<PAGE>
As filed with the Securities and Exchange Commission on July 20, 2000
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ADESSO HEALTHCARE TECHNOLOGY SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
California 7374 94-3228382
(before reincorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
Delaware
(after reincorporation)
(State or other jurisdiction of
incorporation or organization)
</TABLE>
2835 Zanker Road
San Jose, California 95134
(408) 894-7700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Brian K. Barnard
President and Chief Executive Officer
Adesso Healthcare Technology Services, Inc.
2835 Zanker Road
San Jose, California 95134
(408) 894-7700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
Michael J. Danaher Frederick W. Kanner
Richard L. Picheny Dewey Ballantine LLP
Wilson Sonsini Goodrich & Rosati 1301 Avenue of the Americas
Professional Corporation New York, New York 10019
650 Page Mill Road (212) 259-8000
Palo Alto, California 94304
(650) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Amount of
Title of Each Class of Securities to be Registered Aggregate Offering Price(1)(2) Registration Fee
<S> <C> <C>
Common Stock $0.0001 per share.............................. $50,000,000 $13,200
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares being registered and the proposed maximum offering price per share
are not included in this table.
(2) Estimated solely for the purpose of calculating the registration fee.
------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
The information in this preliminary 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 preliminary
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
PRELIMINARY PROSPECTUS Subject to completion July 20, 2000
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Shares
[ADESSO Logo]
Common Stock
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This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock. We expect the public offering
price to be between $ and $ per share.
The Nasdaq National Market has approved our common stock for quotation under the
symbol "ADSO."
Before buying any shares, you should read the discussion of material risks of
investing in our common stock in "Risk factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
Per share Total
<S> <C> <C>
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to Adesso $ $
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</TABLE>
The underwriters may also purchase up to shares of common stock from us at
the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. The underwriters may exercise
this option only to cover over-allotments, if any. If the underwriters exercise
the option in full, the total underwriting discounts and commissions will be
$ , and the total proceeds, before expenses, to us will be $ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about ,
2000.
UBS Warburg LLC
CIBC World Markets
U.S. Bancorp Piper Jaffray
<PAGE>
Through and including , 2000 (the 25th day after commencement of
this offering), federal securities law may require all dealers selling shares of
our common stock, whether or not participating in this offering, to deliver a
prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary..................... 3
The offering........................... 7
Summary financial and operating data... 8
Risk factors........................... 9
Forward-looking information............ 20
Use of proceeds........................ 21
Dividend policy........................ 21
Capitalization......................... 22
Dilution............................... 23
Selected financial data................ 25
Management's discussion and analysis of
financial condition and results of
operations............................ 26
Business............................... 33
Management............................. 45
Related party transactions............. 54
Principal stockholders................. 56
Description of capital stock........... 58
Shares eligible for future sale........ 62
Underwriting........................... 64
Legal matters.......................... 66
Experts................................ 66
Where you can find more information.... 66
Index to financial statements.......... F-1
</TABLE>
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<PAGE>
Prospectus summary
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock which we discuss under "Risk factors." We were incorporated
in California in May 1995. We intend to reincorporate in Delaware prior to the
completion of this offering. Our principal executive offices are located at
2835 Zanker Road, San Jose, California 95134. Our telephone number is
(408) 894-7700. Our website is http://www.adessohts.com. We do not intend the
information found on our website to be a part of this prospectus and our website
may not contain all of the information that is important to you.
OUR BUSINESS
We provide proprietary applications designed to address problems facing
healthcare payors by improving physician reimbursement systems and enabling more
efficient management of healthcare resources. Our applications combine
information technology, actuarial science and Internet-based data delivery tools
to create compensation systems designed to align the incentives of health plans
and specialty physicians, restore physician autonomy and ultimately improve the
efficiency of the healthcare delivery system. We host payment applications that
employ scientific methodologies and severity-adjusted patient data to determine
appropriate physician reimbursement on what is commonly referred to as a case
rate method. Additionally, we use our unique database to generate profiling
reports on physicians and pharmaceutical treatment patterns and outcomes.
We currently sell our payment applications, Internet-based information and data
evaluation products to managed care plans, health plans and physician groups. We
market our profiling applications to these customers as well as pharmaceutical
manufacturers. Our major customers are Aetna US Healthcare, Highmark Blue Cross
Blue Shield, Humana, Novartis, UnitedHealthCare and Prudential HealthCare. We
also provide our services to multiple managed care organizations. To date, we
are generating revenues from contracts with nine health plans and one hospital
group.
The cornerstone of our solution is the Adesso Severity-Adjusted Case Rate
Application, or ASAC. This application uses a sophisticated payment algorithm to
generate a case rate that reflects the complexity and critical nature of the
patient's condition as determined by the variables of a patient's age, sex,
diagnosis, type of medical facility, procedural frequency and other demographic
and medical information. This severity-adjusted case rate is applied throughout
the duration of that patient's treatment. ASAC allocates limited medical
resources to patients with the most critical medical conditions. As a result,
specialty physicians are paid appropriately for their caseload and are empowered
to make all medical decisions based on their patient's medical condition without
intrusive and expensive third-party administrative interference. We believe that
ASAC allows our healthcare payor customers to:
- predict, measure and control healthcare delivery costs in medical
specialties more effectively;
- contain specialty costs and lower facility spending in the 14 specialties
that we believe drive over 80% of medical, professional, hospital and
pharmacy costs;
- eliminate the need for utilization management and restore physician
autonomy, while lowering health plan administrative costs;
- compensate physicians for providing appropriate patient care, while removing
incentives for inefficient and unnecessary treatment; and
3
<PAGE>
- outsource physician compensation systems for a monthly fee and avoid high
up-front costs and the extensive use of internal information technology
resources.
We have built and are continuing to expand what we believe is one of the most
extensive profiling databases that contains detailed information on patient
condition, including diagnosis, severity, age, sex and location, as well as
medical treatment and outcome data. We believe this database allows us to create
unique profiling reports on physician practices and pharmaceutical efficacy. Our
eClinician Profiler and ePrescription Profiler give specialty physicians monthly
feedback on key measures of performance relative to their specialty colleagues
and demonstrate to our health plan customers the advantages of reimbursing
physicians with ASAC. eClinician Profiler and ePrescription Profiler can be
accessed through our 14 specialty-specific Internet portals and provide tools
that our customers can use to promote physician behavior change. We believe our
Internet websites will become important destinations for specialty physicians to
retrieve current economic and medical practice pattern information generated by
our applications.
INDUSTRY BACKGROUND
The healthcare sector is one of the largest industries in the United States.
Each year the United States allocates significant resources for healthcare
services. The US Health Care Finance Administration, or HCFA, estimates that
healthcare expenditures are expected to increase from approximately
$1.3 trillion, or 15% of the estimated US gross domestic product in 2000, to
approximately $2.2 trillion in 2008. Population growth, increased access to
healthcare, technological advances and an aging population have fueled the
growth in healthcare expenditures.
The government and other healthcare consumers are placing increasing pressure on
the industry to improve the quality and cost-effectiveness of healthcare. To
achieve this goal, health plans have primarily focused on gaining price
concessions from providers and suppliers and limiting access to healthcare
products and services. Recently, consumers, providers and policymakers have
begun to question the effectiveness of this managed care approach. Patients and
their employers have expressed dissatisfaction with escalating health plan
premiums and restrictive processes designed to limit physician choice and access
to healthcare services. Physicians and patients have expressed concern that
managed care has led to a decline in the quality of patient care and has
increased administrative inefficiencies.
We believe that antiquated, nonscientific physician compensation systems and
inadequate use of information technology are among the major causes of the
current inefficiencies in the healthcare industry.
COMPENSATION MODELS
Fee-for-service
Currently, the vast majority of specialty physicians are reimbursed under a
fee-for-service compensation model. Under fee-for-service, a physician is paid a
predetermined fee for providing a service. For example, if the reimbursement for
one x-ray is $50, the reimbursement for ten x-rays would be $500. Under this
compensation model, physicians are reimbursed based upon the quantity of
services performed. In order to increase their compensation under this model,
physicians must increase the quantity of services performed. These increases in
procedures under quantity-based fee-for-service compensation models are often
unnecessary based on the patient's diagnosis and may lead to wasted medical,
professional, hospital and pharmacy resources. Furthermore, unnecessary
procedures often put patients under greater risk of complications related to the
additional procedures.
4
<PAGE>
To control fee-for-service medical expenses, healthcare payors have used the
following cost containment programs:
- gatekeeping, a process requiring the patient to consult with a primary care
physician prior to receiving care from a specialty physician;
- prior authorization, a process requiring the patient or physician to seek
prior approval from the health plan or physician group for a prescribed
course of treatment;
- utilization management, a process of introducing a third-party clinician,
designed to direct or manage the treatment prescribed by the physician; and
- limited physician networks, a method of restricting a patient's choice of
physician for medical services.
In attempting to reduce costs, these programs create barriers, limit patient
choice, reduce physician autonomy and significantly increase administrative
expenses.
Case rates
In response to the inherent inefficiencies in the fee-for-service model, and in
an attempt to encourage physicians to practice more efficiently, healthcare
payors developed case rate compensation systems. Under the case rate
compensation method, the payor makes a predetermined lump-sum payment to the
physician for all services that the physician is likely to deliver over the
course of treatment for a particular diagnosis. To date, case rate compensation
has been limited to certain diagnoses such as normal pregnancy, where the range
and extent of medical treatment is highly predictable due to the uniform patient
population.
OUR SOLUTION
Our solution enables the widespread use of case rates to determine physician
reimbursement in the 14 medical specialties that we believe drive over 80% of
healthcare spending. Our ASAC application uses information technology,
innovative actuarial algorithms and our unique database of patient information
to create customized, severity-adjusted case rates. Our profiling applications
provide healthcare administrators and physicians with the critical information
they need to understand clinical utilization, resource usage, financial payments
and to make sound management decisions. Additionally, we facilitate the sharing
of clinical information among healthcare constituents on a community-by-
community basis. We believe our solutions improve our customers' business
performance by simplifying medical cost structures and the sharing of
information among healthcare industry constituents.
OUR STRATEGY
Our objective is to make ASAC the standard reimbursement tool for health plans
throughout the United States and to use our unique database to provide profiling
applications used for the measurement of physician performance and
pharmaceutical treatment patterns and outcomes. The key elements to our strategy
include the following:
- expand sales of our payment application to existing customers;
- target new customers for our payment applications;
- promote our profiling applications;
- continue development and enhancement of our products; and
- pursue strategic relationships and acquisitions.
5
<PAGE>
Adesso-Registered Trademark- and SSO-Registered Trademark- are registered
service marks, and the Adesso logo, ASAC-TM-, eClinician Profiler-TM- and
ePrescription Profiler-TM- are trademarks of Adesso Healthcare Technology
Services, Inc. This prospectus also contains brand names, trademarks, trade
names and service marks of companies other than Adesso, and these brand names,
trademarks, trade names and service marks are the property of their respective
holders.
6
<PAGE>
The offering
The following information assumes that the underwriters do not exercise the
over-allotment option granted to them to purchase additional shares in the
offering.
<TABLE>
<S> <C>
Common stock we are offering................. shares
Common stock to be outstanding after the shares
offering...................................
Proposed Nasdaq National Market symbol....... ADSO
Use of proceeds.............................. To fund our operations, including sales and
marketing expenditures, development of new
products and services, investment in
technology infrastructure, potential
acquisitions, debt repayment, working capital
and other general corporate purposes. See
"Use of proceeds."
Risk factors................................. Investing in our common stock involves
significant risks. See "Risk factors."
</TABLE>
Unless we indicate otherwise, when analyzing the information in this prospectus,
you should assume that all outstanding shares of our preferred stock convert
into 4,397,272 shares of our common stock upon the closing of this offering.
The number of shares of common stock to be outstanding after the offering in the
table above is based on the number of shares outstanding as of June 30, 2000,
excluding:
- 1,225,250 shares issuable upon the exercise of options at a weighted average
exercise price of $3.03 per share;
- 135,615 shares issuable upon the exercise of Series A warrants at an
exercise price of $1.00 per share;
- 166,667 shares of Series D Preferred Stock issuable upon the exercise of a
purchase option by Comdisco, Inc. prior to the closing of our initial public
offering, at an exercise price of $10.50 per share;
- 104,167 shares of Series E Preferred Stock issuable upon the exercise of a
supplemental purchase option by Comdisco, Inc. prior to the closing of our
initial public offering, at an exercise price of $16.80 per share;
- 264,502 additional shares available for future grant under our 1997 Stock
Option Plan;
- additional shares available for future grant under our 2000 Stock
Option Plan;
- additional shares available for future purchase under our 2000
Employee Stock Purchase Plan; and
- 416,667 shares potentially issuable to Total Therapeutic Management, Inc.,
or TTM, in connection with our acquisition of TTM, if TTM meets specified
performance criteria by May 1, 2001.
In addition, we have agreed to issue an additional shares if the
underwriters exercise their over-allotment option in full, which we describe in
"Underwriting". If the underwriters exercise this option in full, shares
of our common stock will be outstanding after this offering.
7
<PAGE>
Summary financial and operating data
The pro forma balance sheet data below reflects the conversion of each
outstanding share of redeemable convertible preferred stock into one share of
common stock upon the closing of this offering.
The as adjusted balance sheet data reflects the receipt of the net proceeds from
the sale of shares of our common stock in this offering at an assumed
price to the public of $ per share, after deducting the underwriting discounts
and commissions and estimated offering expenses. The pro forma net loss per
share and shares used in computing pro forma net loss per share are calculated
as if all of our redeemable convertible preferred stock were converted into
shares of our common stock on the date of their issuance.
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
------------------------------ -------------------
1997 1998 1999 1999 2000(a)
(In thousands, except per share data)
(unaudited)
Statement of operations data
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<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 861 $ 1,828 $ 1,987 $ 903 $ 1,799
Operating costs and expenses:
Cost of services..................................... 3,967 4,230 1,565 614 1,370
Sales and marketing.................................. 600 695 710 301 671
General and administrative........................... 3,181 4,593 3,519 1,350 2,721
Stock-based compensation............................. 6 11 2,276 565 3,198
------- ------- ------- ------- -------
Total operating costs and expenses..................... 7,754 9,529 8,070 2,830 7,960
------- ------- ------- ------- -------
Loss from operations................................... (6,893) (7,701) (6,083) (1,927) (6,161)
Interest income (expense), net......................... 180 293 (569) (50) (1,722)
Other income (expense), net............................ -- 191 (221) (2) (30)
------- ------- ------- ------- -------
Net loss............................................... (6,713) (7,217) (6,873) (1,979) (7,913)
Dividend related to beneficial conversion feature of
redeemable, convertible preferred stock.............. -- -- -- -- (1,025)
------- ------- ------- ------- -------
Net loss attributable to common stockholders........... (6,713) (7,217) (6,873) (1,979) (8,938)
======= ======= ======= ======= =======
Net loss per common share, basic and diluted........... $(31.67) $(30.07) $(23.78) $ (6.87) $(30.71)
======= ======= ======= ======= =======
Weighted average shares used in computing net loss per
share, basic and diluted............................. 212 240 289 288 291
======= ======= ======= ======= =======
Pro forma net loss per share, basic and diluted
(unaudited).......................................... $ (1.66) $ (2.06)
======= =======
Shares used in computing pro forma net loss per share,
basic and diluted (unaudited)........................ 4,151 4,345
======= =======
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000(b)
-----------------------------------
Pro Pro forma
Actual forma as adjusted
(In thousands)
(unaudited)
-------------------------------------------------------------------------------------------------
Balance sheet data
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 1,943 $ 1,943
Working capital............................................. 932 932
Total assets................................................ 24,235 24,235
Long-term debt, less current portion........................ 2,334 2,334
Accumulated deficit......................................... (32,175) (32,175)
Redeemable convertible preferred stock...................... 37,897 --
Total stockholders' equity (deficit)........................ (19,871) 18,026
</TABLE>
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(a) Included in the income statement for the six months ended June 30, 2000, are
two months of results from our subsidiary TTM, acquired on May 1, 2000.
Revenue from TTM for the two months since acquisition totals $595,000.
(b) Included in the balance sheet as at June 30, 2000, are the assets and
liabilities of our subsidiary TTM as of June 30, 2000. The accumulated
deficit includes the results of TTM for the two months since acquisition of
$(8,000).
8
<PAGE>
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Risk factors
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF THE
OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATION COULD BE HARMED. IN SUCH AN EVENT, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
If the healthcare industry fails to adopt our products and services, our revenue
growth and operating results could be harmed.
The failure of industry participants to accept our products and services as a
replacement for traditional methods of compensation and profiling could limit
our revenue growth. To date, the healthcare industry has not widely adopted our
products. The commercial success of our products depends on their adoption as a
method of determining physician reimbursement and for physician and
pharmaceutical profiling. We must educate health plan administrators, physicians
and other healthcare providers about the benefits of our applications in order
to foster the adoption of our products. If healthcare industry participants do
not understand, accept and adopt our methodology and applications, our revenues
will not continue to grow and we may not become profitable.
Our customers and revenue growth opportunities within the healthcare industry
are highly concentrated. If we are unable to sell our products and services to
major health plans in the healthcare industry, our revenues and operating profit
will be harmed.
Within the healthcare industry approximately 650 health plans provide healthcare
benefits to over 70% of the US population. Our ability to sell to these health
plans will have a direct impact on our ability to increase our revenues. If we
are unable to sell our applications for multiple specialties in several cities
to many of the national and large regional health plans, we may not be able to
increase our revenues and operating profits.
If prospective customers do not purchase our products and services after we have
devoted significant resources and incurred substantial costs during the course
of our lengthy sales cycle, our profitability will suffer.
Due to the length of our sales cycle, which generally ranges from three to
twelve months, we often devote significant resources and incur substantial costs
without any assurance that a prospective customer will contract for our products
or services. The time, expense and effort of securing customers may exceed our
expectations and may harm our business and operating results. In the event that
a prospective customer does not contract for our products or services, we will
have incurred substantial costs that cannot be recovered and will not result in
future revenues or profits.
If we fail to manage our growth effectively, our business and operating results
could be harmed.
Continued rapid growth will place significant strain upon our management,
resources and operational systems. If we fail to manage our growth effectively
our business and operating results could be harmed. We will need to expand our
existing information systems and add implementation personnel to meet the
requirements of our future operations. Any expansion or replacement of our
information
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9
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Risk factors
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systems may not be sufficient to meet our needs. Recruiting, training and
managing additional personnel could be difficult.
We recently hired a significant number of key management and staff personnel.
Since June 1999, we have hired over 50% of the current management team and over
60% of our current staff. We will continue to add personnel to maintain our
ability to grow in the future. We must integrate our new employees and key
executives into a cohesive team and at the same time increase the total number
of employees and train and manage our employee work force in a timely and
effective manner to expand our business. We may not be able to do so
successfully, which would hurt our ability to expand our business and harm our
operating results.
If we and our customers are unable to implement the applications we have sold,
our revenue growth and operating results could be harmed.
Our success depends on our ability to implement our products and services for a
large number of health plans with substantially different information systems
and varying business relationships with their physicians. The decision to
implement our products and services requires a technical analysis of the health
plan's information systems and proposed data interfaces with our systems, an
analysis of the health plan's physician contracting arrangements. Such
implementation may also require intensive health plan staff education regarding
the advantages of our products and services. Health plans implementing our
compensation applications could be required to recontract with their physicians.
Further, physicians compensated using our compensation applications will need to
adopt new payment reconciliation methods. Resistance to new processes related to
our products and services and difficulties or delays in implementing our
applications may inhibit the growth of our revenues and harm our operating
results.
If we fail to meet the performance standards in our contracts, we could lose
customers, which would harm our revenues and operating results.
Some of our agreements contain product and service performance standards. If we
fail to meet these standards, our revenues would be lower as a result of earning
smaller performance incentive payments. Our customers could terminate their
agreements with us for continued poor performance. If customers terminate any of
our material service agreements or if we fail to generate associated revenues,
our business and operating results would be harmed.
We have a limited number of customers and relatively fixed operating costs. Our
contracts can be cancelled upon 90 to 180 days' notice. If several contracts are
delayed or cancelled within a short period of time, our revenues and operating
profits could be harmed.
Our contracts with our customers typically have a one to three year term with
automatic one year renewals. We or our customers can terminate a contract prior
to the end of the contract term upon notification ranging from 90 to 180 days
without penalty. Our operating expenses are relatively fixed and cannot be
reduced on short notice to compensate for unanticipated contract delays or
cancellations. As a result, if any of our significant customers or a number of
our smaller customers cancel, significantly reduce or modify our business
relationships, our business, financial condition and operating results could be
harmed. As of June 30, 2000, we were providing services to approximately ten
different customers.
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10
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Risk factors
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If we are unable to attract, retain and motivate management and other skilled
employees, we will not be successful.
Our success will depend in large part on the continued services of key
management and skilled personnel. Competition for personnel in the healthcare
information technology market is intense, and there are a limited number of
persons with knowledge of both the healthcare and information technology
industries. We do not have guaranteed employment agreements with our executive
officers, so any of these individuals may terminate his or her employment with
us at any time. If we lose the services of one or more of our key management
employees, or are unable to hire additional key management personnel to meet our
needs, our business and operating results could be harmed.
We expect to further expand our operations, which will increase our needs for
skilled employees. Our continued ability to compete effectively in our business
depends on our ability to attract, retain and motivate these individuals. Our
failure to attract, retain and motivate employees may limit the rate at which we
can expand our business, including the implementation of new contracts, the
retention of existing customers, and the development of new products and
services, which could harm our future business and operating results.
If we are unable to successfully integrate past or future acquired businesses,
our business may be harmed, and if we require additional financing for future
acquisitions, you could be subject to dilution.
Since inception, we have made one acquisition and may acquire additional
companies as part of our growth strategy. If we are unable to successfully
integrate past or future acquired businesses, we may incur substantial costs and
delays or other operational, technical or financial problems. In addition, the
failure to successfully integrate acquisitions may divert management's attention
from our existing strategies and may damage our relationships with our key
customers and employees.
To finance future acquisitions, we may issue equity securities that could be
dilutive to our stockholders. We may also incur debt and additional amortization
expenses related to goodwill and other intangible assets in future acquisitions.
The interest expense related to this debt and additional amortization expense
may significantly reduce our profitability and harm our business and financial
condition.
If we deliver defective products, generate errors or handle customer data
improperly, we may lose customers and incur liability.
Our customers demand reliability and accuracy in the delivery of our services.
Although we devote substantial resources to meeting these demands, errors may
occur. If we make errors and mistakes in the processing of customer data we may
lose data and generate inaccurate information and cause delays. Such errors
could cause us to lose customers and could result in liability and penalties.
Our services agreements generally contain limitations on liability, and we
maintain insurance with a $10 million coverage limit to protect against claims
associated with the use of our products and services. However, the contractual
provisions and insurance coverage may not provide adequate coverage against all
possible claims that may be asserted. In addition, appropriate insurance may be
unavailable in the future at commercially reasonable rates. A successful claim
in excess of our insurance coverage could harm our financial condition and
operating results. Even unmerited unsuccessful claims could result in litigation
or arbitration costs and may divert management's attention from our existing
business.
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11
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Risk factors
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Because we have had net losses over the past several years and we have a limited
operating history, it may be difficult to evaluate our business.
We were incorporated in May 1995. We reported net losses of $6.7 million for the
year ended December 31, 1997, $7.2 million for the year ended December 31, 1998,
$6.9 million for the year ended December 31, 1999, and $7.9 million for the six
month ended June 30, 2000 before a dividend related to the beneficial conversion
of our preferred stock. We expect to increase activities and spending in sales
and marketing and in substantially all of our operational areas. We base our
expense levels in part upon our expectations concerning future revenues, and
these expense levels are relatively fixed in the short-term. If we have lower
revenue, we may not be able to reduce our short-term spending in response. Any
failure to meet our revenue projections would harm our ability to achieve and
maintain future profitability. Risks or difficulties that may impact our
strategies and thus may cause us not to achieve and maintain profitability
include our ability to:
- develop successful sales and marketing programs designed to increase
revenues;
- develop or modify product implementation processes with our customers;
- manage operating expenses;
- meet the product and service performance expectations of our customers; and
- develop new products and services.
We expect to continue to incur significant development, sales and marketing, and
other operational expenses in connection with our business. We may also incur
expenses in connection with strategic relationships.
We expect to continue to incur net losses for the next several quarters. Our
business strategy may not be successful and we may not successfully address
these risks or difficulties. If we should fail to adequately address any of
these risks or difficulties, our business would likely suffer.
Anti-takeover provisions in our charter and bylaws and under Delaware law could
discourage a third-party from acquiring us.
Anti-takeover provisions contained in our certificate of incorporation and our
bylaws could delay or prevent a third party from acquiring us, even if doing so
might be beneficial to our stockholders. These provisions could limit the price
that investors are willing to pay for shares of our stock. Some of these
provisions include our ability to:
- authorize the issuance of preferred stock which can be created and issued by
the board of directors without prior stockholder approval, commonly referred
to as "blank check" preferred stock, with rights senior to those of common
stock;
- prohibit stockholder action by written consent;
- establish a classified board of directions; and
- require advance notice for submitting nominations for election to our board
of directors and for proposing matters that can be acted upon by
stockholders at a meeting.
We are also subject to provisions of Delaware law that could delay, deter or
prevent a change in control of us.
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12
<PAGE>
Risk factors
--------------------------------------------------------------------------------
If we fail to protect our technology and confidential information or if
infringement claims are asserted against us, our competitive position and
business could be harmed.
Our success depends in part upon proprietary software and other confidential
information. The software and information technology industries have experienced
widespread unauthorized reproduction of software products and other proprietary
technology. We do not own any patents and therefore we rely on a combination of
copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property. However, these
protections may not be sufficient and they do not prevent independent third
party development of competitive products or services.
We believe that our proprietary rights do not infringe upon the proprietary
rights of third parties. However, third parties may assert infringement claims
against us in the future. If such claims were upheld, we could be required to
enter into license agreements or royalty arrangements with the party asserting
the claim and we might also be required to indemnify customers for claims made
against them, all of which would hurt our business.
If we experience performance or security problems with our systems, our
reputation and business could be damaged.
Our customers' satisfaction and our business could be harmed if we or our
customers experience any system delays, failures or loss of data. We currently
process substantially all our customers' transactions and data at our facilities
in San Jose, California and Atlanta, Georgia. Although we have safeguards for
emergencies and we have data and system backup procedures in place, we do not
have sufficient hardware backup facilities to process information if either or
both of these facilities are not functioning. The occurrence of a major system
failure at either of our facilities could interrupt data processing or result in
the loss of stored data. In addition, we depend on the efficient operation of
data transport connections maintained internally and by third parties. Any
disruption in these connections could harm our business.
We retain confidential customer and patient information in our data centers.
Therefore, it is critical that we ensure the security of our facilities and
infrastructure and that the marketplace perceive them to be secure. Despite the
implementation of security measures, our infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors, attacks by third
parties or similar disruptive problems. An unauthorized user who is able to
access our computer or communication systems could gain access to confidential
patient or health plan information or our own confidential information. A
material security breach could harm our business and our reputation or could
result in liability to us. Therefore, it is critical that we maintain the
security of our facilities and infrastructure. The occurrence of any of these
events could result in the interruption, delay or cessation of our services,
which could harm our business or operating results. Further, our reputation may
suffer if third parties were to obtain this information and we may be liable for
its misappropriation. Any effect on our reputation or any liability for any
disclosure could harm our business and operating results.
State and federal laws that protect individual health information may limit our
plans to collect, use and disclose that information.
If we fail to comply with laws or regulations governing the collection,
dissemination, use and confidentiality of patient health information, this
failure could have a material adverse effect on our business, operating results
and financial condition. Numerous federal and state laws and regulations
--------------------------------------------------------------------------------
13
<PAGE>
Risk factors
--------------------------------------------------------------------------------
govern the collection, dissemination, use and confidentiality of
patient-identifiable health information, including:
- state privacy and confidentiality laws;
- state laws regulating health care professionals, such as physicians,
pharmacists and nurse practitioners;
- Medicaid laws;
- the Health Insurance Portability and Accountability Act of 1996 and related
rules, or HIPAA, proposed by the Department of Health and Human Services;
- Health Care Financing Administration standards for Internet transmission of
health data; and
- Federal Trade Commission Children's Online Privacy Protection Rule.
Congress is expected to propose legislation that would establish a new federal
standard for protection and use of health information, and the US Federal Trade
Commission has announced that it will investigate this issue. In addition, the
laws of other countries also govern the use of and disclosure of health
information. Our systems for safeguarding patient health information from
unauthorized disclosure or use may not preclude successful claims against us for
violation of applicable law. In addition, future laws or changes in current laws
may necessitate costly adaptations to our systems. We have developed medical
information systems and reporting systems that we use to collect, analyze and
report aggregate medical care, medical research, outcomes and financial data
pertaining to items such as physician practice and prescription patterns. Some
state legislation regulates the aggregation of health information and the
manipulation, use and ownership of that aggregated data, even when this data
does not reveal the patient's identity. Because this area of the law is rapidly
changing, our collection, analysis and reporting of aggregate healthcare data
maintained in our database may not at all times and in all respects comply with
laws or regulations governing the ownership, collection and use of this data.
Future laws or changes in current laws governing the ownership, collection and
use of aggregate healthcare data may necessitate costly adaptations of our
systems or limit our ability to use this data.
If there are changes in government regulation of the healthcare industry, our
business could be harmed.
During the past several years, the healthcare industry has been subject to
increasing levels of government regulation of, among other things, reimbursement
rates and capital expenditures. In addition, proposals to reform the healthcare
system have been considered by Congress. These proposals, if enacted, may
further increase government involvement in healthcare, lower reimbursement rates
and otherwise hurt the healthcare industry, which could harm our business.
Healthcare organizations may react to these proposals and the uncertainty
surrounding such proposals in ways that could result in a reduction or deferral
in the use of our applications and services. We cannot predict what impact, if
any, such proposals or healthcare reforms might have on our business, financial
condition and operating results.
Government regulation of Internet communications may impact our business by
directly or indirectly increasing our costs.
We provide information via the Internet which includes, in part, through data
transmission over public telephone lines. Governments regulate these
transmissions through regulatory policies that establish
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14
<PAGE>
Risk factors
--------------------------------------------------------------------------------
charges and terms for wireline communications. We are currently not subject to
direct regulation by any governmental agency, other than regulations applicable
to businesses generally. Changes in the regulatory environment relating to the
application of access charges and Universal Service Fund support payments to
Internet and Internet telephony providers, regulation of Internet services,
including Internet telephony, and other regulatory changes that directly or
indirectly affect costs imposed on Internet or Internet telephony providers,
telecommunications costs or increase in the likelihood or scope of competition,
could harm our business and financial results.
If a natural disaster strikes our operating facilities, we may be unable to
service our customers for a substantial amount of time and we would experience
lost revenue.
Our operating facilities are located in San Jose, California. The facilities and
information technology equipment are difficult to replace and could require
substantial replacement lead-time. Our operating facilities may be affected by
natural disasters such as earthquakes and floods. Earthquakes are of particular
significance since the operating facilities are located in an earthquake-prone
area. In the event our existing operating facilities or equipment is affected by
man-made or natural disasters, we may be unable to meet customer demands or
sales projections. If our operations were curtailed or ceased, it would
seriously harm our business.
RISKS RELATED TO THIS OFFERING
New investors will suffer immediate and substantial dilution in the tangible net
book value of their shares.
We expect the initial public offering price of our common stock to be
substantially higher than the net tangible book value per share of our common
stock. The net tangible book value of a share of our common stock purchased at
an assumed initial public offering price of $ per share will be only $ . You
may incur additional dilution if holders of stock options, whether currently
outstanding or subsequently granted, exercise their options to purchase common
stock.
Many corporate actions will be substantially controlled by officers, directors
and affiliated entities regardless of the opposition of other investors to
pursue an alternative course of action.
Our directors and executive officers beneficially own approximately 71.9% ( %
after completion of this offering) of our outstanding common stock. These
stockholders, if they acted together, could exert substantial control over
matters requiring approval by our stockholders. These matters would include the
election of directors and the approval of mergers or other business
combinations. This concentration of ownership may also discourage, delay or
prevent a change in control of our company, which could hurt our stock price.
These actions may be taken even if they are opposed by the other investors,
including those who purchase shares in this offering.
Future sales of our common stock could cause our stock price to decline in
value.
Our stockholders could sell substantial amounts of our common stock in the
public market following the offering. As a result, the aggregate number of
shares of our common stock available to the public would increase and,
consequently, the price of our common stock could fall. We cannot predict the
timing or amount of future sales of shares of our stock or the effect, if any,
that market sales of shares, or the availability of shares for sale, will have
on the prevailing market price of our common stock. Upon completion of the
offering, we will have outstanding shares of common stock,
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15
<PAGE>
Risk factors
--------------------------------------------------------------------------------
assuming no exercise of outstanding options or warrants. Of these shares, the
shares sold in this offering will be freely tradable. This leaves
shares that will be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of shares Date
--------------------------------------------------------------------------------------------
<S> <C>
..................... Available for immediate sale on the date of this prospectus
..................... Available for sale 90 days after the date of this prospectus
..................... Available for sale 180 days after the date of this
prospectus
</TABLE>
Shortly after the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act of 1933 to register a total of
shares of common stock issuable under our 1995 Stock Option Plan, 1997
Stock Option Plan and 2000 Employee Stock Purchase Plan.
The holders of 4,397,272 shares of our preferred stock have registration rights
for the shares of common stock issuable upon conversion of these shares of
preferred stock. All preferred shares will be converted into a total of
4,397,272 shares of common stock immediately prior to the offering. After the
offering, the holders of shares of our common stock, which represent
approximately % of our outstanding common stock after this offering
assuming no exercise of outstanding options or warrants after , will be
entitled to have the resale of their shares registered under the Securities Act.
If these holders cause a large number of securities to be registered and sold in
the public market, these sales could harm the market price for our common stock.
In connection with the offering, all of our officers, directors and % of
our stockholders have agreed that, with certain exceptions, they will not sell
any shares of common stock or enter into similar transactions for 180 days after
the date of this prospectus without the consent of UBS Warburg LLC. In addition,
if we include in a company-initiated registration statement shares held by these
holders pursuant to the exercise of their registration rights and there is
limited demand to purchase our shares, this inclusion may harm our ability to
raise needed capital by effectively reducing the number of newly-issued shares
we can sell to the public.
Since we have broad discretion in how we use the proceeds from this offering, we
may use the proceeds in ways with which you disagree.
We intend to use the net proceeds from this offering to fund our operations, for
sales and marketing expenditures, development of new products and services,
investment in technology infrastructure, potential acquisitions, debt repayment
and other general corporate and working capital purposes. In addition, a portion
of the net proceeds may be used for acquisitions of businesses, products and
technologies that are complementary to ours. Accordingly, our management will
have significant flexibility in applying the net proceeds of this offering. The
failure of our management to use such funds effectively could harm our business,
financial condition and operating results.
The price for our common stock could decline.
The initial public offering price of our common stock will be determined by
negotiation between us and the representatives of the underwriters and may not
be indicative of the prices that will prevail in the public market after the
offering. The market price of our common stock could fall below the initial
public offering price. You may not be able to resell your shares at or above the
initial public offering price due to a number of factors, including:
- unanticipated quarterly variations in our operating results;
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16
<PAGE>
Risk factors
--------------------------------------------------------------------------------
- failure to achieve, or changes in, financial estimates by securities
analysts;
- announcements of new healthcare reimbursement products, services or
technological innovations;
- customer relationship developments;
- regulatory changes;
- conditions generally affecting the healthcare and technology industries;
- additions or departure of key personnel;
- lack of success of our operating strategy;
- sales of our common stock;
- competition; and
- the operating and stock price performance of other comparable companies.
In addition, the stock market in general, the Nasdaq National Market and the
market for healthcare companies in particular, have experienced extreme price
and volume volatility, which have particularly affected the market prices of
many healthcare technology companies and which have often been unrelated to the
operating performance of these companies.
In the past, following periods of volatility in the market price of a public
company's securities, securities class action litigation has often been
instituted against that company. Such litigation could result in substantial
costs and a diversion of management's attention and resources.
Our need for additional financing is uncertain as is our ability to raise
further financing.
We currently anticipate that our available cash resources combined with the net
proceeds from this offering will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least 12 months after the
date of this prospectus. We may need to raise additional funds, however, to
respond to business contingencies, which may include our need to:
- fund more rapid expansion;
- fund additional marketing expenditures;
- enhance our operating infrastructure;
- respond to competitive pressures;
- provide for additional working capital; or
- acquire complementary businesses or necessary technologies.
We do not currently generate sufficient cash to fully fund our operations. To
date, we have financed our operations principally through the issuance of equity
securities and some borrowings.
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 operations, take advantage of opportunities, develop
products or services or otherwise respond to competitive pressures could be
significantly limited.
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17
<PAGE>
Risk factors
--------------------------------------------------------------------------------
The liquidity of our common stock is uncertain since it has not been publicly
traded.
There has not been a public market for our common stock. We cannot predict the
extent to which investor interest in our company will lead to the development of
an active, liquid trading market for our common stock. If an active trading
market does not develop, our shares will be subject to higher price volatility
and less efficient execution of buy and sell orders for our investors.
If we raise additional funds, your ownership interest will decline.
If additional funds are raised through the issuance of equity or convertible
debt securities, your percentage ownership of our stock will be reduced, and
these newly-issued securities may have rights, preferences or privileges senior
to those of existing stockholders, including those acquiring shares in this
offering.
Because it is unlikely that we will ever pay dividends, you will only be able to
benefit from holding our stock if the stock price appreciates.
We have never paid cash dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future. Additionally, under our
outstanding credit agreements we are prohibited from declaring or paying
dividends without the consent of our lender, Comdisco, Inc.
RISKS RELATED TO OUR INDUSTRY
If we fail to meet the competition we face from both established entities and
new entries in the market, our revenues and profitability will be harmed.
We face competition from providers of traditional reimbursement applications.
Many of our competitors and potential competitors have significantly greater
financial, technical, product development, marketing and other resources and
greater market recognition than we have.
Our competitors can be categorized as follows:
- in-house information technology departments of health plans;
- emerging healthcare e-commerce companies;
- healthcare information technology consulting firms; and
- healthcare information software vendors.
Each of these types of companies can be expected to compete with us within
various segments of the healthcare information technology market. Furthermore,
major software information systems companies and other entities, including those
specializing in the healthcare industry that are not presently offering
applications that compete with our technology and services, may enter these
markets. Our competitors may develop products or technologies that are better or
more attractive than those offered by us or that may render our technology and
services obsolete. Many of our current and potential competitors are larger than
us and offer broader services than we do.
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18
<PAGE>
Risk factors
--------------------------------------------------------------------------------
Consolidation in the healthcare industry could harm our future operating results
and opportunities for growth.
Consolidation in the healthcare industry may require us to reconfigure our
products, services and systems to accommodate a change in data formats and codes
utilized by recently acquired or consolidated health plans. Further, the
consolidation of health plans operating in the same geographic market may
substantially reduce the number of competitive health plans in that market.
Existing and potential customers, especially mid-size market employees that
operate in only one geographic market, may not find our products and services
beneficial if there is only limited competition among health plans.
Our business will suffer if commercial users do not accept Internet solutions.
Our success depends in part on the adoption of Internet solutions by commercial
users. Our business could suffer dramatically if Internet solutions are not
accepted or not perceived to be effective. The Internet may not prove to be a
viable commercial marketplace for a number of reasons, including:
- inadequate development of the necessary infrastructure for access to our
Internet site and server reliability;
- security and confidentiality concerns;
- lack of development of complementary products, such as a high-speed modems
and high-speed communication lines;
- implementation of competing technologies;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; and
- government regulation.
We expect Internet use to grow in number of users and volume of traffic. The
Internet infrastructure may be unable to support the demands placed on it by
this continued growth.
Growth in the demand for our products and services will depend in part, on the
adoption of Internet solutions by healthcare industry participants, which
requires the acceptance of a new way of conducting business and exchanging
information. To maximize the benefits of our solutions, our customers must be
willing to process and retrieve data using the Internet.
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19
<PAGE>
--------------------------------------------------------------------------------
Forward-looking information
Some of the statements under "Prospectus summary," "Risk factors," "Management's
discussion and analysis of financial condition and results of operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by any forward-looking statements. Some of these factors are listed
under "Risk factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"could," "should," "expects," "plans," "anticipates," "intends," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievement.
Except as required by law, we undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this prospectus or
to conform these statements to actual results or to changes in our expectations.
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20
<PAGE>
--------------------------------------------------------------------------------
Use of proceeds
We estimate that the net proceeds from the sale of the shares of common stock we
are offering will be approximately $ million at an assumed initial
public offering price of $ per share after deducting underwriting
discounts and commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that the net proceeds
will be approximately $ million.
We currently intend to use the net proceeds from this offering to fund our
operations, for sales and marketing expenditures, development of new products
and services, investment in technology infrastructure, potential acquisitions,
debt repayment and other general corporate and working capital purposes. In
addition, a portion of the net proceeds may be used for acquisitions of
businesses, products and technologies that are complementary to ours. We
currently have no agreements with respect to any material acquisitions as of the
date of this prospectus. We intend to use up to $7.6 million of the net proceeds
of this offering to repay senior and subordinated debt. Our senior debt was
entered into in April 1998, and the remaining principal balance on it was
$600,000 as of June 30, 2000. Our senior debt was entered into in April 1998.
Our subordinated debt was entered into in June 1999 and was used to fund working
capital needs. The principal outstanding balance of our subordinated debt as of
July 19, 2000, was $7.0 million. We intend to use the balance of the net
proceeds from this offering for general corporate purposes, including working
capital. Our management may spend the proceeds from this offering in ways that
the stockholders may not deem desirable.
The timing and amount of our actual expenditures will be based on many factors,
including cash flows from operations and the growth of our business.
Until we use the net proceeds of this offering for the above purposes, we intend
to invest the funds in short-term, investment grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.
Dividend policy
We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends in the foreseeable future. Any future determination relating to
our dividend policy will be made at the discretion of our board of directors and
will depend on a number of factors, including future earnings, capital
requirements, financial conditions and future prospects and other factors that
our board of directors may deem relevant.
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21
<PAGE>
--------------------------------------------------------------------------------
Capitalization
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis to give effect to the automatic conversion of all of
our shares of redeemable convertible preferred stock outstanding as of the
date this prospectus into 4,397,272 shares of common stock upon the closing
of this offering; and
- on a pro forma as adjusted basis to give effect to the sale of the
shares of common stock offered by this prospectus at an assumed
initial public offering price of $ per share and the receipt of the net
proceeds and assuming repayment of all debt with the proceeds.
<TABLE>
<CAPTION>
Pro Pro forma
Actual forma as adjusted
(In thousands, except share and per
share data)
(unaudited)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt, less current portion........................ $ 2,334 $ 2,334 $ --
-------- -------- ------
Redeemable convertible preferred stock, $0.0001 par value:
5,535,000 shares authorized, actual; none authorized, pro
forma and pro forma as adjusted; 4,397,272 shares issued
and outstanding, actual; none issued and outstanding, pro
forma and pro forma as adjusted........................... 37,897 -- --
-------- -------- ------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value: none authorized,
actual; 10,000,000 shares authorized, pro forma and pro
forma as adjusted; none issued and outstanding, actual,
pro forma and pro forma as adjusted..................... -- -- --
Common stock, $0.0001 par value: 5,800,000 shares
authorized, actual; shares authorized, pro forma
and pro forma as adjusted; 278,255 shares issued and
outstanding, actual; 4,675,527 shares issued and
outstanding, pro forma; shares issued and
outstanding, pro forma as adjusted...................... -- 468
Additional paid-in capital................................ 24,219 61,648
Unearned stock-based compensation......................... (11,915) (11,915)
Accumulated deficit....................................... (32,175) (32,175)
-------- --------
Total stockholders' equity (deficit).................... (19,871) 18,026
-------- --------
Total capitalization.................................. $ 20,360 $ 20,360
======== ========
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of June 30, 2000 and excludes:
- 1,225,250 shares issuable upon the exercise of options at a weighted average
exercise price of $3.03 per share;
- 135,615 shares issuable upon the exercise of Series A warrants at an
exercise price of $1.00 per share;
- 166,667 shares of Series D Preferred Stock issuable upon the exercise of a
purchase option by Comdisco, Inc. prior to the closing of our initial public
offering, at an exercise price of $10.50 per share;
- 104,167 shares of Series E Preferred Stock issuable upon the exercise of a
supplemental purchase option by Comdisco, Inc. prior to the closing of our
initial public offering, at an exercise price of $16.80 per share;
- 264,502 additional shares available for future grant under our 1997 Stock
Option Plan;
- additional shares available for future grant under our 2000 Stock
Option Plan;
- additional shares available for future purchase under our 2000
Employee Stock Purchase Plan; and
- 416,667 shares potentially issuable to Total Therapeutic Management, Inc.,
or TTM, in connection with our acquisition of TTM if TTM meets specified
performance criteria by May 1, 2001.
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22
<PAGE>
--------------------------------------------------------------------------------
Dilution
Our historical net tangible book value as of June 30, 2000 was approximately
$1,617,000 million, or $5.81 per share, based on the number of shares
outstanding as of June 30, 2000. Historical net tangible book value per share is
equal to the amount of our total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding as of June 30, 2000.
Our pro forma net tangible book value as of June 30, 2000, was approximately
$1,617,000 million excluding intangible assets consisting of goodwill and
customer-based intangibles or $0.35 per share, based on the pro forma number of
shares outstanding as of June 30, 2000 of 4,675,527, calculated after giving
effect to the automatic conversion of 4,397,272 shares of our redeemble
convertible preferred stock outstanding as of June 30, 2000, into 4,397,272
shares of our common stock.
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 net tangible book value per share of our
common stock immediately afterwards, after giving effect to the sale of
shares in this offering. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Historical net tangible book value per share as of
June 30, 2000............................................ $ 5.81
Decrease attributable to conversion of preferred stock.... (5.46)
Pro forma net tangible book value per share as of June 30,
2000..................................................... 0.35
Increase per share attributable to the offering...........
Net tangible book value per share after the offering........
Dilution per share to new investors......................... $
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000, after
giving effect to this offering, the total number of shares of common stock
purchased from us and the total consideration and the average price per share
paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
Total cash proceeds net
Shares purchased of issuance costs
-------------------- ----------------------- Average price
Number Percent Amount Percent per share
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 4,675,527 % $21,530,000 % $ 4.60
--------- -----------
New investors......................... $
--------- -----------
Total............................. $
========= ===========
</TABLE>
The number of shares of common stock outstanding in the table above is based on
the number of shares outstanding as of June 30, 2000 and excludes:
- 1,225,250 shares issuable upon the exercise of options at a weighted average
exercise price of $3.03 per share;
- 135,615 shares issuable upon the exercise of Series A warrants at an
exercise price of $1.00 per share;
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23
<PAGE>
Dilution
--------------------------------------------------------------------------------
- 166,667 shares of Series D Preferred Stock issuable upon the exercise of a
purchase option by Comdisco, Inc. prior to the closing of our initial public
offering, at an exercise price of $10.50 per share;
- 104,167 shares of Series E Preferred Stock issuable upon the exercise of a
supplemental purchase option by Comdisco, Inc. prior to the closing of our
initial public offering, at an exercise price of $16.80 per share;
- 264,502 additional shares available for future grant under our 1997 Stock
Option Plan;
- additional shares available for future grant under our 2000 Stock
Option Plan;
- additional shares available for future purchase under our 2000
Employee Stock Purchase Plan; and
- 416,667 shares potentially issuable to Total Therapeutic Management, Inc.,
or TTM, in connection with our acquisition of TTM if TTM meets specified
performance criteria by May 1, 2001.
To the extent that these options or warrants are exercised, there will be
further dilution to new investors. See "Management -- Employee benefit plans"
for further information regarding our 1995 Stock Option Plan, 1997 Stock Option
and 2000 Employee Stock Purchase Plan.
If the underwriters exercise their over-allotment option in full, the following
will occur:
- the percentage of shares of our common stock held by existing stockholders
will decrease to approximately % of the total number of shares of our
common stock outstanding after this offering;
- the number of shares of our common stock held by new public investors will
increase to , or approximately % of the total number of shares of
our common stock outstanding after this offering; and
- our pro forma net tangible book value will increase to $ per share to
existing stockholders and our pro forma net tangible book value will be
diluted by $ per share to new investors.
--------------------------------------------------------------------------------
24
<PAGE>
--------------------------------------------------------------------------------
Selected financial data
The following selected financial data should be read in conjunction with our
financial statements and the notes to those financial statements and
"Management's discussion and analysis of financial condition and results of
operations" included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1997, 1998 and 1999, and the balance sheet
data as of December 31, 1998 and 1999, are derived from our audited financial
statements, included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1995 and 1996, and the balance sheet data
as of December 31, 1995, 1996 and 1997, are derived from financial statements
not included in this prospectus. Historical results are not necessarily
indicative of the results to be expected in the future.
Pro forma net loss per share for the year ended December 31, 1999 and the six
months ended June 30, 2000 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the our redeemable convertible preferred stock into shares of
common stock effective upon the closing of the offering, as if such conversion
occurred on January 1, 1999 or at the date of original issuance, if later.
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
---------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000(a)
(In thousands, except per share data)
Statement of operations data
(unaudited)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ -- $ 397 $ 861 $ 1,828 $ 1,987 $ 903 $ 1,799
Operating costs and expenses:
Cost of services.......................... -- 1,450 3,967 4,230 1,565 614 1,370
Sales and marketing....................... 41 229 600 695 710 301 671
General and administrative................ 630 1,375 3,181 4,593 3,519 1,350 2,721
Stock-based compensation.................. -- -- 6 11 2,276 565 3,198
------ ------- ------- ------- ------- ------- -------
Total operating costs and expenses...... 671 3,054 7,754 9,529 8,070 2,830 7,960
------ ------- ------- ------- ------- ------- -------
Loss from operations........................ (671) (2,657) (6,893) (7,701) (6,083) (1,927) (6,161)
Interest and other income (expense), net.... 25 (59) 180 484 (790) (52) (1,752)
------ ------- ------- ------- ------- ------- -------
Net loss.................................... (646) (2,716) (6,713) (7,217) (6,873) (1,979) (7,913)
Dividend related to beneficial conversion
feature of redeemable, convertible
preferred stock........................... -- -- -- -- -- -- (1,025)
------ ------- ------- ------- ------- ------- -------
Net loss attributable to common
stockholders.............................. $ (646) $(2,716) $(6,713) $(7,217) $(6,873) $(1,979) $(8,938)
====== ======= ======= ======= ======= ======= =======
Net loss per share, basic and diluted....... $(8.50) $(14.07) $(31.67) $(30.07) $(23.78) $ (6.87) $(30.71)
====== ======= ======= ======= ======= ======= =======
Weighted average shares used in computing
net loss per share, basic and diluted..... 76 193 212 240 289 288 291
====== ======= ======= ======= ======= ======= =======
Pro forma net loss per share, basic and
diluted (unaudited)....................... $ (1.66) $ (2.06)
Shares used in computing pro forma net loss
per share, basic and diluted
(unaudited)............................... 4,151 4,345
======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
-------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000(b)
(unaudited)
-----------------------------------------------------------------------------------------------------------------
Balance sheet data
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 151 $ 1,062 $ 8,981 $ 2,372 $ 1,095 $ 1,943
Working capital (deficit).................... 55 (45) 8,087 2,436 717 932
Total assets................................. 301 2,382 14,113 7,028 4,983 24,235
Long-term debt, less current portion......... -- -- -- 750 2,075 2,334
Accumulated deficit.......................... (691) (3,407) (10,172) (17,389) (24,262) (32,175)
Redeemable convertible preferred stock....... 774 4,239 10,507 19,536 19,536 37,897
Total stockholders' equity (deficit)......... (790) (3,774) (10,078) (17,273) (19,472) (19,871)
</TABLE>
------------
(a) Included in the income statement for the six months ended June 30, 2000, are
two months of results from our subsidiary TTM, acquired on May 1, 2000.
Revenue from TTM for the two months since acquisition totals $595,000.
(b) Included in the balance sheet as at June 30, 2000, are the assets and
liabilities of our subsidiary TTM as of June 30, 2000. The accumulated
deficit includes the results of TTM for the two months since acquisition of
$(8,000).
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25
<PAGE>
--------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements included elsewhere in this prospectus. This discussion may
contain forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under "Risk Factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.
OVERVIEW
We were founded and incorporated in 1995 in the state of California. The initial
development of our products were focused on the Adesso Severity-Adjusted Case
Rate Application, or ASAC, as an alternative approach to determining specialty
physician reimbursement. Utilizing information on the patient's medical
condition such as diagnosis, severity of medical condition, age, sex, location
and medical procedure, ASAC develops a case rate to determine specialty
physician reimbursement on a patient-by-patient basis. This approach to
determine physician reimbursement differs from the most common method of
fee-for-service compensation in which the primary driver of specialty physician
reimbursement is the office visit and procedures ordered, with no consideration
given to the complexity of the medical condition.
The first three years of operations were principally devoted to the development
and continual refinement of the ASAC while establishing test markets and initial
customer relationships through organizations such as Independent Practice
Associations, or IPAs, and hospital groups. In 1999, we migrated the ASAC's
software programs to a new relational database in preparation for large-scale
commercial use. As a result, we have established customer relationships with
national managed care organizations such as Aetna US Healthcare, Highmark Blue
Cross Blue Shield, Humana and UnitedHealthCare.
Our principal source of revenue to date has been derived from providing managed
care organizations access to our ASAC as an application service provider, or
ASP. We expect the revenue from our ASAC to continue to grow, with the majority
of these revenues being derived from services provided to large managed care
organizations. However, in the near term, we anticipate that revenues from TTM
will comprise our principal source of revenue. The revenue from providing ASAC
to customers is generally priced on a fixed price basis and we may enter in
variable pricing arrangements for higher volumes on a case-by-case basis.
Contracts with customers for the use of the ASAC are typically one to three
years in length.
On May 1, 2000, we acquired Total Therapeutic Management, Inc., or TTM, a
healthcare services company specializing in providing consulting services aimed
at enhancing the effectiveness of treating various illnesses with
pharmaceuticals. In providing these services, TTM contracts with pharmaceutical
companies, healthcare providers and managed care organizations. TTM is located
in Atlanta, Georgia and has 18 employees.
We issued 416,667 shares of our Series E redeemable convertible preferred stock
valued at $39.34 per share for a purchase price of $16.4 million. An additional
416,667 shares may be received by the former TTM stockholders contingent upon an
earnout tied to sales and profitability targets. The
--------------------------------------------------------------------------------
26
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
contingent payment, if any, will be calculated as of May 1, 2001, and paid by
June 30, 2001, and will be capitalized as goodwill and amortized over its
remaining useful life.
The establishment of new customer relationships involves a lengthy and extensive
sales and implementation process. The sales process for new customers typically
takes from four to six months, and the implementation process typically takes an
additional three to six months. For existing customers, our sales process takes
approximately one to four months and the implementation process takes two to
four months. Expenses incurred during the sales process are accounted for as
selling and marketing expenses. Expenses incurred during the implementation
process are accounted for as cost of services.
Cost of services consists primarily of personnel costs for customer service,
systems implementation, account management, and information technology
operations as it pertains to processing customer data. A significant portion of
cost of services consists of new customer implementation expenses. Therefore, as
we gain new customers, the actual cost of services will increase.
Sales and marketing expenses primarily consist of personnel, travel,
advertising, public relations and promotional efforts. We intend to
significantly increase our sales and marketing expenses over the next several
years.
General and administrative expenses consist primarily of payroll and
payroll-related expenses associated with, executive management and corporate
administrative personnel, information technology infrastructure, professional
fees and facility-related costs. We have historically capitalized programming
costs related to the development of our applications and are amortizing these
costs to general and administrative expenses. We expect that, in support of the
continued growth and operation of our business, general and administrative
expenses will continue to increase for the foreseeable future.
Since our inception, we have incurred losses. As of June 30, 2000, we had an
accumulated deficit of $32.2 million. These losses and this accumulated deficit
have resulted from the significant costs we incurred in the development of our
technology platform, our establishment of relationships with customers and our
development and maintenance of our customer and health plan interfaces. We
intend to continue to invest heavily in sales and marketing and in our
information technology infrastructure. As a result, we believe that we will
continue incurring operating losses through the second quarter of 2001. Although
we have experienced modest revenue growth in recent periods, our operating
results for future periods are subject to numerous uncertainties. In view of the
rapidly evolving nature of our business and our limited operating history, we
believe that historical period-to-period comparisons of our operating results
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
RESULTS OF OPERATIONS
Six months ended June 30, 2000, and 1999
Revenues
Revenues increased from $903,000 for the six months ended June 30, 1999, to
$1.8 million for the same period in 2000, representing an increase of $896,000,
or 99.2%. This increase was primarily due to the acquisition of TTM, which
represented $595,000 or 66.4% of the increase and increased implementation fees
of $462,000 associated with our new contract with Highmark Blue Cross Blue
Shield. These implementation fees were received for building interfaces with
Highmark and were based on a rate specified in the contract multiplied by the
number of hours spent on the project. These increases were partially offset by
terminations of smaller physician-based customer contracts.
--------------------------------------------------------------------------------
27
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
Cost of services
Cost of services increased from $614,000 for the six months ended June 30, 1999,
to $1.4 million for the same period in 2000, representing an increase of
$756,000, or 123.1%. This increase was primarily due to: the acquisition of TTM,
which represented $262,000, or 34.7%, of the increase; and, increased personnel
and implementation costs of $175,000. Cost of services, as a percentage of
revenues, increased from 68.0% for the six months ended June 30, 1999, to 76.2%
for the same period in 2000. During this period, we grew our operating structure
to support our customer base in advance of increased revenues.
Sales and marketing
Sales and marketing increased from $301,000 for the six months ended June 30,
1999, to $671,000 for the same period in 2000, representing an increase of
$370,000, or 122.9%. This increase was primarily due to additional sales staff,
related selling expense of $355,000 and the acquisition of TTM which represents
$52,000. Sales and marketing, as a percentage of revenues, increased from 33.3%
for the six months ended June 30, 1999, to 37.3% for the same period in 2000. We
anticipate that sales and marketing expenses will increase in future periods in
absolute dollars spent as we expand our target markets.
General and administrative
General and administrative expenses increased from $1.4 million during the six
months ended June 30, 1999 to $2.7 million for the same period in 2000,
representing an increase of $1.3 million or 101.6%. This increase is
attributable to increased expenditures for technology-related costs totaling
$277,000; an increase in administrative and technical support personnel of
$259,000; costs associated with relocation of our facilities of $189,000; costs
associated with the acquisition of TTM of $296,000; and amortization of goodwill
of $139,000.
Interest and other income (expense), net
Interest income includes interest income earned from our invested cash. Interest
expense includes interest expense related to outstanding debt obligations under
our senior and subordinated debt agreements. Interest income decreased from
$86,000 for the six months ended June 30, 1999, to $47,000 for the same period
in 2000. This decrease was primarily due to lower cash balances. Interest
expense increased from $136,000 to $1.8 million, and was primarily due to
amortization of interest expense associated with warrants issued in conjunction
with our convertible debt in June 1999 and April 2000.
Amortization of stock-based compensation
We account for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock issued to Employees" and Financial Accounting Standards Board
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans" and comply with the disclosure provisions
of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation."
Under APB 25, compensation expense is based on the difference, if any, on the
date of the grant, between the fair value of our stock and the exercise price.
SFAS 123 defines a "fair value" based method of accounting for an employee stock
option or similar equity investment. The pro forma disclosures of the difference
between compensation expense included in net loss and the related cost measured
by the fair market value method are presented in Note 8 of the notes to our
financial statements.
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28
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
We account for equity instruments issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
In connection with the granting of stock options to employees, we recorded
stock-based compensation expense totaling approximately $550,000 for the six
months ended June 30, 1999, and $3.0 million for the same period in 2000. This
amount represents the difference between the exercise price and the fair market
value of our common stock for accounting purposes on the date these stock
options were granted.
We may incur additional stock based compensation expense in the future as a
result of both options or other securities granted at below fair market value
and fluctuations in the market value of our stock which have a direct impact on
the value of options and warrants held by non employees.
Years ended December 31, 1997, 1998 and 1999
Revenues
Revenues increased from $1.8 million in 1998 to $2.0 million in 1999, or 11.1%.
Revenues in 1998 represented a 109.0% increase over 1997 revenues of $861,000.
The increase in 1999 was primarily due to new contracts with Humana and United
Healthcare, offset by terminations of smaller physician based groups. The
increase in 1998 was primarily due to new contracts with Scottsdale Physician
Hospital Organization and FPA Medical Management.
Cost of services
Cost of services decreased from $4.2 million in 1998, to $1.6 million in 1999,
or 61.9%. Cost of services in 1998 represented a 5.0% increase over 1997 cost of
services of $4.0 million. The decrease in 1999 was primarily due to the
reorganization and consolidation of our Minnesota operations into our San Jose
operations and a restructuring and reduction in force in our San Jose
operations. The increase in 1998 was primarily due to additions in personnel and
the opening of our Minnesota office in support of increased demand for our
services. Cost of services related to our Minnesota office in 1998 were
$1.1 million. Cost of services, as a percentage of revenues, decreased from
464.6% in 1997 to 233.3% in 1998 and to 80.0% in 1999.
Sales and marketing
Sales and marketing expenses increased from $695,000 in 1998 to $710,000 in
1999, or 2.2%. Sales and marketing expenses in 1998 represented a 15.8% increase
over 1997 sales and marketing expenses of $600,000. The 1998 and 1999 increases
are related to selling expenses. Sales and marketing expenses, as a percentage
of revenues, decreased from 69.7% in 1997 to 38.6% in 1998 and decreased to
35.5% in 1999.
General and administrative
General and administrative expenses decreased from $4.6 million in 1998, to
$3.5 million in 1999, or 23.9%. General and administrative expenses in 1998
represented a 43.8% increase over 1997 general and administrative expenses of
$3.2 million. The 1999 decrease was primarily due to the reorganization and
consolidation of our Minnesota into our San Jose offices. The 1998 increase was
primarily due to additions to management in San Jose and Minnesota. General and
administrative expenses, as a percentage of revenues, decreased from 371.7% in
1997 to 255.6% in 1998 and to 175.0% in 1999.
--------------------------------------------------------------------------------
29
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
Interest and other income (expense), net
Interest income decreased from $386,000 in 1998 to $176,000 in 1999, or 54.4%.
Interest income in 1998 represented an 84.7% increase over 1997 interest income
of $209,000. The decrease from 1998 to 1999 was primarily due to decreased cash
reserves resulting from the losses incurred in 1999. The increase from 1997 to
1998 was primarily due to increased cash reserves resulting from the sale of
preferred stock in 1997. Interest expense increased from $93,000 in 1998 to
$745,000 in 1999. Interest expense in 1998 increased $64,000 over 1997. The
increase in 1998 was due to increased debt related to equipment purchases and
the increase in 1999 was related to interest expense and amortization of
interest expense associated with warrants issued in conjunction with our
convertible debt in June 1999. Other income of $203,000 is an incentive payment
associated with smaller IPA and medical groups. The disposal of assets of
$221,000 of assets in 1999 was related to the closure of our Minnesota
operations.
Amortization of stock-based compensation
In connection with the granting of stock options to employees, we recorded
stock-based compensation expense totaling approximately $2.2 million in 1999,
$-- in 1998 and $-- in 1997. These amounts represent the difference between the
exercise price and the deemed fair value of our common stock for accounting
purposes on the date these stock options were granted. The amortization of
additional deferred compensation will result in annual charges of $7.4 million,
$4.5 million, $2.0 million, and $605,000 for the fiscal years 2000, 2001, 2002
and 2003, respectively.
Income taxes
As of December 31, 1999, we had federal and state net operating loss
carryforwards of $22.1 million and $16.3 million, respectively. The federal and
state net operating loss and credit carryforwards begin to expire in 2003, if
not utilized. Utilization of the federal net operating losses and credit
carryforwards will be limited by the change of ownership provisions contained in
Section 382 of the Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations principally with $21.5 million of private equity
financings that came from a series of preferred stock offerings over the period
from July 1995 to June 2000 as follows:
Preferred stock transactions
<TABLE>
<CAPTION>
Proceeds
net of
No. of issuance
Year shares costs
(dollar amounts in thousands)
-----------------------------------------------------------------------------------------------------
Issue
<S> <C> <C> <C>
Preferred Stock, Series A................................... 1995 790,000 $ 774
Preferred Stock, Series B................................... 1996 1,021,356 3,456
Preferred Stock, Series C................................... 1997 853,631 5,271
Preferred Stock, Series D................................... 1997 1,196,570 10,026
Preferred Stock, Series E................................... 2000 535,715 1,970
---------- -------
4,397,272 $21,506
========== =======
</TABLE>
Each share of Series A, B, C, D and E Preferred Stock will be converted into one
share of our common stock in connection with this offering.
--------------------------------------------------------------------------------
30
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
As of June 30, 2000, we had cash, cash equivalents and short-term investments
totaling $1.9 million, and $1.5 million available under a subordinated debt
agreement.
Our operating activities used cash of $5.5 million in 1997, $7.0 million in 1998
and $4.1 million in 1999. Cash used from operations in the six month period
ending June 30, 2000 was $3.3 million. Uses of cash have been primarily related
to our funding of net losses. Cash used to fund losses in 1997 was offset by
cash generated by increases in medical claims payable.
Our investing activities used cash of $1.8 million in 1997, $461,000 in 1998,
$452,000 in 1999 and provided cash of $250,000 for the six months ending
June 30, 2000. The cash used in investing activities relates to the purchase of
office and computer equipment. We had a $100,000 loss on the disposal of assets
in 1999 related to the closure of the Minnesota office.
Our financing activities provided cash of $15.8 million in 1997, $900,000 in
1998, $3.3 million in 1999 and $3.9 million in the first six months of 2000. In
1997 we issued redeemable convertible preferred stock for proceeds of
$15.8 million. In 1998 we made repayments of long-term debt of $196,000 and
retired our revolving line of credit of $102,000. In 1999, we had repayments of
long-term debt of $216,000. In April 2000 we closed a preferred stock financing
round that raised $2.0 million and entered into a subordinated loan agreement
for $3.5 million, of which $2.0 million was outstanding as of June 30, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 44, or FIN 44, Accounting for certain transactions involving
stock compensation, an interpretation of APB No. 25. FIN 44 establishes guidance
for the accounting for stock option grants or modifications to existing stock
option awards and is effective for option grants made after June 30, 2000.
FIN 44 also establishes guidance for the repricing of stock options and
determining whether a grantee is an employee, for which the guidance is
effective after December 15, 1998, and modifying a fixed option to add a reload
feature, for which the guidance is effective after January 12, 2000. The
adoption of certain of the provisions of FIN 44 prior to June 30, 2000, did not
have a material effect on the financial statements. We do not expect that the
adoption of the remaining provisions will have a material effect on the
financial statements.
In December 1999, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We have
complied with the provisions of SAB 101 for all periods presented.
In June 1998, the FASB 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 balance sheet 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 relationship
that exists. SFAS 133 will be effective for fiscal years beginning after
June 15, 2000. We do not currently hold derivative instruments or engage in
hedging activities.
Any additional changes in accounting principles or interpretations can have a
significant adverse effect on our reported results and may even require
retroactive application, affecting our reporting of
--------------------------------------------------------------------------------
31
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
--------------------------------------------------------------------------------
transactions that were completed before the change was announced. There are no
such accounting principles or interpretations which impact us in this way at
present.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the then
prevailing interest rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of investment-grade securities, including
commercial paper, money market funds and government and non-government debt
securities. At December 31, 1999 and June 30, 2000 we held no investments in
marketable securities.
We have operated primarily in the United States and all sales to date have been
made in US dollars. Accordingly, we have not had any exposure to foreign
currency rate fluctuations.
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods presented.
--------------------------------------------------------------------------------
32
<PAGE>
--------------------------------------------------------------------------------
Business
OVERVIEW
We provide proprietary applications designed to address problems facing
healthcare payors by improving physician reimbursement systems and enabling more
efficient management of healthcare resources. Our applications combine
information technology, actuarial science and Internet-based data delivery tools
to create compensation systems designed to align the incentives of health plans
and specialty physicians, restore physician autonomy and ultimately improve the
efficiency of the healthcare delivery system. We host payment applications that
employ scientific methodologies and severity-adjusted patient data to determine
appropriate physician reimbursement. Additionally, we use our unique database to
generate profiling reports on physicians and pharmaceutical treatment patterns
and outcomes.
We currently sell payment applications, Internet-based information and data
evaluation products to managed care plans, health plans, and physician groups.
We market our profiling applications to these customers as well as
pharmaceutical manufacturers. Our major customers are Aetna US Healthcare,
Highmark Blue Cross Blue Shield, Humana, Novartis, UnitedHealthCare and
Prudential HealthCare. We also provide our services to multiple at-risk managed
care organizations. To date, we are generating revenues from contracts with nine
health plans and one hospital group.
ASAC--Adesso Severity-Adjusted Case Rate Application
The Adesso Severity-Adjusted Case Rate Application, or ASAC, enables healthcare
payors to determine physician reimbursement for 14 medical specialties based on
detailed data on the patient's condition, including diagnosis, severity, age,
sex, location and medical procedure. Each month our customers submit this data
for each patient seeking treatment from one of the covered medical specialties
within a geographic market, and we use our payment algorithms to calculate
physician reimbursement for each patient.
We believe that ASAC allows our healthcare payor customers to:
- predict, measure and control healthcare delivery costs in medical
specialties more effectively;
- contain specialty costs and lower facility spending in the 14 specialties
that we believe drive over 80% of medical, professional, hospital and
pharmacy costs;
- eliminate the need for utilization management, or UM, and restore physician
autonomy while lowering health plan administrative costs;
- compensate physicians for providing appropriate patient care, while removing
incentives for inefficient and unnecessary treatment; and
- outsource physician compensation systems for a monthly fee and avoid high
up-front costs and the extensive use of internal information technology
resources.
Adesso eClinician and ePrescription profiler applications
We have built and are continuing to expand what we believe is one of the most
extensive profiling databases that contains detailed information on patient
condition, including diagnosis, severity, age, sex and location, as well as
medical treatment and outcome data. We believe this database allows us to create
unique profiling reports on physician practices and pharmaceutical efficacy. Our
eClinician Profiler and ePrescription Profiler give specialty physicians monthly
feedback on key measures of
--------------------------------------------------------------------------------
33
<PAGE>
Business
--------------------------------------------------------------------------------
performance relative to their specialty colleagues and demonstrate to our
healthcare payor customers the advantages of reimbursing physicians with the
ASAC. eClinician Profiler and ePrescription Profiler can be accessed through our
14 specialty-specific Internet portals and provide tools that our customers can
use to promote physician behavior change. We believe our Internet websites will
become important destinations for specialty physicians to retrieve current
economic and medical practice pattern information generated by our applications.
INDUSTRY BACKGROUND
The healthcare sector is one of the largest industries in the United States.
Each year the United States allocates significant resources for healthcare
services. The US Health Care Finance Administration, or HCFA, estimates that
healthcare expenditures are expected to increase from $1.3 trillion, or 15% of
the estimated US gross domestic product in 2000, to approximately $2.2 trillion
in 2008. The growth in healthcare expenditures has been fueled by population
growth, increased access to healthcare, technological advances and an aging
population.
As the demand for healthcare services has grown, the US healthcare industry has
shifted away from traditional indemnity plans into health maintenance
organizations and other managed healthcare benefit plans. These organizations
have attempted to balance demand for expensive healthcare services with the need
to maintain affordable access for the employer and governmental groups that fund
the majority of healthcare services provided in the United States.
We believe the shift from traditional indemnity plans into health maintenance
organizations and other managed healthcare benefit plans has been largely
ineffective at controlling costs or providing satisfactory access to services.
HFCA estimates that over $250 billion, or 21% of every healthcare dollar, is
wasted through the delivery of unnecessary care, performance of unnecessary or
duplicate procedures and tests or excessive administrative costs. We believe
that a portion of this wasteful spending is attributable to non-scientific and
paper intensive compensation systems that create friction among healthcare
payors, physicians and patients, and fail to appropriately reimburse physicians
based on the complexity of their patient caseloads.
The government and other healthcare consumers are placing increasing pressure on
the industry to improve the quality and cost-effectiveness of healthcare. To
achieve this goal, health plans have primarily focused on gaining price
concessions from providers and suppliers and limiting access to healthcare
products and services. Recently, consumers, providers and policymakers have
begun to question the effectiveness of this managed care approach. Patients and
their employers have expressed dissatisfaction with escalating health plan
premiums and restrictive processes designed to limit physician choice and access
to healthcare services. Physicians and patients have expressed concern that
managed care has led to a decline in the quality of patient care and has
increased administrative inefficiencies.
Current Internet-based efforts to improve healthcare administration are
primarily seeking to change administrative and financial processes, reduce
systems costs, improve cash flow or speed billing and purchasing. Even if
successful, these efforts do not address the significant majority of healthcare
spending that results from the cost of clinical diagnosis and treatment. These
costs arise from the process of medical decision making, treatment choice and
therapeutic efficacy, and comprise the largest portion of spending in the
healthcare industry. Furthermore, HCFA estimates that health plans, hospitals
and pharmaceutical companies spend more than $35 billion annually to manage
treatment decisions and control clinical costs. Because inefficiencies within
the healthcare system consume enormous resources and pose medical risks to
consumers, constituents across the healthcare industry
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are seeking cost-effective information and tools to improve the quality and
efficiency of healthcare delivery.
Physicians direct the majority of other healthcare expenditures. HCFA estimates
that over $320 billion is spent on physician compensation, $112 billion is spent
on pharmaceutical products, and $424 billion is spent on facility or hospital
services per year. In particular, we believe physicians in 14 specialties
account for approximately 80% of healthcare expenditures and direct a majority
of facility and pharmaceutical costs.
We believe that antiquated, nonscientific physician compensation systems and
inadequate information technology are the major causes of the current
inefficiencies in the healthcare industry.
Health plans and hospitals have been seeking to better control and measure the
clinical and reimbursement processes to increase accountability and improve
care. We believe that many of the current efforts associated with gaining such
control do not address the processes that result in clinical and reimbursement
inefficiencies. Healthcare delivery systems, physicians, health plans, the
government and employers are seeking information regarding clinical quality and
medical errors, as well as tools to enhance clinical efficiency. Additionally,
as a result of geographic, organizational and technological fragmentation,
current information exchange is often incomplete or redundant, thus creating the
need for a comprehensive technology solution.
GROWTH OF THE INTERNET IN HEALTHCARE
The Internet has emerged as the fastest growing communications medium in
history. International Data Corporation, an independent research firm, estimates
that the total number of Internet users worldwide will grow from 142 million at
the end of 1998 to 502 million by the end of 2003. The Internet is currently
being used to speed and streamline a variety of business transactions. The
Internet's open architecture, platform and location independence, scalability
and growing acceptance make it an increasingly important medium for the
information-intensive and highly transactional healthcare industry. We believe
that many existing Internet-based applications do not provide tools to monitor
the care delivery process or improve clinical efficiency. Additional
improvements in the ability to search, store, structure, integrate and filter
vast amounts of disparate data and to dynamically analyze, customize and display
information in contexts relevant to particular users will further increase the
usefulness of Internet-based applications to the healthcare market.
COMPENSATION MODELS
Fee-for-service
Currently, the vast majority of specialty physicians are reimbursed under a
fee-for-service compensation model. Under fee-for-service, a physician is paid a
predetermined fee for providing a service. For example, if the reimbursement for
one x-ray is $50, the reimbursement for ten x-rays would be $500. Under this
compensation model, physicians are reimbursed based upon the quantity of
services performed. In order to increase their compensation under this model,
physicians must increase the quantity of services performed. These increases in
procedures under quantity-based fee-for-service compensation models are often
unnecessary based on the patient's diagnosis and may lead to wasted medical,
professional, hospital and pharmacy resources. Furthermore, unnecessary
procedures often put patients under greater risk of complications related to the
additional procedures.
The largest payors of healthcare services in the United States are
Medicare/Medicaid and managed care organizations that operate on a fixed annual
premium per patient. Most managed care organizations
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reimburse physicians using fee-for-service compensation models. One of the most
significant problems for managed care organizations is managing the variability
of fee-for-service costs within the fixed amount of annual premium.
Quantity-based fee-for-service compensation models result in increased costs and
improperly align incentives among managed care organizations, physicians and
patients.
To control fee-for-service medical expenses, healthcare payors have used the
following cost containment programs:
- gatekeeping, a process requiring the patient to consult with a primary care
physician prior to receiving care from a specialty physician;
- prior authorization, a process requiring the patient and or physician to
seek prior approval from the health plan or specialty physician group for a
prescribed course of treatment;
- utilization management, a process of introducing a third-party clinician,
designed to direct or manage the treatment prescribed by the physician; and
- limited physician networks, a method of restricting a patient's choice of
specialty physician for medical services.
In attempting to reduce costs, these programs create barriers, limit patient
choice, reduce physician autonomy and significantly increase administrative
expenses.
Case rates
In response to the inherent inefficiencies in the fee-for-service model, and in
an attempt to encourage physicians to practice more efficiently, healthcare
payors developed case rate compensation systems. Under the case rate
compensation method, the payor makes a predetermined lump-sum payment to the
physician for all services that the physician is likely to deliver over the
course of treatment for a particular patient diagnosis. To date, case rate
compensation has been limited to certain diagnoses such as normal pregnancy,
where the range and extent of medical treatment is highly predictable due to the
uniform patient population.
The fee-for-service payment for a pregnant woman may vary from $1,000 for a
normal delivery to almost twice that for a caesarian, or c-section. Over the
period from 1970 to 1990, c-section rates have almost tripled, with little or no
improvement in mortality or morbidity to the mother or infant. The
fee-for-service compensation model has the effect of financially encouraging the
more expensive and more complicated procedure. Under fee-for-service, specialty
physicians that perform more c-sections earn more than those that perform
efficient normal deliveries. Attempts to limit utilization of c-sections through
utilization management and limited networks have been both unpopular and
unsuccessful at controlling the number of c-sections performed.
In the 1980's many managed care organizations adopted a case rate payment for
the course of treatment for normal pregnancy. This episodic case rate pays
specialty physicians for the treatment of the pregnant patient, not for the
procedure, and remains constant whether or not a c-section is performed.
In many places where case rates have been adopted, the percentage of c-sections
has fallen from the mid 30's as a percent of total births to the mid to low
20's. The latter c-section rates are still high by international standards, but
lower than when fee-for-service is used. In addition, by adopting the case rate
method, health plans eliminate the need for utilization management and other
inefficient cost containment measures. Further, the decision to perform a
procedure is left solely to the patient and the physician.
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OUR SOLUTION
Our solution enables the widespread use of case rates to determine specialty
physician reimbursement in the 14 medical specialties that we believe drive over
80% of healthcare spending. Our applications use information technology,
innovative actuarial algorithms and our unique database of patient information
to create customized, severity-adjusted case rates. Our applications provide
healthcare administrators and physicians with the critical information they need
to understand clinical utilization, resource usage, financial payments and to
make sound management decisions. Additionally, we facilitate the sharing of
clinical information among healthcare participants on a community-by-community
basis. We believe our solutions improve our customers' business performance by
simplifying medical cost structures and the sharing of information between
healthcare industry participants.
Our solutions enable our customers to more effectively predict, measure and
control healthcare delivery costs, contain specialty costs, lower facility
spending, eliminate the need for utilization management and reward physicians
for providing appropriate care to each patient. In addition, because we offer
our solutions as an application service provider, or ASP, our customers pay a
monthly fee and are able to avoid high up-front costs and extensive use of
information technology resources normally associated with technology solutions.
ASAC--Adesso Severity-Adjusted Case Rate Application
The cornerstone of our solution is the ASAC. This application uses a
sophisticated payment algorithm to generate a case rate that reflects the
complexity and critical nature of the patient's condition as determined by the
variables of a patient's age, sex, diagnosis, type of medical facility,
procedural frequency and other demographic and medical information. This
severity-adjusted case rate is applied throughout the duration of that patient's
treatment.
Our severity-adjusted case rate system allocates limited medical resources to
patients with the most critical medical conditions. As a result, specialty
physicians are paid appropriately for their caseload and are empowered to make
all medical decisions based on the patient's medical condition without intrusive
and expensive third-party administrative interference.
We believe ASAC enables our healthcare payor customers to:
- promote the rational and efficient allocation of healthcare resources;
- control medical costs by eliminating incentives to order unnecessary
healthcare procedures;
- control administrative costs by eliminating procedures for utilization
review; and
- restore physician autonomy and minimize health plan interference in the
physician-patient relationship.
[GRAPHIC DESCRIPTION OF SEVERITY-ADJUSTED CASE RATES APPEARS HERE.]
Our case studies indicate that where ASAC has been utilized, approximately 80%
of physicians have seen an increase in their reimbursement on a per-procedure
basis compared to traditional fee-for-service compensation models. Our studies
found that this increase was largely funded by the approximately 20% of
physicians that traditionally ordered numerous unnecessary tests and procedures
for patients whose age, sex, and diagnosis did not indicate a severe medical
condition.
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ePresciption Profiler and eClinician Profiler applications
ePrescription Profiler and eClinician Profiler are our proprietary profiling
applications that complement ASAC and may be accessed by our customers via the
Internet. ePrescription Profiler allows health plans to analyze their
pharmaceutical costs, and provides individual physicians with the ability to
review their own prescribing habits relative to their colleagues. Health plans
use ePrescription Profiler to target physicians for face to face education, or
academic detailing, and to analyze pharmaceutical use patterns within their
managed care network. Our eClinician Profiler examines specialty physician
practice pattern variations and trends.
We provide health plans and physicians with current analysis of physician
performance relative to peers in their respective service areas. The eClinician
Profiler application provides physicians and health plans information that may
promote and reward appropriate utilization of healthcare resources based on the
medical severity of each case. We believe that our ePrescription Profiler
applications may be of great value to pharmaceutical companies and health plans.
Data supplied by our profiling applications enable health plans and
pharmaceutical companies to evaluate their current formulary and receive
severity-adjusted feedback on the usage of prescription pharmaceutical products.
We believe that ePrescription Profiler will allow our pharmaceutical customers
to evaluate drug efficacy through diagnosis related outcome studies.
OUR STRATEGY
Our objective is to make ASAC the standard reimbursement tool for health plans
throughout the United States and to use our unique database to provide profiling
applications used for the measurement of physician and pharmaceutical treatment
patterns and outcomes. The key elements to our strategy include the following:
Expand sales of our payment application to existing customers
Our customers include four of the largest managed care organizations in the
United States: Aetna US Healthcare, Highmark Blue Cross Blue Shield, Humana and
UnitedHealthCare. Each one of these customers has adopted our payment
application for selected specialties in one or more regions. Our strategy is to
encourage these customers to adopt our payment application in additional regions
and for additional specialties.
Target new customers for our payment application
Health Insurance Association of America estimates that there are over 650
managed care organizations covering approximately 70% of the United States'
population. We are expanding our sales force and developing programs
specifically targeted at these new customers.
Promote our profiling applications
We recently introduced our eClinician Profiler and ePrescription Profiler
profiling applications. We will include eClinician Profiler as a feature to
enhance sales of our payment application, and we will also seek to sell
eClinician Profiler as a stand-alone product. ePrescription Profiler when used
in conjunction with eClinician Profiler combines data on pharmaceutical usage
and patient outcomes with patient diagnoses and severity that we believe is not
available elsewhere. We market ePrescription Profiler to managed care
organizations as a tool to help them evaluate and manage usage of their list of
approved drugs. We market ePrescription Profiler to pharmaceutical companies as
a tool to support their marketing and sales programs, in particular for
compliance with prescribed therapies.
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Continue development and enhancement of our products
We intend to continue to expand and enrich our database of patient diagnoses and
treatment patterns, and we intend to use our unique database to continue
improving our payment and profiling applications. We will seek to expand the
variety and depth of reports available through our profiling applications.
Additionally, we intend to develop new data products as the quality and depth of
our data base expands in conjunction with the expansion of our customer base. We
are also incorporating Internet functionality to improve service delivery to our
customers, including 24-hour, seven day access and faster response times, and to
enable us to reduce our operating costs.
Pursue strategic relationships and acquisitions
We intend to pursue strategic relationships with business partners to broaden
our product offerings, increase our distribution channels and improve the
delivery of our services to our customers. For example, we recently acquired TTM
to add the development of ePrescription Profiler to our product offerings
thereby broadening our product line and customer base.
PRODUCTS
We have two product lines, our payment application and two profiling
applications, eClinician Profiler and ePrescription Profiler. All of our
applications are based on our proprietary patient diagnosis and treatment
database.
ASAC--Adesso Severity-Adjusted Case Rate Application
Our primary application is ASAC which generates customized case rates for 14
different medical specialties. These case rates are severity-adjusted and
continually updated over a patient's course of treatment. ASAC calculates the
severity of the patient's medical condition by factoring in a patient's age,
gender, diagnosis and the location of service. Each of these factors is weighted
by the patient's unique medical condition. The 14 medical specialties we cover
are:
<TABLE>
<S> <C> <C>
- Allergy - Gastroenterology - Otolaryngology
- Behavioral health - General surgery - Physical therapy
- Cardiac surgery - OB/GYN - Podiatry
- Cardiology - Ophthalmology - Urology
- Dermatology - Orthopedic surgery
</TABLE>
We developed ASAC using our unique diagnosis database and our internally
developed processing algorithms. Over the past five years, we have assembled a
proprietary 40 million member-month database of diagnostic information that is
essential to the calculation of accurate severity-adjustment factors. A
member-month is the cumulative monthly information regarding a patient's medical
condition and associated treatments. Specialty physicians are incentivized to
accurately and completely code patient diagnostic information and additional
complicating factors, or co-morbidities, in order to be appropriately
compensated. This data is used to periodically update our proprietary database.
We believe this provides us with current accurate data that enables us to
calculate severity-adjusted case rates.
Our applications are provided within an ASP model, wherein health plans pay for
ASAC on a monthly, subscription basis. Physicians submit their claims
information to the health plan, and the
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health plan then combines the claims data with the patient's demographic
information. The health plan transmits the combined claim and demographic
information to us. We then process the information into severity-adjusted case
rates and transmit the information back to the health plans, allowing them to
process physicians' compensation based on the severity-adjusted case rates. The
payment information is also available to both health plans and physicians
through our 14 speciality-specific Internet portals each focused on a specific
medical specialty. Our business model allows our clients to gain access to
advanced technology without large up-front capital investments and the extensive
use of internal information technology resources.
ePrescription Profiler and eClinician Profiler--Adesso profiling applications
To complement ASAC, we offer two profiling applications, ePrescription Profiler
and eClinician Profiler.
ePrescription Profiler
ePrescription Profiler allows our customers to combine real-time data regarding
a patient's age, sex, diagnosis, co-morbidity, procedures and outcomes with a
patient's pharmaceutical profile. We believe the control and management of
pharmaceutical expenses represents a significant healthcare industry challenge.
The combined data provides a comprehensive summary of total patient care
management and the economic and medical impact of pharmaceutical interventions.
ePrescription Profiler also evaluates drug efficacy through diagnosis related
outcome studies as well as assisting in the monitoring of patient compliance
with prescribed therapies. We believe that this application will be of great
value to pharmaceutical companies and health plans.
eClinician Profiler
eClinician Profiler gives specialty physicians monthly feedback on key measures
of performance relative to their specialty colleagues. This application provides
profiling and analyses of specialty physician performance using all of our
severity variables and allows physicians to compare and contrast their
performance against peers or national standards. Our data correlates the
relationship between outcomes and medical cost expenditure. eClinician Profiler
is accessed through our 14 specialty-specific Internet portals and provides
tools designed to promote physician behavioral change.
CUSTOMERS
Our customers are primarily large national and regional managed care
organizations and large pharmaceutical companies throughout the United States.
As of June 30, 2000, we have entered into long-term relationships with 15 health
systems, health plans, major hospitals and pharmaceutical and biotechnology
companies.
Our major managed care customers are Aetna US Healthcare Inc., Highmark Inc,
Humana Health Plan Inc., Keystone Health Plan West, Inc., Prudential Health
Plan, Inc. and UnitedHealthCare of Florida, Inc. Our major pharmaceutical
customers are Merck & Co. Inc., Novartis Pharmaceuticals Corporation, Park-Davis
Pharmaceuticals and Pfizer, Inc.
The Company's operations are conducted in one business segment and sales are
primarily made to healthcare management providers. During the year ended
December 31, 1999 we generated 39.8% of our revenues from one customer and for
the six months ended June 30, 2000 we generated 84.5% of our revenues from our
four largest clients. In addition, one of our customers accounted for 42.6% and
27.7% of our revenue in 1998 and 1997, respectively.
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SALES AND MARKETING
We take a consultative approach to selling our services. We have a national
sales force of highly experienced sales executives targeting four different
geographical regions in the United States. Due to the technical nature of our
product, our sales cycle is three to six months for existing customers and six
to twelve months for new customers. Our sales process includes a national and
regional sales effort for national health plans such as Humana and Aetna US
HealthCare, and a local effort for regional health plans.
Our sales process includes the pre-sales qualification, identification of key
buyers and influencers, and working with prospective customers to educate them
on our products and the components of a successful implementation. Our sales
professionals continue to work with clients during the implementation process
and monitor the ongoing success of the relationship. Our current sales force
primarily focuses their efforts on existing business through continued sales
support post implementation.
We target new customers primarily through our marketing efforts. We focus our
marketing effort on the creation of market awareness through lead generation,
cross selling, sales support and strategic relationships within the healthcare
industry. Our marketing programs include seminar participation, e-mail programs,
website programs, telemarketing and direct mailing.
CUSTOMER SUPPORT
We believe that a high level of support is necessary to maintain long-term
relationships with our customers. We provide our customers with the following
services:
Customer service center
Our service desk staff provides a wide range of customer support functions. Our
customers may contact the service desk via a toll-free number, 24 hours a day,
seven days a week.
Account management team
The account manager assigned to each of our customers is responsible for
proactively monitoring customer satisfaction, exposing customers to additional
training and process-improvement opportunities and coordinating issue
resolution.
Technical support
We employ functional and technical support personnel who work directly with our
account management team and customers to resolve technical, operational and
application problems or questions.
Local physician roundtables
We develop and provide ongoing support of clinical advisory councils, or
Physician Roundtables, as each specialty is sold within each market. In these
forums, specialty leaders review various issues, including payment, performance
profiling and analyses of variation. In addition, we report on the performance
of the entire network to its associated Physician Roundtables and health plan
constituencies. The provision of benchmarks for utilization rates at the
specialty network level significantly adds value for its health plan customers.
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Internet portals
Delivering data to health plans and physicians is a key to our strategy. Our 14
specialty-specific Internet portals allow our clients to access information over
the Internet, using only a personal computer, Internet service provider and
dial-up connection. Our clients can create customized reports to show the
relative severity of patient caseload, reimbursement trends, and information
regarding physician practice variation.
TECHNOLOGY
Our unique database of diagnosis, age, gender, and other material factors, which
we use in generating our mass customized severity-adjusted case rates, is
updated on a monthly basis. We developed this database in 1995, and enhance it
on an ongoing basis. We derive our data enhancements from data provided directly
from our customers on a monthly or more frequent basis. These data enhancements
allow us to update our customized severity-adjusted case rates on a monthly
basis. We monitor performance, including fault isolation and resolution, trend
analysis, and service levels 24 hours a day, seven days a week and we employ
automated staff notification if a fault occurs.
COMPETITION
The market for healthcare technology services is competitive, rapidly evolving
and subject to rapid change. We provide proprietary applications that are
integrated into the traditional applications of our customers through our ASP
business model. Our products are marketed as two product lines: our ASAC payment
application and our specialty physician and pharmacy profiling applications.
Each of our product lines face different competitors, although we believe that
our total solution as a whole has no single competitor.
We believe our present competition consists of current traditional healthcare
reimbursement applications. These applications have been either purchased from
third-party vendors or internally developed and programmed by the managed care
organization. Our future competition will most likely be either from internally
developed severity case rate applications within the managed care organizations
or emerging healthcare technology companies.
Our competitors can be categorized as follows:
- in-house information technology departments of healthcare plans;
- emerging healthcare e-commerce companies;
- healthcare information technology consulting firms; and
- healthcare information software vendors.
Each of these types of companies can be expected to compete with us within
various segments of the healthcare information technology market. Furthermore,
major software information systems companies and other entities, including those
specializing in the healthcare industry that are not presently offering
applications that compete with our technology and services, may enter these
markets.
Our competitors may have substantially greater financial, technical, research
and other resources and larger, more established marketing, sales, distribution
and service organizations than us. Moreover, competitors may develop and offer
broader product lines and have greater name recognition than us and may offer
discounts as a competitive tactic. In addition, several development stage
companies are
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making or developing products that compete with our products. Our competitors
may develop or market products or services that are more effective or
commercially attractive than our products and services that would render our
products and services obsolete. Also, we may not have the financial resources,
technical expertise or marketing, distribution or support capabilities to
compete successfully in the future. Our success will depend in large part on our
ability to maintain a competitive position with respect to our products and
services. Rapid development by others may also result in competing products or
services.
INTELLECTUAL PROPERTY
Our intellectual property is important to our business. We have developed
software assets and internal methodologies for performing customer services. We
rely on a combination of copyright protection, trade secrets, know-how and
continuing technological innovation to develop and maintain our competitive
position. Our success will depend in part upon our ability to preserve our
copyrights and trade secrets, to operate without infringing the proprietary
rights of third parties and to acquire licenses relating to enabling technology
or products used with our payment and profiling applications.
GOVERNMENT REGULATION
Internet regulation
The Internet and its associated technologies are subject to government
regulation. Many existing laws and regulations, when enacted, did not anticipate
the methods of Internet-based medical management solutions we offer. We believe,
however, that these laws and regulations may nonetheless be applied to us.
Current laws and regulations that affect our Internet-based business relate to
the following:
- patient medical record information;
- the electronic transmission of information between healthcare providers,
payors, clearinghouses and other healthcare industry participants;
- the use of software applications in the diagnosis, cure, treatment,
mitigation or prevention of disease;
- health maintenance organizations, insurers, healthcare service providers
and/or employee health benefit plans; and
- the relationships between or among healthcare providers.
Privacy concerns
Concerns regarding privacy are particularly acute in the health care industry
because of the sensitive nature of medical information. Federal legislation has
been introduced to attempt to address the concern, including provisions
regarding the portability, privacy and security of patient data in the Health
Insurance Portability and Accountability Act of 1996, or HIPAA, and proposed
Patients' Bill of Rights Act bills.
We believe that our service offerings address health care privacy concerns by
providing personalized health care information in a secure, private manner.
Furthermore, we believe that our service offerings can be utilized to address
privacy concerns in other industries on the Internet.
In addition, federal and state laws and regulations govern the storage and
disclosure of medical records and health care information and such laws are
changing, in part in reaction to the increased use of electronic storage and
transmission of such information. Most recently, the federal Department of
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Health and Human Services, or HHS, acting pursuant to HIPAA, proposed standards
for the privacy of individually identifiable health care information. These
proposed regulations would not preempt more stringent state laws and
regulations. In general, the proposed regulations would prohibit the
unauthorized use and disclosure of electronically transmitted, individually
identifiable health information subject only to certain limited exceptions.
Federal and state healthcare regulation
Our software applications, information technology services and Internet portals
are designed to function within the current healthcare financing and
reimbursement system. During the past several years, the healthcare industry has
been subject to increasing levels of government regulation of, among other
things, reimbursement rates and certain capital expenditures. In addition,
proposals to reform the healthcare system have been considered by Congress.
These proposals, if enacted, may further increase government involvement in
healthcare, lower reimbursement rates and otherwise change the operating
environment for our customers. As in the past, healthcare organizations may
react to these proposals and the uncertainty surrounding such proposals in ways
that could result in a reduction or deferral in the use of our technologies and
services. We cannot predict with any certainty what impact, if any, such
proposals or healthcare reforms might have on our business, financial condition
or results of operations.
Legislation currently being considered at the federal level could impact the
manner in which we conduct our business. HIPAA mandates the use of standard
transactions, standard identifiers, security and other provisions by this year.
We are revising our networks and software applications to enable compliance with
the proposed regulations. However, until the proposed regulations become final,
they could change, which could require us to expend additional resources to
comply with the revised standards. In addition, the success of our compliance
efforts may be dependent on the success of healthcare participants in dealing
with the standards.
EMPLOYEES
As of June 30, 2000, we employed approximately 71 employees, including 39 in
operations, 10 in sales and marketing and 22 in information technology, finance
and accounting, and administration. Our employees are not subject to any
collective bargaining agreements, and we generally have good relations with our
employees.
FACILITIES
As of June 30, 2000, we leased two facilities, all located within the United
States. Our principal executive and corporate offices are located in San Jose,
California. Our leases have expiration dates ranging from 2000 to 2004. We
believe that our facilities are adequate for our current operations and that
additional leased space can be obtained if needed.
LEGAL PROCEEDINGS
We are not involved in, or aware of, any legal proceedings that either
individually or taken as a whole would have a material adverse effect on our
business, financial condition or results of operations.
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Management
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers and
directors:
<TABLE>
<CAPTION>
Name Age Position
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brian K. Barnard..................... 39 President and Chief Executive Officer
Richard B. Lanman, MD................ 45 Chairman of the Board and Chief Medical Officer
Kurt E. Amundson..................... 48 Chief Financial Officer
Bradley Luke......................... 35 Vice President, Finance
Norm Donovan......................... 44 Vice President, Information Technology
David Lee Harris..................... 38 Vice President, Operations
Terrence Burke(2).................... 58 Director
Judd Jessup(1)....................... 52 Director
Ronald Kase(1)....................... 41 Director
Gilbert Kliman, MD(2)................ 41 Director
Charles R. Kokesh(1)................. 51 Director
Thomas F. Stephenson(2).............. 58 Director
</TABLE>
------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
BRIAN K. BARNARD Mr. Barnard has served us as President and Chief Executive
Officer since August 1998, and as a member of our board of directors since
August 1998. From June 1996 to March 1998, Mr. Barnard served as President of
the Southeast Division of FPA Medical Management, a national physician practice
management company, and from February 1991 to June 1996, as its Executive
Director, responsible for operations and development. Prior to 1991,
Mr. Barnard held various management positions with Prudential Insurance.
Mr. Barnard received an MBA from the University of Phoenix and a BA in History
and Political Science from James Madison University.
RICHARD B. LANMAN, MD Dr. Lanman is our founder. He has served us as Chairman
of the Board since September 1997 and as a member of our board of directors and
Chief Medical Officer since July 1995. Prior to founding us, Dr. Lanman was
Senior Vice President and Medical Director for San Jose Medical Group, Inc, from
October 1993 to April 1995. Dr Lanman received an MD from Northwestern
University and a BS in Chemistry from Stanford University.
KURT E. AMUNDSON Mr. Amundson has served us as Chief Financial Officer since
May 2000. From May 1998 to February 2000, Mr. Amundson was President and Chief
Operating Officer of Medisys PLC, a developer, manufacture and marketer of
medical devices. From January 1996 to May 1998, Mr. Amundson served as Chief
Financial Officer of Metra Biosystems, Inc. From March 1994 to January 1996, he
was Chief Financial Officer of Shaman Pharmaceuticals. Mr. Amundson received a
BA in Graphic Communications from California Polytechnic State University, San
Luis Obispo, and is a Certified Public Accountant in the State of California.
BRADLEY LUKE Mr. Luke has served us as Vice President, Finance since June 1999.
From July 1997 to June 1999, Mr. Luke was Director of Finance at PacifiCare
Health Systems, a national managed healthcare organization. From May 1995 to
July 1997, Mr. Luke also served in various management positions at PacifiCare
Health Systems and its subsidiary PacifiCare Life and Health. Mr. Luke received
an MBA and a BA in Business Administration from California State University,
Fullerton.
--------------------------------------------------------------------------------
45
<PAGE>
Management
--------------------------------------------------------------------------------
NORM DONOVAN Mr. Donovan has served us as Vice President, Information
Technology since July 1999. From August 1995 to December 1998, Mr. Donovan was
Director of Information Technology at Siliconix/Temic, a developer, manufacturer
and marketer of semiconductor devices and a subsidiary of Daimler Benz. Prior to
August 1995, Mr. Donovan held various information technology management
positions at Siliconix/Temic. Mr. Donovan received BS degrees in chemical
engineering, electrical engineering and chemistry from the University of
California, Davis.
DAVID LEE HARRIS Mr. Harris has served us as Vice President, Regional
Operations since September 1998. From November 1997 to September 1998,
Mr. Harris was Vice President Operations for the Southeast division of FPA
Medical Management, Inc., a national physician practice management company. From
May 1995 to November 1997, Mr. Harris served in various management positions,
including Vice President of Contracts and Director of Operations for the
Southeast division of FPA. Mr. Harris received a BS in electrical engineering
from the University of Mississippi.
TERRENCE C. BURKE Mr. Burke has served us as a director since December 1996.
Currently retired, Mr. Burke was most recently Senior Executive Vice President
of Metra Health Inc., a healthcare company, from January 1995 until
October 1996. From October 1994 to January 1995, Mr. Burke was Senior Vice
President for Travelers Health Plans. From September 1992 to October 1994,
Mr. Burke served as Senior Vice President of Aetna Health Plans, Aetna
Corporation. Mr. Burke currently serves as a member of the board of directors of
PlanetRx.com Inc. and several privately-held companies, including System
Excellence, a Toronto-based company. Mr. Burke received a BA from the University
of Washington.
JUDD JESSUP Mr. Jessup has served us as a director since May 1998. Currently
retired, Mr. Jessup was most recently President of the HMO division of FHP
International Corporation from June 1994 to June 1996. From June 1987 to
June 1994, Mr. Jessup was President of TakeCare, Inc., which was acquired by FHP
International Corporation in June 1994. Mr. Jessup serves on the board of
directors for Corvel Corporation, NovaMed Eyecare, Inc. and several
privately-held companies. Mr. Jessup received a BA in Biology from Knox College
and an MBA from the University of Denver.
RONALD H. KASE Mr. Kase has served us as a director since January 1997.
Mr. Kase joined New Enterprise Associates, a venture capital investment firm, in
1990 and has been a general partner since May 1995. Mr. Kase serves on the board
of directors of Data Critical Corporation, a wireless healthcare data products
company, MedicalLogic/Medscape, Inc., a medical information infrastructure
company, and several privately-held companies. Mr. Kase received an MBA from the
University of Chicago and a BS in Mechanical Engineering from Purdue University.
GILBERT KLIMAN, MD Dr. Kliman has served us as a director since December 1997.
Dr. Kliman has been a Venture Partner at InterWest Partners since November 1996
and a General Partner since February 1999. From November 1995 to October 1996,
Dr. Kliman was an Investment Manager at Norwest Venture Capital. From July 1989
to September 1992, Dr. Kliman was an Associate at TA Associates. Dr. Kliman was
a practicing eye surgeon and co-founder of Aris Vision Institute, a network of
laser vision correction centers. Dr. Kliman serves on the board of directors of
ePocrates and net32.com. Dr. Kliman holds a BA in Biology from Harvard
University, an MD from the University of Pennsylvania, and an MBA from the
Stanford Graduate School of Business.
CHARLES R. KOKESH Mr. Kokesh has served us as a director since May 1995, and
was Chairman of the Board from May 1995 to September 1997. Mr. Kokesh is the
founder and managing general partner of Technology Funding and has served in
this capacity since 1979. Mr. Kokesh serves on the board of directors of
Thermatrix, Inc. and several privately-held companies and charitable
organizations.
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46
<PAGE>
Management
--------------------------------------------------------------------------------
Mr. Kokesh received an AB from Harvard College, an MBA from Harvard Business
School and a JD from Boalt Hall School of Law, University of California at
Berkeley.
THOMAS F. STEPHENSON Mr. Stephenson has served us as a director since
March 1996. He has been a general partner and managing member of the Sequoia
capital funds since 1988. Prior to joining Sequoia, Mr. Stephenson was President
of Fidelity Venture Associates, the venture capital subsidiary of Fidelity
Investments. Mr. Stephenson is the Chairman of the Board of Landacorp Inc. and a
director of Chapters Online Inc. and several privately-held companies.
Mr. Stephenson received a BA and an MBA from Harvard University and a JD from
Boston College Law School.
BOARD COMPOSITION
Our board of directors currently has eight members. In accordance with the terms
of our amended and restated certificate of incorporation, the terms of office of
the directors are divided into three classes:
- Class I, whose term will expire at the annual meeting of stockholders to be
held in 2001;
- Class II, whose term will expire at the annual meeting of stockholders to be
held in 2002; and
- Class III, whose term will expire at the annual meeting of stockholders to
be held in 2003.
The Class I directors are , and , the
Class II directors are , and , and the
Class III director are and . At each annual meeting of
stockholders after the initial classification or special meeting in lieu
thereof, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election or special meeting held in lieu thereof. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management.
BOARD COMMITTEES
The audit committee of the board of directors was established in September 1999.
The committee reviews, acts on and reports to the board of directors on various
auditing and accounting matters, including the recommendation of our independent
auditors, the scope of the annual audits, fees to be paid to the independent
auditors, the performance of our independent auditors and our accounting
practices. The members of our audit committee are Ronald Kase, Charles R. Kokesh
and Judd Jessup, each of whom is an independent director.
The compensation committee of the board of directors was established in
September 1999 and determines the salaries and benefits for our employees,
directors and other individuals compensated by us. The compensation committee
also administers our stock option plans, including determining the stock option
grants for our employees, consultants, directors and other individuals. The
members of the compensation committee are Terrence Burke, Gilbert Kliman and
Thomas F. Stephenson, each of whom is an independent director.
DIRECTOR COMPENSATION
Currently, we do not provide cash compensation to members of our board of
directors for serving on our board of directors or for attendance at committee
meetings. Members of our board of directors are reimbursed for some expenses in
connection with attendance at board and committee meetings. In consideration for
services as non-employee directors, we have in the past granted options to
purchase our common stock pursuant to the terms of our stock plans, and our
board continues to have the discretion to grant options to new non-employee
directors. Beginning with the effective date of this offering, our outside
directors will each annually receive automatic, nondiscretionary grants of
options to purchase shares of our common stock.
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47
<PAGE>
Management
--------------------------------------------------------------------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee has been an officer or employee of ours
at any time. None of our executive officers serves as a member of the board of
directors or compensation committee of any other company that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation and our bylaws provide that our directors and
officers shall be indemnified by us to the fullest extent authorized by Delaware
law, as it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with their service for or on our
behalf. In addition, our certificate of incorporation provides that our
directors will not be personally liable for monetary damages to us for breaches
of their fiduciary duty as directors, unless they violated their duty of loyalty
to us or our stockholders, acted in bad faith, knowingly or intentionally
violated the law, authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors. We have obtained
insurance that insures our directors and officers against specified losses and
that insures us against specific obligations to indemnify our directors and
officers.
EXECUTIVE COMPENSATION
Summary of cash and other compensation
The following table shows all compensation received during the year ended
December 31, 1999, by our Chief Executive Officer and our two other highest-paid
executive officers, collectively referred to as the named executive officers.
Summary compensation
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Annual Long-term
compensation compensation awards
-------------- ---------------------
Securities
Name and principal position Salary underlying options
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brian K. Barnard............................................ $ 237,109 338,144
President and Chief Executive Officer
Richard Lanman, MD.......................................... $ 238,854 125,535
Chief Medical Officer
David Lee Harris............................................ $ 118,435 43,750
Vice President Operations
</TABLE>
Options
The following table shows information regarding options granted to the named
executive officers during the fiscal year ended December 31, 1999.
Each option represents the right to purchase one share of our common stock. The
options generally become vested over four years. See "Management -- Employee
benefit plans" for more details
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48
<PAGE>
Management
--------------------------------------------------------------------------------
regarding these options. In the year ended December 31, 1999, we granted options
to purchase an aggregate of 432,750 shares of common stock to various officers,
employees, directors and consultants.
The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
required by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the initial public offering
price (assuming an initial public offering price of $ per share). Actual
gains, if any, on stock option exercises are dependent on the future performance
of our common stock and overall stock market conditions. The amounts reflected
in the table may not necessarily be achieved.
Option grants in last fiscal year
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Individual grants
----------------------- Potential realizable value
Number of at assumed annual rates
securities % of total of appreciation of stock
underlying options Exercise price for option term
options granted to price per Expiration ---------------------------
Name granted employees share date 5% 10%
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brian K. Barnard........ 100,000 23% $1.50 9/30/09
Richard Lanman, MD...... 80,000 18% $1.50 9/30/09
David Lee Harris........ 20,000 5% $1.50 9/30/09
</TABLE>
The following table shows information as of December 31, 1999, concerning the
number and value of unexercised options held by each of the named executive
officers. Options shown as exercisable in the table below are immediately
exercisable. There was no public trading market for the common stock as of
December 31, 1999. Accordingly, the value of unexercised in-the-money options
listed below has been calculated on the basis of the assumed initial public
offering price of $ per share, less the applicable exercise price per share,
multiplied by the number of shares underlying such options.
Aggregated option exercises in the year ended December 31, 1999 and year-end
option values
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Number of securities
underlying Value of unexercised
Shares unexercised options at in-the-money options
acquired December 31, 1999 at December 31, 1999
upon Value ---------------------------- ----------------------------
Name exercise realized Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brian K. Barnard.................. -- 74,420 263,724
Richard Lanman, MD................ 31,340 30,951 94,584
David Lee Harris.................. -- 5,937 37,813
</TABLE>
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan
Our 1995 Stock Option Plan was adopted by our board of directors in July 1995
and approved by our stockholders in July 1995. In January 1997, the 1995 Stock
Option Plan was replaced by the 1997 Stock Option Plan. Our board of directors
has determined that no further options will be granted
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49
<PAGE>
Management
--------------------------------------------------------------------------------
under the 1995 Stock Option Plan. However, the provisions of this plan will
still govern outstanding options granted pursuant to this plan. This plan
provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, to
our employees and the grant of nonstatutory stock options to our employees,
directors and consultants.
Number of shares outstanding
As of June 30, 2000, options to purchase 67,890 shares of our common stock were
outstanding under this plan.
Adjustments upon corporate transactions
This plan provides that in the event of an acquisition of us, the successor
corporation will assume or substitute each option granted under the plan. All
outstanding options under this plan that are not assumed or substituted will
terminate on the closing of the acquisition.
1997 Stock Option Plan
Our 1997 Stock Option Plan was adopted by our board of directors in
February 1997, approved by our stockholders in February 1997, and amended in
August 1998. Our board of directors has determined that no further options will
be granted under this plan. However, the provisions of this plan will still
govern outstanding options granted pursuant to the plan. This plan provides for
the grant of incentive stock options within the meaning of Section 422 of the
Code to our employees and the grant of nonstatutory stock options to our
employees, directors and consultants.
Number of shares available
A maximum of 1,491,525 shares of our common stock may be issued under this plan.
As of June 30, 2000, options to purchase 1,225,250 shares of our common stock
were outstanding under this plan.
Adjustments upon acquisition
This plan provides that in the event of an acquisition of us, the successor
corporation will assume or substitute each option granted under the plan. If the
outstanding options are not assumed or substituted, the options held by persons
performing services for us will become fully vested and immediately exercisable.
All outstanding options under the plan that are not assumed or substituted will
terminate on the closing of the acquisition.
2000 Stock Option Plan
Our 2000 Stock Option Plan was adopted by our board of directors in 2000
and approved by our stockholders in 2000. This plan provides for the grant
of incentive stock options within the meaning of Section 422 of the Code to our
employees and the grant of nonstatutory stock options to our employees,
directors and consultants.
Number of shares available
A maximum number of shares may be issued under this plan. As of June 30,
2000, no options were outstanding under this plan. In addition, this plan
provides for:
- annual increases in the number of shares available for issuance under the
plan on the first day of each fiscal year, beginning with our fiscal year
2001, equal to the lesser of % of the outstanding shares of our common
stock as determined on the first day of such fiscal year, shares or a
lesser amount as our board of directors may determine;
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50
<PAGE>
Management
--------------------------------------------------------------------------------
- the issuance of any shares that were reserved but unissued under our 1995
Stock Option Plan or 1997 Stock Option Plan; and
- the issuance of any shares that have been returned or will be returned to
our 1995 Stock Option Plan or 1997 Stock Option Plan.
In no event, however, shall more than shares plus such annual increases be
issued upon the exercise of incentive stock options under this plan.
Administration of the 2000 Plan
Our board of directors, or a committee of our board, serves as the administrator
of this plan. In the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, such a committee
will consist of two or more "outside directors" within the meaning of
Section 162(m) of the Code. The administrator has the power to determine the
terms of the options granted, the exercise price, the number of shares subject
to each option, the exercisability of the options and the form of consideration
payable upon exercise.
Terms of options
The administrator determines the exercise price of options granted under this
plan, but with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code and all incentive stock options, the exercise price must be equal to at
least the fair market value of our common stock on the date of grant. Under this
plan, the term of an incentive stock option may not exceed ten years, except
that with respect to any participant who owns 10% of the voting power of all
classes of our outstanding capital stock, the term must not exceed five years
and the exercise price must be equal to at least 110% of the fair market value
of our common stock on the date of grant. The administrator determines, in its
sole discretion, the term of all other options.
Under this plan, no optionee may be granted an option to purchase more than
shares in any fiscal year. In connection with their initial service, an
optionee may be granted an additional option to purchase up to shares.
Employees, directors or consultants that terminate their relationship with us
may exercise their options for the period of time stated in their option
agreement. Generally, if such termination is due to disability, the option will
remain exercisable for 12 months and if due to death will remain exercisable for
18 months. In all other cases, the option will generally remain exercisable for
six months, though in no case may an option be exercised later than the
expiration of its term.
Automatic option grants to non-employee directors
Generally, all grants of options to our non-employee directors under this plan
are automatic. This plan provides that each non-employee director will be
granted an initial option to purchase shares upon the later of (i) the
effective date of this offering or (ii) the date such person first becomes a
non-employee director (except for those directors who become non-employee
directors by ceasing to be employee directors). In addition, all non-employee
directors who have been directors for at least six months will receive
additional options to purchase shares on of each year.
All such options granted to non-employee directors have a term of ten years and
an exercise price equal to the fair market value of our common stock on the date
of grant. Each such initial option becomes exercisable as to % of the shares
subject to the option on each anniversary of the date of grant, provided that
the non-employee director remains a director on such dates. Each such additional
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51
<PAGE>
Management
--------------------------------------------------------------------------------
option becomes exercisable as to % of the shares subject to the option on the
anniversary of the date of grant, provided that the non-employee director
remains a director on such date.
Transferability of options
This plan generally does not allow for the transfer of options and only
optionees may exercise their options during their lifetime.
Adjustments upon acquisition
This plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option granted under the plan and
each non-employee director option will become fully vested and immediately
exercisable. If the outstanding options are not assumed or substituted, the
administrator will provide notice to optionees that they have the right to
exercise all of their options under the plan, including options that would not
otherwise be exercisable, for a period of 15 days from the date of such notice.
Such options will terminate upon the expiration of the 15-day period.
Amendment and termination
This plan will automatically terminate in 2010, unless we terminate it sooner.
In addition, our board of directors has the authority to amend, suspend or
terminate this plan, provided that it does not adversely affect any option
previously granted under the plan.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish our 2000 Employee Stock
Purchase Plan. This plan was adopted by our board of directors in 2000 and
approved by our stockholders in 2000.
Number of shares available
A total of shares of our common stock will be made available for sale
under this plan. In addition, this plan provides for annual increases in the
number of shares available for sale under the plan on the first day of each
fiscal year, beginning with our fiscal year 2001, equal to the lesser of % of
the outstanding shares of our common stock as determined on the first day of
such fiscal year, shares, or a lesser amount as our board of directors may
determine.
Administration
Our board of directors or a committee of our board will serve as the
administrator of this plan. The administrator has full and exclusive authority
to interpret the terms of the plan and determine eligibility for purchase of
shares under the plan.
Eligibility to participate
All of our employees are eligible to participate in this plan if they are
customarily employed by us. However, an employee will not be eligible to
purchase shares under this plan if such employee:
- immediately after such purchase will own stock possessing 5% or more of the
total combined voting power or value of all classes of our capital stock; or
- has rights to purchase stock under any of our employee stock purchase plans
that accrue at a rate that exceeds $25,000 worth of stock for each calendar
year.
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52
<PAGE>
Management
--------------------------------------------------------------------------------
Offering periods and contributions
This plan is intended to qualify under Section 423 of the Code as an employee
stock purchase plan and contains consecutive, overlapping 24-month offering
periods. Each offering period includes four 6-month purchase periods. The
offering periods generally start on the first trading day on or after and
of each year, except that the first such offering period will commence on
the first trading day on or after the effective date of this offering and will
end on the last trading day on or before .
This plan permits participants to purchase common stock through payroll
deductions of up to % of their eligible compensation, which includes the
participant's base salary and commissions, but excludes all other compensation.
A participant may purchase a maximum of shares during any 6-month purchase
period.
Purchase of shares
Amounts deducted and accumulated by the participant under this plan will be used
to purchase shares of our common stock at the end of each six-month purchase
period. The purchase price for such shares will be 85% of the lower of the fair
market value of our common stock at the beginning of an offering period or at
the end of the applicable 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, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and will be
automatically re-enrolled in a new offering period. Participants may end their
participation at any time during an offering period and will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
Transferability of rights
A participant may not transfer rights granted under this plan other than by will
or intestacy or as otherwise provided under the plan.
Adjustments upon acquisition
In the event of our merger with or into another corporation or a sale of all or
substantially all of our assets, a successor corporation may assume or
substitute purchase rights granted under the plan. If the successor corporation
does not assume or substitute for such purchase rights, the offering period then
in progress will be shortened, and a new exercise date will be set.
Amendment and termination
This plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate this plan, except that, subject to exceptions
described in the plan, no such action may adversely affect any outstanding
rights to purchase stock under the plan.
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53
<PAGE>
--------------------------------------------------------------------------------
Related party transactions
From January 1, 1997, through June 30, 2000, we have issued the following
securities in private placement transactions:
- 853,631 shares of our Series C Preferred Stock, at a purchase price of $6.20
per share, for an aggregate purchase price of approximately $5.3 million in
January 1997;
- 1,196,570 shares of our Series D Preferred Stock, at a purchase price of
$8.40 per share, for an aggregate purchase price of approximately
$10.0 million in December 1997;
- a purchase option to purchase up to 166,667 shares of our Series D Preferred
Stock issued to Comdisco, Inc. in connection with a $3,500,000 loan in
June 1999;
- 119,048 shares of our Series E Preferred Stock at a purchase price of $16.80
per share, for an aggregate purchase price of approximately $2.0 million in
April 2000;
- 416,667 shares of our Series E Preferred Stock issued in connection with the
acquisition of TTM in April 2000; and
- a supplemental purchase option to purchase up to 104,167 shares of our
Series E Preferred Stock issued to Comdisco, Inc. in connection with a
$3,500,000 loan in April 2000.
All of the above securities were issued in reliance upon an exemption from
registration under Section 4(2) of the Securities Act of 1933, or Regulation
promulgated thereunder.
The purchasers of more than $60,000 of these securities include, among others,
the following executive officers, directors and holders of more than 5% of our
outstanding stock and their affiliates:
<TABLE>
<CAPTION>
Shares of preferred stock
---------------------------------------------------------------------------------------------------
----------------------------------------------
Total
Series C Series D Series E consideration
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funds associated with InterWest Partners(1)........ -- 588,096 16,259 $5,213,218
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Funds Associated with New Enterprise
Associates(2)...................................... 428,226 238,095 18,422 $4,964,489
2490 Sand Hill Road
Menlo Park, CA 94025
Funds associated with Sequoia Capital(3)........... 177,420 119,048 21,596 $2,462,820
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Funds associated with Technology Funding Venture
Partners(4)...................................... 177,420 178,571 33,009 $3,154,552
2000 Alameda de las Pulgas
San Mateo, CA 94403
John and Marva Warnock............................. 56,452 59,524 -- $ 850,004
260 Surrey Street
Los Altos, CA 94022
</TABLE>
---------
(1) Includes 570,218 shares of Series D Preferred Stock and 15,765 shares of
Series E Preferred Stock held by InterWest Partners VI, L.P. and 17,878
shares of Series D Preferred Stock and 494 shares of Series E Preferred
Stock held by InterWest Investors VI, L.P. Dr. Gilbert Kliman, one of our
directors, is a member of the general partner of these funds. Dr. Kliman
disclaims beneficial ownership of the shares held by these funds except to
the extent of his pecuniary interest therein.
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54
<PAGE>
Related party transactions
--------------------------------------------------------------------------------
(2) Includes 806 shares of Series C Preferred Stock held by NEA Ventures 1997,
L.P., 414,517 shares of Series C Preferred Stock, 238,095 shares of
Series D Preferred Stock and 18,422 shares of Series E Preferred Stock held
by New Enterprise Associates VII, L.P. and 12,903 shares of Series C
Preferred Stock held by NEA President's Fund, L.P. Mr. Ronald Case, one of
our directors, is a general partner of these funds. Mr. Case disclaims
beneficial ownership of the shares held by these funds except to the extent
of his pecuniary interest therein.
(3) Includes 161,452 shares of Series C Preferred Stock, 108,929 shares of
Series D Preferred Stock and 20,516 shares of Series E Preferred Stock held
by Sequoia Capital VI, 8,871 shares of Series C Preferred Stock, 4,762
shares of Series D Preferred Stock and 1,080 shares of Series E Preferred
Stock held by Sequoia Technology Partners VI, 7,097 shares of Series C
Preferred Stock held by Sequoia 1995, 1,929 shares of Series D Preferred
Stock held by Sequoia 1997 and 3,428 shares of Series D Preferred Stock held
by SQP 1997. Mr. Thomas Stephenson, one of our directors, is a general
partner of these funds. Mr. Stephenson disclaims beneficial ownership of the
shares held by these funds except to the extent of his pecuniary interest
therein.
(4) Includes 177,420 shares of Series C Preferred Stock, 19,524 shares of
Series D Preferred Stock and 7,726 shares of Series E Preferred Stock held
by Technology Funding Partners III, L.P., 119,047 shares of Series D
Preferred Stock and 12,218 shares of Series E Preferred Stock held by
Technology Funding Partners IV, an Aggressive Growth Fund, L.P., 28,095
shares of Series D Preferred Stock and 11,217 shares of Series E Preferred
Stock held by Technology Funding Venture Partners V, an Aggressive Growth
Fund, L.P. and 11,905 shares of Series D Preferred Stock and 1,848 shares of
Series E Preferred Stock held by Technology Funding Medical
Partners I, L.P.
For additional information regarding the ownership of securities by executive
officers, directors and stockholders who beneficially own more than 5% of our
outstanding common stock, please see "Principal stockholders."
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55
<PAGE>
--------------------------------------------------------------------------------
Principal stockholders
The following table shows information known to us with respect to the beneficial
ownership of our common stock as of June 30, 2000, and as adjusted to reflect
the sale of the shares of common stock offered under this prospectus by:
- each person or group of affiliated persons who is known by us to
beneficially own more than 5% of our common stock;
- each of our directors;
- each named executive officer listed in the "Summary compensation" table
above; and
- all of our directors and executive officers as a group.
Except as indicated in the footnotes to this table and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of our common stock shown as
beneficially owned by them. Beneficial ownership and percentage ownership are
determined in accordance with the rules of the SEC. The table below includes the
number of shares underlying options and warrants that are exercisable within
60 days from June 30, 2000 and assumes the conversion of all shares of our
preferred stock into shares of our common stock prior to this offering. It is
therefore based on 4,675,527 shares of our common stock outstanding prior to
this offering and shares outstanding immediately after this offering. The
address for those individuals for which an address is not otherwise indicated
is: 2835 Zanker Road, San Jose, CA 95134.
<TABLE>
<CAPTION>
Percent owned Percent owned
Beneficial owner Total number before offering after offering
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Directors and named executive officers
Brian K. Barnard(1)......................................... 144,072 3.08%
Richard Lanman, MD(2)....................................... 193,124 4.13%
Ronald Kase(3).............................................. 684,743 14.65%
Judd Jessup(4).............................................. 14,177 0.30%
Thomas F. Stephenson(5)..................................... 779,602 16.67%
Charles R. Kokesh(6)........................................ 1,158,231 24.77%
Terrance Burke(7)........................................... 19,250 0.41%
Gilbert Kliman, MD(8)....................................... 604,355 12.93%
All directors and executive officers as a group (8 3,597,554
persons).................................................... 76.94%
Five percent stockholders
Funds associated with InterWest Partners(8)................. 604,355 12.92%
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Funds Associated with New Enterprise Associates(3).......... 684,743 14.64%
2490 Sand Hill Road
Menlo Park, CA 94025
Funds associated with Sequoia Capital(5).................... 779,602 16.67%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
</TABLE>
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56
<PAGE>
Principal stockholders
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent owned Percent owned
Beneficial owner Total number before offering after offering
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Funds associated with Technology Funding Venture 1,158,231
Partners(6)................................................. 24.77%
2000 Alameda de las Pulgas
San Mateo, CA 94403
John and Marva Warnock...................................... 233,502 4.99%
260 Surrey Street
Los Altos, CA 94022
</TABLE>
---------
(1) Includes 144,072 shares underlying options.
(2) Includes 61,784 shares underlying options.
(3) Includes 806 shares of Series C Preferred Stock held by NEA Ventures 1997,
L.P., 414,517 shares of Series C Preferred Stock, 238,095 shares of
Series D Preferred Stock and 18,422 shares of Series E Preferred Stock held
by New Enterprise Associates VII, L.P. and 12,903 shares of Series C
Preferred Stock held by NEA President's Fund, L.P. Mr. Ronald Kase, one of
our directors, is a general partner of these funds. Mr. Kase disclaims
beneficial ownership of the shares held by these funds except to the extent
of his pecuniary interest therein.
(4) Includes 13,291 shares underlying options.
(5) Includes 420,000 shares of Series B Preferred Stock, 161,452 shares of
Series C Preferred Stock, 108,929 shares of Series D Preferred Stock and
20,516 shares of Series E Preferred Stock held by Sequoia Capital VI,
23,077 shares of Series B Preferred Stock, 8,871 shares of Series C
Preferred Stock, 4,762 shares of Series D Preferred Stock and 1,080 shares
of Series E Preferred Stock held by Sequoia Technology Partners VI, 18,461
shares of Series B Preferred Stock and 7,097 shares of Series C Preferred
Stock held by Sequoia 1995, 1,929 shares of Series D Preferred Stock held
by Sequoia 1997 and 3,428 shares of Series D Preferred Stock held by SQP
1997. Mr. Thomas F. Stephenson, one of our directors, is a general partner
of Sequoia Capital VI and Sequoia Technology Partners. He is only a general
partner for these funds. Mr. Stephenson disclaims beneficial ownership of
the shares held by these funds except to the extent of his pecuniary
interest therein.
(6) Includes 177,420 shares of Series C Preferred Stock, 19,524 shares of
Series D Preferred Stock and 7,726 shares of Series E Preferred Stock held
by Technology Funding Partners III, L.P., 119,047 shares of Series D
Preferred Stock and 12,218 shares of Series E Preferred Stock held by
Technology Funding Partners IV, an Aggressive Growth Fund, L.P., 400,000
shares of Series A Preferred Stock, 369,231 shares of Series B Preferred
Stock, 28,095 shares of Series D Preferred Stock and 11,217 shares of
Series E Preferred Stock held by Technology Funding Venture Partners V, an
Aggressive Growth Fund, L.P. and 11,905 shares of Series D Preferred Stock
and 1,848 shares of Series E Preferred Stock held by Technology Funding
Medical Partners I, L.P.
(7) Includes 19,250 shares underlying options.
(8) Includes 570,218 shares of Series D Preferred Stock and 15,765 shares of
Series E Preferred Stock held by InterWest Partners VI, L.P. and 17,878
shares of Series D Preferred Stock and 494 shares of Series E Preferred
Stock held by InterWest Investors VI, L.P. Dr. Gilbert Kliman, one of our
directors, is a member of the general partner of these funds. Dr. Kliman
disclaims beneficial ownership of the shares held by these funds except to
the extent of his pecuniary interest therein.
--------------------------------------------------------------------------------
57
<PAGE>
--------------------------------------------------------------------------------
Description of capital stock
The following information describes our common stock and preferred stock, as
well as options and warrants to purchase our common stock, and provisions of our
certificate of incorporation and our bylaws, all as will be in effect upon the
closing of this offering. This description is only a summary. You should also
refer to the certificate and bylaws that have been filed with the SEC as
exhibits to our registration statement, of which this prospectus forms a part.
The descriptions of the common stock and preferred stock, as well as options and
warrants to purchase our common stock, reflect changes to our capital structure
that will occur upon the closing of this offering in accordance with the terms
of the certificate.
Upon completion of this offering, our authorized capital stock will consist of
shares of common stock, par value $0.0001 per share, and 10,000,000
shares of preferred stock, par value $0.0001 per share.
COMMON STOCK
As of June 30, 2000, there were 278,255 shares of common stock outstanding and
held of record by 20 stockholders. There will be shares of common
stock outstanding upon the closing of this offering, which gives effect to the
issuance of shares of common stock offered by us under this
prospectus and the conversion of preferred stock discussed below.
Each share of common stock has identical rights and privileges in every respect.
The holders of our common stock are entitled to vote upon all matters submitted
to a vote of our stockholders and are entitled to one vote for each share of
common stock held.
Subject to the prior rights and preferences, if any, applicable to shares of
preferred stock or any series of preferred stock, the holders of common stock
are entitled to receive dividends, payable in cash, stock or otherwise, as may
be declared by our board out of any funds legally available for the payment of
dividends.
If we voluntarily or involuntarily liquidate, dissolve or wind-up, the holders
of common stock will be entitled to receive after distribution in full of the
preferential amounts, if any, to be distributed to the holders of preferred
stock or any series of preferred stock, all of the remaining assets available
for distribution ratably in proportion to the number of shares of common stock
held by them. Holders of common stock have no preferences or any preemptive
conversion or exchange rights.
PREFERRED STOCK
As of June 30, 2000, there were 4,397,272 shares of convertible preferred stock
outstanding. Upon the closing of this offering, all outstanding shares of
convertible preferred stock will be automatically converted into 4,397,272
shares of our common stock and will be held of record by 43 stockholders. These
shares of convertible preferred stock will no longer be authorized, issued or
outstanding. Our amended and restated certificate of incorporation, which
becomes effective upon the closing of this offering, authorizes the issuance of
10,000,000 shares of preferred stock.
Upon completion of this offering our board is authorized to provide for the
issuance of shares of preferred stock in one or more series, and to fix for each
series voting rights, if any, designations, preferences and relative,
participating, optional or other special rights and such qualifications,
--------------------------------------------------------------------------------
58
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
limitations or restrictions as provided in a resolution or resolutions adopted
by the board. The board will have the ability to authorize the issuance of
shares of preferred stock with terms and conditions that could discourage a
takeover or other transaction that holders of some or a majority of shares of
common stock might believe to be in their best interests or in which holders of
common stock might receive a premium for their shares over the then market
price.
WARRANTS
As of June 30, 2000, warrants to purchase a total of 135,615 shares of our
Series A Preferred Stock, at an exercise price of $1.00 per share, 166,667
shares of Series D Preferred Stock at an exercise price of $10.50 per share and
104,167 shares of Series E Preferred Stock at an exercise price of $16.80 per
share were outstanding. These warrants contain anti-dilution provisions
providing for adjustments of the exercise price and the number of shares
underlying the warrants upon the occurrence of certain events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction. The warrants will expire on the earlier of
March 8, 2001 or the closing of the initial public offering of our common stock.
The warrants grant to the holders registration rights with respect to the common
stock issuable upon their exercise, which are described below. All of these
warrants will be exercisable immediately before this offering.
REGISTRATION RIGHTS
Under the terms of an agreement with the holders of our preferred stock,
representing 4,397,272 shares of common stock, on an as-converted basis, are
entitled to demand the registration of their shares under the Securities Act of
1933. The holders of a majority of such shares are entitled to demand that we
register their shares under the Securities Act of 1933 subject to limitations
described in the relevant agreement. We are not required to effect more than two
registrations for such holders pursuant to these demand registration rights. In
addition, these holders are entitled to piggyback registration rights with
respect to the registration of their shares of common stock. If we propose to
register any shares of common stock either for our account or for the account of
other security holders, the holders of shares having piggyback rights are
entitled to receive notice of the registration and are entitled to include their
shares in the registration, subject to limitations. Further, at any time after
we become eligible to file a registration statement on Form S-3, a holder or
holders of shares with registration rights may require us to file registration
statements under the Securities Act of 1933 on Form S-3 with respect to their
shares of our common stock if the aggregate offering price of these shares is
expected to exceed $500,000. These demand, piggyback and S-3 registration rights
expire on either the fifth anniversary of the effective date of this offering
or, for an individual holder, upon a holder's becoming eligible to sell, in
accordance with Rule 144 of the Securities Act of 1933 and within a three month
period, all shares with registration rights held by such holder. These
registration rights are also subject to other conditions and limitations, among
which is the right of the underwriters of an offering to limit the number of
shares of common stock held by security holders with registration rights to be
included in such registration. We are generally required to bear all of the
expenses of all these registrations except selling expenses incurred on behalf
of holders requesting registration. Except for shares requested to be included
with this offering, registration of any of the shares of our common stock held
by security holders with registration rights would result in such shares
becoming freely tradable without restriction under the Securities Act of 1933
immediately upon effectiveness of such registration. At the underwriters'
request, any shares that holders seek to include in the current offering cannot
be sold until 180 days following the effectiveness of this offering if the
underwriters so request, otherwise such shares are freely tradable without
restriction.
--------------------------------------------------------------------------------
59
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following transactions more difficult:
- the acquisition of us by means of a tender offer;
- the acquisition of us by proxy contest or other means;
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure our company outweighs the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms. The amendment of any of the following
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
Election and removal of directors
Effective with the first annual meeting of stockholders following completion of
this offering, our amended and restated bylaws provide for the division of our
board of directors into three classes, as nearly equal in number as possible,
with the directors in each class serving for a three-year term, and one class
being elected each year by our stockholders. This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us and may maintain the
incumbency of the board of directors, as it generally makes it more difficult
for stockholders to replace a majority of the directors. Further, our amended
and restated certificate of incorporation filed in connection with this offering
and restated bylaws do not provide for cumulative voting in the election of
directors.
Stockholder meetings
Under our amended and restated certificate of incorporation and amended and
restated bylaws, only our board of directors, chairman of the board or chief
executive officer may call special meetings of stockholders. 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. In
addition, our amended and restated certificate of incorporation eliminates the
right of stockholders to act by written consent without a meeting and eliminates
cumulative voting.
Undesignated preferred stock
The authorization of undesignated preferred stock makes it possible for our
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
us. These and other provisions may have the effect of deterring or delaying
hostile takeovers or delaying changes in control or management.
--------------------------------------------------------------------------------
60
<PAGE>
Description of capital stock
--------------------------------------------------------------------------------
Section 203
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder unless:
- prior to the date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers, and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
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61
<PAGE>
--------------------------------------------------------------------------------
Shares eligible for future sale
Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Furthermore, since no shares
will be available for sale shortly after this offering because of contractual
and legal restrictions on resale as described below, sales of substantial
amounts of our common stock in the public market after these restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants after
December 31, 1999. Of these shares, all of the shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates. The remaining
shares of common stock held by existing stockholders are restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration described below
under Rules 144, 144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
- no shares will be eligible for sale upon completion of this offering; and
- shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 180 days after the date of
this prospectus.
LOCK-UP AGREEMENTS
All of our officers, directors and some of our stockholders and option holders
have agreed not to transfer or dispose of, directly or indirectly, any shares of
our common stock or any securities convertible into shares or exercisable or
exchangeable for shares of our common stock, for a period of at least 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
only with the prior written consent of UBS Warburg LLC.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus a person or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of our common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also subject to a matter of sale provisions and notice
requirements and to the availability of current public information about us.
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62
<PAGE>
Shares eligible for future sale
--------------------------------------------------------------------------------
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner except an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. shares of our common stock will
qualify as "144(k) shares" within 180 days after the date of this prospectus.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any of
our employees, consultants or advisors, other than affiliates, who purchases or
receives shares from us in connection with a compensatory stock purchase plan or
option plan or other written agreement will be eligible to resell their shares
beginning 90 days after the date of this prospectus, subject only to the manner
of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.
REGISTRATION OF OPTION SHARES
After the closing of this offering, we intend to file a registration statement
to register for resale the shares of common stock reserved for issuance
under our stock option plans. We expect the registration statement to become
effective immediately upon filing. Shares issued upon the exercise of stock
options granted under our stock option plans will be eligible for resale in the
public market from time to time subject to vesting and, in the case of certain
options, the expiration of the lock-up agreements referred to above.
REGISTRATION RIGHTS
Holders of our preferred stock, whose shares will be converted into 4,397,272
shares of our common stock upon the closing of this offering and holders of
warrants to purchase 135,615 shares of preferred stock have the right, subject
to various conditions and limitations, to include their shares in registration
statements relating to our securities. By exercising their registration rights
and causing a large number of shares to be registered and sold in the public
market, these holders may cause the price of the common stock to fall. In
addition, any demand to include such shares in our registration statements could
harm our ability to raise needed capital. See "Management -- Benefit plans,"
"Principal stockholders," "Shares eligible for future sale" and "Underwriting."
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63
<PAGE>
--------------------------------------------------------------------------------
Underwriting
We and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, CIBC World Markets
Corp. and U.S. Bancorp Piper Jaffray Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number
Underwriter of shares
-----------------------------------------------------------------------
<S> <C>
UBS Warburg LLC.............................................
CIBC World Markets Corp.....................................
U.S. Bancorp Piper Jaffray Inc..............................
-------
Total.................................................
=======
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional shares.
<TABLE>
<CAPTION>
No exercise Full exercise
-----------------------------------------------------------------------------------------
<S> <C> <C>
Per share................................................... $ $
Total................................................... $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1,450,000.
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
The underwriters have informed us that they do not expect discretionary sales to
exceed 5% of the shares of common stock to be offered.
Adesso and all of its stockholders have agreed with the underwriters not to
offer, sell, contract to sell, hedge or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under the Securities
Act relating to, any of its common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, without the prior written consent of UBS Warburg LLC.
--------------------------------------------------------------------------------
64
<PAGE>
Underwriting
--------------------------------------------------------------------------------
The underwriters have reserved for sale, at the initial public offering price,
up to shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our management, other parties,
including our employees, may participate in the reserve shares program. The
number of shares available for sale to the general public in the offering will
be reduced to the extent these persons purchase 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 in this offering.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:
- the information set forth in this prospectus and otherwise available to the
representatives;
- the history of and the prospects for the industry in which we compete;
- the ability of our management;
- our prospectus for future earnings, the present state of our development,
and our current financial position;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of our common stock while the offering
is in progress.
The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or affect the
market price of our common stock. As a result, the price of our common stock may
be higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments that the underwriters may be required to make in respect thereof.
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65
<PAGE>
--------------------------------------------------------------------------------
Legal matters
The validity of the shares of common stock offered hereby will be passed upon
for us by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Dewey
Ballantine LLP, New York, New York, is acting as counsel for the underwriters in
connection with various legal matters relating to the shares of common stock
offered by this prospectus.
Experts
The financial statements of Adesso Healthcare Technology Services, Inc. as of
December 31, 1998, and 1999, and for each of the three years in the period ended
December 31, 1999, included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of Total Therapeutic Management, Inc. as of June 30,
1998 and 1999 and for each of the two years in the period ended June 30, 1999,
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments, under the Securities Act with respect to the
shares of our common stock to be sold in this offering. This prospectus does not
contain all the information set forth in the registration statement. For further
information with respect to us and the shares of common stock to be sold in this
offering, reference is made to the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of ours, such
reference is qualified in all respects by such contract or document filed as
part of the registration statement. You should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
You may read and copy all or any portion of the registration statement or any
other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's website (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors of
these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.
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66
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
Index to financial statements
<TABLE>
<CAPTION>
Page
----------------------------------------------------------------------
<S> <C>
Adesso Healthcare Technology Services Inc.
Report of Independent Accountants......................... F-2
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Stockholders' Deficit....................... F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
Unaudited Pro Forma Combined Financial Information........ F-24
Total Therapeutic Management, Inc.
Report of Independent Accountants......................... F-28
Balance Sheets............................................ F-29
Statements of Operations.................................. F-30
Statements of Stockholders' Deficit....................... F-31
Statements of Cash Flows.................................. F-32
Notes to Financial Statements............................. F-33
</TABLE>
--------------------------------------------------------------------------------
F-1
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Adesso Healthcare Technology
Services Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Adesso Healthcare Technology
Services Inc. (the "Company") at December 31, 1998 and 1999 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 5, 2000
--------------------------------------------------------------------------------
F-2
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro forma
stockholders'
December 31, equity at
------------------- June 30, June 30,
1998 1999 2000 2000
(unaudited) (unaudited)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 2,372 $ 1,095 $ 1,943
Accounts receivable................................. 876 197 1,440
Prepaid expenses and other current assets........... 77 89 181
-------- -------- --------
Total current assets.............................. 3,325 1,381 3,564
Cash held in trust.................................... 1,833 1,954 1,085
Property and equipment, net........................... 1,830 1,538 1,477
Goodwill, net......................................... -- -- 12,256
Customer based intangibles, net....................... -- -- 4,153
Other assets.......................................... 40 110 1,700
-------- -------- --------
Total assets...................................... $ 7,028 $ 4,983 $ 24,235
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................... $ 54 $ 109 $ 156
Accrued liabilities................................. 619 306 734
Deferred revenue.................................... -- -- 1,475
Current portion of long-term debt................... 216 249 267
-------- -------- --------
Total current liabilities......................... 889 664 2,632
Contracts payable..................................... 3,126 2,180 1,243
Long-term debt, less current portion.................. 750 2,075 2,334
-------- -------- --------
Total liabilities................................. 4,765 4,919 6,209
-------- -------- --------
Commitments (Note 6)
Redeemable convertible preferred stock;
Liquidation value of $19,453 at December 31, 1998,
1999 and June 30, 2000............................. 19,536 19,536 37,897 $ --
-------- -------- -------- --------
Stockholders' deficit:
Common stock; $0.0001 par value; 5,800,000 shares
authorized; 265,185, 277,082 and 278,255 issued and
outstanding at December 31, 1998, 1999, and June
2000 respectively and 4,675,527 shares pro forma... -- -- -- $ 468
Additional paid-in capital.......................... 143 9,065 24,219 61,648
Deferred stock-based compensation................... (27) (4,275) (11,915) (11,915)
Accumulated deficit................................. (17,389) (24,262) (32,175) (32,175)
-------- -------- -------- --------
Total stockholders' deficit....................... (17,273) (19,472) (19,871) $ 18,026
-------- -------- -------- ========
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit...... $ 7,028 $ 4,983 $ 24,235
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-3
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
(unaudited)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 861 $ 1,828 $ 1,987 $ 903 $ 1,799
------- ------- ------- ------- -------
Operating costs and expenses:
Cost of services............................ 3,967 4,230 1,565 614 1,370
Sales and marketing......................... 600 695 710 301 671
General and administrative.................. 3,181 4,593 3,519 1,350 2,721
Stock-based compensation (Note 8)........... 6 11 2,276 565 3,198
------- ------- ------- ------- -------
Total operating costs and expenses........ 7,754 9,529 8,070 2,830 7,960
------- ------- ------- ------- -------
Loss from operations.......................... (6,893) (7,701) (6,083) (1,927) (6,161)
Interest income............................... 209 386 176 86 47
Interest expense.............................. (29) (93) (745) (136) (1,769)
Other income.................................. -- 203 -- -- 16
Loss on disposal of assets and other
expense..................................... -- (12) (221) (2) (46)
------- ------- ------- ------- -------
Net loss...................................... (6,713) (7,217) (6,873) (1,979) (7,913)
Dividend related to beneficial conversion
feature of redeemable convertible preferred
stock....................................... -- -- -- -- (1,025)
------- ------- ------- ------- -------
Net loss attributable to common
stockholders................................ $(6,713) $(7,217) $(6,873) $(1,979) $(8,938)
======= ======= ======= ======= =======
Net loss per common share, basic and
diluted..................................... $(31.67) $(30.07) $(23.78) $ (6.87) $(30.71)
======= ======= ======= ======= =======
Weighted average common shares outstanding.... 212 240 289 288 291
======= ======= ======= ======= =======
Pro forma net loss per share, basic and
diluted (unaudited)......................... $ (1.66) $ (2.06)
======= =======
Pro forma weighted average common shares
outstanding (unaudited)..................... 4,151 4,345
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-4
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands, except share data)
<TABLE>
<CAPTION>
Common stock Additional Unearned Total
------------------- paid-in stock-based Accumulated stockholders'
Shares Amount capital compensation deficit deficit
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996...................... 213,500 $ -- $ 87 $ -- $ (3,459) $ (3,372)
Exercise of stock options... 39,372 -- 1 -- -- 1
Repurchase of common stock.. (20,750) -- -- -- -- --
Unearned stock-based
compensation.............. -- -- 14 (14) -- --
Amortization of stock-based
compensation.............. -- -- -- 6 -- 6
Net loss.................... -- -- -- -- (6,713) (6,713)
------- ------- ------- -------- -------- --------
Balances, December 31,
1997...................... 232,122 -- 102 (8) (10,172) (10,078)
Exercise of stock options... 46,355 -- 15 -- -- 15
Repurchase of common stock.. (13,292) -- (4) -- -- (4)
Unearned stock-based
compensation.............. -- -- 30 (30) -- --
Amortization of stock-based
compensation.............. -- -- -- 11 -- 11
Net loss.................... -- -- -- -- (7,217) (7,217)
------- ------- ------- -------- -------- --------
Balances, December 31,
1998...................... 265,185 -- 143 (27) (17,389) (17,273)
Exercise of stock options... 11,897 -- 7 -- -- 7
Unearned stock-based
compensation.............. -- -- 6,524 (6,524) -- --
Amortization of stock-based
compensation.............. -- -- -- 2,276 -- 2,276
Issuance of warrants in
connection with debt...... -- -- 2,391 -- -- 2,391
Net loss.................... -- -- -- -- (6,873) (6,873)
------- ------- ------- -------- -------- --------
Balances, December 31,
1999...................... 277,082 -- 9,065 (4,275) (24,262) (19,472)
Exercise of stock options
(unaudited)............... 1,173 -- 1 -- -- 1
Beneficial Conversion
feature related to
issuance of redeemable
convertible preferred
stock (unaudited)......... -- -- 1,970 -- -- 1,970
Dividend related to
beneficial conversion
feature (unaudited)....... -- -- (1,025) -- -- (1,025)
Unearned stock-based
compensation
(unaudited)............... -- -- 10,838 (10,838) -- --
Amortization of stock-based
compensation
(unaudited)............... -- -- -- 3,198 -- 3,198
Issuance of warrants in
connection with debt...... -- -- 3,370 -- -- 3,370
Net loss (unaudited)........ -- -- -- -- (7,913) (7,913)
------- ------- ------- -------- -------- --------
Balances, June 30, 2000
(unaudited)............... 278,255 $ -- $24,219 $(11,915) $(32,175) $(19,871)
======= ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-5
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
(unaudited)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(6,713) $(7,217) $(6,873) $(1,979) $(7,913)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 209 612 522 238 415
Loss on disposal of assets....................... -- 12 221 -- --
Amortization of stock-based compensation
expense......................................... 6 11 2,276 565 3,198
Amortization of warrants issued in connection
with debt....................................... -- -- 465 66 1,531
Changes in assets and liabilities:
Accounts receivable............................ (682) 346 679 173 (16)
Prepaid expenses and other current assets...... 202 30 (12) (30) (71)
Cash held in trust............................. (899) (328) (121) (837) 869
Other assets................................... (214) 263 (70) (31) (420)
Accounts payable............................... 862 (1,187) 55 86 8
Accrued liabilities............................ 451 (212) (313) (480) 423
Deferred revenue............................... -- -- -- -- (379)
Medical claims payable......................... 1,259 643 (945) 191 (937)
------- ------- ------- ------- -------
Net cash used in operating activities........ (5,519) (7,027) (4,116) (2,038) (3,292)
------- ------- ------- ------- -------
Cash flows from investing activities:
Cash acquired in acquisition of Total Therapeutic
Management (TTM) net of acquisition costs.......... -- -- -- -- 365
Purchase of property and equipment................. (1,823) (461) (452) (232) (115)
------- ------- ------- ------- -------
Net cash used in investing activities........ (1,823) (461) (452) (232) 250
------- ------- ------- ------- -------
Cash flows from financing activities:
Net increase (decrease) in revolving line of
credit............................................ 102 (102) -- -- --
Proceeds from long-term debt....................... -- 1,115 3,500 1,737 2,040
Repayment of long-term debt........................ -- (196) (216) (105) (121)
Proceeds from issuance of redeemable convertible
preferred stock, net.............................. 15,796 51 -- -- 1,970
Proceeds from issuance of common stock............. 1 15 7 -- 1
Repurchase of common stock......................... -- (4) -- -- --
------- ------- ------- ------- -------
Net cash provided by financing activities.... 15,899 879 3,291 1,632 3,890
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 8,557 (6,609) (1,277) (638) 848
Cash and cash equivalents, beginning of period....... 424 8,981 2,372 2,372 1,095
------- ------- ------- ------- -------
Cash and cash equivalents, end of period............. $ 8,981 $ 2,372 $ 1,095 $ 1,734 $ 1,943
======= ======= ======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest............................. $ 29 $ 93 $ 280 $ 70 $ 70
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of warrants in connection with debt....... $ -- $ -- $ 2,391 $ 2,391 $ 3,370
Unearned stock-based compensation.................. $ 14 $ 30 $ 6,524 $ 1,982 $10,838
Issuance of redeemable convertible preferred stock
as consideration for acquisition of TTM........... $ -- $ -- $ -- $ -- $16,391
Assumption of liabilities in acquisition of TTM.... $ -- $ -- $ -- $ -- $ 1,898
Tangible assets acquired in acquisition of TTM..... $ -- $ -- $ -- $ -- $ 1,908
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-6
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BUSINESS OF THE COMPANY
Adesso Healthcare Technology Services Inc. (the "Company" or "Adesso"), formerly
Adesso Specialty Services Organization, Inc., contracts with medical care
providers and managed care organizations to provide physician compensation and
profiling applications to its customers throughout the United States. The
Company emerged from the development stage during the year ended December 31,
1997.
The Company has developed a proprietary payment methodology that reimburses
specialty physicians specialists based on the characteristics and severity of
health conditions of the patients under their care. Adesso offers its
methodology as a replacement to the customary fee-for-service payment plans
currently offered by most insurance providers.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited interim financial data
The accompanying balance sheet as of June 30, 2000, the statements of operations
and of cash flows for the six-month periods ended June 30, 1999 and 2000 and the
statement of stockholders' deficit for the six months ended June 30, 2000 are
unaudited. The unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of management,
reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly the Company's financial position and its results of
operations and its cash flows for the six-month periods ended June 30, 1999 and
2000. The financial data and other information disclosed in these notes to the
financial statements related to these periods are unaudited. The results for the
six months ended June 30, 2000 are not necessarily indicative of the results to
be expected for the year ending December 31, 2000.
Use of estimates
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
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 reported period. Actual results could differ from those estimates.
Revenue recognition
The Company generates revenues by processing specialist physician reimbursement
payments according to its proprietary payment methodology. The Company's
revenues are contractually arranged with each managed care organization or
health plan administrator. Each contract defines a monthly "management fee" that
is a certain percentage of a pool of funds that are paid to a group of
participating physicians during each respective month. Additionally, the Company
generates revenues from analytical services to certain customers. In these
cases, fees are defined as a flat rate per month. The Company recognizes
revenues on a monthly basis as they are earned.
Under its standard form contract, Adesso bears no risk of losses from medical
claims. The managed care organizations remit payment to the medical care
providers based on Adesso's payment
--------------------------------------------------------------------------------
F-7
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
methodology. Adesso receives only its management fee from the managed care
organizations. Under certain other contracts, Adesso acts as a payment broker.
The managed care organizations send the entire amount of funds to Adesso. Then
Adesso remits payments to the medical care providers and retains its management
fee. Such funds that Adesso has received, but not yet remitted, are classified
as cash held in trust, with the corresponding liability included in contracts
payable.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Cash held in trust
The Company has contracts with certain customers under which cash is held in
trust for the managed care organizations by the Company. The Company has a
fiduciary obligation to disburse funds to certain participating physicians on
behalf of the managed care organizations.
Concentration of credit risk
The Company's cash and cash equivalents are maintained at a major U.S. financial
institution that management believes is creditworthy. Deposits in this
institution may exceed the amount of insurance provided on such deposits.
One customer accounted for 27.7%, 42.6% and 39.8% of the Company's revenues
during the years ended December 31, 1997, 1998 and 1999, respectively. The same
customer accounted for 84.8% and 23.5% of accounts receivable on December 31,
1998 and 1999, respectively.
Financial instruments
The carrying values of the Company's financial instruments, including cash and
cash equivalents, cash held in trust, accounts receivable, accounts payable and
accrued expenses approximate their fair values due to their short maturities.
Based upon borrowing rates currently available to the Company for loans with
similar terms, the carrying value of the debt obligations approximate fair
value.
Property and equipment
Property and equipment are stated at cost. Property and equipment consists of
certain capitalized software costs, leasehold improvements and office furniture
and equipment. Depreciation is computed using the straight-line method over the
shorter of the estimated useful lives of the assets, generally three to five
years, or the lease term, where applicable. Gains and losses upon asset disposal
are reflected in income in the year of disposal. Maintenance and repairs are
expensed as incurred. The Company capitalizes certain software development costs
for internally used software in accordance with the American Institute of
Certified Public Accountant's Statement of Position No. 98-1 ("SOP 98-1").
--------------------------------------------------------------------------------
F-8
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Impairment of long-lived assets
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which requires
the Company to review for impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When such an event occurs, management determines whether there
has been an impairment by comparing the anticipated undiscounted future net cash
flows to the related asset's carrying value. If an asset is considered impaired,
the asset is written down to fair value, which is determined based either on
discounted cash flows or appraised values, depending on the nature of the asset.
Segments
The Company operates in one segment and uses one measurement of profitability to
manage its business. All long-lived assets are maintained in the United States.
Income taxes
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities, using tax
rates expected to be in effect when the differences will reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Accounting for stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and Financial Accounting Standards Board
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans" ("FIN 28"), and complies with the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
Under APB 25, compensation expense is based on the excess, if any, on the date
of the grant, of the fair value of the Company's stock over the exercise price.
Under SFAS 123, compensation expense is measured on the date of grant based on
the fair value of the award. The pro forma disclosures of the impact on net loss
of measuring stock-based compensation expense in accordance with SFAS 123 are
presented in Note 8.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
Net loss per common share
Basic net loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is
--------------------------------------------------------------------------------
F-9
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
computed by giving effect to all dilutive potential common shares, including
options, warrants and redeemable convertible preferred stock. Options, warrants
and redeemable convertible preferred stock were not included in the computation
of diluted net loss per share for the years ended December 31, 1997, 1998 and
1999 and for the six-month periods ended June 30, 1999 and 2000 because the
effect of including them would have been antidilutive. A reconciliation of the
numerator and denominator used in the calculation of historical basic and
diluted net loss per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended Six months
December 31, ended June 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
(unaudited)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................................... $(6,713) $(7,217) $(6,873) $(1,979) $(7,913)
Dividend related to beneficial conversion
feature -- -- -- -- (1,025)
------- ------- ------- ------- -------
Net loss attributable to common
stockholders............................... $(6,713) $(7,217) $(6,873) $(1,979) $(8,938)
======= ======= ======= ======= =======
Denominator:
Weighted average common shares outstanding
for basic and diluted calculations........ 212 240 289 288 291
------- ------- ------- ------- -------
Net loss per common share, basic and
diluted.................................... $(31.67) $(30.07) $(23.78) $ (6.87) $(30.71)
======= ======= ======= ======= =======
</TABLE>
Antidilutive securities
The following outstanding weighted average number of options and warrants (prior
to the application of the treasury stock method) and redeemable convertible
preferred stock (on an as-converted basis) were excluded from the computation of
diluted net loss per common share because including them would have had an
antidilutive effect:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------------- ---------------------
1997 1998 1999 1999 2000
(unaudited)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options and warrants............... 460,649 571,142 844,673 765,893 1,311,853
Redeemable convertible preferred
stock............................ 2,667,996 3,858,051 3,861,557 3,861,557 4,054,519
</TABLE>
Recent accounting pronouncements
In March 2000, the FASB issued Interpretation No. 44, "Accounting for certain
transactions involving stock compensation, an interpretation of APB No. 25"
("FIN 44"). FIN 44 establishes guidance for the accounting for stock option
grants or modifications to existing stock option awards and is effective for
option grants made after June 30, 2000. FIN 44 also establishes guidance for the
repricing of stock options and determining whether a grantee is an employee, for
which the guidance is effective after December 15, 1998 and modifying a fixed
option to add a reload feature, for which the guidance is
--------------------------------------------------------------------------------
F-10
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
effective after January 12, 2000. The adoption of certain of the provisions of
FIN 44 prior to June 30, 2000 did not have a material effect on the financial
statements. The Company does not expect that the adoption of the remaining
provisions will have a material effect on the financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company has complied
with the provisions of SAB 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). 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
balance sheet 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 relationship that exists. SFAS 133 will be effective for fiscal
years beginning after June 15, 2000. The Company does not currently hold
derivative instruments or engage in hedging activities.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements...................................... $ 33 $ 45
Furniture and office equipment.............................. 381 381
Unamortized software development costs...................... -- 294
Computer equipment.......................................... 2,110 1,830
------ -------
Total cost.................................................. 2,524 2,550
Less: Accumulated depreciation and amortization............. (694) (1,012)
------ -------
$1,830 $ 1,538
====== =======
</TABLE>
Depreciation and amortization expense related to property and equipment was
$200,000, $558,000 and $522,000 for the years ended December 31, 1997, 1998 and
1999, respectively. Amortization expense related to capitalized software
development costs was $--, $-- and $15,000 during the years ended December 31,
1997, 1998 and 1999, respectively.
During the year ended December 31, 1999, the Company took a physical inventory
of all of its fixed assets. In this physical inventory, the Company identified
certain computer equipment that was inoperable or outdated. The Company disposed
of this equipment and recognized a loss on disposal of $221,000.
--------------------------------------------------------------------------------
F-11
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Rent and utilities.......................................... $210 $ 15
Severance benefits.......................................... 150 --
Payroll..................................................... 101 11
Vacation.................................................... 81 80
Bonuses..................................................... 7 54
Professional fees........................................... 54 65
Information technology...................................... -- 66
Other....................................................... 16 15
---- ----
$619 $306
==== ====
</TABLE>
NOTE 5 -- LONG-TERM DEBT
In April 1998, the Company entered into a master loan and security agreement
(the "Senior Debt Agreement") with a business credit corporation. Under the
Senior Debt Agreement, the Company can borrow up to $2,000,000 to finance the
purchase of equipment in separate loans with individual amounts of not less than
$50,000. The effective annual interest rate of borrowings under the Senior Debt
Agreement is 14.975%. All borrowings under the Senior Debt Agreement are
collateralized by the equipment purchased with such borrowings.
In June 1999, the Company entered into a subordinated loan and security
agreement (the "Subordinated Debt Agreement") with a separate lender (the
"Lender"). Under the Subordinated Debt Agreement, the Company can borrow up to
$3,500,000, available in two installments of $1,750,000. The Company entered
into promissory note agreements in June and October 1999 for these installments.
The effective annual interest rate on borrowings under the Subordinated Debt
Agreement is 9.5%. All borrowings under the Subordinated Debt Agreement are
collateralized by all future earnings and assets of the Company other than those
subject to the Senior Debt Agreement.
Under the Subordinated Debt Agreement, the Company granted to the Lender
warrants to purchase up to 166,667 shares of the Company's Series D redeemable
convertible preferred stock at an exercise price of $10.50 per share, for a
maximum total purchase price of $1,750,000. (See Note 7).
In addition to the debt facilities described above, Adesso has a $250,000 line
of credit, none of which was used at December 31, 1999.
--------------------------------------------------------------------------------
F-12
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Senior debt................................................. $966 $ 750
Subordinated debt........................................... -- 3,500
---- ------
966 4,250
Less unamortized warrants................................... -- (1,926)
---- ------
966 2,324
Less current portion of senior debt......................... 216 249
---- ------
Total long-term debt........................................ $750 $2,075
==== ======
</TABLE>
Future aggregate minimum debt payments are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 671
2001........................................................ 2,397
2002........................................................ 2,004
------
Total loan payments......................................... 5,072
Less: Interest.............................................. 822
------
Present value of loan payments.............................. $4,250
======
</TABLE>
NOTE 6 -- COMMITMENTS
Operating leases
The Company leases its office facilities under three noncancelable operating
leases that expire in January 2001, November 2002 and May 2004. The Company also
leases certain equipment under an operating lease that expires in June 2003.
Future minimum lease payments and rental income under noncancelable operating
leases as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Lease Rental
Year ending December 31, Payments Income
<S> <C> <C>
---------------------------------------------------------------------------------
2000........................................................ $ 495 $ 436
2001........................................................ 622 477
2002........................................................ 643 468
2003........................................................ 515 352
2004........................................................ 168 118
------ ------
$2,443 $1,851
====== ======
</TABLE>
Rent expense under noncancelable leases for the years ended December 31, 1997,
1998 and 1999 was $195,000, $435,000 and $468,000, respectively.
--------------------------------------------------------------------------------
F-13
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK
As of December 31, 1998 and 1999, the Company's redeemable convertible preferred
stock consisted of four series ("Series A, B, C and D," respectively) as
follows:
<TABLE>
<CAPTION>
Proceeds
Shares net of
------------------------ Liquidation issuance
Authorized Outstanding amount costs
Series (in thousands)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A............................................... 1,000,000 790,000 $ 790 $ 774
B............................................... 1,185,000 1,021,356 3,319 3,465
C............................................... 900,000 853,631 5,293 5,271
D............................................... 1,250,000 1,196,570 10,051 10,026
--------- --------- ------- -------
4,335,000 3,861,557 $19,453 $19,536
========= ========= ======= =======
</TABLE>
As of June 30, 2000, the Company's redeemable convertible preferred stock
consisted of five series ("Series A, B, C, D and E," respectively) as follows
(unaudited):
<TABLE>
<CAPTION>
Proceeds
Shares Net of
------------------------ Liquidation Issuance
Authorized Outstanding Amount Costs
Series (in thousands)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A............................................... 1,000,000 790,000 $ 790 $ 774
B............................................... 1,185,000 1,021,356 3,319 3,465
C............................................... 900,000 853,631 5,293 5,271
D............................................... 1,250,000 1,196,570 10,051 10,026
Series E (See Note 12).......................... 1,200,000 119,048 -- 1,970
Series E issued for acquisition of Total
Therapeutic Management........................ -- 416,667 -- 16,391
--------- --------- ------- -------
5,535,000 4,397,272 $19,453 $37,897
========= ========= ======= =======
</TABLE>
The amount of aggregate proceeds from the issuance of Series B is greater than
the liquidation amount for Series B because certain convertible debentures were
converted into shares of Series B at a price per share greater than the
liquidation value per share.
Series E has no liquidation amount because the holders of Series E, unlike the
holders of Series A, B, C and D, do not have any preferential liquidation
rights.
Dividend rights
The holders of the Company's Series A, B, C and D (but not the holders of the
Series E) are entitled to receive cash dividends, in preference to the holders
of the Company's common stock, at the rate of 8% per year of the outstanding
liquidation preference amounts (defined in the following section). Such
dividends shall be payable only when funds are legally available and when
declared by the Company's
--------------------------------------------------------------------------------
F-14
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Board of Directors and are non-cumulative. As of December 31, 1999, no dividends
have been declared.
As long as any shares of Series A, B, C, D or E are outstanding, no dividends
may be paid to the holders of the Company's common stock unless an equal amount
per share (on an as-if-converted basis) is also paid to the holders of
Series A, B, C, D and E.
Liquidation rights
In the event of any liquidation, dissolution or winding up of the Company or the
acquisition of the Company by another entity, the holders of Series A, B, C and
D (but not the holders of Series E) shall be entitled to receive, prior to and
in preference to the holders of the Company's common stock, a liquidation
preference amount equal to the liquidation values per share multiplied by the
number of shares outstanding. The liquidation values per share of Series A, B, C
and D are $1.00, $3.25, $6.20 and $8.40, respectively. If the assets of the
company are insufficient to pay the full liquidation preference amounts, the
available assets shall be distributed to the holders of Series A, B, C and D
ratably in proportion to the full preference amounts they would otherwise be
entitled to receive. After payment of the full liquidation preference amounts,
any remaining assets of the Company legally available for distribution shall be
distributed ratably to the holders of the Company's common stock and to the
holders of Series A, B, C, D and E (on an as-if-converted basis).
Voting rights
The holders of Series A, B, C, D and E have voting rights equal to those of the
holders of the Company's common stock. Each holder of Series A, B, C, D and E,
voting collectively, is entitled to the number of votes equal to the number of
shares of common stock into which such shares of the redeemable convertible
preferred stock are convertible.
As long as any shares of redeemable convertible preferred stock are outstanding,
the consent of the holders of at least a majority of the outstanding shares of
Series A, B, C, D and E is required for any major actions by the Company,
including any amendment to the Company's Articles of Incorporation or Bylaws,
any change to the number of authorized shares of stock, any declaration of
dividends, any acquisition or asset transfer and any change in the authorized
number of members of the Company's Board of Directors.
Right to elect members of the Board of Directors of the Company
Holders of Series A, B, C and D (but not holders of Series E), voting as
separate classes, are entitled to elect one member of the Board of Directors per
class.
Conversion rights
Each share of Series A, B, C, D and E is convertible into one share of the
Company's common stock. Such conversion shall occur at the option of the holder
of such share or automatically and immediately upon the closing of a firmly
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
common stock of the Company in which the price per share is at least $16.80
(adjusted for any stock dividends, combinations, splits, recapitalizations and
the like) and the gross cash proceeds to the Company
--------------------------------------------------------------------------------
F-15
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(before underwriting discounts, commissions and fees) are at least $20,000,000.
The current one-to-one conversion rate shall be adjusted, as necessary, for any
events affecting the value of a share of stock such as stock splits and stock
dividends.
Warrants to purchase redeemable convertible preferred stock
In March 1996, the Company signed a note and warranty purchase agreement with
ten of the existing Series B redeemable convertible preferred stockholders.
Warrants to purchase 135,615 shares of Series A redeemable convertible preferred
stock were granted to these stockholders at an exercise price of $1.00 per
share. These warrants expire at the earlier of an initial public offering or
March 8, 2001. The warrants had a fair value of $0.50 per share on the date of
issuance and are included in additional paid-in capital. None of these warrants
have been exercised as of December 31, 1999. The cumulative value of these
warrants was amortized during the year ended December 31, 1996.
In June 1999, the Company granted a warrant to purchase up to 166,667 shares of
Series D redeemable convertible preferred stock at an exercise price of $10.50
per share in connection with a subordinated loan and security agreement (See
Note 5). The warrants had fair value of $14.35 per share on the date of
issuance, for a total value of $2,391,000, and are included in additional
paid-in capital. The cost of these warrants is being amortized as interest
expense over the life of the loan, which is three years. None of these warrants
have been exercised as of December 31, 1999. As of December 31, 1999, the
unamortized cost of these warrants, recorded as an offset to the corresponding
debt, was $1,926,000. The amortization charged to interest expense during the
year ended December 31, 1999 was $465,000.
The Company valued the warrants described above using the Black-Scholes option
pricing model applying expected lives of 10 years, risk-free rates of 5.90% for
June 1999 and 6.27% for March 1996, dividend yields of zero percent and
volatilities of 75%.
NOTE 8 -- STOCKHOLDERS' DEFICIT
Common stock
The Company's Articles of Incorporation authorize the Company to issue 5,800,000
shares of zero par value common stock.
Stock option plan
In July 1995, the Company's Board of Directors approved the adoption of the 1995
Stock Option Plan (the "1995 Plan"). The 1995 Plan provided for the granting of
options to purchase shares of the Company's common stock to employees, directors
and consultants. In January 1997, the 1995 Plan was terminated. As of
December 31, 1999, 67,890 shares of the Company's common stock remain reserved
for outstanding options granted under the 1995 Plan.
In January 1997, the Company's Board of Directors approved the adoption of the
1997 Stock Option Plan (the "1997 Plan" or the "Plan"). The 1997 Plan replaced
the 1995 Plan. Under the 1997 Plan, employees, directors and consultants may be
granted options to purchase shares of the Company's common stock. Only
non-statutory stock options may be granted to non-employees. Only employees
--------------------------------------------------------------------------------
F-16
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
are eligible to receive qualified incentive stock options. As of December 31,
1999, the Company's Board of Directors has reserved 1,040,336 shares of common
stock under the 1997 Plan.
Non-statutory options may be granted with an exercise price not less than 85% of
the fair value of the Company's common stock on the date the option is granted.
Qualified incentive stock options may be granted with an exercise price not less
than 100% of the fair value of the Company's common stock on the date the option
is granted. Options may be granted to persons who, at the time of the grant, own
less than 10% of the voting power of the Company. The maximum term of the
options is ten years. The Plan stipulates that vesting occur at a rate of at
least 20% of the total number of options granted per year. All of the Company's
currently outstanding options vest at a rate of at least 25% per year. Vesting
terminates at such time the employment or consulting relationship terminates.
Activity under these plans is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Options outstanding
Shares ---------------------------------------
available Weighted-
for grants Number of average
of options Price per exercise Aggregate
options outstanding share price proceeds
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996........ 54 268 $0.01 - $0.62 $0.26 $ 70
Additional shares reserved......... 257 -- $ -- $ -- --
Options granted.................... (236) 236 $0.33 - $0.62 $0.59 139
Options exercised.................. -- (39) $0.01 - $0.33 $0.03 (1)
Options cancelled.................. 78 (78) $0.01 - $0.62 $0.44 (34)
---- ----- ------------- ----- ------
Balances, December 31, 1997........ 153 387 $0.01 - $0.62 $0.45 174
Additional shares reserved......... 271 -- -- -- --
Options granted.................... (475) 475 $0.62 - $0.84 $0.84 397
Options exercised.................. -- (47) $0.03 - $0.62 $0.32 (15)
Options cancelled.................. 303 (303) $0.01 - $0.84 $0.58 (177)
---- ----- ------------- ----- ------
Balances, December 31, 1998........ 252 512 $0.01 - $0.84 $0.74 379
Additional shares reserved......... 340 -- -- -- --
Options granted.................... (433) 433 $0.84 - $1.50 $1.39 602
Options exercised.................. -- (12) $0.10 - $0.62 $0.58 (7)
Options cancelled.................. 82 (82) $0.01 - $1.50 $0.83 (68)
---- ----- ------------- ----- ------
Balances, December 31, 1999........ 241 851 $0.01 - $1.50 $1.07 906
Additional shares reserved......... 400 -- -- -- --
Options granted.................... (410) 410 $1.50 - $8.00 $7.02 2,879
Options exercised.................. (2) $0.62 - $0.84 $0.50 (1)
Options cancelled.................. 34 (34) $0.62 - $8.00 $2.12 (72)
---- ----- ------------- ----- ------
Balances, June 30, 2000
(unaudited)...................... 265 1,225 $0.62 - $8.00 $3.03 $3,712
==== ===== ============= ===== ======
</TABLE>
--------------------------------------------------------------------------------
F-17
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pro forma stock-based compensation
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Had compensation cost been determined based on the fair value at
the grant date of the awards for the years ended December 31, 1997, 1998 and
1999 consistent with the provisions of SFAS 123, the Company's net loss for the
year ended December 31, 1997, 1998 and 1999, respectively, would have been
greater, as shown below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1997 1998 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss attributable to common stockholders -- as
reported.................................................. $(6,713) $(7,217) $(6,873)
Net loss attributable to common stockholders -- pro forma... $(6,743) $(7,381) $(7,792)
Net loss per common share, basic and diluted -- as
reported.................................................. $(31.67) $(30.07) $(23.78)
Net loss per common share, basic and diluted -- pro forma... $(31.81) $(30.75) $(26.96)
</TABLE>
Such pro forma disclosures may not be representative of future compensation cost
because options vest over several years and additional grants may be made each
year. The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1997 1998 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average risk-free interest rate.................... 6.35% 5.26% 5.59%
Expected life............................................... 10 years 10 years 10 years
Expected dividends.......................................... -- -- --
</TABLE>
Based on the above assumptions, the weighted average fair value per share of
options granted were $0.27, $0.34 and $19.68 for the years ended December 31,
1997, 1998 and 1999, respectively.
--------------------------------------------------------------------------------
F-18
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------------------------
Weighted Weighted
average Weighted average Weighted
remaining average remaining average
Exercise Number contractual exercise Number contractual exercise
price outstanding life (years) price exercisable life (years) price
---------------------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0.01................. 20,535 5.80 $0.01 20,535 5.80 $0.01
0.03.................. 355 6.22 0.03 355 6.22 0.03
0.10.................. 1,000 6.09 0.10 1,000 6.09 0.10
0.33.................. 21,000 6.62 0.33 19,954 6.62 0.33
0.40.................. 23,000 6.97 0.40 17,270 6.97 0.40
0.62.................. 22,800 7.87 0.62 20,269 7.82 0.62
0.84.................. 408,678 8.71 0.84 140,659 8.66 0.84
1.50.................. 353,750 9.46 1.50 -- -- --
------- ---- ------- ----
851,118 8.82 220,042 7.98
======= ==== ======= ====
</TABLE>
During the year ended December 31, 1999, the Company recorded unearned
stock-based compensation totaling $6,524,000 which is being amortized to expense
over the period during which the options vest, generally four years, using the
method set out in Example 2 of Financial Accounting Standards Board
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans" ("FIN 28").
For grants of stock options granted to employees, the Company recorded
stock-based compensation expense of $--, $-- and $2,220,000 for the years ended
December 31, 1997, 1998 and 1999 and $550,000 and $3,049,000 for the six-month
periods ended June 30, 1999 and 2000, respectively. Of the $2,220,000 of expense
for the year ended December 31, 1999, $413,000 related to cost of services,
$656,000 related to selling and marketing and $1,151,000 related to general and
administrative. Of the $550,000 of expense for the six months ended June 30,
1999, $20,000 related to cost of services, $260,000 related to selling and
marketing and $270,000 related to general and administrative. Of the $3,049,000
expense for the six months ended June 30, 2000, $756,000 related to cost of
services, $425,000 related to selling and marketing and $1,868,000 related to
general and administrative.
Stock-based compensation expense relating to stock options granted to external
consultants is recognized as the stock options are earned. The fair values of
the stock options granted are calculated at each reporting date using the
Black-Scholes option pricing model. As a result, the stock-based compensation
expense will fluctuate as the fair market value of the Company's common stock
fluctuates. The Company believes that the fair value of the stock options are
more reliably measurable than the fair value of the services received. In
connection with the grant of stock options to consultants, the Company recorded
stock-based compensation expense of $6,000, $11,000 and $56,000 for the years
ended December 31, 1997, 1998 and 1999 and $15,000 and $149,000 the six months
ended June 30, 1999 and 2000, respectively. All stock-based compensation expense
relating to external consultants was for cost of services.
--------------------------------------------------------------------------------
F-19
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2000, the Company expects to amortize stock-based compensation
expense with respect to employees of $4,392,000 during the six months ended
December 31, 2000 and $4,494,000, $1,957,000 and $605,000 during the years ended
December 31, 2001, 2002 and 2003, respectively.
NOTE 9 -- 401(K) PLAN
The Company's employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. Employees may make voluntary,
tax-deferred contributions to the 401(k) Plan up to the statutorily prescribed
annual limit. The Company makes discretionary matching contributions to the
401(k) Plan on behalf of employees up to the limit determined by the Board of
Directors. The Company contributed zero, $17,000 and $15,000 to the 401(k) Plan
during the years ended December 31, 1997, 1998 and 1999, respectively.
NOTE 10 -- INCOME TAXES
At December 31, 1999, the Company had Federal and state net operating loss
carryforwards of $22,077,000 and $16,309,000, respectively, available to offset
future regular and alternative minimum taxable income. The Company's federal and
state net operating loss carryforwards expire in 2003 through 2019.
The Tax Reform Act of 1986 limits the use of net operating losses and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a company. If the Company should have an ownership change, as defined by the
U.S. Tax Code, utilization of the carryforwards could be restricted.
Temporary differences that give rise to significant portions of deferred tax
assets and liabilities at December 31, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Net operating losses........................................ $ 6,840 $ 8,415
Accrued expenses and reserves............................... 35 32
Depreciation on property and equipment...................... (115) (101)
------- -------
Net deferred tax assets..................................... 6,760 8,346
Less: Valuation allowance................................... (6,760) (8,346)
------- -------
Net deferred tax asset...................................... $ -- $ --
======= =======
</TABLE>
Due to uncertainty regarding the realization of the favorable tax attributes in
future tax returns, the Company has established a valuation allowance offsetting
its net deferred tax assets.
NOTE 11 -- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
STOCKHOLDERS' EQUITY
All outstanding shares of Series A, B, C, D and E redeemable convertible
preferred stock shall be automatically converted into shares of common stock
immediately upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the Securities Act of
--------------------------------------------------------------------------------
F-20
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1933, as amended, covering the offer and sale of the Company's common stock in
which the price per share is at least $16.80 (adjusted for any stock dividends,
combinations, splits, recapitalizations and the like) and the gross cash
proceeds to the Company (before underwriting discounts, commissions and fees)
are at least $20,000,000. The pro forma effect of this conversion has been
presented as a separate column in the Company's balance sheet, assuming that
this conversion had occurred as of June 30, 2000.
Pro forma basic and diluted net loss per common share have been computed to give
effect to common equivalent shares from redeemable convertible preferred stock
that will automatically convert upon the closing of the Company's initial public
offering (using the as-if-converted method) for the year ended December 31, 1999
and the six months ended June 30, 2000.
A reconciliation of the numerator and denominator used in the calculation of pro
forma basic and diluted net loss per common share follows (in thousands except
per share amounts):
<TABLE>
<CAPTION>
Six months
Year ended ended
December 31, June 30,
1999 2000
(unaudited)
----------------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net loss attributable to common stockholders.............. $(6,873) $(8,938)
======= =======
Denominator:
Shares used in computing basic and diluted net loss per
share.................................................... 289 291
Adjusted to reflect the effect of the assumed conversion
of redeemable convertible preferred stock from the date
of issuance:
Series A................................................ 790 790
Series B................................................ 1,021 1,021
Series C................................................ 854 854
Series D................................................ 1,197 1,197
Series E................................................ -- 192
------- -------
Weighted average shares used in computing pro forma basic
and diluted net loss per share............................ 4,151 4,345
======= =======
Pro forma basic and diluted net loss per share.............. $ (1.66) $ (2.06)
======= =======
</TABLE>
NOTE 12 -- SUBSEQUENT EVENTS
Series E redeemable convertible preferred stock
On March 16, 2000, the Board of Directors of the Company approved the issuance
of 1,200,000 shares of Series E redeemable convertible preferred stock at a
price of $16.80 per share. The holders of Series E redeemable convertible
preferred stock have equivalent rights as the holders of Series A, B, C and D
redeemable convertible preferred stock except that Series E stockholders are not
entitled to dividends (unless dividends to the common stockholders are declared)
and the Series E shares have no liquidation value.
--------------------------------------------------------------------------------
F-21
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On March 23, 2000, the Company received a $945,000 bridge loan from four of its
existing investors. On April 6, 2000, the Company issued 56,277 shares of
Series E redeemable convertible preferred stock as payment in full of the bridge
loan. A beneficial conversion feature for the issuance of this convertible debt
has been recorded as interest expense. This was calculated in accordance with
Emerging Issues Task Force No. 98-5 ("EITF 98-5"), "Accounting for Convertible
Securities with Beneficial Conversion Features" and is limited by the proceeds
received of $945,000. These shares and the corresponding cash proceeds are
included in the totals described in the section below.
On April 6, 2000, the Company issued 119,048 shares of Series E redeemable
convertible preferred stock for $16.80. 62,771 shares were issued for net
proceeds of $1,025,000, and 56,277 were issued on conversion of a $945,000
bridge loan described above. A beneficial conversion feature has been recorded
for the 62,771 shares calculated in accordance with EITF 98-5. The beneficial
conversion feature is limited to the amount of proceeds received of $1,025,000
and is shown as a preferred dividend in the Statement of Operations.
Long-term debt facility and issuance of warrants to purchase Series E redeemable
convertible preferred stock
On April 27, 2000, the Company increased its maximum borrowing capacity under
the Subordinated Debt Agreement (See Note 5.) by $3,500,000. In connection with
this agreement, the Company granted to the Lender warrants to purchase up to
104,167 shares of Series E redeemable convertible preferred stock, at an
exercise price of $16.80 per share, for a maximum total purchase price of
$1,750,000. On June 8, 2000 and on July 7, 2000, the Company borrowed $2,040,000
and $1,460,000, respectively, under this debt facility.
The fair values of the warrants described above were $32.35 per share on the
date of issuance calculated using the Black-Scholes pricing model. The aggregate
value at issuance was $3,370,000. This amount has been included in additional
paid-in capital. The cost of these options is being amortized as interest
expense over the life of the loan, which is three years. The unamortized cost of
these options has been offset against the loan to the extent possible. The
excess of this offset over the amount borrowed at June 30, 2000 was $1,143,000
which is included within other assets.
Acquisition of Total Therapeutic Management, Inc.
On May 1, 2000, the Company executed an agreement to acquire Total Therapeutic
Management, Inc. ("TTM") in a transaction to be accounted for as a purchase
business combination. TTM provides consulting services to the healthcare and
pharmaceutical industries.
Pursuant to the acquisition agreement, all issued and outstanding common shares
of TTM were exchanged for shares of the Company's Series E redeemable
convertible preferred stock. Adesso issued 416,667 shares of its Series E
redeemable convertible preferred stock, valued at $39.34 per share, to the TTM
stockholders, resulting in an acquisition price of $16,391,000. The Company
anticipates incurring $212,000 in acquisition related expenses, consisting
primarily of financial advisory, accounting and legal fees. In addition, the
former TTM stockholders may receive up to an additional 416,667 shares of
Series E redeemable convertible preferred stock if the TTM subsidiary meets
certain revenue targets and other performance benchmarks in the twelve months
following the closing of the acquisition.
--------------------------------------------------------------------------------
F-22
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1997 stock option plan authorized shares
In May 2000, the Board of Directors of the Company authorized an increase in the
number of shares reserved under the 1997 stock option plan of 400,000 shares of
common stock, to a total of 1,491,525 shares.
Registration
On May 24, 2000, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission to permit the
Company to sell its common stock to the public. Upon completion of the Company's
initial public offering meeting the conditions described in Note 11 above, all
of the outstanding shares of Series A, B, C, D and E redeemable convertible
preferred stock will be automatically converted into shares of common stock.
--------------------------------------------------------------------------------
F-23
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
On May 1, 2000, Adesso executed an agreement to acquire Total Therapeutic
Management, Inc. ("TTM") in a transaction to be accounted for as a purchase
business combination. TTM provides consulting services to the healthcare and
pharmaceutical industries.
As a result of the acquisition, all issued and outstanding common shares of TTM
were exchanged for shares of the Company's Series E redeemable convertible
preferred stock ("Series E"). The Company issued 416,667 shares of Series E to
TTM stockholders at a fair value of $39.34 per share, for an aggregate value of
$16,391,000. The Company anticipates incurring $212,000 in acquisition related
expenses, consisting primarily of financial advisory, accounting and legal fees.
In addition, the former stockholders of TTM may receive up to an additional
416,667 shares of Series E if the TTM subsidiary meets certain revenue targets
and other performance benchmarks in the twelve months following the closing of
the acquisition.
The acquisition cost has been allocated to the assets acquired, including
tangible and intangible assets, and liabilities assumed based on the fair value
of such assets and liabilities on the date of acquisition. The fair values of
assets and liabilities were determined based on a combination of TTM management
estimates and professional appraisals. The allocation of acquisition cost is
subject to change pending a final analysis of the total acquisition cost and
fair value of the assets acquired and liabilities assumed. Adesso will not
record the potential grant of additional shares of Series E until such time as
it is determined that TTM has met its performance targets. If such targets are
met then Adesso will account for this is an adjustment to the purchase price of
TTM. The acquisition cost has been allocated as follows (in thousands):
<TABLE>
<S> <C>
---------------------------------------------------------------------
Tangible assets received.................................... $ 1,908
Customer based intangibles.................................. 4,200
Goodwill.................................................... 12,394
Liabilities assumed......................................... (1,899)
-------
$16,603
=======
</TABLE>
Tangible assets received consist primarily of cash and cash equivalents,
accounts receivable and property and equipment. Liabilities assumed consist
primarily of deferred revenue and other accrued liabilities. Deferred revenue is
computed as cash payments received but not yet earned. Revenue is recognized as
earned according to the percentage-of-completion method. The carrying amounts of
TTM's tangible assets and liabilities as of April 30, 2000 were used to
calculate the pro forma adjustments as they approximate fair value at such date.
The amounts allocated to customer based intangibles and goodwill are being
amortized over fifteen years, using the straight-line method.
The acquisition is expected to be structured as a tax-free exchange of stock.
Therefore, the differences between the recognized fair values of acquired
assets, including intangible assets, and their historical tax bases are not tax
deductible.
--------------------------------------------------------------------------------
F-24
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro forma
Historical Historical -------------------------
Adesso TTM Adjustments Combined
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 1,799 $ 824 $ -- $ 2,623
-------- ------ ------ --------
Operating costs and expenses:
Cost of services............................... 1,370 754 -- 2,124
Sales and marketing............................ 671 25 -- 696
General and administrative..................... 2,721 128 368(A) 3,217
Stock-based compensation....................... 3,198 -- -- 3,198
-------- ------ ------ --------
Total operating costs and expenses........... 7,960 907 368 9,235
-------- ------ ------ --------
Loss from operations............................. (6,161) (83) (368) (6,612)
Interest income.................................. 47 8 -- 55
Interest expense................................. (1,769) -- -- (1,769)
Other income..................................... 16 -- -- 16
Other expense.................................... (46) -- -- (46)
-------- ------ ------ --------
Net loss......................................... $ (7,913) $ (75) $ (368) $ (8,356)
Dividend related to beneficial conversion feature
of redeemable convertible preferred stock...... (1,025) -- -- (1,025)
Net loss attributable to common stockholders..... (8,938) (75) (368) (9,381)
======== ====== ====== ========
Net loss per share, basic and diluted............ $ (30.71) $ (13.25)
======== ========
Weighted average common shares outstanding..... 291 708
======== ========
Pro forma net loss per share, basic and diluted
(B)............................................ $ (2.06) $ 2.03
======== ========
Weighted average common shares outstanding
(B)........................................... 4,345 4,616
======== ========
</TABLE>
--------------------------------------------------------------------------------
F-25
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro forma
Historical Historical -------------------------
Adesso TTM Adjustments Combined
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,987 $3,655 $ -- $ 5,642
------- ------ ------- -------
Operating costs and expenses:
Cost of service................................. 1,565 2,223 -- 3,788
Sales and marketing............................. 710 150 -- 860
General and administrative...................... 3,519 1,325 1,106(A) 5,950
Stock-based compensation........................ 2,276 -- -- 2,276
------- ------ ------- -------
Total operating costs and expenses............ 8,070 3,698 1,106 12,874
------- ------ ------- -------
Loss from operations.............................. (6,083) (43) (1,106) (7,232)
Interest income................................... 176 25 -- 201
Interest expense.................................. (745) -- -- (745)
Other expense..................................... (221) -- -- (221)
------- ------ ------- -------
Net loss.......................................... $(6,873) $ (18) $(1,106) $(7,997)
======= ====== ======= =======
Net loss per share, basic and diluted............. $(23.78) $(11.33)
======= =======
Weighted average common shares outstanding...... 289 706
======= =======
Pro forma net loss per share, basic and diluted
(B)............................................. $ (1.66) $ (1.76)
======= =======
Weighted average common shares outstanding
(B)............................................ 4,151 4,556
======= =======
</TABLE>
--------------------------------------------------------------------------------
F-26
<PAGE>
Adesso Healthcare Technology Services Inc.
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE 1 -- BASIS OF PRESENTATION
The unaudited pro forma statements of operations give effect to the acquisition
as if it had occurred on January 1, 1999 and present the unaudited statement of
operations of Adesso for the six months ended June 30, 2000 with the unaudited
statement of operations of TTM for the four months ended April 30, 2000 and the
audited statement of operations of Adesso for the year ended December 31, 1999
combined with the unaudited statement of operations of TTM for the year ended
December 31, 1999.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the transactions had been
consummated at the dates indicated, nor is it necessarily indicative of the
future operating results or the financial position of the combined companies.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following adjustments have been made to arrive at the pro forma combined
financial information:
A. Additional amortization of goodwill and customer based intangibles over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
Pro forma expense
-------------------------
Six months
Year ended ended
Amortization December 31, June 30,
Amount period 1999 2000
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill...................................... $12,394 15 years $ 826 $275
Customer based intangibles.................... 4,200 15 years 280 93
------- ------ ----
Total......................................... $16,594 $1,106 $368
======= ====== ====
</TABLE>
B. Pro forma basic and diluted net loss per share attributable to common
stockholders is computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic conversion of
Adesso's outstanding redeemable convertible preferred stock effective upon
the closing of Adesso's initial public offering as if such conversion had
occurred on January 1, 1999, or the date of original issuance, if later.
However, the shares of Series E issued as consideration for the acquisition
of TTM are assumed to have been converted into shares of Adesso's common
stock under the automatic conversion feature as of January 1, 1999.
Potential dilutive shares of Adesso's common and redeemable convertible
preferred stock issuable upon the exercise of stock options and warrants,
aggregating 844,673 shares at December 31, 1999 and 1,311,853 shares at June
30, 2000, have been excluded from the diluted net loss per share calculation
because the effect of including them would have been antidilutive.
--------------------------------------------------------------------------------
F-27
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Total Therapeutic
Management, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Total Therapeutic Management, Inc.
("TTM") at June 30, 1998 and 1999, and the results of its operations and its
cash flows for each of the two years in the period ended June 30, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of TTM's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 19, 2000
--------------------------------------------------------------------------------
F-28
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30,
------------------- March 31,
1998 1999 2000
(unaudited)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 41 $ 12 $ 716
Accounts receivable....................................... -- 1,286 1,203
Other current assets...................................... 10 29 14
---- ------ ------
Total current assets.................................... 51 1,327 1,933
Property and equipment, net................................. 2 15 58
Other assets................................................ -- -- 30
---- ------ ------
Total assets............................................ $ 53 $1,342 $2,021
==== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 16 $ 203 $ 56
Amounts billed but not yet earned......................... -- 1,281 1,912
---- ------ ------
Total current liabilities............................... 16 1,484 1,968
Long-term debt.............................................. 50 -- --
---- ------ ------
Total liabilities....................................... 66 1,484 1,968
---- ------ ------
Stockholders' equity (deficit):
Common stock, $0.05 par value; 104,372 shares authorized,
issued and outstanding................................... 5 5 5
Retained earnings (accumulated deficit)................... (18) (147) 48
---- ------ ------
Total stockholders' equity (deficit).................... (13) (142) 53
---- ------ ------
Total liabilities and stockholders' equity
(deficit)............................................ $ 53 $1,342 $2,021
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-29
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year ended Nine months
June 30, ended March 31,
------------------- -------------------
1998 1999 1999 2000
(unaudited)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................................................. $1,198 $2,769 $1,866 $2,265
Operating costs and expenses:
Cost of services........................................ 1,032 1,528 832 1,350
Sales and marketing..................................... 129 290 211 147
General and administrative.............................. 31 1,093 628 580
Stock-based compensation................................ -- -- -- --
------ ------ ------ ------
Total operating costs and expenses.................... 1,192 2,911 1,671 2,077
Income (loss) from operations............................. 6 (142) 195 188
Other income (expense).................................... (12) 13 -- 7
------ ------ ------ ------
Net income (loss) before income taxes..................... (6) (129) 195 195
------ ------ ------ ------
Net income (loss)......................................... $ (6) $ (129) $ 195 $ 195
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-30
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands)
<TABLE>
<CAPTION>
Common stock Total
------------------- Accumulated stockholders'
Shares Amount deficit deficit
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, June 30, 1997............................ 100 $ 5 $ (12) $ (7)
Net loss........................................... -- -- (6) (6)
--- ---- ----- -----
Balances, June 30, 1998............................ 100 5 (18) (13)
Net loss........................................... -- -- (129) (129)
--- ---- ----- -----
Balances, June 30, 1999............................ 100 5 (147) (142)
Net income (unaudited)............................. -- -- 195 195
--- ---- ----- -----
Balances, March 31, 2000 (unaudited)............... 100 $ 5 $ 48 $ 53
=== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-31
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended Nine months
June 30, ended March 31,
------------------- -------------------
1998 1999 1999 2000
(unaudited)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss)........................................ $ (6) $ (129) $ 195 $ 195
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 3 3 4 7
Changes in assets and liabilities:
Accounts receivable.................................. -- (1,286) (302) 83
Prepaids and current assets.......................... (10) (19) (3) 15
Other assets......................................... 32 -- -- (30)
Deferred revenue..................................... -- 1,281 905 631
Accounts payable and accrued liabilities............. (147) 187 619 (147)
----- ------- ------ -----
Net cash provided by (used in) operating
activities........................................ (128) 37 1,418 754
----- ------- ------ -----
Cash flows used in investing activities:
Purchases of fixed assets................................ (2) (16) (6) (50)
----- ------- ------ -----
Net cash used in investing activities.............. (2) (16) (6) (50)
----- ------- ------ -----
Cash flows used in financing activities:
Proceeds from long-term debt............................. -- -- -- 100
Repayments of long-term debt............................. -- (50) (50) (100)
----- ------- ------ -----
Net cash used in financing activities.............. -- (50) (50) --
----- ------- ------ -----
Net change in cash and cash equivalents.................... (130) (29) 1,362 704
Cash and cash equivalents at beginning of period......... 171 41 41 12
----- ------- ------ -----
Cash and cash equivalents at end of period................. $ 41 $ 12 $1,403 $ 716
===== ======= ====== =====
Supplemental cash flow information:
Cash paid for interest................................... $ 3 $ 12 $ 12 $ 7
Cash paid for income taxes............................... $ 3 $ 80 $ 2 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
F-32
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BUSINESS OF THE COMPANY
Organization and nature of operations
Total Therapeutic Management, Inc., ("TTM"), was incorporated in the State of
Florida on July 10, 1995. TTM contracts with pharmaceutical companies,
healthcare providers and managed care organizations to provide consulting
services aimed at enhancing the effectiveness of treating various illnesses with
pharmaceuticals.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited interim financial data
The accompanying balance sheet as of March 31, 2000, the statements of
operations and of cash flows for the nine-month periods ended March 31, 1999 and
2000 and the statement of stockholders' deficit for the nine months ended
March 31, 2000 are unaudited. The unaudited interim financial statements have
been prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position and its results of operations and its cash flows for the nine-month
periods ended March 31, 1999 and 2000. The financial data and other information
disclosed in these notes to the financial statements related to these periods
are unaudited. The results for the nine months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ended
June 30, 2000.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
TTM earns revenues primarily from studies referred to as Quality Improvement
Programs ("QIPs"). Under the QIP arrangement, TTM contracts with pharmaceutical
companies, healthcare providers and managed care organizations to analyze the
effects of various pharmaceuticals in the treatment of various diseases and make
recommendations for improving effectiveness. The beneficiaries of TTM's QIPs are
pharmaceutical companies, healthcare providers, managed care providers and,
ultimately, patients.
TTM recognizes revenue on its QIP contracts under the percentage-of-completion
method, whereby revenues are recognized according to the ratio of contract costs
incurred to total estimated contract costs. TTM's QIP contracts typically extend
over several months and can extend over more than one year.
TTM also provides consulting services under smaller contracts. For these
services, TTM recognizes revenues as the services are rendered.
--------------------------------------------------------------------------------
F-33
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TTM generally receives payment for its services in advance as contractually
arranged. These up-front payments are classified as deferred revenue until the
revenue is earned.
Income taxes
Deferred tax assets and liabilities are determined based on the difference
between financial reporting and tax bases of assets and liabilities, measured at
tax rates expected to be in effect when the differences will affect taxable
income. Valuation allowances are established when necessary to reduced deferred
tax assets to the amounts expected to be realized.
Cash and cash equivalents
TTM considers all liquid investments with original maturities of three months or
less to be cash equivalents.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets, generally three to five years, or the lease term, if
applicable. Gains and losses upon disposal are taken into income in the year of
disposition. Maintenance and repairs are charged to operations as incurred.
Financial instruments
The carrying value of TTM's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair value due to the short maturities of these instruments.
Research and development expenses
Research and development costs are expensed as incurred.
Impairment of long-lived assets
TTM accounts for long-lived assets under Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), which requires TTM to review
for impairment of long-lived assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When such
an event occurs, management determines whether there has been an impairment by
comparing the anticipated undiscounted future net cash flows to the related
asset's carrying value. If an asset is considered impaired, the asset is written
down to fair value, which is determined based either on discounted cash flows or
appraised values, depending on the nature of the asset.
Segments
TTM operates in one segment and uses one measurement of profitability to manage
its business. All long-lived assets are maintained in the United States.
--------------------------------------------------------------------------------
F-34
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Recent accounting pronouncements
In March 2000, the FASB issued Interpretation No. 44 "Accounting for certain
transactions involving stock compensation, an interpretation of APB Opinion
No. 25" ("FIN 44"). FIN 44 establishes guidance for the accounting for stock
option grants or modifications to existing stock option awards and is effective
for option grants made after June 30, 2000. FIN 44 also establishes guidance for
the repricing of stock options and determining whether a grantee is an employee,
for which the guidance is effective after December 15, 1998 and modifying a
fixed option to add a reload feature, for which the guidance is effective after
January 12, 2000. This interpretation will not impact the Company as TTM has not
granted stock-based awards.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. TTM has
complied with the provisions of SAB 101 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("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 relationship that exists.
SFAS 133 will be effective for fiscal years beginning after June 15, 2000. TTM
does not currently hold derivative instruments or engage in hedging activities.
Concentration of credit risk and other risks and uncertainties
TTM's cash and cash equivalents are maintained at a major U.S. financial
institution that management believes is creditworthy. Deposits in this
institution may exceed the amount of insurance provided on such deposits.
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 1999 consists primarily of a receivable from one
customer for invoiced amounts related to an ongoing consulting engagement. There
were no accounts receivable recorded at June 30, 1998.
--------------------------------------------------------------------------------
F-35
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1999
(in thousands)
------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures...................................... $ 3 $ 3
Computer and office equipment............................... 16 25
---- ----
19 28
Less: Accumulated depreciation.............................. (17) (13)
---- ----
$ 2 $ 15
==== ====
</TABLE>
Depreciation expense for the years ended June 30, 1998 and 1999 was $4,000 and
$4,000, respectively.
NOTE 5 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1999
(in thousands)
-------------------------------------------------------------------------------------
<S> <C> <C>
Employee benefits........................................... $ -- $ 31
Direct contract costs....................................... -- 111
Other accrued expenses...................................... 16 61
--------- ----
$ 16 $203
========= ====
</TABLE>
NOTE 6 -- OPERATING LEASES
As of June 30, 1999, TTM leased vehicles under operating leases without options
to cancel the leases. Future minimum lease payments required under these vehicle
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending June 30,
-----------------------------------------------------------------
<S> <C>
2000........................................................ $15
2001........................................................ 16
---
$31
===
</TABLE>
--------------------------------------------------------------------------------
F-36
<PAGE>
Total Therapeutic Management, Inc.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On June 11, 1999, TTM entered into a lease for office space to be occupied
August 1, 1999. Future minimum lease payments required under this lease are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending June 30,
------------------------------------------------------------------
<S> <C>
2000........................................................ $ 93
2001........................................................ 101
2002........................................................ 101
2003........................................................ 102
2004........................................................ 9
----
$406
====
</TABLE>
NOTE 7 -- EMPLOYEE BENEFIT PLANS
TTM has a 401(k) Salary Deferral Plan (the "Plan"), whereby eligible employees
may voluntarily contribute a percentage of their compensation. For each plan
year, the employer will contribute to the Plan an amount of matching
contributions determined by the employer at its discretion. The employer may
choose not to make matching contributions for a particular year. TTM did not
make any contributions to the Plan during the years ended December 31, 1998 and
1999.
NOTE 8 -- SUBSEQUENT EVENTS
Stock Split
On April 3, 2000, TTM issued a 20-for-1 split of its common stock. All common
stock data in this report has been stated to retroactively reflect the split.
Acquisition
On May 1, 2000, TTM was acquired Adesso Healthcare Technology Services Inc.
("Adesso") in a transaction to be accounted for as a purchase business
combination by Adesso. Under the terms of the acquisition, all issued and
outstanding shares of common stock were exchanged for 416,667 shares of
Series E redeemable convertible preferred stock of Adesso, which are convertible
into common stock of Adesso on a share for share basis upon the closing of a
public stock offering by Adesso. In addition, former TTM stockholders may
receive an additional 416,667 shares of Adesso's Series E redeemable convertible
preferred stock if TTM meets certain revenue targets and other performance
benchmarks in the twelve months after the closing of the acquisition.
--------------------------------------------------------------------------------
F-37
<PAGE>
[LOGO OF ADESSO APPEARS HERE]
<PAGE>
--------------------------------------------------------------------------------
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the amounts of all expenses payable by
us in connection with the registration of the common stock offered hereby
(estimated except for the Registration Fee, NASD Filing Fee and Nasdaq National
Market listing fee), other than underwriting discounts and commissions:
<TABLE>
<S> <C>
------------------------------------------------------------------------
Registration Fee -- Securities and Exchange Commission...... $ 13,200
NASD Filing Fee............................................. 5,500
Nasdaq National Market listing fee.......................... 95,000
Blue Sky fees and expenses.................................. 10,000
Accountants' fees and expenses.............................. 500,000
Legal fees and expenses..................................... 450,000
Printing and engraving expenses............................. 300,000
Transfer agent and registrar fees........................... 25,000
Miscellaneous............................................... 51,300
----------
Total................................................... $1,450,000
==========
</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 our Amended and Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI(1) of our Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on our behalf if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to our best interest, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
We have entered into indemnification agreements with our directors and executive
officers, in addition to indemnification provided for in our Amended and
Restated Bylaws, and we intend to enter into indemnification agreements with any
new directors and executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
A. In the three years preceding the filing of this registration statement, we
have from time to time granted stock options to our employees and
consultants in reliance upon exemption from registration pursuant to either
(i) Section 4(2) of the Securities Act of 1933 or (ii) Rule 701
--------------------------------------------------------------------------------
II-1
<PAGE>
Part II
--------------------------------------------------------------------------------
promulgated under the Securities Act of 1933. The following table sets forth
certain information regarding such grants:
<TABLE>
<CAPTION>
Number of shares Exercise prices
------------------------------------------------------------------------------------------------
<S> <C> <C>
January 1, 1997 to December 31, 1997........................ 236,382 $0.33 to $0.62
January 1, 1998 to December 31, 1998........................ 474,794 $0.62 to $0.84
January 1, 1999 to December 31, 1999........................ 432,750 $0.84 to $1.50
January 1, 2000 to June 30, 2000............................ 410,008 $1.50 to $8.00
</TABLE>
For additional information concerning these transactions, please see "Management
-- Employee benefit plans" in the prospectus included in this registration
statement.
B. Set forth in chronological order is information regarding all securities
sold by us in the three years preceding the filing of this registration
statement.
(1) Since January 1, 1997, we have granted to employees, directors and
consultants options to purchase an aggregate of 1,553,934 shares of
Common Stock under our 1995 Incentive Stock Option Plan, 1997 Stock
Option Plan and 2000 Employee Stock Purchase Plan, of which
1,225,250 shares with a weighted average exercise price of $3.03 are
outstanding as of June 30, 2000.
(2) In January 1997, we issued 853,631 shares of our Series C Preferred
Stock to individuals and entities for an aggregate purchase price of
approximately $5.3 million.
(3) In December 1997, we issued 1,196,570 shares of our Series D Preferred
Stock to individuals and entities for an aggregate purchase price of
approximately $10.0 million.
(4) In June 1999, we granted an option to Comdisco, Inc. to purchase 166,667
shares of our Series D Preferred Stock in connection with a loan
agreement.
(5) In April 2000, we issued 119,048 shares of our Series E Preferred Stock
to individuals and entities for an aggregate purchase price of
approximately $2.0 million.
(6) In April 2000, we granted an option to Comdisco, Inc. to purchase
104,167 shares of our Series E Preferred Stock in connection with a loan
agreement.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act,
Regulation D promulgated thereunder, or, with respect to issuances to our
employees, directors and consultants, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. No underwriters were
involved in the foregoing sales of securities.
No underwriters were involved in the foregoing sales of securities.
--------------------------------------------------------------------------------
II-2
<PAGE>
Part II
--------------------------------------------------------------------------------
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* Certificate of Incorporation of Registrant prior to
completion of this offering
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant to be effective upon completion of this
offering
3.3* Bylaws of Registrant prior to completion of this offering
3.4* Form of Amended and Restated Bylaws of Registrant to be
effective upon completion of this offering
4.1* Form of Registrant's Common Stock Certificate
4.2 Reference is made to Exhibits 3.2 and 3.4
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Series E Preferred Stock Purchase Agreement, dated April 6,
2000
10.2 Amended and Restated Investors' Rights Agreement dated April
6, 2000
10.3* 1995 Stock Option Plan and related form of Stock Option
Agreement
10.4 1997 Stock Option Plan and related form of Stock Option
Agreement
10.5* 2000 Stock Option Plan and related form of Stock Option
Agreement
10.6* 2000 Employee Stock Purchase Plan
10.7 Form of Warrant
10.8 Form of Proprietary Information Agreement between the
Registrant and certain of its employees
10.9 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.10 Sublease Agreement between the Registrant and Evans &
Sutherland Graphics Corporation, dated February 1, 2000
10.11 Lease Agreement between the Registrant and WHPX-S Real
Estate Limited Partnership, dated September 25, 1997
10.12 Sublease Agreement between the Registrant and Agiliti, Inc.,
dated May 27, 1999
10.13 Subordinated Loan and Security Agreement between the
Registrant and Comdisco, Inc., dated June 11, 1999
10.14 Amendment Number One to Subordinated Loan and Security
Agreement between the Registrant and Comdisco, Inc., dated
April 27, 2000
10.15 Master Loan and Security Agreement between the Registrant
and Transamerica Business Credit Corporation, dated
April 21, 1998
21.1 Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants, with respect to financial statements of
Adesso Healthcare Technology Services, Inc.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants, with respect to financial statements of Total
Therapeutic Management, Inc.
23.3* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (contained in Exhibit 5.1)
24.1 Powers of Attorney (See page II-5)
27.1 Financial Data Schedule
</TABLE>
---------
* To be filed by amendment
--------------------------------------------------------------------------------
II-3
<PAGE>
Part II
--------------------------------------------------------------------------------
(b) Financial Statement Schedules
None.
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 SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 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 the
time shall be deemed to be the initial bona fide offering thereof.
--------------------------------------------------------------------------------
II-4
<PAGE>
--------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on the 20(th) day of July, 2000.
<TABLE>
<S> <C> <C>
ADESSO HEALTHCARE TECHNOLOGY SERVICES, INC.
By: /s/ BRIAN K. BARNARD
------------------------------------------
Brian K. Barnard
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian K. Barnard and Kurt Amundson and
each of them acting individually, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Registration Statement (including
post-effective amendments thereto filed pursuant to Rule 462(b) increasing the
number of securities for which registration is sought), and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents, with full power and authority of each to act alone, full power and
authority to do and perform each and every act and this requisite and necessary
to be done in connection therewith, as fully for all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agent, or his or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this 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/ BRIAN K. BARNARD President and Chief Executive Officer July 20, 2000
----------------------------------
Brian K. Barnard
/s/ KURT AMUNDSON Chief Financial Officer (Principal Financial July 20, 2000
---------------------------------- Officer)
Kurt Amundson
/s/ BRADLEY LUKE Vice President, Finance (Principal July 20, 2000
---------------------------------- Accounting Officer)
Bradley Luke
/s/ RICHARD LANMAN, M.D. Director July 20, 2000
----------------------------------
Richard Lanman, M.D.
/s/ CHARLES R. KOKESH Director July 20, 2000
----------------------------------
Charles R. Kokesh
</TABLE>
--------------------------------------------------------------------------------
II-5
<PAGE>
Signatures
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Signature Title Date
----------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ THOMAS STEPHENSON Director July 20, 2000
----------------------------------
Thomas Stephenson
/s/ GILBERT KLIMAN, M.D. Director July 20, 2000
----------------------------------
Gilbert Kliman, M.D.
/s/ JUDD JESSUP Director July 20, 2000
----------------------------------
Judd Jessup
/s/ TERRENCE BURKE Director July 20, 2000
----------------------------------
Terrence Burke
/s/ RONALD KASE Director July 20, 2000
----------------------------------
Ronald Kase
</TABLE>
--------------------------------------------------------------------------------
II-6
<PAGE>
--------------------------------------------------------------------------------
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
number Description of document
----------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Certificate of Incorporation of Registrant prior to
completion of this offering
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant to be effective upon completion of this
offering
3.3* Bylaws of Registrant prior to completion of this offering
3.4* Form of Amended and Restated Bylaws of Registrant to be
effective upon completion of this offering
4.1* Form of Registrant's Common Stock Certificate
4.2 Reference is made to Exhibits 3.2 and 3.4
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Series E Preferred Stock Purchase Agreement, dated April 6,
2000
10.2 Amended and Restated Investors' Rights Agreement dated April
6, 2000
10.3* 1995 Stock Option Plan and related form of Stock Option
Agreement
10.4 1997 Stock Option Plan and related form of Stock Option
Agreement
10.5* 2000 Stock Option Plan and related form of Stock Option
Agreement
10.6* 2000 Employee Stock Purchase Plan
10.7 Form of Warrant
10.8 Form of Proprietary Information Agreement between the
Registrant and certain of its employees
10.9 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.10 Sublease Agreement between the Registrant and Evans &
Sutherland Graphics Corporation, dated February 1, 2000
10.11 Lease Agreement between the Registrant and WHPX-S Real
Estate Limited Partnership, dated September 25, 1997
10.12 Sublease Agreement between the Registrant and Agiliti, Inc.,
dated May 27, 1999
10.13 Subordinated Loan and Security Agreement between the
Registrant and Comdisco, Inc., dated June 11, 1999
10.14 Amendment Number One to Subordinated Loan and Security
Agreement between the Registrant and Comdisco, Inc., dated
April 27, 2000
10.15 Master Loan and Security Agreement between the Registrant
and Transamerica Business Credit Corporation, dated
April 21, 1998
21.1 Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants, with respect to financial statements of
Adesso Healthcare Technology Services, Inc.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants, with respect to financial statements of Total
Therapeutic Management, Inc.
23.3* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (contained in Exhibit 5.1)
24.1 Powers of Attorney (See page II-5)
27.1 Financial Data Schedule
</TABLE>
---------
* To be filed by amendment
