howard Chesin, K.L. Peterson & B.H. Peterson
Charitable Remainder Trust, Kenneth L. Peterson, Scott Jordan, John &
Elizabeth Smale, Lawrence Nusbaum, Martin Kaplan, Mikhail Vorotynstev, Dila
Skrelja, Danielle Doukas Trust, Rex Moore, Elena Vorotynstev, Leonard
Pedris, East 88th Street Corp., White Rock Tuscon LLC, Internet Ventures
Partners LLC, Dan Lee Ltd. and Dall Inc. at exercise prices ranging from
$0.33 to $3.33 per share.
(13) In March 2000, the Registrant issued 10,000 shares of common
stock to Matthews Medical and Scientific, Inc. These securities have been
issued in a transaction exempt from registration in reliance upon Section
4(2) of the Securities Act of 1933.
In all of the above transactions, the recipients of securities represented
their intention 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 were affixed to the securities issued.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Fourth Amended and Restated Certificate of Incorporation of
Registrant**
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed promptly after the closing of the
offering
3.3 Bylaws of the Registrant
3.4 Form of Bylaws of the Registrant to be in effect after the
closing of the offering
4.1 Specimen Common Stock Certificate*
4.2 Investor Rights Agreement by and among Registrant and
Purchasers of Registrant's Class A, B-1 and B-2 Preferred
Stock, Sundeep Bhan, Sanjay Pingle, Sameer Shariff, Rajnish
Kapoor, Mercer Management Consulting, Merchant Capital, Inc.
and Douglas Mack
4.3 Rights Agreement by and among Registrant and the former
shareholders of American Medical Communications, Inc.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation*
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers*
10.2 1999 Stock Option Plan
10.3 2000 Stock Option Plan and form of agreement thereunder
10.4 2000 Employee Stock Purchase Plan and form of agreement
thereunder
10.5 2000 Director Option Plan and form of agreement thereunder
10.6 Employment Agreement by and between Registrant and Sundeep
Bhan
10.7 Employment Agreement by and between Registrant and Sameer
Shariff
10.8 Employment Agreement by and between Registrant and Sanjay
Pingle
10.9 Employment Agreement by and between Registrant and Gregory
Scott
10.10 Employment Agreement by and between Registrant and Douglas
Mack
10.11 Employment Agreement by and between Registrant and Vincent
Friedewald, Jr., M.D.
10.12 Lease Agreement by and between Registrant and
Broadway -- 13th Associates, L.P.
</TABLE>
II-3
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.13 Lease Agreement by and between Registrant and 59 Maiden Lane
Associates, LLC
10.14 Supply Agreement by and between Registrant and Matthews
Medical Books+*
23.1 Consent of Ernst & Young LLP, Independent Auditors**
23.1a Consent of Amper, Politziner & Mattia P.A.**
23.2 Consent of Counsel (see Exhibit 5.1)*
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedules
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
All other exhibits have been previously filed.
+ Confidential treatment has been requested for portions of this exhibit. The
omitted portions have been separately filed with the Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
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 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 Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto, duly authorized, in the City of New York, New York, on April 4, 2000.
Medsite.com, Inc.
By: /s/ SUNDEEP BHAN
------------------------------------
Sundeep Bhan
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ SUNDEEP BHAN President, Chief Executive Officer and April 4, 2000
- ----------------------------------------- Chairman of the Board of Directors
Sundeep Bhan (Principal Executive Officer)
* Executive Vice President, Chief Financial April 4, 2000
- ----------------------------------------- Officer and Secretary (Principal Financial
Gregory Scott and Accounting Officer)
* Executive Vice President, April 4, 2000
- ----------------------------------------- Sales & Marketing
Sameer Shariff
* Executive Vice President, April 4, 2000
- ----------------------------------------- Products
Sanjay Pingle
* Senior Vice President, April 4, 2000
- ----------------------------------------- e-Commerce
Douglas Mack
* Director April 4, 2000
- -----------------------------------------
Walter Barandiaran
* Director April 4, 2000
- -----------------------------------------
Mitchell Blutt, M.D.
* Director April 4, 2000
- -----------------------------------------
Gary Stein
</TABLE>
II-5
<PAGE> 108
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Medsite.com., Inc.
and subsidiary as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' (deficit) and cash flows for each of the
three years in the period ended December 31, 1999 and have issued our report
thereon dated February 9, 2000. Our audits also included the consolidated
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 31, 2000, except as to Note 15, as to which the date is May, 2000.
The foregoing report is in the form that will be signed upon the stock
split having been effected as described in Note 15 to the financial statements.
/s/ ERNST & YOUNG LLP
New York, New York
April 4, 2000
II-6
<PAGE> 109
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MEDSITE.COM, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING COSTS AND OTHER NET OF END
OF YEAR EXPENSES ACCOUNTS RECOVERIES OF YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts 1997........ $ -- $ -- $ --
Allowance for Doubtful Accounts 1998........ $ -- $ 32,125 $ 32,125
Allowance for Doubtful Accounts 1999........ $32,125 $184,625 $216,750
</TABLE>
II-7
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------- ----------------------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement*
3.1 Fourth Amended and Restated Certificate of Incorporation of
Registrant**
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed promptly after the closing of the
offering
3.3 Bylaws of the Registrant
3.4 Form of Bylaws of the Registrant to be in effect after the
closing of the offering
4.1 Specimen Common Stock Certificate*
4.2 Investor Rights Agreement by and among Registrant and
Purchasers of Registrant's Class A, B-1 and B-2 Preferred
Stock, Sundeep Bhan, Sanjay Pingle, Sameer Shariff, Rajnish
Kapoor, Mercer Management Consulting, Merchant Capital, Inc.
and Douglas Mack
4.3 Rights Agreement by and among Registrant and the former
shareholders of American Medical Communications, Inc.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation*
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers*
10.2 1999 Stock Option Plan
10.3 2000 Stock Option Plan and form of agreement thereunder
10.4 2000 Employee Stock Purchase Plan and form of agreement
thereunder
10.5 2000 Director Option Plan and form of agreement thereunder
10.6 Employment Agreement by and between Registrant and Sundeep
Bhan
10.7 Employment Agreement by and between Registrant and Sameer
Shariff
10.8 Employment Agreement by and between Registrant and Sanjay
Pingle
10.9 Employment Agreement by and between Registrant and Gregory
Scott
10.10 Employment Agreement by and between Registrant and Douglas
Mack
10.11 Employment Agreement by and between Registrant and Vincent
Friedewald, Jr., M.D.
10.12 Lease Agreement by and between Registrant and
Broadway -- 13th Associates, L.P.
10.13 Lease Agreement by and between Registrant and 59 Maiden Lane
Associates, LLC
10.14 Supply Agreement by and between Registrant and Matthews
Medical Books+*
23.1 Consent of Ernst & Young LLP, Independent Auditors**
23.1a Consent of Amper, Politziner & Mattia P.A.**
23.2 Consent of Counsel (see Exhibit 5.1)*
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedules
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
All other exhibits have been previously filed.
+ Confidential treatment has been requested for portions of this exhibit. The
omitted portions have been separately filed with the Commission.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
Exhibit 3.1
FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF MEDSITE.COM, INC.
a Delaware corporation
(Originally incorporated as Medsite Publishing, Inc. on November 25, 1997)
ARTICLE I.
The name of this Corporation is Medsite.com, Inc.
ARTICLE II.
The address of the registered office of the Corporation in the State of
Delaware is 15 East North Street, Dover, Delaware 19901, in the County of Kent,
and the name of the registered agent at such address is W/K Corporate Services
(DEL), Inc.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL as presently in
effect or as it may hereafter be amended.
ARTICLE IV.
A. Classes of Stock. This Corporation is authorized to issue two
classes of stock, to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the corporation is authorized to issue
is Sixty Million (60,703,000) shares. Fifty Million (50,000,000) shares shall be
Common Stock, par value $.0001 per share, and Ten Million and Seven Hundred and
Three Thousand (10,703,000) shares shall be Preferred Stock, par value $.0001
per share. Of the authorized shares of Preferred Stock, a total of Three
Thousand (3,000) shares shall be designated Class A Preferred Stock ("Class A
Preferred"), a total of Nine Million Five Hundred Thousand (9,500,000) shares
shall be designated Class B1 Preferred Stock ("Class B1 Preferred") and a total
of One Million Two Hundred Thousand (1,200,000) shares shall be designated Class
B2 Preferred Stock ("Class B2 Preferred," and together with the Class B1
Preferred, the "Class B Preferred").
The Board of Directors is further authorized to decrease (but
not below the number of shares of any such series then outstanding) the number
of shares of any series, the number of which was fixed by it, subsequent to the
issue of shares of such series then outstanding, subject to the powers,
preferences and rights, and the qualifications, limitations and restrictions
thereof stated in the resolution of the Board of Directors originally fixing the
number of shares of such series. If the number of shares of any series is so
decreased, then the shares constituting such decrease shall
<PAGE> 2
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such.
B. Rights, Preferences, Privileges and Restrictions of Preferred Stock.
The rights, preferences, privileges and restrictions granted to and imposed on
the Class A Preferred and Class B Preferred are as set forth below in this
Article IV(B).
1. Dividend Provisions. The holders of shares of Preferred Stock shall
be entitled to receive, when and as declared by the Board of Directors,
dividends in an amount equal to such dividend as is declared on the Common Stock
multiplied by the number of shares of Common Stock into which the Class A
Preferred Stock, Class B1 Preferred Stock and Class B2 Preferred Stock,
respectively, are then convertible. All dividends declared on the Preferred
Stock shall be paid prior to any payment of dividends on the Common Stock. All
such dividends shall be non-cumulative, shall be payable first to all holders of
Preferred Stock pro-rata in preference to Common Stock with no Common Stock to
receive any such dividend in preference to any other such class, and shall be
payable out of such funds as are legally available therefor.
2. Liquidation Preference. Subject to the provisions of Section 2(c)
below, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary (a "Liquidation"), distributions
to the stockholders of the Corporation shall be made in the following manner:
(a) Amount of Preferred Liquidation Preference. The holders of
the Class B1 Preferred and Class B2 Preferred shall be entitled to receive upon
any Liquidation, prior and in preference to any distribution or payment to the
holders of Class A Preferred or Common Stock, an amount equal to the sum of (1)
the amount of $5.50 (the "Class B1 Original Purchase Price") for each share of
Class B1 Preferred held by them (as adjusted for any stock dividends,
combinations or splits with respect to such shares) plus an amount equal to all
declared but unpaid dividends on such respective shares (the "Class B1
Preferential Amount") and (2) the amount of $5.00 (the "Class B2 Original
Purchase Price") for each share of Class B2 Preferred held by them (as adjusted
for any stock dividends, combinations or splits with respect to such shares)
plus an amount equal to all declared but unpaid dividends on such respective
shares (the "Class B2 Preferential Amount" and collectively with the Class B1
Preferential Amount, the "Class B1 and Class B2 Preferential Amounts"). If upon
any Liquidation, the assets and funds of the Corporation legally available for
distribution hereunder shall be insufficient to permit the payment of the Class
B1 and Class B2 Preferential Amounts, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Class B1 Preferred and Class B2 Preferred in such a
manner that the amount to be distributed to each holder of Class B1 Preferred
and Class B2 Preferred shall equal the amount obtained by multiplying the entire
assets and funds of the Corporation legally available for distribution hereunder
by a fraction, the numerator of which shall be the sum obtained by adding (w)
the product obtained by multiplying the number of shares of Class B1 Preferred
then held by the holder by the Class B1 Preferential Amount and (x) the product
obtained by multiplying the number of shares of Class B2 Preferred then held by
the holder by the Class B2 Preferential Amount, and the denominator of which
shall be the sum obtained by adding (y) the product obtained by multiplying the
total then outstanding number of shares of Class B1
-2-
<PAGE> 3
Preferred by the Class B1 Preferential Amount and (z) the product obtained by
multiplying the total then outstanding number of shares of Class B2 Preferred by
the Class B2 Preferential Amount.
After payment in full of the Class B1 and Class B2
Preferential Amounts, the holders of the Class A Preferred shall be entitled to
receive, prior and in preference to any distribution or payment to the holders
of the Common Stock, an amount equal to the sum of (1) the amount of $1,000.00
(the "Class A Original Purchase Price") for each share of Class A Preferred then
held by them (as adjusted for any stock dividends, combinations or splits with
respect to such shares), and (2) all declared but unpaid dividends on the Class
A Preferred (collectively, the "Class A Preferential Amount").
If the assets and funds available for distribution
among the holders of the Class A Preferred shall be insufficient to permit the
full payment to such holders of the Class A Preferential Amount, then the entire
amount of the assets and funds of the Corporation legally available for
distribution after payment of the Class B1 and Class B2 Preferential Amounts
shall be distributed ratably among the holders of Class A Preferred in such a
manner that the amount to be distributed to each holder of Class A Preferred
shall equal the amount obtained by multiplying the entire assets and funds of
the Corporation legally available for distribution hereunder by a fraction, the
numerator of which shall be the number of shares of Class A Preferred then held
by the holder and the denominator of which shall be the total then outstanding
number of shares of Class A Preferred.
(b) Distribution After Payment of Preferred Liquidation
Preference. After payment has been made to the holders of Preferred Stock of the
full preferential amounts set forth in Section 2(a) above, the entire remaining
assets and funds of the Corporation legally available for distribution, if any,
shall be distributed ratably among the holders of Common Stock.
(c) Deemed Liquidation.
(i) Notwithstanding Section 2(a) above, in the event
of (A) a sale of all or substantially all of the assets of the Corporation or
(B) any merger or consolidation of the Corporation unless the Corporation's
stockholders of record as constituted immediately prior to such merger or
consolidation will, immediately after such merger or consolidation hold greater
than fifty percent (50%) of the voting power of the surviving or successor
entity to the business of the Corporation (any of which, a "Deemed
Liquidation"), the holders of Class A Preferred, Class B1 Preferred and Class B2
Preferred shall be entitled to receive, before any distribution or payment is
made upon the Common Stock, the Class A Preferential Amount and Class B1 and
Class B2 Preferential Amounts, as applicable. If upon any Deemed Liquidation,
the assets and funds of the Corporation legally available for distribution shall
be insufficient to permit the payment to the holders of the then outstanding
shares of Preferred Stock of the full aforesaid preferential amounts, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of Preferred Stock in such a
manner that the amount distributed to each holder of Preferred Stock shall equal
the amount obtained by multiplying the entire assets and funds of the
Corporation legally available for distribution hereunder by a fraction, the
numerator of which shall be the sum obtained by adding (u) the product obtained
by multiplying the number of shares of Class A Preferred held by the holder by
the Class A Preferential Amount,
-3-
<PAGE> 4
(v) the product obtained by multiplying the number of shares of Class B1
Preferred then held by the holder by the Class B1 Preferential Amount and (w)
the product obtained by multiplying the number of shares of Class B2 Preferred
then held by the holder by the Class B2 Preferential Amount, and the denominator
of which shall be the sum obtained by adding (x) the product obtained by
multiplying the total then outstanding number of shares of Class A Preferred by
the Class A Preferential Amount, (y) the product obtained by multiplying the
total then outstanding number of shares of Class B1 Preferred by the Class B1
Preferential Amount and (z) the product obtained by multiplying the total then
outstanding number of shares of Class B2 Preferred by the Class B2 Preferential
Amount.
(ii) In any of such events, if the consideration
received by the Corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment
letter or other similar restrictions on free marketability shall be valued as
follows: (1) if traded on a securities exchange or through the Nasdaq National
Market, the value shall be deemed to be the average of the closing prices of the
securities on such exchange over the thirty day period ending three days prior
to the closing; (2) if actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty day period ending three days prior to the closing;
and (3) if there is no active public market, the value shall be the fair market
value thereof, as determined in good faith by the Board of Directors of the
Corporation.
(B) Securities subject to investment letter
or other restrictions on free marketability (other than restrictions arising
solely by virtue of a stockholder's status as an affiliate or former affiliate)
shall be valued in such a manner as to make an appropriate discount from the
market value determined as above in (A) (1), (2) or (3) to reflect the
approximate fair market value thereof, as determined in good faith by the Board
of Directors of the Corporation.
(iii) In the event the holders of Preferred Stock
are unable to receive their preferential amounts in accordance with the
requirements of this Section 2(c), this Corporation shall forthwith either:
(A) cause such closing to be postponed until
such time as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event
the rights, preferences and privileges of the holders of Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(c)(iv) hereof.
(iv) The Corporation shall give each holder of
record of Preferred Stock written notice of any such impending transaction not
later than ten (10) days prior to the stockholder meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction
whichever notice date is earlier, and shall also notify such holders in writing
of the final approval of such transaction. The first of such notices shall
describe the material terms and
-4-
<PAGE> 5
conditions of the impending transaction, the provisions of this Section 2, and
the amounts anticipated to be distributed to holders of each outstanding series
and class of capital stock of the Corporation pursuant to this Section 2, and
the Corporation shall thereafter give such holders prompt notice of any material
changes. The transaction shall in no event take place sooner than twenty (20)
days after the Corporation has given the first notice provided for herein or
sooner than ten (10) days after the Corporation has given notice of any material
changes provided for herein; provided, however, that such periods may be
shortened upon the written consent of the holders of Preferred Stock that are
entitled to such notice rights or similar notice rights and that represent at
least a majority of the voting power of all then outstanding shares of such
Preferred Stock (on an as-converted basis).
3. Redemption.
(a) Redemption of Class B Preferred.
(i) In the event that prior to the fifth
anniversary of the date of initial issuance of the Class B Preferred (the "Class
B Anniversary Date"), the Corporation has not consummated either (i) a Qualified
Offering (as defined in Section 4(b) below) or (ii) a sale of all or
substantially all of the assets of the Corporation or any merger or
consolidation of the Corporation after which the Corporation's stockholders of
record as constituted immediately prior to such merger or consolidation will,
immediately after such merger or consolidation, hold less than fifty percent
(50%) of the voting power of the surviving or successor entity to the business
of the Corporation (a "Change of Control"), then upon receipt within sixty (60)
days following the Class B Anniversary Date of the written request (the "Class B
Redemption Request") of the holders of not less than two-thirds of the then
outstanding shares of Class B Preferred, the Corporation shall redeem all of the
Class B Preferred Stock outstanding on the Class B Redemption Date (as defined
in Section 3(a)(ii)), up to the maximum amount this Corporation may lawfully
redeem out of funds legally available therefor. The Corporation shall pay in
cash therefor an amount per share of Class B1 Preferred equal to the Class B1
Redemption Price and an amount per share of Class B2 Preferred equal to the
Class B2 Redemption Price (each as defined in Section 3(a)(iv)).
(ii) Within thirty (30) days of the receipt by
the Corporation of the Class B Redemption Request, the Corporation shall mail,
first class postage prepaid, written notice (the "Class B Notice of Redemption")
to each holder of record (at the close of business on the business day preceding
the day on which notice is given) of Class B Preferred and Class A Preferred, at
the address last shown on the records of the Corporation for such holder or
given by the holder to the Corporation, for the purpose of notifying such holder
of the redemption to be effected. The Class B Notice of Redemption shall specify
a date (the "Class B Redemption Date") between thirty (30) and sixty (60) days
after the mailing of the Class B Notice of Redemption on which the Class B
Preferred then outstanding shall be redeemed and the place at which payment may
be obtained, which shall be the principal offices of the Corporation or such
other place as shall be mutually agreeable to the Corporation and the holders of
not less than a majority of the Class B Preferred. The Class B Notice of
Redemption shall call upon each holder of Class B Preferred, at such holder's
option, either (i) to surrender to the Corporation, in the manner and at the
place designated, such holder's certificate or certificates representing the
shares to be redeemed or (ii) to convert such Class B Preferred into Common
Stock prior to the Class B Redemption Date in accordance with the provisions of
Section 4 below.
-5-
<PAGE> 6
(iii) On the Class B Redemption Date, the
Corporation shall pay by cash or check to the order of the person whose name
appears on the certificate or certificates of the Class B1 Preferred or Class B2
Preferred that (i) shall not have been converted pursuant to Section 4 hereof
and (ii) shall have been surrendered to the Corporation in the manner and at the
place designated, the Class B1 Redemption Price or Class B2 Redemption Price, as
applicable, and thereupon each surrendered certificate shall be cancelled.
(iv) The Class B1 Redemption Price shall be equal
to the greater of (A) the Class B1 Preferential Amount or (B) the Fair Market
Value (as defined below) of the shares of Common Stock that would be received
upon conversion of each share of Class B1 Preferred in accordance with the
provisions of Section 4 below. The Class B2 Redemption Price shall be equal to
the greater of (A) the Class B2 Preferential Amount or (B) the Fair Market Value
(as defined below) of the shares of Common Stock that would be received upon
conversion of each share of Class B2 Preferred in accordance with the provisions
of Section 4 below.
(v) All shares of Class B Preferred shall be
redeemed before any shares of Class A Preferred are redeemed pursuant to Section
3(b) below. If the funds of the Corporation legally available for redemption of
the Class B Preferred are insufficient to redeem the total shares of Class B
Preferred outstanding on the Class B Redemption Date, the Corporation shall
allocate those funds which are legally available for redemption in such a manner
so that the Corporation redeems the maximum possible number of whole shares of
Class B Preferred ratably among the holders thereof based upon the respective
redemption amounts due each holder of Class B Preferred. The shares of Class B
Preferred not so redeemed shall remain outstanding and shall be entitled to all
the powers, preferences and rights provided for herein. At any time thereafter
when additional funds of the Corporation are legally available for the
redemption of the Class B Preferred, such funds will immediately be used to
redeem the balance of the shares of the Class B Preferred which the Corporation
has become obligated to redeem on the Class B Redemption Date but which it has
not redeemed, and shall be allocated in accordance with this Section 3(a).
(vi) From and after the Class B Redemption Date,
unless there shall have been a default in payment of the Class B1 Redemption
Price or the Class B2 Redemption Price, in which case all rights shall survive
until so paid, all rights of the holders of Class B Preferred (except the right
to receive the Class B1 Redemption Price or the Class B2 Redemption Price
subsequent to the Class B Redemption Date upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
(vii) For purposes of this Section 3, Fair Market
Value shall mean the fair value of 100% of the outstanding Common Stock of the
Corporation (on a fully diluted, as converted basis, including, without
limitation, the shares of Common Stock into which all shares of Preferred Stock
outstanding immediately prior to the Class B Redemption Date and the Class A
Redemption Date (as defined below) could be converted at the applicable
Conversion Rate then in effect), based upon the sale of the Corporation as a
going concern to a strategically motivated, financially able and unaffiliated
third party buyer, without any discount for the nonliquidity or minority
ownership of the Common Stock, as determined by a qualified independent
investment banker (an "Investment Banker") agreed to by the Corporation on the
one hand and the holders of a majority of the
-6-
<PAGE> 7
outstanding shares of Preferred Stock on the other hand. If the Corporation, on
the one hand, and the holders of a majority of the outstanding shares of
Preferred Stock, on the other hand, cannot agree on a mutually acceptable
Investment Banker within forty-five (45) days prior to the Class B Redemption
Date, each of the Corporation, on the one hand, and such holders, on the other
hand, shall select an investment banker and such investment bankers shall within
three (3) days appoint a mutually acceptable third Investment Banker which shall
compute Fair Market Value and such computation shall be binding. Notwithstanding
anything in paragraph (a) above to the contrary, an election to redeem shares of
Class B Preferred or Class A Preferred need not be made until ten (10) days
after the final and binding computation of Fair Market Value has been made, and
any election to redeem made on or before such tenth day shall be deemed to have
been timely made pursuant to paragraph (i) above (any election or notice prior
to such final election being revocable). The Corporation shall bear all costs
and expenses of the determination of Fair Market Value.
(b) Redemption of Class A Preferred.
(i) In the event that prior to Class B
Anniversary Date, the Corporation has not consummated either a Qualified
Offering (as defined in Section 4(b) below) or a Change of Control, then upon
receipt within sixty (60) days of the Class B Anniversary Date of the written
request (the "Class A Redemption Request") of the holders of not less than
two-thirds of the then outstanding shares of Class A Preferred, the Corporation
shall redeem all of the Class A Preferred Stock outstanding on the Class A
Redemption Date (as defined in Section 3(b)(ii)), up to the maximum amount this
Corporation may lawfully redeem out of funds legally available therefor. The
Corporation shall pay in cash therefor an amount per share of Class A Preferred
equal to the Class A Redemption Price (as defined in Section 3(b)(iv)).
(ii) Within thirty (30) days of the receipt by
the Corporation of the Class A Redemption Request, the Corporation shall mail,
first class postage prepaid, written notice (the "Class A Notice of Redemption")
to each holder of record (at the close of business on the business day preceding
the day on which notice is given) of Class A Preferred and Class B Preferred, at
the address last shown on the records of the Corporation for such holder or
given by the holder to the Corporation, for the purpose of notifying such holder
of the redemption to be effected. The Class A Notice of Redemption shall specify
a date (the "Class A Redemption Date") between thirty (30) and sixty (60) days
after the mailing of the Class A Notice of Redemption on which the Class A
Preferred then outstanding shall be redeemed and the place at which payment may
be obtained, which shall be the principal offices of the Corporation or such
other place as shall be mutually agreeable to the Corporation and the holders of
not less than a majority of the Class A Preferred. The Class A Notice of
Redemption shall call upon each holder of Class A Preferred, at such holder's
option, either (i) to surrender to the Corporation, in the manner and at the
place designated, such holder's certificate or certificates representing the
shares to be redeemed or (ii) to convert such Class A Preferred into Common
Stock prior to the Class A Redemption Date in accordance with the provisions of
Section 4 below. Notwithstanding the foregoing, in no event will the "Class A
Redemption Date" be a date earlier than the Class B Redemption Date.
(iii) On the Class A Redemption Date, the
Corporation shall pay by cash or check to the order of the person whose name
appears on the certificate or certificates of the Class A Preferred that (i)
shall not have been converted pursuant to Section 4 hereof and (ii) shall have
been
-7-
<PAGE> 8
surrendered to the Corporation in the manner and at the place designated, the
Class A Redemption Price, and thereupon each surrendered certificate shall be
cancelled.
(iv) The Class A Redemption Price shall be equal
to the greater of (A) the Class A Preferential Amount or (B) the Fair Market
Value (as defined above) of the shares of Common Stock that would be received
upon conversion of each share of Class A Preferred in accordance with the
provisions of Section 4 below.
(v) No shares of Class A Preferred may be
redeemed until all shares of Class B Preferred have been redeemed if the holders
of Series B Preferred have elected to be redeemed in accordance with Section
3(a). If the funds of the Corporation legally available for redemption of the
Class A Preferred are insufficient to redeem the total shares of Class A
Preferred outstanding on the Class A Redemption Date, the Corporation shall
allocate those funds which are legally available for redemption in such a manner
so that the Corporation redeems the maximum possible number of whole shares of
Class A Preferred ratably among the holders thereof based upon the respective
redemption amounts due each holder of Class A Preferred. The shares of Class A
Preferred not so redeemed shall remain outstanding and shall be entitled to all
the powers, preferences and rights provided for herein. At any time thereafter
when additional funds of the Corporation are legally available for the
redemption of the Class A Preferred, such funds will immediately be used to
redeem the balance of the shares of the Class A Preferred which the Corporation
has become obligated to redeem on the Class A Redemption Date but which it has
not redeemed, and shall be allocated in accordance with this Section 3(b).
(vi) From and after the Class A Redemption Date,
unless there shall have been a default in payment of the Class A Redemption
Price, in which case all rights shall survive until so paid, all rights of the
holders of Class A Preferred (except the right to receive the Class A Redemption
Price subsequent to the Class A Redemption Date upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever.
4. Conversion. The holders of Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined (i) in the case of the Class A Preferred, by
dividing the Class A Original Purchase Price by the Class A Conversion Price,
determined as hereinafter provided, in effect on the date the certificate is
surrendered for conversion, (ii) in the case of the Class B1 Preferred, by
dividing the Class B1 Original Purchase Price by the Class B1 Conversion Price,
determined as hereinafter provided, in effect on the date the certificate is
surrendered for conversion and (iii) in the case of the Class B2 Preferred, by
dividing the Class B2 Original Purchase Price by the Class B2 Conversion Price,
determined as hereinafter provided, in effect on the date the certificate is
surrendered for conversion. The initial Class A Conversion Price per share for
shares of Class A Preferred Stock shall be $0.4703, the initial Class B1
Conversion Price per share for
-8-
<PAGE> 9
shares of Class B1 Preferred Stock shall be the Class B1 Original Purchase
Price, and the initial Class B2 Conversion Price per share of Class B2 Preferred
Stock shall be the Class B2 Original Purchase Price; the Class A Conversion
Price, the Class B1 Conversion Price and the Class B2 Conversion Price shall be
referred to collectively as the "Conversion Prices"); provided, however, that
each such Conversion Price shall be subject to adjustment as set forth in
subsection 4(d) hereof.
(b) Automatic Conversion. Each share of Class A Preferred and
Class B Preferred shall automatically be converted into shares of Common Stock
at the Conversion Price at the time in effect for such share of Class A
Preferred and Class B Preferred immediately upon the earlier of (i) (except as
provided below in subsection 3(c)), the closing of the Corporation's sale of its
Common Stock in an underwritten public offering on form S-1 or SB-2 (or
successor forms) under the Securities Act of 1933, as amended (the "Act"),
yielding net proceeds to the Corporation in excess of twenty-five million
dollars ($25,000,000) at a per share price of at least $10.50 (as adjusted for
any stock splits, stock dividends, combinations, recapitalizations or the like)
(a "Qualified Offering") and (ii) the date specified upon the election to
convert all Class A Preferred and Class B Preferred, as the case may be, into
Common Stock by holders of at least a majority, as applicable, of the then
outstanding shares of Class A Preferred or Class B Preferred, voting on an
as-converted basis at a duly held meeting or by written consent or other
agreement.
(c) Mechanics of Conversion. Before any holder of Preferred
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
or deliver an appropriate indemnity agreement, at the office of this Corporation
or of any transfer agent for the Preferred Stock, and shall give written notice
to this Corporation at its principal corporate office, of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. This
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Act, the conversion, unless otherwise designated by the holder, will be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive
Common Stock upon conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for
Certain Splits and Combinations. The number and kind of securities issuable upon
the conversion of the Preferred Stock and the respective Conversion Prices shall
be subject to adjustment from time to time in accordance with the following
provisions:
(i) Certain Definitions. For purposes of this
Section 4:
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(A) The term "Additional Shares of Common
Stock" shall mean all shares of Common Stock issued, or deemed to be issued by
the Corporation pursuant to paragraph (vii) of this Section 4(d), after the date
of this Second Amended and Restated Certificate of Incorporation except (1)
shares of Common Stock issuable upon conversion of, or distributions with
respect to, the Class A Preferred issued by the Corporation, (2) shares of
Common Stock issuable upon conversion of, or distributions with respect to, the
Class B Preferred issued by the Corporation, (3) up to 3,250,000 shares (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) of Common Stock issuable upon the exercise of options granted to
officers, directors, consultants and employees of the Corporation under stock
option plans approved by the Board of Directors and the stockholders of the
Corporation ("Employee Plan Options"), (4) up to 150,000 shares of Common Stock
(as adjusted for any stock dividends, combinations or splits with respect to
such shares) issued to (or issuable upon the exercise of warrants granted to)
equipment lessors or financial institutions, (5) 1,167,422 shares of Common
Stock issuable upon the exercise of options (other than those provided in (3)
above) and warrants outstanding on the date of the initial issuance of the Class
B Preferred, and (6) up to 100,000 shares of Common Stock issued (or issuable
upon the exercise of warrants granted) with the approval of the Board of
Directors of the Corporation to existing option or warrant holders in return for
their agreeing to modify their existing rights.
(B) The term "Common Stock" shall be deemed
to mean the Common Stock, $.0001 par value, and the stock of the Corporation of
any class, or series within a class, whether now or hereafter authorized, which
has the right to participate in the distribution of either earnings or assets of
the Corporation without limit as to the amount. For purposes of this definition,
the Common Stock shall not include the Preferred Stock.
(C) The term "Convertible Securities" shall
mean any evidence of indebtedness, shares or other securities convertible into
or exchangeable for Common Stock.
(D) The term "Options" shall mean rights,
options or warrants to subscribe for, purchase or otherwise acquire Common Stock
or Convertible Securities.
(ii) Reorganization; Reclassification. In
the event of a reorganization, share exchange, or reclassification, other than a
Deemed Liquidation, a change in par value, or from par value to no par value, or
from no par value to par value or a transaction described in subsection (iv) or
(v) below, each share of Preferred Stock shall, after such reorganization, share
exchange or reclassification, be convertible into the kind and number of shares
of stock or other securities or other property of the Corporation which the
holder of Preferred Stock would have been entitled to receive if the holder had
held the Common Stock issuable upon conversion of such share of Preferred Stock
immediately prior to such reorganization, share exchange, or reclassification.
(iii) Consolidation, Merger. Without limiting
the provisions of Section (ii) above, in the event of a merger or consolidation
to which the Corporation is a party (other than a Deemed Liquidation), each
share of Preferred Stock shall, after such merger or consolidation, be
convertible into the kind and number of shares of stock and/or other securities,
cash or other property which the holder of such share of Preferred Stock would
have been entitled to receive if the holder had held the Common Stock issuable
upon conversion of such share of Preferred Stock immediately prior to such
consolidation or merger.
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<PAGE> 11
(iv) Subdivision or Combination of Shares. In
case outstanding shares of Common Stock shall be subdivided, the Conversion
Prices shall be proportionately reduced as of the effective date of such
subdivision, or as of the date a record is taken of the holders of Common Stock
for the purpose of so subdividing, whichever is earlier. In case outstanding
shares of Common Stock shall be combined, the Conversion Prices shall be
proportionately increased as of the effective date of such combination, or as of
the date a record is taken of the holders of Common Stock for the purpose of so
combining, whichever is earlier.
(v) Stock Dividends. In case shares of Common
Stock are issued as a dividend or other distribution on the Common Stock (or
such dividend is declared), then the Conversion Prices shall be adjusted, as of
the date a record is taken of the holders of Common Stock for the purpose of
receiving such dividend or other distribution (or if no such record is taken, as
at the earliest of the date of such declaration, payment or other distribution),
to that price determined by multiplying the Conversion Prices in effect
immediately prior to such declaration, payment or other distribution by a
fraction (i) the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to the declaration or payment of such
dividend or other distribution, and (ii) the denominator of which shall be the
total number of shares of Common Stock outstanding immediately after the
declaration or payment of such dividend or other distribution. In the event that
the Corporation shall declare or pay any dividend on the Common Stock payable in
any right to acquire Common Stock for no consideration, then the Corporation
shall be deemed to have made a dividend payable in Common Stock on an amount of
shares equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock. For purposes of the formula expressed in this
Section 4(d)(v), all shares of Common Stock issuable upon the exercise of
outstanding Options or issuable upon the conversion (at the Conversion Prices in
effect immediately before such determinations) of the Preferred Stock or
outstanding Convertible Securities (including Convertible Securities issued upon
the exercise of outstanding Options), shall be deemed outstanding shares of
Common Stock.
(vi) Issuance of Additional Shares of Common
Stock. If the Corporation shall issue any Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Section 4(d)(vii) below) after the date of this Second Amended and Restated
Certificate of Incorporation (other than as provided in the foregoing paragraphs
4(d)(ii), (iii), (iv) or (v)), for no consideration or for a consideration per
share less than the respective Conversion Prices in effect on the date of and
immediately prior to such issue, then in such event, the respective Conversion
Prices shall be adjusted, concurrently with such issue, to those prices
determined by multiplying each Conversion Price theretofore in effect by a
fraction (i) the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of shares of
Common Stock which the aggregate consideration received by the Corporation for
the total number of Additional Shares of Common Stock so issued would purchase
at such Conversion Price in effect immediately prior to such issue, and (ii) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued. For purposes of the formula expressed in this
Section (vi), all shares of Common Stock issuable upon the exercise of
outstanding Options or issuable upon the conversion (at the Conversion Prices in
effect immediately before such determinations) of the Preferred Stock or
outstanding Convertible Securities (including Convertible
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<PAGE> 12
Securities issued upon the exercise of outstanding Options), shall be deemed
outstanding shares of Common Stock.
(vii) Deemed Issue of Additional Shares of
Common Stock. In the event the Corporation at any time or from time to time
after the date of this Second Amended and Restated Certificate of Incorporation
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities then entitled to receive
any such Options or Convertible Securities, then the maximum number of shares of
Common Stock issuable upon the exercise of such Options, or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
(subject to the exceptions thereto) issued as of the time of such issue of
Options or Convertible Securities or, in case such a record date shall have been
fixed, as of the close of business on such record date, provided that in any
such case in which Additional Shares of Common stock are deemed to be issued:
(A) no further adjustments in the Conversion
Prices shall be made upon the subsequent issue of Convertible Securities or
shares of Common Stock upon the exercise of such Options or the issue of Common
Stock upon the conversion or exchange of such Convertible Securities on the
original terms therefor; and
(B) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any decrease in the consideration payable to the Corporation, or increase in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Prices computed upon the original issuance of
such Options or Convertible Securities (or upon the occurrence of a record date
with respect thereto), and any subsequent adjustments based thereon, upon any
such decrease or increase becoming effective, shall be recomputed to reflect
such decrease or increase if it would result in a reduction of the Conversion
Prices (provided, however, that no such adjustment of the Conversion Prices
shall affect Common Stock previously issued upon conversion of the Preferred
Stock).
(viii) Determination of Consideration. For
purposes of this Section 4, the consideration received by the Corporation for
the issue of any Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property. Such consideration
shall:
(i) insofar as it consists of cash,
be the aggregate amount of cash received by the Corporation; and
(ii) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
the issue, as determined by nationally reputable independent public accounting
firm (an "Accounting Firm"), other than the accounting firm then engaged as the
Corporation's independent auditors, agreed upon by the Corporation on the one
hand and the holders of a majority of the outstanding shares of Preferred Stock
on the other hand. If the Corporation on the one hand and the holders of a
majority of the outstanding shares of Preferred Stock on the other hand cannot
agree on a mutually acceptable Accounting Firm within 30 days of
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the date the adjustment is to be made to the Conversion Prices hereunder, each
of the Corporation on the one hand and such holders on the other hand shall
select an Accounting Firm and such Accounting Firms shall within 3 days appoint
a mutually acceptable third Accounting Firm (other than the Accounting Firm then
engaged as the Corporation's independent auditors) which shall compute the fair
value of the consideration and such computation shall be final and binding. For
purposes of determining the fair value, consideration in the nature of services
shall be deemed of no value.
(B) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to paragraph (g) above,
relating to Options and Convertible Securities, shall be the minimum aggregate
amount of additional consideration (as set forth in the instruments relating
thereto) payable to the Corporation upon the exercise of such Options and the
conversion or exchange of such Convertible Securities (as the case may be),
including the amounts received by the Corporation as consideration for the issue
of such Options or Convertible Securities.
(ix) Other Provisions Applicable to
Adjustment Under this Section. The following provisions will be applicable to
the adjustments in Conversion Prices as provided in this Section 4:
(A) Treasury Shares. The number of shares
of Common Stock at any time outstanding shall not include any shares thereof
then directly or indirectly owned or held by or for the account of the
Corporation. For purposes of this Section 4, the sale or other disposition of
any Common Stock of the Corporation theretofore held in its treasury shall,
unless otherwise set forth herein, be deemed to be an issuance thereof.
(B) Notices of Adjustments. Whenever the
Conversion Prices are adjusted as herein provided, an officer of the Corporation
shall compute the adjusted Conversion Prices in accordance with the foregoing
provisions and shall prepare a written certificate setting forth such adjusted
Conversion Prices and showing in detail the facts upon which such adjustment is
based, and such written instrument shall promptly be delivered to the record
holders of the Preferred Stock.
(x) Special Class B1 Conversion Price
Adjustment.
(A) Notwithstanding the other provisions
of this Section 4(d) but subject to paragraph (D) below, in the event that on or
prior to April 20, 2001, (i) the Corporation has not consummated its initial
public offering at a price per share greater than or equal to $15.00 (as
adjusted for any stock splits, stock dividends, combinations, recapitalizations
or the like) or (ii) a Liquidity Event has not occurred pursuant to which the
per share consideration received in such Liquidity Event is greater than or
equal to $15.00 (as adjusted for any stock splits, stock dividends,
combinations, recapitalizations or the like), the initial Class B1 Conversion
Price shall be adjusted to $5.00 (which is subject to further adjustment as set
forth in Section (C) below).
For purposes of the foregoing, the amount of any consideration other than cash
paid or payable in connection with a Liquidity Event shall be determined as
provided in Section 4(d)(viii) hereof.
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<PAGE> 14
(B) A "Liquidity Event" means a bona fide offer by
the Corporation to acquire the outstanding shares of Class B1 Preferred (whether
in connection with a bona fide direct offer made generally to all the holders of
the Class B Preferred or negotiation for or consummation of a merger or
consolidation of the Corporation or the sale of assets of the Corporation
(provided that the net proceeds of any such asset sale shall be distributed
promptly following such asset sale)).
(C) In the event that the initial Class B Conversion
Price is adjusted pursuant to this Section 4(d)(x), then, at such time,
the adjusted Class B1 Conversion Price shall be further adjusted retroactively,
but without duplication, for (i) any issuance of Additional Shares of Common
Stock since the first issuance of Class B Preferred (including Additional Shares
of Common Stock deemed to be issued pursuant to Section 4(d)(vii) above) and
(ii) any event of the type set forth in Section 4(d)(iv) and (v) occurring since
the time of the first issuance of the Class B1 Preferred Stock. This adjustment
shall be made, without duplication, by applying to the adjusted Class B1
Conversion Price the provisions of subsections 4(d)(iv) through 4(d)(vii) as
though such adjusted Conversion Price had been in effect at the time of the
first issuance of Class B1 Preferred. The provisions of subsections 4(d)(ii) and
4(d)(iii) shall also be applied or reapplied, without duplication, as though the
adjusted Conversion Price had been in effect at the time of the first issuance
of Series A Preferred Stock.
(D) No adjustment to the Class B1 Conversion Price
shall be made pursuant to subsection (A) above if (i) with respect to an
individual holder of Class B1 Preferred, there shall be a bona fide offer to the
holders of the Class B1 Preferred (whether made directly to such stockholders or
in the form of a merger or consolidation of the Corporation) to acquire their
shares of Class B1 Preferred at a per share price of at least $15.00 per share
(as adjusted for any stock splits, stock dividends, combinations,
recapitalizations or the like) and such stockholder does not approve or accept
such a bona fide acquisition offer or (b) with respect to all holders of the
Class B1 Preferred, if the holders of Class B Preferred are required to approve
such transaction pursuant to Section 5(a) hereof or pursuant to applicable law
and such stockholders do not approve such a bona fide offer.
5. Voting Rights.
(a) Preferred Stock. Each holder of shares of Preferred Stock
shall be entitled to notice of any stockholder meeting in accordance with the
Bylaws of the Corporation, shall be entitled to a number of votes equal to the
number of shares of Common Stock into which the shares of Preferred Stock held
by such holder could then be converted, shall have voting rights and powers
equal to the voting rights and powers of the holders of Common Stock, and shall
vote together as a single class with holders of Common Stock and all series of
Preferred Stock on all matters except as expressly required by law. Fractional
votes shall not be permitted, and any fractional voting rights resulting from
the right of any holder of Preferred Stock to vote on an as converted basis
(after aggregating the shares into which all shares of Preferred Stock held such
holder could be converted) shall be rounded to the nearest whole number (with
one-half being rounded upward). The holders of Preferred Stock shall have no
separate class or series vote on any matter except as expressly required by law
and except as follows:
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<PAGE> 15
(i) Class A Preferred. The Corporation shall
not, without first obtaining the vote of more than 50% of the outstanding shares
of Class A Preferred, voting together as a class:
(A) declare or pay dividends on the Common
Stock (unless the Corporation has paid all dividends on the Preferred Stock) or
repurchase any Common Stock (except for the repurchase of up to $1,000,000
annually of Common Stock or Common Stock equivalents held by former employees of
the Corporation);
(B) authorize or effect any liquidation or
winding up of the Corporation;
(C) authorize or effect any sale of all or
substantially all of the assets of the Corporation or any merger or
consolidation of the Corporation;
(D) issue any equity security pari passu or
senior or superior in any manner to the Class A Preferred;
(E) authorize the reclassification of any
outstanding shares of the Corporation's capital stock into shares having
preference or priority as to dividends or assets senior to or on parity with the
preference or priority of the Class A Preferred; or
(F) amend the Corporation's Certificate of
Incorporation or Bylaws in a manner that adversely affects the rights of the
Class A Preferred Stock.
(ii) Class B Preferred. The Corporation shall
not, without first obtaining the vote of more than 50% of the outstanding shares
of Class B Preferred, with the Class B1 Preferred and Class B2 Preferred voting
together as a single class (except that the Class B1 Preferred or Class B2
Preferred, as the case may be, shall vote separately as a sub-class with respect
to any of the following actions in the event that such action affects such
separate sub-class in a manner materially and adversely different from the other
such sub-class):
(A) declare or pay dividends on the Common
Stock (unless the Corporation has paid all dividends on the Preferred Stock) or
repurchase any Common Stock (except for the repurchase of up to $1,000,000
annually of Common Stock or Common Stock equivalents held by former employees of
the Corporation);
(B) authorize or effect any liquidation or
winding up of the Corporation;
(C) authorize or effect any sale of all or
substantially all of the assets of the Corporation or any merger or
consolidation of the Corporation;
(D) issue any equity security pari passu or
senior or superior in any manner to the Class B Preferred;
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<PAGE> 16
(E) authorize the reclassification of any
outstanding shares of the Corporation's capital stock into shares having
preference or priority as to dividends or assets senior to or on parity with the
preference or priority of the Class B Preferred; or
(F) amend the Corporation's Certificate of
Incorporation or Bylaws in a manner that adversely affects the rights of the
Class B Preferred Stock.
(b) Election of Directors. For so long as twenty-five percent
(25%) or more of the originally issued shares of the Class A Preferred remains
outstanding, the holders of the outstanding Class A Preferred, voting separately
as a class, shall be entitled to elect two (2) directors to the Board of
Directors (the "Class A Directors"), and for so long as twenty-five percent
(25%) or more of the originally issued shares of the Class B Preferred remains
outstanding, the holders of the outstanding Class B Preferred, voting separately
as a class, shall be entitled to elect two (2) directors to the Board of
Directors (the "Class B Directors"). At any meeting held for the purpose of
electing or removing directors, the presence in person or by proxy of the
holders of a majority of the shares of Class A Preferred then outstanding shall
constitute a quorum of the Class A Preferred for the purpose of electing or
removing directors by holders of the Class A Preferred and the presence in
person or by proxy of the holders of a majority of the shares of Class B
Preferred then outstanding shall constitute a quorum of the Class B Preferred
for the purpose of electing or removing directors by holders of the Class B
Preferred. A vacancy in any directorship elected solely by the holders of the
Class A Preferred or Class B Preferred shall be filled only by vote or written
consent in lieu of a meeting of the holders of the Class A Preferred or Class B
Preferred, as the case may be. Any member of the Board of Directors elected
solely by the holders of the Class A Preferred or Class B Preferred (i) may only
be removed by the vote of the holders of not less than a majority of the shares
of Class A Preferred or Class B Preferred Stock, as the case may be, voting
thereon, and (ii) may call a meeting of the Board of Directors or the
stockholders of the Corporation by notice to the president or any secretary of
the Corporation.
(c) Other Restrictions. Without the consent of at least one
(1) Class A Director and one (1) Class B Director, the Corporation will not, and
will not enter into any agreement to:
(i) Incur any indebtedness in excess of
$1,000,000;
(ii) Approve any amendments to the Corporation's
stock option plans (other than clarifying amendments);
(iii) Engage, directly or indirectly, in any
loans, leases, contracts or other transactions with any director, officer, key
employee or greater than ten percent (10%) stockholder of the Corporation, or
any member of such person's immediate family, including the parents, spouse,
children and other relatives of any such person or any affiliate of any of them;
(iv) Acquire stock or assets (by purchase, merger
or otherwise) of any third party for consideration in excess of $5,000,000; or
(v) Sell, transfer, lease, license or otherwise
dispose of all or substantially all of the assets of the Corporation.
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<PAGE> 17
6. Status of Converted Preferred Stock. In the event any shares of
Preferred Stock shall be converted pursuant to Section 4, the shares so
converted shall be canceled and shall not thereafter be issuable by the
Corporation. The Second Amended and Restated Certificate of Incorporation of
this Corporation shall be appropriately amended to effect the corresponding
reduction in the Corporation's authorized capital stock.
C. Rights, Preferences, Privileges and Restrictions of Common Stock.
The rights, preferences, privileges and restrictions granted to and imposed upon
the Common Stock are as set forth below in this Article IV(C).
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 hereof.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall have
the right to one (1) vote, shall be entitled to notice of any stockholder
meeting in accordance with the Bylaws of this Corporation, and shall be entitled
to vote upon such matters and in such manner as is otherwise provided herein or
as may be provided by law.
ARTICLE V.
The Board of Directors of the Corporation is authorized to adopt, amend
or repeal the bylaws of the Corporation in the manner provided in the bylaws of
the Corporation.
ARTICLE VI.
To the fullest extent permitted by the DGCL as presently in effect or
as it may hereafter be amended, a director of the Corporation shall not be
liable to the Corporation or its stockholders for monetary damages resulting
from a breach of his or her fiduciary duty as a director.
ARTICLE VII.
The Corporation reserves the right to amend, alter or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereafter prescribed by statute, and all rights of stockholders herein are
subject to this reservation.
* * *
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<PAGE> 18
The foregoing Fourth Amended and Restated Certificate of Incorporation
has been duly adopted by the Corporation's directors and stockholders in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
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<PAGE> 19
IN WITNESS WHEREOF, the undersigned has executed this certificate on
March 17, 2000.
MEDSITE.COM, INC.
By: /s/ Sundeep Bhan
Sundeep Bhan, President
Attest:
/s/ Gregory W. Scott
Gregory W. Scott, Chief Financial Officer
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<PAGE> 1
Exhibit 23.1
CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 31, 2000 (except for Note 15, as to which the
date is May , 2000), in Amendment No. 1 to the Registration Statement (Form
S-1 No. 333-30636) and related Prospectus of Medcite.com, Inc. for the
registration of 9,200,000 shares of its common stock.
Ernst & Young LLP
New York, New York
The foregoing consent is in the form that will be signed upon the stock
split having been effected as described in Note 15 to the financial statements.
/s/ Ernst & Young LLP
New York, New York
April 4, 2000
<PAGE> 1
EXHIBIT 23.1a
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the captions "Experts" in this
registration statement on Form S-1 and related prospectus of Medsite.com, Inc.
for the registration of shares of its common stock and to the use in this
Registration Statement Form S-1 of our report dated August 13, 1999, with
respect to the financial statements of Total Health Products, Inc. as of
December 31, 1998 and for the years ended December 31, 1998 and 1997.
/s/ Amper, Politziner & Mattia P.A.
------------------------------------
AMPER, POLITZINER & MATTIA P.A.
April 4, 2000
Edison, New Jersey
