-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VzuekyYEr42cmET7ZW0tajrw77XQRS8t3eyWjiwnFIOKmVIhC+bTarP09w00V2Hj mo677ap5yZYl85MsXuYseg== 0000950116-96-001470.txt : 19961224 0000950116-96-001470.hdr.sgml : 19961224 ACCESSION NUMBER: 0000950116-96-001470 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19961220 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHDESK CORP CENTRAL INDEX KEY: 0001023767 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 843165144 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-14519 FILM NUMBER: 96684421 BUSINESS ADDRESS: STREET 1: 2560 NINTH ST STREET 2: SUITE 220 CITY: BERKELEY STATE: CA ZIP: 94710 BUSINESS PHONE: 5108832160 SB-2/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996 REGISTRATION STATEMENT NO. 333-14519 ============================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------ HEALTHDESK CORPORATION (Exact name of registrant as specified in its charter) California 7372 94-3165144 (State or other jurisdiction (Primary Standard Industrial (IRS Employer of incorporation or organization) Classification Code Number) Identification No.)
2560 Ninth Street, Suite 220 Berkeley, California 94710 (510) 883-2160 (Address, including Zip Code and telephone number, including Area Code, of Registrant's principal executive offices) PETER O'DONNELL President and Chief Executive Officer HealthDesk Corporation 2560 Ninth Street, Suite 220 Berkeley, California 94710 (510) 883-2160 (Name, address, including Zip Code and telephone number, including Area Code, of agent for service) ------ Copies to: PETER M. ASTIZ, ESQ. ROBERT J. MITTMAN, ESQ. GRAY CARY WARE & FREIDENRICH, TENZER GREENBLATT LLP A Professional Corporation The Chrysler Building 400 Hamilton Avenue 405 Lexington Avenue Palo Alto, California 94301 New York, New York 10174 Tel: (415) 328-6561 Tel: (212) 885-5000 Fax: (415) 327-3699 Fax: (212) 885-5001 ------ Approximate date of proposed sale to the public: As promptly as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------ CALCULATION OF REGISTRATION FEE
===================================================================================== Title of Each Class Proposed Maximum Proposed Maximum Amount of of Securities to be Amount to be Offering Price Aggregate Registration Registered Registered (1) per Share (2) Offering Price (2) Fee - ------------------------------------------------------------------------------------- Common Stock ...... 2,470,000 $5.00 $12,350,000 $3,742.42 - ------------------------------------------------------------------------------------- Warrants .......... 2,070,000 $.10 $207,000 $62.73 - ------------------------------------------------------------------------------------- Common Stock(3) ... 2,070,000 $5.00 $10,350,000 $3,136.36 - ------------------------------------------------------------------------------------- Total ............................................................... $6,941.51(4) =====================================================================================
(1) Assumes the Underwriters option to purchase up to 270,000 additional shares and/or 270,000 additional Warrants is exercised in full. (2) Estimated solely for the purposes of calculating the amount of the registration fee pursuant to Rule 457(a). (3) Issuable upon exercise of the Warrants to be sold to the public hereunder, together with, pursuant to Rule 416, such indeterminent number of shares of Common Stock as may be issuable pursuant to anti-dilution provisions contained therein. (4) $4,090.91 of such amount has been previously paid. Registration fee of $2,850.60 is being paid hereunder. - ---------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ============================================================================= HEALTHDESK CORPORATION CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2
Form SB-2 Registration Statement Item and Heading Heading in Prospectus -------------------------------------------------------- --------------------- 1. Front of Registration Statement and Outside Front Cover Page of Prospectus ........................... Outside Front Cover Page of Prospectus; Additional Information 2. Inside Front and Outside Back Cover Pages of Prospectus ......................................... Inside Front Cover Page 3. Summary Information and Risk Factors ............... Prospectus Summary; Risk Factors; The Company 4. Use of Proceeds .................................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price .................... Outside Front Cover Page; Underwriting 6. Dilution ........................................... Dilution 7. Selling Security Holders ........................... Principal Shareholders 8. Plan of Distribution ............................... Outside Front Cover Page; Underwriting 9. Legal Proceedings .................................. Not Applicable 10. Directors, Executive Officers, Promoters and Control Persons .................................... Management 11. Security Ownership of Certain Beneficial Owners and Management ......................................... Principal Shareholders 12. Description of Securities .......................... Outside Front Cover Page; Prospectus Summary; Capitalization; Description of Securities 13. Interest of Named Experts and Counsel .............. Not Applicable 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities ..................... Limitation of Liability and Indemnification Matters 15. Organization Within Last Five Years ................ Certain Transactions 16. Description of Business ............................ Front Cover Page; Prospectus Summary; The Company; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Shareholders; Description of Securities; Shares Eligible for Future Sale; Legal Matters; Experts; Financial Statements 17. Management's Discussion and Analysis or Plan of Operation .......................................... Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property ............................ Business 19. Certain Relationships and Related Transactions ..... Certain Transactions 20. Market for Common Equity and Related Stockholder Matters ................................ Outside Front Cover Page; Risk Factors; Dividend Policy; Description of Securities; Shares Eligible for Future Sale 21. Executive Compensation ............................. Management 22. Financial Statements ............................... Financial Statements 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ................ Not Applicable
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROPECTUS DATED DECEMBER 20, 1996 SUBJECT TO COMPLETION HEALTHDESK CORPORATION 1,800,000 SHARES OF COMMON STOCK AND REDEEMABLE WARRANTS TO PURCHASE 1,800,000 SHARES OF COMMON STOCK ------ The Company is offering hereby 1,800,000 shares of Common Stock and redeemeable warrants to purchase 1,800,000 shares of Common Stock (the "Warrants"). The shares of Common Stock and Warrants may be purchased separately and will be separately transferable immediately upon issuance. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at a price of $5.00, subject to adjustment in certain circumstances, at any time commencing , 1998 through and including , 2002. The Warrants are redeemable by the Company, upon the consent of the Underwriter, at any time commencing , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 30 of the trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. See "Description of Securities." Prior to this offering, there has been no public market for the Common Stock or the Warrants and there can be no assurance that any such market will develop. The Common Stock and Warrants will be quoted on the Nasdaq Small Cap Market under the symbols "HDSK" and "HDSKW," respectively. The offering prices of the Common Stock and the Warrants, and the exercise price of the Warrants, were determined pursuant to negotiations between the Company and the Underwriter and do not necessarily relate to the Company's book value or other established criteria of value. For a discussion of factors considered in determining the initial public offering prices, see "Underwriting." This Prospectus also relates to the offer and sale by certain shareholders of the Company (the "Selling Shareholders") of 400,000 shares of Common Stock issued pursuant to a bridge financing (the "Bridge Financing") in October 1996, which shares are not part of the underwritten public offering. The shares offered by the Selling Shareholders may not be sold prior to twelve months from the date of this Prospectus and, without the consent of the Underwriter, may not be sold prior to eighteen months from the date of this Prospectus. See "Selling Shareholders and Plan of Distribution." ------ THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION." ------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================ Price to Underwriting Proceeds to Public Discount(1) Company(2) - -------------------------------------------------------------------------------- Per Share .................. $5.00 $.50 $4.50 - -------------------------------------------------------------------------------- Per Warrant ............... $.10 $.01 $.09 - -------------------------------------------------------------------------------- Total (3) ................. $9,180,000 $918,000 $8,262,000 ================================================================================ (1) In addition, the Company has agreed to pay to the Underwriter a 3% nonaccountable expense allowance and to sell to the Underwriter warrants (the "Underwriter's Warrants") to purchase 180,000 shares of Common Stock and/or 180,000 Warrants. The Company has also agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of $650,000 payable by the Company, including the nonaccountable expense allowance of $275,400 ($316,710 if the Underwriter's over-allotment option is exercised in full). (3) The Company has granted the Underwriter a 45-day option to purchase up to 270,000 additional shares of Common Stock and/or 270,000 additional Warrants, solely to cover over-allotments, if any. If such option is exercised in full, the total price to public, underwriting discounts and proceeds to Company will be $10,557,000, $1,055,700 and $9,501,300, respectively. See "Underwriting." ------ The shares of Common Stock and Warrants are being offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the shares of Common Stock and Warrants offered hereby will be made against payment therefor at the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, on or about , 1997. WHALE SECURITIES CO., L.P. The date of this Prospectus is , 1997. As of the date of this Prospectus, the Company will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, will file reports, proxy and information statements and other information with the Securities and Exchange Commission (the "Commission"). The Company intends to furnish its shareholders with annual reports containing financial statements and such other periodic reports as the Company deems appropriate or as may be required by law. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AND WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. The statements which are not historical facts contained in this Prospectus are forward looking statements that involve risks and uncertainties, including those described under "Risk Factors." Unless otherwise indicated, all information contained in this Prospectus gives retroactive effect to (i) a 1.2-for-1 stock split effected in September 1996, (ii) the automatic conversion of all outstanding shares of the Company's Series A Preferred Stock into Common Stock upon the consummation of this offering, and (iii) the conversion of $500,000 principal amount of promissory notes into 100,000 shares of Common Stock on the date of this Prospectus, and assumes no exercise of the Underwriter's over-allotment to purchase an additional 270,000 shares of Common Stock and/or 270,000 additional warrants. THE COMPANY HealthDesk Corporation (the "Company"), a development stage company, is engaged in designing, developing and marketing HealthDesk(R) OnLine, a healthcare management and information system which enables consumers to take a more active role in their personal and family health. HealthDesk OnLine features easy-to-use Windows-based software designed to develop personal medical records and health management programs and access educational, health related information from the Company's private Website and over the Internet. The Company's proposed system is intended to lower the cost and improve the quality and accessibility of healthcare by promoting preventive maintenance and patient compliance and permitting electronic mail communications between consumers and healthcare providers and payers. HealthDesk OnLine is being developed in response to perceived market opportunities arising from increasing efforts of industry participants to stem the escalating cost of healthcare. In July 1996, the Company commenced preliminary market testing of HealthDesk OnLine pursuant to a license agreement with Blue Cross/Blue Shield of Massachusetts ("BCMA"). The Company has modified HealthDesk OnLine to satisfy BCMA's requirements and BCMA is currently testing such product. In the event of successful initial acceptance testing, the proposed market test contemplates that BCMA will distribute HealthDesk OnLine to up to 50 of its employees and thereafter BCMA will have an opportunity to determine whether to distribute HealthDesk OnLine to up to 500 of its members. The market test is intended to provide information on the product's usability and acceptance by consumers and to test the technical aspects and functionality of the Company's software system. The Company also recently entered into an agreement with Blue Cross/Blue Shield of Iowa ("BCI") to conduct similar market testing activities. There can be no assurance that such market testing will be conducted on a timely basis or that such testing will be successful. The Company's primary marketing strategy is to license HealthDesk OnLine to sponsoring organizations (including pharmaceutical companies, managed care organizations, disease management companies, employers and affinity groups) with access to significant numbers of potential subscribers. The Company intends to focus its efforts on healthcare organizations primarily responsible for bearing the financial risk of patients with chronic diseases. The Company recently entered into a letter of intent with Medical Inter- Insurance Exchange ("MIIX"), a medical malpractice insurance carrier, which contemplates that the Company will design, develop and test a software module for diabetic patients. The Company is currently evaluating various other commercialization strategies, including the license of HealthDesk OnLine to manufacturers of medical devices, pursuant to arrangements by which such manufacturers would bundle such product with the products of such manufacturers. The Company is also seeking to establish strategic relationships with third parties relating to product development and marketing. The Company currently offers HealthDesk OnLine with no license fee to potential sponsoring organizations willing to participate in market testing activities. In the event of successful completion of market testing activities, the Company anticipates that its principal sources of revenues will be derived from license fees from sponsoring organizations and subscription and online content and usage fees from con- 3 sumers. The Company will seek to expand its sources of revenues to include development fees for specific disease management software modules or features. In addition, the Company may seek revenues by including advertising in the system. The Company believes that the broad range of capabilities combined in HealthDesk OnLine, including the system's desktop and online functionality, and the system's ability to link consumers with healthcare payers and providers, differentiate HealthDesk OnLine from competitive products and make it attractive to potential sponsoring organizations seeking to contain healthcare costs. The Company intends to use a portion of the proceeds of this offering to refine and enhance the capabilities of HealthDesk OnLine and expand system capacity. In addition to the proposed development and commercialization of specific disease management modules designed to monitor chronic conditions, the Company will seek to license or develop the following: personalized electronic newsletters designed to automatically search content databases and websites by topic on a periodic basis; an online "chat" capability; and software enhancements designed to assist users in both health risk assessment and symptom triage. The Company may also seek to develop features which will facilitate the input of data from medical devices, such as blood pressure cuffs, blood glucose monitors and peak flow meters, directly into HealthDesk OnLine which data may be monitored by healthcare providers. Since its inception, the Company has engaged primarily in research and development and has generated limited revenues. The Company expects to incur significant up-front expenses in connection with product development and commercialization (including the payment of salaries for management, technical, marketing and other personnel), which will result in significant losses for the foreseeable future. There can be no assurance that the Company's product development efforts will be successfully completed or that HealthDesk OnLine will prove to be commercially viable. See "Risk Factors." The Company was incorporated under the laws of the State of California in August 1992. The Company's executive offices are located at 2560 Ninth Street, Suite 220, Berkeley, California 94710, and its telephone number is (510) 883-2160. The Company's home page is located on the World Wide Web at http://www.healthdesk.com. BACKGROUND The Company introduced its initial product, HealthDesk, in early 1993. HealthDesk, which is marketed directly to consumers pursuant to agreements with independent sales representatives, contains certain of the medical records and healthcare management and information features of HealthDesk OnLine without online capabilities. The Company currently markets HealthDesk on a limited basis and does not expect future revenues derived from such product to be meaningful. See "Business -- Potential Markets and Marketing." In October 1993, the Company entered into an agreement with Kaiser Foundation Health Plan of the Mid-Atlantic States of Washington, D.C. ("Kaiser") pursuant to which the Company engaged in product development activities and Kaiser conducted limited consumer acceptance testing of the Company's initial product in consideration of $145,000. In February 1994, the Company entered into an agreement with Quantum Health Resources ("Quantum"), a company engaged in disease management services, pursuant to which the Company developed a software module for hemophilia patients and commenced development of a software module for cystic fibrosis patients in consideration of approximately $390,000. In 1994, Quantum conducted limited consumer acceptance testing of such hemophilia module. While the Company believes that the results of such testing were positive, the Company does not have any further arrangements with either Kaiser or Quantum to test such products. See "Business -- Market Testing." RECENT FINANCINGS In February 1996, the Company completed a private placement of 1,059,600 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") at a price of $2.08 per share and received net proceeds of approximately $2,183,000. Each share of Series A Preferred Stock automatically converts into one share of Common Stock upon the consummation of this offering. See "Description of Securities." 4 In July and August 1996, the Company issued an aggregate of $500,000 principal amount of promissory notes to John Pappajohn, a director and principal shareholder of the Company, and Edgewater Private Equity Fund II, L.P. ("Edgewater"), a principal shareholder of the Company. James Gordon, a director of the Company, is president of the General Partner of Edgewater. Such notes will automatically convert into 100,000 shares of Common Stock at the initial public offering price per share on the earlier of the date of this Prospectus or March 31, 1997. See "Certain Transactions." In October 1996, the Company consummated a financing (the "Bridge Financing") pursuant to which it issued an aggregate of (i) $2,000,000 principal amount of promissory notes (the "Bridge Notes") which bear interest at the rate of 9% per annum and are due on the earlier of the consummation of this offering or October 11, 1997 and (ii) 400,000 shares of Common Stock. The Company will record the Bridge Notes at a discount of $900,000, which will be allocated to the 400,000 shares of Common Stock issued in connection with the Bridge Financing at an attributed price of $2.25 per share. Additionally, $154,000 of debt issuance costs will be recorded in connection with the Bridge Financing. The effective interest rate of the Bridge Notes is 279%. The Underwriter acted as placement agent in connection with the Bridge Financing. The Company intends to use a portion of the proceeds of this offering to repay the entire principal amount of and accrued interest on the Bridge Notes. See "Use of Proceeds" and "Selling Shareholders and Plan of Distribution." THE OFFERING Securities offered ............ 1,800,000 shares of Common Stock and Warrants to purchase 1,800,000 shares of Common Stock. Common Stock to be outstanding after the offering .......... 5,489,720 shares (1) Warrants Number to be outstanding after the offering........... 1,800,000 Warrants. Exercise terms................ Exercisable commencing , 1998, each to purchase one share of Common Stock at a price of $5.00, subject to adjustment in certain circumstances. See "Description of Securities -- Redeemable Warrants." Expiration date............... , 2002. Redemption.................... Redeemable by the Company, upon the consent of the Underwriter, at any time commencing , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 30 trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. The Warrants will be exercisable until the close of business on the date fixed for redemption. See "Description of Securities -- Redeemable Warrants." Use of Proceeds ............... The Company intends to use the net proceeds of this offering for sales and marketing; repayment of indebtedness; product development; expansion of system capacity; and the balance for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors .................. The securities offered hereby are speculative and involve a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Nasdaq Symbols ................ Common Stock -- HDSK Warrants -- HDSKW 5 - ------ (1) Does not include (i) 1,800,000 shares of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 360,000 shares reserved for issuance upon exercise of the Underwriter's Warrants and the Warrants included therein; (iii) 768,050 shares of Common Stock reserved for issuance upon exercise of options granted under the Company's 1994 Founder's Stock Option Plan (the "Stock Option Plan"); (iv) 79,830 shares reserved for issuance upon exercise of options available for future grant under the Stock Option Plan; and (v) up to a maximum of 100,000 shares of Common Stock reserved for issuance in the event the Company fails to maintain an effective registration statement with respect to the shares held by the Selling Shareholders. See "Management--1994 Stock Option Plan," "Principal Shareholders," "Description of Securities" and "Underwriting." Notice to California Investors. Each purchaser of Common Stock or Warrants in California must be an "accredited investor," as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or satisfy one of the following suitability standards: (i) minimum annual gross income of $65,000 and a net worth (exclusive of home, home furnishings and automobiles) of $250,000; or (ii) minimum net worth (exclusive of home, home furnishings and automobiles) of $500,000. SUMMARY FINANCIAL DATA The summary financial information set forth below is derived from and should be read in conjunction with the financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus. STATEMENT OF OPERATIONS DATA:
Year Ended December 31, Nine Months Ended September 30, ---------------------------- ---------------------------- 1994 1995 1995 1996 ----------- ------------- ----------- ------------- Total revenues .................. $ 397,240 $ 224,011 $ 223,432 $ 6,170 Net loss ........................ (237,022) (1,436,473) (781,594) (2,597,791) Net loss per share .............. (.08) (.45) (.26) (.67) Weighted average number of shares outstanding .................... 2,964,581 3,181,929 2,986,878 3,854,742
BALANCE SHEET DATA:
At September 30, 1996 ----------------------------------------------- As Adjusted Actual Pro Forma(1) (1)(2) -------------- ------------ -------------- Working capital (deficit) .... $(1,636,871) $ (362,871) $ 6,195,129 Total assets ................. 790,600 2,083,517 7,541,517 Total liabilities ............ 1,940,988 1,959,905 859,905 Shareholders' equity (deficit) (1,150,388) 123,612 6,681,612(3)
- ------ (1) Gives effect to (i) the conversion of all outstanding shares of Series A Preferred Stock into 1,059,600 shares of Common Stock upon the consummation of this offering; (ii) the consummation of the Bridge Financing in October 1996 and the application of the net proceeds therefrom, including the repayment of $583,000 of indebtedness to Quantum; and (iii) the issuance of 100,000 shares of Common Stock upon conversion of outstanding indebtedness on the date of this Prospectus. The foregoing adjustments are collectively referred to herein as the "Proforma Adjustments." (2) Gives effect to the sale of the shares of Common Stock and Warrants offered hereby and application of the estimated net proceeds therefrom, including repayment of the Bridge Notes. See "Use of Proceeds." (3) Gives effect to a non-recurring charge of $900,000 representing the unamortized loan discount and $154,000 of unamortized deferred financing costs associated with the Bridge Financing which will be recorded when the Bridge Notes are repaid with the proceeds of this offering. See Note 12 to Notes to Financial Statements. 6 RISK FACTORS The securities offered hereby are speculative and involve a high degree of risk. Each prospective investor should carefully consider the following risk factors before making an investment decision. 1. Development Stage Company. The Company was organized in August 1992 and is still in the development stage. Since its inception, the Company has been engaged primarily in product development activities. The Company's initial product was introduced in early 1993 and has not yet proven to be commercially viable. As a result, the Company has no relevant operating history upon which an evaluation of its performance and prospects can be made. The Company will be subject to all of the risks, uncertainties, expenses, delays, problems and difficulties typically encountered in the establishment of a new business and the development and commercialization of new products. The Company has limited experience in developing and commercializing new products based on innovative technologies and there is limited information available concerning the potential performance of the Company's software or market acceptance of the Company's proposed products. There can be no assurance that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in product commercialization or that the Company's efforts will result in successful product commercialization. See "Business." 2. Limited Revenues; Significant and Continuing Losses; Qualified Report of Independent Auditors. The Company has not yet generated any meaningful revenues, and will not generate any meaningful revenues until after the Company successfully completes development and market testing of HealthDesk OnLine and attracts and retains a significant number of subscribers. For the period August 28, 1992 (inception) to September 30, 1996, the Company incurred a cumulative net loss of approximately $4,555,000. Since September 30, 1996, the Company has continued to incur increasing and significant losses, and the Company anticipates that it will continue to incur significant losses until, at the earliest, it generates sufficient revenues to offset the substantial up-front expenditures and operating costs associated with developing and commercializing its proposed products. The Company will also incur non-recurring charges relating to the Bridge Financing of approximately $1,054,000 upon the consummation of this offering. There can be no assurance that the Company will be able to attract and retain a sufficient number of subscribers to generate meaningful revenues or achieve profitable operations or that HealthDesk OnLine will prove to be commercially viable. The Company's independent auditors have included an explanatory paragraph in their report stating that recurring losses during the development stage raise substantial doubt about the Company's ability to continue as a going concern. See Financial Statements. 3. Dependence on Offering Proceeds; Working Capital Deficit; Negative Cash Flow; Possible Need for Additional Financing. The Company's capital requirements relating to the development and commercialization of HealthDesk OnLine have been and will continue to be significant. The Company is dependent on the proceeds of this offering or other financing in order to continue in business and develop and commercialize its proposed products. The Company's capital requirements have exceeded its cash resources and, at September 30, 1996, the Company had a working capital deficit of $1,636,876 and had a negative cash flow of $1,547,256 during the nine months ended September 30, 1996. Based on currently proposed plans and assumptions relating to its operations (including the timetable of, and costs associated with, product development and commercialization), the Company believes that the proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of this offering prove to be insufficient to fund operations (due to unanticipated expenses, technical difficulties, problems or otherwise), the Company would be required to seek additional financing sooner than currently anticipated. There can be no assurance that the proceeds of this offering will be sufficient to permit the Company to successfully develop and commercialize HealthDesk OnLine or that any assumptions relating to the Company's operations will prove to be accurate. To the extent that the proceeds of this offering are not sufficient to enable the Company to generate meaningful revenues or achieve profitable operations, the inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. In addition, any implementation of the Company's business plans subsequent to the twelve month period following this offering may require proceeds greater than the proceeds of this offering or otherwise currently available to the Company. There can be no assurance that any additional financing will be available to the Company on commercially reasonable terms, or at all. Any additional financing involving the issuance of equity securities could result in substantial dilution to the interests of the Company's shareholders. See "Use of Proceeds." 7 4. Uncertainty of Product Development. Although the Company believes that the development efforts relating to the technological aspects of the basic HealthDesk OnLine platform are substantially completed, the Company has not yet completed third-party testing of the basic platform or the development or testing of any system enhancements or specific disease management modules. The Company will be required to commit considerable time, effort and resources to finalize such development and adapt its software to satisfy specific requirements of potential customers. Continued system refinement, enhancement and development efforts are subject to all of the risks inherent in the development of new products and technologies, including unanticipated delays, expenses, technical problems or difficulties, as well as the possible insufficiency of funds to satisfactorily complete development, which could result in abandonment or substantial change in product commercialization. There can be no assurance that product development efforts will be successfully completed on a timely basis, or at all, that the Company will be able to successfully adapt its software to satisfy specific requirements of potential customers, or that unanticipated events will not occur which would result in increased costs or material delays in product development or commercialization. In addition, while the Company believes that its software performs the principal functions for which it has been designed, the Company has only conducted limited tests of its software in connection with preliminary market testing activities. Consequently, there can be no assurance that such software will perform all of the functions for which it has been designed or prove to be sufficiently reliable in widespread commercial use. Technologies as complex as those incorporated into the Company's software may contain errors which become apparent subsequent to commercial use. Remedying such errors could delay the Company's plans and cause it to incur substantial additional costs. See "Business -- Product Development." 5. New Concept; Uncertainty of Market Acceptance and Commercialization Strategy. HealthDesk OnLine represents a new business concept. As is typical in the case of a new business concept, demand and market acceptance for HealthDesk OnLine as a newly introduced product is subject to a high level of uncertainty. Achieving market acceptance for HealthDesk OnLine will require significant efforts and expenditures by the Company to create awareness and demand by healthcare payers, providers and consumers. The Company's prospects will be significantly affected by its ability to successfully develop and maintain relationships with sponsoring organizations, which will promote their services using HealthDesk OnLine and, at the same time, attract significant numbers of subscribers. Because demand by payers, providers and consumers are substantially interrelated, any lack or lessening of demand by any of these would have an adverse effect on market acceptance for HealthDesk OnLine. The Company has not yet commenced significant marketing activities and has limited experience and limited financial, technical, personnel and other resources to independently undertake extensive marketing activities. Although the Company is currently evaluating a number of possible product marketing and distribution strategies, the Company initially intends to offer HealthDesk OnLine with no license fee to potential sponsoring organizations willing to participate in market testing in order to closely monitor performance and provide support for the users of such product. Such activities are expected to allow the Company to adjust and revise its proposed products in light of market needs and user feedback, to develop pricing strategies relative to cost structure, to test new products and to correct software or product defects which may arise. Thereafter, although the Company will seek to develop and commercialize specific disease management modules, the Company's primary marketing strategy is to license and sell HealthDesk OnLine to sponsoring organizations with access to significant numbers of potential subscribers. The Company's marketing strategy and preliminary and future marketing plans may be unsuccessful and are subject to change as a result of a number of factors, including progress or delays in the Company's marketing efforts, changes in market conditions (including the emergence of potentially significant related market segments for applications of the Company's technology), the nature of possible license and distribution arrangements which may become available to it in the future and economic, political, regulatory and competitive factors. To the extent that the Company is able to enter into satisfactory third-party marketing and distribution arrangements in the future, it will be largely dependent on the efforts of such third parties and on the marketability and sales of their products. There can be no assurance that the Company's strategy will result in successful product commercialization or that the Company's efforts will result in initial or continued market acceptance for the Company's proposed products. See "Business -- Potential Markets and Marketing." 6. Uncertainty of Market Testing Results. The Company currently proposes to conduct market testing of HealthDesk OnLine with BCMA and BCI and other potential sponsoring organizations. The Company's success may be highly dependent upon the results of these tests and there can be no assurance that such tests will be 8 successful. If such tests are not successful, the Company will be required to attempt to enhance or modify HealthDesk OnLine so that it will meet with sponsoring organization and consumer acceptance. There can be no assurance that the Company will be able to modify HealthDesk OnLine so that positive test results can be demonstrated. Even if test results are positive, there can be no assurance that sponsoring organizations will be sufficiently encouraged by the results to commit to use HealthDesk OnLine on a non-market test basis. They may elect to utilize other products, services or technologies which they believe to be more efficient or have other cost advantages over the Company's system. In addition, there can be no assurance that positive test results will translate into consumer acceptance over a longer period of time or that sponsoring organizations or consumers will be satisfied with operational results or that the results of market testing will be indicative of the ultimate success of product commercialization, particularly if installed in geographic areas with demographic characteristics different from those of test markets. See "Business -- Market Testing." 7. Competition; Technological Obsolescence. The markets that the Company intends to enter are characterized by intense competition and an increasing number of new market entrants who have developed or are developing potentially competitive products. The Company will face competition from numerous sources, including prospective customers which may develop and market their own competitive products and services, health information system vendors, software companies, online and Internet service providers and others with the technical capabilities and expertise which would encourage them to develop and commercialize competitive products or services. Several companies, including Healtheon Corp. ("Healtheon"), IBM Global Health Village, Med Access Corporation, CareSoft, Inc., Access Health, Inc. and America's Housecalls Network, have announced plans to develop and commercialize competitive product and service offerings. Certain of such competitors have substantially greater financial, technical, marketing, distribution, personnel and other resources than the Company, permitting such companies to implement extensive marketing campaigns, both generally and in response to efforts by additional competitors to enter into new markets and market new products and services. Healtheon has announced that it has entered into an agreement with BCMA relating primarily to the electronic exchange of health plan benefit information between consumers and health plans. There can be no assurance that Healtheon's relationship with BCMA will not adversely affect the Company's ability to successfully market HealthDesk OnLine to BCMA. In addition, the markets for the Company's proposed products are characterized by rapidly changing technology and evolving industry standards which could result in product obsolescence or short product life cycles. Accordingly, the ability of the Company to compete will be dependent upon the Company's ability to complete development and introduce HealthDesk OnLine into the marketplace in a timely manner, to continually enhance and improve its software and to successfully develop and market new products. There can be no assurance that the Company will be able to compete successfully, that competitors will not develop technologies or products that render the Company's products obsolete or less marketable or that the Company will be able to successfully enhance its products or develop new products. See "Business -- Competition." 8. Capacity Constraints; System Failure and Security Risks. The Company's operations will depend upon the capacity, reliability and security of its system infrastructure. The Company currently has limited system capacity and will be required to continually expand its system infrastructure to accommodate significant numbers of users and increasing amounts of healthcare information they may wish to access. Expansion of the Company's system infrastructure will require substantial financial, operational and management resources. The Company intends to use a portion of the proceeds of this offering to purchase computer equipment to expand system capacity. There can be no assurance that the Company will be able to expand its system infrastructure to meet potential demand on a timely basis, at a commercially reasonable cost, or at all. Failure by the Company to expand its system infrastructure on a timely basis would have a material adverse effect on the Company. In addition, the Company will be dependent upon Web browsers and third-party Internet and online service providers for access to the Company's services, hardware suppliers for prompt delivery, installation and service of computer equipment used to deliver the Company's services and on content providers to provide current healthcare information for use by consumers. The Company's operations will also be dependent on the Company's ability to protect its computer equipment against damage from fire, earthquakes, power loss, telecommunications failures and similar events. The Company does not have earthquake insurance or redundant, multiple site capacity in the event of any such occurrence. The Company does maintain fire insurance with an aggregate limitation of $1 million and business interruption insurance with an aggregate limitation of $4 million. The Company's system infrastructure will be 9 also vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with the Company's computer systems. Computer viruses or problems caused by third parties could lead to material interruptions, delays or cessation in service to consumers. Inappropriate use of the Internet by third parties could also potentially jeopardize the security of confidential information stored in the computer systems of consumers. Security and privacy concerns of consumers may limit the Company's ability to develop a significant subscriber base. See "Use of Proceeds" and "Business -- Infrastructure, Operations and Technology." 9. Potential Liability and Insurance. In recent years, participants in the healthcare industry have been subject to an increasing number of lawsuits alleging malpractice, product liability and related legal theories, many of which involve large claims and significant defense costs. Due to the nature of its business, the Company could become involved in litigation regarding the healthcare information transmitted over its system with the risk of adverse publicity, significant defense costs and substantial damage awards. The Company has adopted policies and procedures intended to reduce the risk of claims, which include the provision of disclaimers in connection with its services. The Company does not currently maintain malpractice liability insurance. In addition, because healthcare information and materials may be downloaded and may be subsequently distributed to others, there is a potential that claims will be made against the Company for defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of such materials. The Company also could be exposed to liability in connection with the selection of materials that may be accessible over its system. Claims could be made against the Company if material deemed inappropriate for viewing by children could be accessed. The Company carries an umbrella insurance policy with a limit of $4 million in the aggregate, general liability insurance with a limitation of $2 million in the aggregate and $1 million per occurrence and errors and omissions insurance with a limitation of $1 million. Nevertheless, the Company's insurance may not cover potential claims of this type or may not be adequate to cover liability that may be imposed or related defense costs. There can be no assurance that the Company will not face claims resulting in substantial liability for which the Company is partially or completely uninsured. Any partially or completely uninsured claim against the Company, if successful and of sufficient magnitude, would have a material adverse effect on the Company. See "Business -- Potential Liability and Insurance." 10. Government Regulation. The healthcare industry is subject to extensive, stringent and frequently changing federal and state regulation which is interpreted and enforced by regulatory authorities with broad discretion. Among other things, these regulations govern the provision of healthcare services and the marketing of medical devices. These regulations generally predate the development of products and services such as those offered and proposed to be offered by the Company and the application and enforcement of such regulations to the Company and its products and services is uncertain. However, certain of the statutes governing the provision of healthcare services could be construed by regulatory authorities to apply to the Company's proposed business activities. There can be no assurance that regulatory authorities do not or will not deem the Company's business activities to constitute the unlicensed practice of medicine. Furthermore, in the event the Company develops features which facilitate the input of data from medical devices directly into HealthDesk OnLine, it is possible that the United States Food and Drug Administration would require the Company and/or an equipment manufacturer to obtain pre-marketing clearance with respect to any such product. The process of obtaining and maintaining required regulatory approvals can be lengthy, expensive and uncertain. Even if regulatory approvals are obtained, a marketed product and its manufacturer are subject to continuing regulatory review, and discovery of previously unknown problems could result in restrictions on such product or manufacturer, including withdrawal of the product from the market. Amendments to or interpretation and enforcement of existing statutes or regulations, the adoption of new statutes or regulations or the development of new enhancements and features to HealthDesk OnLine could subject the Company to increased regulation and require the Company to alter methods of operation at costs which could be substantial. Failure to comply with applicable laws and regulations could subject the Company to civil remedies, including substantial fines, penalties and injunctions, as well as possible criminal sanctions. Although there are currently few laws or regulations directly applicable to access to or commerce on the Internet, due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing and characteristics and quality of products and services. The Telecommunications Reform Act of 1996, which was recently enacted, imposes criminal penalties on anyone who distributes obscene, lascivious or indecent communications on the Internet. 10 While the enforcement of such statute has been enjoined and is currently subject to challenge in the courts, the adoption of any such laws or regulations may limit the growth of the Internet, which could in turn decrease the demand for the Company's proposed products and services and increase the Company's cost of doing business. Inasmuch as the applicability to the Internet of the existing laws governing issues such as property ownership, libel and personal privacy is uncertain, any such new legislation or regulation or the application of existing laws and regulations to the Internet could have an adverse effect on the Company's business and prospects. See "Business -- Government Regulation." 11. Dependence on Third-Party Licenses. Substantially all of the information content currently included in HealthDesk OnLine has been licensed by the Company from unaffiliated third parties. The licenses granted to the Company are subject to termination on relatively short notice. Although the Company believes that similar healthcare information is available from multiple sources, in the event of any termination of such licenses, the Company may be required to independently develop information content or license such information content from other providers. There can be no assurance that the Company would be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to obtain current healthcare information for use by consumers on a timely and competitive basis could have a material adverse effect on the Company. See "Business -- Infrastructure, Operations and Technology." 12. Dependence on Limited Customer Base. To date, the Company's revenues have been derived from a limited number of customers. Two customers accounted for approximately 76% and 5%, respectively, of revenues in 1994 and 40% and 56%, respectively, in 1995. Additionally, one customer accounted for approximately 96% and 92%, respectively, of revenues for the nine months ended September 30, 1995 and 1996. Although the Company is not currently generating meaningful revenues, in the event that the Company is able to successfully commercialize HealthDesk OnLine or obtain third party funding of the costs of developing new software modules, there can be no assurance that the Company will not continue to be dependent on a limited customer base for all or a substantial portion of its revenues. The Company's letter of intent with MIIX contemplates that the Company would grant to MIIX a right of first refusal to fund the development of additional software modules. See "Business - -- Potential Markets and Marketing." 13. Industry Factors; Lengthy Sales Cycle. The healthcare industry has experienced significant changes in recent years, primarily due to rising healthcare costs. Healthcare payers are increasingly challenging the price of medical services and products, which have had and could continue to have a significant effect on the procurement practices of healthcare providers, generally causing them to be more selective in the purchase of new technologies. Several proposals have been made by federal and state government officials that may lead to substantial healthcare reform, including the implementation of government-directed national healthcare system and stringent healthcare cost containment measures. Adoption of such proposed measures could result in reduction or deferral of capital expenditures by potential customers. Also, there has been substantial consolidation in the healthcare industry in recent years, which could make it more difficult for the Company to achieve market acceptance by larger potential customers. Moreover, a sponsoring organization's decision to purchase new products and technology is often lengthy and requires the approval of a significant number of administrators. The period in which a sponsoring organization distributes the Company's software to its members may also be lengthy, depending upon the level of acceptance and usage by its members, which could delay the Company's plans in particular markets. See "Business." 14. Proprietary Information. Although the Company intends to evaluate the feasibility of obtaining patent protection for certain aspects of HealthDesk OnLine, the Company does not hold any patents or registered copyrights. The Company regards certain computer software it has developed for HealthDesk OnLine as proprietary and attempts to protect it with copyrights, trade secret laws, proprietary rights agreements and internal nondisclosure agreements and safeguards. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop know-how or obtain access to the Company's know-how or software codes, concepts, ideas and documentation. Furthermore, there can be no assurance that nondisclosure agreements with the Company's employees will adequately protect the Company's trade secrets. Although the Company believes that its proposed products do not and will not infringe patents or violate proprietary rights of others, it is possible that infringement of existing or future patents or proprietary rights of others have occurred or may occur. In the event the Company's proposed products infringe patents or proprietary 11 rights of others, the Company may be required to modify the design of its proposed products or obtain a license. There can be no assurance that the Company will be able to do so in a timely manner, upon acceptable terms and conditions or at all. The failure to do any of the foregoing could have a material adverse effect upon the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement action and the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. See "Business -- Proprietary Information and Trademarks." 15. Dependence on Key Personnel. The success of the Company will be dependent on the personal efforts of Peter O'Donnell, its President and Chief Executive Officer, Dr. Molly Coye, its Executive Vice President, Timothy S. Yamauchi, its Chief Financial Officer, and other key personnel. The loss of the services of such individuals could have a material adverse effect on the Company's business and prospects. The Company has obtained "key-person" insurance on the life of each of Mr. O'Donnell, Dr. Coye and Mr. Yamauchi in the amounts of $2 million, $2 million and $1 million, respectively. The success of the Company is also dependent upon its ability to hire and retain additional qualified management, marketing, technical, financial and other personnel. Competition for qualified personnel is intense and there can be no assurance that the Company will be able to hire or retain qualified personnel. Any inability to attract and retain qualified management and other personnel could have a material adverse effect on the Company. See "Management." 16. Control by Management. Upon consummation of this offering, the officers and directors of the Company will beneficially own, in the aggregate, approximately 44.0% of the outstanding shares of Common Stock (assuming no exercise of the Warrants). Accordingly, such persons, acting together, will be in a position to exercise significant influence over the Company's affairs. See "Management" and "Principal Shareholders." 17. Potential Conflicts of Interest. The Company has entered into various transactions with certain of its directors and principal shareholders and their affiliates, which could result in potential conflicts of interest. Mr. John Pappajohn and Edgewater, principal shareholders of the Company, have from time to time made loans to the Company, and the Company has entered into a marketing agreement with an entity of which Mr. Pappajohn is a director and principal shareholder. The Company believes that all of such transactions and arrangements were fair and reasonable to the Company and were on terms no less favorable than could have been obtained from unaffiliated third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will continue to be advantageous to the Company, that conflicts of interest will not arise with respect thereto, or that if conflicts do arise, they will be resolved in a manner favorable to the Company. Any such future transactions will be on terms no less favorable to the Company than could be obtained from unaffiliated parties and will be approved by a majority of the independent and disinterested members of the Board of Directors, outside the presence of any interested directors and, to the extent deemed appropriate by the Board of Directors, the Company will obtain shareholder approval or fairness opinions in connection with any such transaction. See "Certain Transactions." 18. Benefits to Related Parties. The Company intends to use a portion of the proceeds to repay the entire principal amount of and accrued interest on the Bridge Notes. John Pappajohn, a director and principal shareholder of the Company, and Edgewater, a principal shareholder of the Company which is affiliated with James Gordon, a director of the Company, each purchased $100,000 principal amount of Bridge Notes pursuant to the Bridge Financing. The Company intends to use approximately 2.6% of the net proceeds to repay such Bridge Notes on the consummation of this offering. In addition, the Company may use a portion of the proceeds of this offering allocated to working capital to pay compensation of its executive officers (which is expected to be approximately $580,000, or approximately 7.6% of the net proceeds, during the twelve months following this offering). See "Use of Proceeds" and "Certain Transactions." 19. Immediate and Substantial Dilution. Investors in this offering will incur immediate and substantial dilution of $3.79 (76%) per share between the adjusted net tangible book value per share after this offering and the initial public offering price of $5.00 per share. The current shareholders of the Company acquired their Common Stock at an average price of $1.27 per share, substantially below the initial public offering price. Accordingly, to the extent the Company continues to incur losses, investors in this offering will bear a disproportionate risk of such losses. See "Dilution" and "Underwriting." 20. Outstanding Options. As of the date of this Prospectus, the Company had outstanding options to purchase an aggregate of 768,050 shares of Common Stock at exercise prices ranging from $1.04 to $5.00. Exer- 12 cise of any of the foregoing options will have a dilutive effect on the Company's shareholders. Furthermore, the terms upon which the Company may be able to obtain additional equity financing may be adversely affected, since the holders of the options can be expected to exercise them, if at all, at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the options. See "Management -- 1994 Stock Option Plan." 21. No Dividends. To date, the Company has not paid any cash dividends on its Common or Preferred Stock and does not expect to declare or pay dividends on the Common Stock in the foreseeable future. See "Dividend Policy." 22. Authorized Preferred Stock. The Company's Restated Articles of Incorporation authorizes the Company's Board of Directors to issue 1,800,000 shares of "blank check" Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares, without further shareholder approval. The rights of the holders of Common Stock will be subject to and may be adversely affected by the rights of holders of any Preferred Stock that may be issued in the future. The ability to issue Preferred Stock without shareholder approval could have the effect of making it more difficult for a third party to acquire a majority of the voting stock of the Company thereby delaying, deferring or preventing a change in control of the Company. The Company's Series A Preferred Stock will convert into Common Stock upon the consummation of this offering. See "Description of Securities." 23. Shares Eligible for Future Sale, Registration Rights. Upon consummation of this offering, the Company will have 5,489,720 shares of Common Stock outstanding, of which 2,200,000 shares, consisting of 1,800,000 shares offered hereby and, subject to certain contractual restrictions described below, the 400,000 shares being offered by the Selling Shareholders, will be freely tradable without restriction or further registration under the Securities Act. All of the remaining 3,289,720 shares of Common Stock outstanding are "restricted securities," as that term is defined in Rule 144 promulgated under the Securities Act, and in the future may be sold only pursuant to an effective registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. Of the 3,289,720 restricted shares, an aggregate of 237,000 shares will be eligible for sale, without registration, under Rule 144 (subject to the contractual restrictions described below), on the date of this Prospectus, and 417,000 shares will be eligible (subject to certain volume limitations and the contractual restrictions described below) commencing 90 days from the date of this Prospectus. All of the Company's officers, directors and security holders (except for the holders of 42,000 shares of Common Stock) have agreed not to sell or dispose of any of their securities of the Company for a period of eighteen months from the date of this Prospectus without the Underwriter's prior written consent. The Company has also granted certain demand and "piggyback" registration rights to the holders of an aggregate of 1,741,600 shares of Common Stock (including 400,000 shares issued in connection with the Bridge Financing). The Company has obtained a waiver of registration rights to the extent such rights would have been applicable to this offering. No prediction can be made as to the effect, if any, that sales of such securities or the availability of such securities for sale will have on the market prices prevailing from time to time. However, even the possibility that a substantial number of the Company's securities may be sold in the public market may adversely affect prevailing market prices for the Common Stock and Warrants and could impair the Company's ability to raise capital through the sale of its equity securities. See "Description of Securities," "Shares Eligible for Future Sale," "Underwriting" and "Selling Shareholders and Plan of Distribution." 24. Absence of Public Market; Possible Volatility of Market Price of Common Stock and Warrants. Prior to this offering, there has been no public trading market for the Common Stock or Warrants. Consequently, the initial public offering price has been determined by negotiation between the Company and the Underwriter and is not necessarily related to the Company's asset value, net worth or other criteria of value. There can be no assurance that a regular trading market for the Common Stock or Warrants will develop after this offering or that, if developed, it will be sustained. The market price of the Common Stock and Warrants following this offering may be highly volatile as has been the case with securities of other small capitalization companies. Factors such as the Company's operating results, announcements of developments related to the Company's business and the introduction of new products or product enhancements by the Company or its competitors may have a significant impact in the market price of the Common Stock and Warrants. In addition, in recent years the stock market in general, and the market for shares of small capitalization stocks in particular, have experienced wide price fluctuations which have often been unrelated to the operating performance of such companies. See "Underwriting." 13 25. Possible Delisting of Securities from NASDAQ System; Disclosure Relating to Low-Priced Stocks. The Common Stock and Warrants will be quoted on NASDAQ SmallCap Market ("NASDAQ") upon the consummation of this offering. However, in order to continue to be included in NASDAQ, a company must maintain $2,000,000 in total assets, a $200,000 market value of the public float and $1,000,000 in total capital and surplus. In addition, continued inclusion requires two market makers and a minimum bid price of $1.00 per share; provided, however, that if a company falls below such minimum bid price, it will remain eligible for continued inclusion in NASDAQ if the market value of the public float is at least $1,000,000 and the Company has $2,000,000 in capital and surplus. NASDAQ has recently proposed new maintenance criteria which, if implemented, would eliminate the exception to the $1.00 per share minimum bid price and require, among other things, $2,000,000 in net tangible assets, $1,000,000 market value of the public float and adherence to certain corporate governance provisions. Failure to meet these maintenance criteria in the future may result in the delisting of the Company's securities from NASDAQ and trading, if any, in the Company's securities would thereafter be conducted in the non-NASDAQ over-the-counter market. As a result of such delisting, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's securities. In addition, if the Common Stock were delisted from trading on NASDAQ and the trading price of the Common Stock was less than $5.00 per share, trading in the Common Stock would also be subject to certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-NASDAQ equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market liquidity of the Common Stock and the ability of purchasers in this offering to sell the Common Stock in the secondary market. 26. Forward Looking Statements. The statements which are not historical facts contained in this Prospectus are forward looking statements that involve risks and uncertainties, including the risks discussed above. The Company's actual results may differ materially from the results discussed in such forward looking statements. 27. Potential Adverse Effect of Warrant Redemption. The Warrants are subject to redemption by the Company, upon the consent of the Underwriter, at any time commencing on , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 30 trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. Redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the Warrants at the then current market price when they might otherwise wish to hold the Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Securities -- Redeemable Warrants." 28. Possible Inability to Exercise Warrants. The Company intends to qualify the sale of the Common Stock and the Warrants in a limited number of states. Although certain exemptions in the securities laws of certain states might permit the Warrants to be transferred to purchasers in states other than those in which the Warrants were initially qualified, the Company will be prevented from issuing Common Stock in such states upon the exercise of the Warrants unless an exemption from qualification is available or unless the issuance of Common Stock upon exercise of the Warrants is qualified. The Company may decide not to seek or may not be able to obtain qualification of the issuance of such Common Stock in all of the states in which the ultimate purchasers of the Warrants reside. In such a case, the Warrants held by purchasers will expire and have no value if such Warrants cannot be sold. Accordingly, the market for the Warrants may be limited because of these restrictions. Further, a current prospectus covering the Common Stock issuable upon exercise of the Warrants must be in effect before the Company may accept Warrant exercises. There can be no assurance the Company will be able to have a prospectus in effect when this Prospectus is no longer current, notwithstanding the Company's commitment to use its best efforts to do so. See "Description of Securities -- Redeemable Warrants." 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock and Warrants offered hereby are estimated to be $7,612,000 ($8,753,800 if the Underwriter's over-allotment option is exercised in full). The Company expects to use the net proceeds during the twelve months following this offering approximately as follows:
Approximate Approximate Percentage Dollar of Net Application of Proceeds Amount Proceeds ----------------------- ------------- ------------- Sales and marketing (1) .......................... $2,100,000 27.6% Repayment of indebtedness(2) ..................... 2,030,000 26.7 Product development(3) ........................... 1,800,000 23.6 Expansion of system capacity(4) .................. 900,000 11.8 Working capital and general corporate purposes(5) 782,000 10.3 ------------- ------------- $7,612,000 100.0% ============= =============
- ------ (1) Includes anticipated costs and expenses associated with marketing activities, including compensation and sales incentives for three existing and up to seven additional sales and marketing personnel, and preparation of sales documents and brochures. See "Business -- Potential Markets and Marketing." (2) Represents amounts to be used for the repayment of the entire $2,000,000 principal amount of the Bridge Notes and estimated accrued interest thereon. The Bridge Notes bear interest at the rate of 9% per annum and are repayable on the earlier of the consummation of this offering or October 11, 1997. The Company used the proceeds of the Bridge Financing principally in connection with the repayment of approximately $583,000 of indebtedness to Quantum and expenses associated with product development and sales and marketing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity." (3) Represents anticipated costs associated with system refinement and enhancement, the cost of hardware and estimated salaries of eleven existing and up to seven additional technical personnel, including consultants. See "Business -- Product Development." (4) Represents anticipated costs associated with the purchase of computer hardware for servers and related telecommunications equipment used to support the Company's system infrastructure. See "Business -- Infrastructure, Operations and Technology." (5) Working capital will be used, among other things, to pay compensation to executive officers (which is anticipated to be approximately $580,000 during the twelve months following this offering) rent, trade payables, license fees for content and software, professional fees and other operating expenses. See "Management." If the Underwriter exercises its over-allotment option in full, the Company will realize additional net proceeds of $1,341,800 which will be added to working capital. Based on currently proposed plans and assumptions relating to its operations (including the timetable of, and costs associated with, product development and commercialization), the Company believes that the proceeds of this offering will be sufficient to satisfy the Company's contemplated cash requirements for at least twelve months following the consummation of this offering. In the event the Company's plans change or its assumptions change or prove to be inaccurate or the proceeds of this offering prove to be insufficient to fund operations (due to unanticipated expenses, delays, problems or otherwise), the Company may find it necessary or desirable to reallocate a portion of the proceeds within the above described categories, use proceeds for other purposes, seek additional financing or curtail its operations. There can be no assurance that additional financing will be available to the Company on commercially reasonable terms, or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Proceeds not immediately required for the purposes described above will be invested principally in United States government securities, short-term certificates of deposit, money market funds or other short-term interest- bearing investments. 15 CAPITALIZATION The following table sets forth the capitalization of the Company (i) on an actual basis; (ii) on a pro forma basis to give effect to the Pro Forma Adjustments; and (iii) as adjusted to give effect to the sale of the shares of Common Stock and Warrants offered hereby and the application of the estimated net proceeds therefrom:
September 30, 1996 -------------------------------------------------- Actual Proforma As Adjusted -------------- --------------- -------------- Short term notes payable ................................. $ 1,088,042 $1,100,000(1) $ -- ============== =============== ============== Shareholders' equity (deficit): Preferred Stock, no par value; 3,000,000 shares authorized: Series A Convertible Preferred Stock; 1,200,000 shares designated, 1,059,600 shares issued and outstanding, actual, no shares issued and outstanding, proforma and as adjusted ..................................... $ 2,183,036 $ -- $ -- Common Stock, no par value; 17,000,000 shares authorized; 2,130,120 shares issued and outstanding, actual; 3,689,720 shares issued and outstanding, pro forma; 5,489,720 shares issued and outstanding, as adjusted (2) 1,221,355 4,678,391 12,290,391 Accumulated deficit ...................................... (4,554,779) (4,554,779) (5,608,779)(3) -------------- --------------- -------------- Total shareholders' equity (deficit) ................ (1,150,388) 123,612 6,681,612 -------------- --------------- -------------- Total capitalization ........................... $(1,150,388) $ 123,612 $ 6,681,612 ============== =============== ==============
- ------ (1) Net of $900,000 loan discount. (2) Does not include: (i) 1,800,000 shares of Common Stock reserved for issuance upon the exercise of the Warrants, (ii) an aggregate of 360,000 shares reserved for issuance upon exercise of the Underwriter's Warrants and the Warrants included therein, (iii) 768,050 shares reserved for issuance upon the exercise of outstanding stock options; (iv) 79,830 shares reserved for future grant under the Stock Option Plan; and (v) 100,000 shares of Common Stock reserved for issuance in the event the Company fails to maintain an effective registration statement with respect to the shares held by the Selling Shareholders. See "Description of Securities." (3) Gives effect to a non-recurring charge of $900,000 representing unamortized loan discount and $154,000 of unamortized deferred financing costs associated with the Bridge Financing which will be recorded when the Bridge Notes are repaid with the proceeds of this offering. See Note 12 to Notes to Financial Statements. DIVIDEND POLICY The Company has paid no cash dividends on its Common Stock since its incorporation. The Company intends to retain any earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future. 16 DILUTION The difference between the initial public offering price per share of Common Stock and the adjusted net tangible book value per share after this offering constitutes the dilution to investors in this offering. Net tangible book value per share of Common Stock is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) on such date, by the number of shares of Common Stock. At September 30, 1996, the Company had a negative net tangible book value of ($1,153,582) or ($.54) per share. After giving retroactive effect to the Pro Forma Adjustments, pro forma net tangible book value of the Company at September 30, 1996 would have been $120,418, or $.03 per share. After giving effect to the sale of the shares of Common Stock and Warrants offered by the Company hereby and the receipt of the estimated net proceeds therefrom (less underwriting discounts and commissions and estimated expenses of this offering), the adjusted net tangible book value of the Company as of September 30, 1996 would have been approximately $6,678,418 or $1.21 per share. This represents an immediate increase in net tangible book value of $1.18 per share to existing shareholders and an immediate dilution of $3.79 per share to new investors. The following table illustrates this dilution to new investors on a per share basis:
Initial public offering price .......................... $5.00 Net tangible book value before Pro Forma Adjustments ..................................... $(.54) Increase attributable to Pro Forma Adjustments .... .57 -------- Pro forma net tangible book value before offering . $ .03 Increase attributable to new investors ............ 1.18 -------- Adjusted pro forma net tangible book value after the offering ............................................. 1.21 ------- Dilution to new investors .............................. $3.79 =======
The following table sets forth on a pro forma basis as of September 30, 1996 with respect to existing shareholders and new investors in this offering, a comparison of the number of shares of Common Stock, acquired from the Company, the percentage of ownership of such shares, the total cash consideration paid, the percentage of total cash consideration paid and the average price per share:
Shares Purchased Total Cash Consideration ------------------------ -------------------------- Average Price Number Percent Amount Percent Per Share ----------- --------- ------------- --------- --------------- Existing shareholders 3,689,720 67.2% $ 4,678,391 34.2% $1.27 New investors ........ 1,800,000 32.8 9,000,000 65.8 5.00 ----------- --------- ------------- --------- --------------- Total ................ 5,489,720 100.0% $13,678,391 100.0% =========== ========= ============= =========
- ------ The above table assumes no exercise of the Underwriter's over-allotment option or outstanding options. If the Underwriter's over-allotment option is exercised in full, the new investors will have paid $10,350,000 for 2,070,000 shares of Common Stock, representing approximately 68.9% of the total consideration for 35.9% of the total number of shares of Common Stock outstanding. In addition, the above table also assumes no exercise of outstanding stock options or the Warrants. As of the date of this Prospectus, there are outstanding stock options to purchase an aggregate of 768,050 shares of Common Stock at exercise prices ranging from $1.04 to $5.00. To the extent that stock options are exercised at prices below the public offering price there will be further dilution to new investors. See "Management--1994 Stock Option Plan" and "Underwriting." 17 SELECTED FINANCIAL DATA The following selected financial data as of December 31, 1992, 1993, 1994 and 1995 and September 30, 1996 and for the years ended December 31, 1992, 1993, 1994 and 1995, and for the nine months ended September 30, 1995 and 1996 should be read in conjunction with the financial statements, including notes thereto appearing elsewhere in this Prospectus. The balance sheet data as of December 31, 1994 and 1995 and the statements of operations data for the years ended December 31, 1994 and 1995, are derived from audited financial statements included in this Prospectus. The statement of operations data for the year ended December 31, 1993 and the balance sheet data as of December 31, 1993 are derived from audited financial statements not included in this Prospectus. The statement of operations data for the period from August 28, 1992 to December 31, 1992 and the balance sheet data as of December 31, 1992 are derived from unaudited financial statements not included in this Prospectus. The selected financial data as of September 30, 1996 and for the nine months ended September 30, 1995 and 1996 is derived from unaudited financial statements that have been prepared on the same basis as the audited financial statements. In the opinion of management, the unaudited financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the information included therein. Results of operations for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the full year or any future period. STATEMENT OF OPERATIONS DATA:
Year Ended December 31, Nine months ended September 30, -------------------------------------------------------------- ------------------------------- 1992(1) 1993 1994 1995 1995 1996 ------------ ------------- ------------- -------------- ------------- -------------- Total revenues ........... $ -- $ 80,221 $ 397,240 $ 224,011 $ 223,432 $ 6,170 Operating expenses: Product development .... 45,789 118,467 231,243 680,886 386,409 1,194,038 Sales and marketing .... 10,231 120,907 220,243 349,133 199,757 836,291 General and administrative ...... 35,924 30,796 170,598 581,043 395,853 562,986 ------------ ------------- ------------- -------------- ------------- -------------- Total operating expenses .......... 91,944 270,170 622,084 1,611,062 982,019 2,593,315 Loss from operations ..... (91,944) (189,949) (224,844) (1,387,051) (758,587) (2,587,145) Other (income) expense, net -- -- 11,378 48,622 22,407 10,046 ------------ ------------- ------------- -------------- ------------- -------------- Loss before income taxes . (91,944) (189,949) (236,222) (1,435,673) (780,994) (2,597,191) Provision for income taxes . 800 800 800 800 600 600 ------------ ------------- ------------- -------------- ------------- -------------- Net loss ................. $ (92,744) $ (190,749) $ (237,022) $(1,436,473) $ (781,594) $(2,597,791) ============ ============= ============= ============== ============= ============== Net loss per share ....... $ (0.05) $ (0.07) $ (0.08) $ (0.45) $ (0.26) $ (0.67) ============ ============= ============= ============== ============= ============== Weighted average number of shares outstanding ..... 1,889,550 2,614,523 2,964,581 3,181,929 2,986,878 3,854,742 ============ ============= ============= ============== ============= ==============
BALANCE SHEET DATA:
December 31, September 30, 1996 -------------------------------------------------------- ------------------ 1992 1993 1994 1995 ------------ ------------ ----------- ----------- Working capital (deficit) ........... $ (91,364) $ (47,969) $ 239,822 $ 870,436 $ (1,636,871) Total assets ........................ 2,893 19,880 451,739 2,003,356 790,600 Total liabilities ................... 91,364 50,893 657,274 803,307 1,940,988 Long-term obligations ............... -- -- 519,834 -- -- Total shareholders' equity (deficit) . (90,264) (31,013) (205,535) 1,200,049 (1,150,388)
- ------ (1) Inception of the Company was August 28, 1992. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was organized in August 1992 and is still in the development stage. Since its inception, the Company has been engaged primarily in product development activities. The Company's initial product was introduced in early 1993 and has not yet proven to be commercially viable. The Company has not yet generated any meaningful revenues, and will not generate any meaningful revenues until after the Company successfully completes development and market testing of HealthDesk OnLine and attracts and retains a significant number of subscribers. For the period August 28, 1992 (inception) to September 30, 1996, the Company incurred a cumulative net loss of approximately $4,555,000. Since September 30, 1996, the Company has continued to incur increasing and significant losses and anticipates that it will continue to incur significant losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front expenditures and operating costs associated with developing and commercializing its proposed products. The Company will also incur non-recurring charges related to the Bridge Financing of approximately $1,054,000 upon the consummation of this offering. There can be no assurance that the Company will be able to attract and retain a sufficient number of subscribers to generate meaningful revenues or achieve profitable operations or that HealthDesk OnLine will prove to be commercially viable. The Company's independent accountants have included an explanatory paragraph in their report on the Company's financial statements as to the ability of the Company to continue as a going concern. This offering is an integral part of the Company's plan to continue as a going concern. See Note 1 to Notes to Financial Statements. Software development costs (consisting primarily of salaries and related expenses) incurred prior to establishing technological feasibility are expensed in accordance with Financial Accounting Standards Board (FASB) Statement No. 86. In accordance with FASB 86, the Company will capitalize software development costs at such time as the technological feasibility of the product has been established. RESULTS OF OPERATIONS Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1996. Revenue decreased by 97.2% from $223,432 for the nine months ended September 30, 1995 to $6,170 for the nine months ended September 30, 1996. The decrease in revenues was principally due to the lack of development fees during the period, which reflects the Company's shift in focus from the development of specific disease software modules to the development of HealthDesk OnLine. Product development costs increased by 209.0% from $386,409 for the nine months ended September 30, 1995 to $1,194,038 for the nine months ended September 30, 1996. This increase was primarily attributable to increased additional programming and development personnel, including consultants engaged in developing HealthDesk OnLine. Sales and marketing costs increased 318.7% from $199,757 for the nine months ended September 30, 1995 to $836,291 for the nine months ended September 30, 1996. This increase was primarily attributable to costs associated with additional sales and marketing personnel engaged in marketing HealthDesk OnLine commencing in the fourth quarter of 1995 and related marketing expenses. General and administrative costs increased by 42.2% from $395,853 for the nine months ended September 30, 1995 to $562,986 for the nine months ended September 30, 1996. This increase was primarily attributable to salaries of new management personnel. Costs also increased as a result of a non-recurring write-off of deferred offering costs accrued during the period and expenses associated with the Company's relocation to larger facilities. Other (income) expense, net decreased by 55.2% from $22,407 for the nine months ended September 30, 1995 to $10,046 for the nine months ended September 30, 1996. This decrease was attributable to increased interest income as a result of the receipt of the proceeds from the sale of Series A Preferred Stock in December 1995. As a result of the foregoing, the Company incurred a net loss of $2,597,791 for the nine months ended September 30, 1996, as compared to a net loss of $781,594 for the prior comparable period. 19 Year Ended December 31, 1994 Compared with Year Ended December 31, 1995. Revenue decreased by 43.6% from $397,240 for the year ended December 31, 1994 to $224,011 for the year ended December 31, 1995. This decrease was primarily attributable to a decrease in development fee revenues. During 1995, the Company focused its efforts on the development of HealthDesk OnLine and reduced its marketing and sales efforts relating to its HealthDesk product. Product development costs increased by 194.4% from $231,243 for the year ended December 31, 1994 to $680,886 for the year ended December 31, 1995. The increase in expenditures was principally related to the expansion of the programming staff and associated costs related to the development of HealthDesk OnLine. Sales and marketing costs increased by 58.5% from $220,243 for the year ended December 31, 1994 to $349,133 for the year ended December 31, 1995. This increase resulted primarily from the hiring of additional marketing personnel and associated sales and marketing efforts in connection with HealthDesk OnLine during the fourth quarter of 1995. General and administrative costs increased by 240.6% from $170,598 for the year ended December 31, 1994 to $581,043 for the year ended December 31, 1995. This increase was primarily attributable to the hiring of new management personnel and severance costs relating to prior management and, to a lesser extent, increased professional fees. Other (income) expense, net increased by 327.3% from $11,378 for the year ended December 31, 1994 to $48,622 for the year ended December 31, 1995. This increase was primarily attributable to increased interest expense as a result of higher levels of borrowings. As a result of the foregoing, the Company incurred a net loss of $1,436,473 for the year ended December 31, 1995, as compared to a net loss of $237,022 for the prior comparable year. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements will be to fund the development and commercialization of HealthDesk OnLine. The Company has historically financed its operations through the issuance of debt and equity securities. Prior to the issuance of 400,000 shares of Common Stock in the Bridge Financing, the Company had issued an aggregate of 2,130,120 shares of Common Stock resulting in net proceeds of $1,221,355. The foregoing excludes an aggregate of (i) 100,000 shares of Common Stock issuable upon conversion of $500,000 principal amount of indebtedness on the date of this Prospectus and (ii) 1,059,600 shares of Series A Preferred Stock, each of which will convert into one share of Common Stock upon the consummation of this offering. In May 1994, the Company borrowed an aggregate of $500,000 from Quantum, evidenced by a promissory note bearing interest at the rate of 7% per annum. The Company repaid such note from proceeds of the Bridge Financing. During the period from June through September 1995, the Company issued 6% convertible promissory notes in the aggregate principal amount of $800,000 to John Pappajohn and Edgewater, principal shareholders of the Company. The notes were converted into an aggregate of 768,000 shares of Common Stock in September 1995. See "Certain Transactions." In December 1995, Mr. Pappajohn exercised an option to purchase 96,000 shares of Common Stock for an aggregate exercise price of $100,000. See "Certain Transactions." In December 1995 and February 1996, the Company completed a private placement of an aggregate of 1,059,600 shares of Series A Preferred Stock and received net proceeds of approximately $2,183,000. Each share of Series A Preferred Stock automatically converts into one share of Common Stock upon consummation of this offering. In July and August 1996, the Company issued an aggregate of $500,000 principal amount 8% promissory notes to Mr. Pappajohn and Edgewater. Such notes will automatically convert into 100,000 shares of Common Stock on the date of this Prospectus. See "Certain Transactions." In October 1996, the Company consummated the Bridge Financing pursuant to which it issued $2,000,000 principal amount of Bridge Notes and 400,000 shares of Common Stock. The Company intends to use a portion of the proceeds of this offering to repay the entire principal amount of and accrued interest on the Bridge Notes. 20 Since its inception, the Company has engaged primarily in research and development and has generated limited revenues. The Company expects to incur significant up-front expenses in connection with product development and commercialization (including the payment of salaries for management, technical, marketing and other personnel), which will result in significant losses for the foreseeable future. The Company's capital requirements relating to the development and commercialization of HealthDesk OnLine have been and will continue to be significant. Other than as described in this Prospectus, the Company has no material commitments for capital expenditures. For the period August 28, 1992 (inception) to September 30, 1996, the Company had capital expenditures of approximately $660,000 relating primarily to computer equipment. The Company has committed to pay license fees for content and software aggregating approximately $190,000 prior to December 31, 1996. The Company is dependent on the proceeds of this offering or other financing in order to continue in business and develop and commercialize its proposed products. Based on currently proposed plans and assumptions relating to its operations (including the timetable of, and costs associated with, product development and commercialization), the Company believes that the proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of this offering prove to be insufficient to fund operations (due to unanticipated expenses, technical difficulties, problems or otherwise), the Company would be required to seek additional financing sooner than currently anticipated. There can be no assurance that the proceeds of this offering will be sufficient to permit the Company to successfully develop and commercialize HealthDesk OnLine or that any assumptions relating to the Company's operations will prove to be accurate. To the extent that the proceeds of this offering are not sufficient to enable the Company to generate meaningful revenues or achieve profitable operations, the inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. In addition, any implementation of the Company's business plans subsequent to the twelve month period following this offering may require proceeds greater than the proceeds of this offering or otherwise currently available to the Company. The Company may determine, depending upon the opportunities available to it, to seek additional debt or equity financing to fund operations. To the extent that the Company finances operations through the issuance of additional equity securities, any such issuance would result in dilution to the interests of the Company's shareholders. Additionally, to the extent that the Company incurs indebtedness or issues debt securities in connection with funding operations, the Company will be subject to all of the risks associated with incurring substantial indebtedness, including the risks that interest rates may fluctuate and cash flow may be insufficient to pay principal and interest on any such indebtedness. There can be no assurance that any additional financing will be available to the Company on commercially reasonable terms, or at all. 21 BUSINESS BACKGROUND The Company, a development stage company, is engaged in designing, developing and marketing HealthDesk OnLine, a healthcare management and information system which enables consumers to take a more active role in their personal and family health. HealthDesk OnLine features easy-to-use Windows-based software designed to develop personal medical records and health management programs and access educational, health related information from the Company's private Website and over the Internet. The Company's proposed system is intended to lower the cost and improve the quality and accessibility of healthcare by promoting preventive maintenance and patient compliance and permitting electronic mail communications between consumers and healthcare providers and payers. HealthDesk OnLine is being developed in response to perceived market opportunities arising from increasing efforts of industry participants to stem the escalating cost of healthcare. MARKET TRENDS According to the Congressional Budget Office, annual healthcare expenditures in the United States have grown from approximately $470 billion in 1982 to more than $1 trillion in 1995, representing more than 14% of the gross national product. It is estimated that more than $270 billion is spent on the treatment and related costs of chronic diseases such as diabetes, HIV/AIDS, cancer, cardio-vascular disease, obstructive pulmonary disease and asthma. In response to escalating healthcare costs, federal and state government authorities have increasingly emphasized stringent cost containment measures, and healthcare payers and providers have focused on programs which reduce the costs of providing medical products and services and managing chronic diseases. Inasmuch as the Company is a development stage company seeking to develop and commercialize a new product, aggregate expenditures on healthcare in general and chronic diseases in particular, may not be directly relevant to the Company's current prospects. The Company believes that the broad range of capabilities combined in HealthDesk OnLine, including the system's desktop and online functionality, and the system's ability to link consumers with healthcare payers and providers, differentiate HealthDesk OnLine from competitive products and make it attractive to potential sponsoring organizations seeking to contain healthcare costs. The Company believes that the following key trends will contribute favorably to expected demand for HealthDesk OnLine: o Proliferation of Managed Care and Competitive Pressures: The healthcare industry has undergone significant transformation in recent years. With the proliferation of managed care, employers, consumers and other purchasers of healthcare have greater access to an increasing number of managed care organizations which are experiencing competitive pressures to differentiate their healthcare product and service offerings to attract and retain members. o Continuing Penetration of Computers and Modems in the Home: An increasing percentage of computer owners also own modems, which are being pre-installed in a growing number of new computers. The Software Publishers Association estimates that approximately 33.9 million or 34% of households in the United States owned a personal computer as of 1995, of which approximately 70% also owned a modem. The Company believes that this growth is accompanied by increasing use of computers for communications such as facsimile transmissions and electronic mail. o Growth of the Informational and Commercial Applications and Resources of the Internet: Use of the Internet has grown rapidly since its commercialization in the early 1990s. An increasing number of servers and Websites are being connected to the Internet, making available educational and healthcare text, graphics and audio and video information which may be accessed by consumers. Traditional and emerging Internet applications, including electronic mail and the World Wide Web, are also increasing in popularity. Internet use is also being promoted by the development of user-friendly navigation and search tools designed to simplify consumer access to the Internet's resources. o Rapidly Changing Consumer Demands: The Company believes that demand for healthcare information and services is increasing as the "baby boomer" generation reaches its peak healthcare consuming years. Consumers are assuming greater responsibility for their healthcare decisions, seeking as much informa- 22 tion as possible when choosing a health plan, doctor or treatment. According to the New York Times, the number of health related sites on the World Wide Web has grown significantly, reflecting the growing demand from consumers for information to help them make more informed choices about their own care. HEALTHDESK ONLINE HealthDesk OnLine software contains several modules for recording information (Health History and Records) and several modules which also monitor the state of the user's lifestyle and efforts at preventive maintenance (Health Diaries). These modules allow users to create an extensive database that can be appended, searched, reviewed and printed at any time. The Company's software also contains modules which provide access to healthcare information from the Company's private Website and over the Internet (Gateways and Services). Health History and Records Background. The background module is designed to store basic information, such as name, age, sex, address, phone number, social security number, insurance carrier and blood type of a user. Personal Conditions. The personal conditions module is designed to track doctor and hospital visits and other important health events, including medications, vaccinations, charges, out-of-pocket expenses and insurance reimbursements. Family Health. The family health module is designed to track health information relating to family members that could affect the health profile of a user. Medication History. The medication history module is designed to track medication usage, including information relating to dosage, frequency, cost and prescribing physician. Supplies. The supplies module is designed to track health-related supplies, such as bandages or syringes used on a regular basis, inventory and costs. Finances. The finances module is designed to collect and store information from other health records modules to enable a user to organize and track comprehensive medical costs. Health Diaries Exercise. The exercise module is designed to track exercise activities, including aerobics, running, walking, weight lifting, swimming and bicycling. Heart Health. The heart health module is designed to track serum cholesterol levels, blood pressure and pulse. Weight. The weight module is designed to track body fat, calorie intake, calories burned and weight. Vital Signs. The vital signs module is designed to track blood pressure, weight, height, pulse and basal temperature. Medications. The medications module is designed to track the date and time medication is taken by the user. Nutrition. The nutrition module is designed to track caloric intake and calories burned, as well as fat, protein and carbohydrate consumption. Each module includes a series of illustrated diagrams, which demonstrate important features relating to a healthcare topic. HealthDesk OnLine software permits a user to add other categories and variables not listed on a module. Readings can be edited, summarized and graphed on-screen for detecting trends and patterns in daily health activities. Gateways and Services Library. The HealthDesk OnLine library module contains an extensive database of healthcare information, consisting primarily of licensed content. Healthcare information currently includes pamphlets addressing specific diseases and medical issues; a medical encyclopedia; a pharmacy reference; information relating to self-help 23 groups; and numerous articles from prominent healthcare periodicals such as New England Journal of Medicine and Journal of the American Medical Association. Healthcare information is stored in the Company's private Website and is accessed through the use of a web browser incorporated into the Company's software. Internet Gateway. The Internet gateway module permits access to the World Wide Web for additional healthcare information through the use of a web browser. Access is limited to websites which the Company believes provide the most relevant healthcare information. Feedback. The feedback module allows users to access user surveys and technical support forms. Electronic Mail HealthDesk OnLine is designed to permit secure electronic messaging between consumers and healthcare payers and providers. Anticipated communications between consumers, payers and providers relate to enrollment; physician selection; test results and patient information; appointment scheduling; reminders; provider directories; surveys; home treatment; and explanation of benefits. The Company intends to employ RSA Data Security encryption software on both the desktop and database server. HealthDesk OnLine has been designed to operate on IBM compatible desktop computers with a minimum requirement of a 80486DX central processing unit and eight megabytes of random access memory. The system runs under Windows 95 and Windows 3.1. Consumers may access the electronic mail system, the Company's private Website and the Internet by dialing a local access number provided by CompuServe. The minimum technical requirement to access the electronic communications features is a 9600 Baud modem. PRODUCT DEVELOPMENT The Company's principal efforts to date have been devoted to the design and development of HealthDesk OnLine. For the fiscal years ended December 31, 1994 and 1995 and the nine months ended September 30, 1996, the Company expended approximately $231,000, $681,000 and $1,194,000, respectively, on product development. Product development expenses are expected to increase through 1997 in connection with market testing activities. As of the date of this Prospectus, eleven of the Company's twenty-four employees were engaged in product development. Although the Company believes that its development efforts relating to the technological aspects of the basic HealthDesk OnLine platform are substantially completed, the Company is continually seeking to refine and enhance the capabilities of its products. The Company intends to use a portion of the proceeds of this offering in connection with refining, enhancing and developing system capabilities and features, including the following: Electronic Newsletter. The Company has recently incorporated into its software an electronic newsletter function which includes a search engine technology obtained from Verity, Inc. pursuant to a three year non-exclusive license. Such technology is designed to automatically search content databases and websites by topic of interest on a periodic basis. The Company intends to use this capability to create reports in the form of personalized newsletters which may be updated on a regular basis by the Company. The Company believes that such newsletter also presents a significant opportunity for advertising and promotional "tie-ins" with corporate sponsors. "Chat" Capabilities. The Company will seek to develop and incorporate online "chat" capabilities and sponsored healthcare forums into HealthDesk OnLine. The Company anticipates that these features will provide consumers with an opportunity to discuss healthcare issues with other consumers and healthcare experts. Health Risk Assessment. The Company will seek to incorporate into its software, content and algorithms designed to assist in health risk assessment by providing feedback with respect to the likelihood of risk of certain diseases based on health information input by the user. The Company is seeking to enter into a third-party license agreement in connection with such enhancement. Symptom Triage. The Company has recently incorporated into its products software obtained from Healthwise, Inc. pursuant to a non-exclusive license. Such software is designed to provide specific responses for treatment based on information relating to symptoms input by the user. 24 Medical Device Integration. The Company may also seek to develop features which will facilitate the input of data from medical devices, such as blood pressure cuffs, blood glucose monitors and peak flow meters, directly into HealthDesk OnLine which data may be monitored by healthcare providers. Any such feature may require the Company and/or the medical device manufacturer to obtain pre-marketing regulatory approvals. See "Government Regulation." Call Center. In the future, the Company may evaluate the feasibility of offering call center services which would allow consumers to speak with a nurse or other medical practitioner by phone. The Company believes that a call center capability would enhance patient compliance with disease management programs. In the event that the Company seeks to develop such capability, it will become subject to increased government regulation. See "Government Regulation." In addition, the Company intends to develop specific disease management modules designed to monitor chronic conditions. The Company believes that disease management modules may increase compliance with treatment programs designed to address the lifestyle of chronically-ill patients. In August 1996, the Company and MIIX entered into a letter of intent, as amended, which contemplates that the Company will design, develop and test a software module for diabetes patients. The letter of intent provides for MIIX to fund up to $500,000 of the cost of developing such module, subject to mutually agreed milestones, including target dates and acceptance criteria. The letter of intent also contemplates that the Company would grant to MIIX a right of first refusal to fund the development of other modules. There can be no assurance that the Company will be able to enter into a definitive agreement with MIIX or otherwise successfully develop or commercialize such software module. See "Potential Markets and Marketing." The markets for the Company's products are characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. Accordingly, the ability of the Company to compete will be dependent on the Company's ability to complete development and introduce HealthDesk OnLine into the marketplace in a timely manner, to continually enhance and improve its software and to successfully develop and market new products. There can be no assurance that competitors will not develop technologies or products that render the Company's products obsolete or less marketable or that the Company will be able to successfully enhance its products or develop new products. MARKET TESTING In July 1996, the Company commenced preliminary market testing of HealthDesk OnLine pursuant to a license agreement with BCMA. The Company agreed to grant to BCMA a limited, non-exclusive, non-transferable license to use the HealthDesk trademark and to distribute HealthDesk OnLine to its members, subscribers and insureds. The Company also agreed that until the end of 1997 it will not grant a license to any health maintenance organization which includes rights to distribute HealthDesk OnLine to members in Massachusetts. The Company has modified HealthDesk OnLine to satisfy BCMA's requirements and BCMA is currently testing such product. In the event of successful initial acceptance testing, the proposed market test contemplates that BCMA will distribute HealthDesk OnLine to up to 50 of its employees during a period of ninety days commencing November 1, 1996 and thereafter BCMA will have an additional thirty days to determine whether to distribute HealthDesk OnLine to up to 500 of its members. The Company currently anticipates that BCMA will commence distributing HealthDesk OnLine to its employees in January 1997. The market test is intended to provide information on the product's usability and acceptance by consumers and to test the technical aspects of the Company's software. The Company also recently entered into a license agreement with BCI to conduct similar market testing to up to 150 of BCI employee households. BCI has commenced distributing HealthDesk OnLine to its employees. There can be no assurance that such market testing will be conducted on a timely basis or that such testing will be successful. The agreements with BCMA and BCI require each to pay development fees in the event they require modifications to HealthDesk OnLine. The agreements also provide for the payment of member maintenance fees; installation fees; transaction fees; and online service fees. The Company has waived payment of a master license fee in connection with each agreement. The Company's agreement with BCMA terminates on April 1, 1997, unless otherwise extended, provided that for a period of six months following termination the Company may not grant a license to any health maintenance organization which includes rights to distribute HealthDesk OnLine to members in Massachusetts. The Company's agreement with BCI terminates in February 1997. 25 The Company currently proposes to conduct market testing of HealthDesk OnLine with BCMA and BCI and other potential sponsoring organizations. The Company's success may be highly dependent upon the results of market testing and there can be no assurance that such tests will be successful. If such tests are not successful, the Company will be required to attempt to enhance or modify HealthDesk OnLine so that it will meet with sponsoring organization and consumer acceptance. There can be no assurance that the Company will be able to modify HealthDesk OnLine so that positive test results can be demonstrated. Even if test results are positive, there can be no assurance that sponsoring organizations will be sufficiently encouraged by the results to commit to use HealthDesk OnLine on a non-market test basis. They may elect to utilize other products, services or technologies which they believe to be more efficient or have other cost advantages over the Company's system. In addition, there can be no assurance that positive test results will translate into consumer acceptance over a longer period of time or that sponsoring organizations or consumers will be satisfied with operational results. In 1994, Kaiser and Quantum conducted limited consumer acceptance testing activities with respect to the Company's initial product and a specific disease software module. While the Company believes that the results of such testing were positive, the Company does not have any further arrangements with either Kaiser or Quantum to test such products. POTENTIAL MARKETS AND MARKETING The Company initially intends to offer HealthDesk OnLine with no license fee to potential sponsoring organizations willing to participate in market testing in order to closely monitor performance and provide support for the users of such product. Such activities are expected to allow the Company to adapt and revise its proposed products in light of market needs and user feedback, to develop pricing strategies relative to cost structure, to test new products and features and to correct software or product defects which may arise. Thereafter, although the Company will seek to develop and commercialize specific disease management modules, the Company's primary marketing strategy is to license HealthDesk OnLine to sponsoring organizations (including pharmaceutical companies, managed care organizations, disease management companies, employers and affinity groups) with access to significant numbers of potential subscribers. The Company believes that the addition of HealthDesk OnLine to the products and services of sponsoring organizations could enhance the competitive position of such organizations by differentiating such organizations' products and services from those of competitors. The Company intends to focus its efforts on healthcare organizations primarily responsible for bearing the financial risk of patients with chronic diseases. The Company's letter of intent with MIIX contemplates that the Company would pay royalties to MIIX ranging from 3% to 10% of revenues derived from the sale or license of a software module designed for diabetes patients. There can be no assurance that the Company will be able to enter into a definitive marketing agreement or that any marketing efforts undertaken by MIIX will be successful. The Company is currently evaluating various other commercialization strategies, including the license of HealthDesk OnLine to manufacturers of medical devices, pursuant to arrangements by which such manufacturers would bundle such product with the products of such manufacturers. The Company does not have any specific plans or arrangements with respect to such products and any such arrangements could require the Company and/or a medical device manufacturer to obtain pre-marketing regulatory approvals. See "Government Regulation." The Company may also seek to establish strategic relationships with third parties relating to product development and marketing. In May 1996, the Company entered into cross-license agreements with Patient Infosystems Inc. ("PII"), formerly known as Disease State Management, Inc., a company engaged in providing healthcare information systems designed to improve patient compliance. Pursuant to such agreements, the Company granted to PII a non-exclusive right to market HealthDesk OnLine and PII granted to the Company a non- exclusive right to market PII's advanced voice recognition telephone system capabilities. The Company believes that such arrangement will permit the Company to offer its services to patients who do not have access to personal computers. Under the agreements, each party agreed to seek cost estimates (which would be based on direct costs incurred) in developing modifications necessary to deliver specific services requested by potential customers. Operational fees would be based on certain assumptions contained in the agreements (subject to the parties' standard terms and conditions). The agreements have an initial term of six months and are automatically renew- 26 able for successive terms unless either party gives 30 days' written notice prior to the termination of any renewal term. The agreements provide for each party to pay an initial license fee of $25,000 and $25,000 for each renewal term. John Pappajohn, a director and principal shareholder of the Company, is a principal shareholder and director of PII. Edgewater, a principal shareholder of the Company, is also a principal shareholder of PII. PII may be a competitor of the Company. See "Certain Transactions." The Company's prospects will be substantially affected by its ability to successfully develop and maintain relationships with key sponsoring organizations, which will promote their services using HealthDesk OnLine and, at the same time attract significant numbers of subscribers. The Company's revenues from third-party marketing arrangements are generally expected to be lower than if the Company sold its products directly to end-users, although the Company would not incur the expense of creating a distribution network and would anticipate a greater volume of end-user sales. To the extent that the Company is ultimately able to enter into satisfactory third-party marketing arrangements, the Company will be largely dependent on the efforts of such third parties. In the case of any such arrangements, the Company's products will require adaptation for specific customers, which could delay product commercialization. In addition, the Company will be dependent on the marketing efforts of third parties and on the marketability and sales of their products. There can be no assurance that the Company will be able to enter into third-party marketing arrangements, that it will be able to adapt its products for specific customers on a timely basis, or at all, or that the Company will realize substantial revenues from any such arrangements. The Company's executive officers and marketing staff of three persons are currently responsible for substantially all of the Company's marketing efforts. Because of the nature of the Company's business, the Company's executive officers are expected to continue to devote significant time to develop personal relationships with senior contacts at sponsoring organizations. The Company's ability to market HealthDesk OnLine may be limited by the number of marketing personnel and will be largely dependent upon the efforts of such individuals. HealthDesk, the Company's initial product, is currently marketed directly to consumers pursuant to agreements with two independent sales representatives. The Company does not expect future revenues derived from such product to be meaningful. The Company's marketing strategy and preliminary and future marketing plans may be unsuccessful and are subject to change as a result of a number of factors, including progress or delays in the Company's marketing efforts, changes in market conditions (including the emergence of potentially significant related market segments for applications of the Company's technology), the nature of possible license and distribution arrangements which may become available to it in the future and economic, political, regulatory and competitive factors. There can be no assurance that the Company's strategy will result in successful product commercialization. COMPETITION The markets that the Company intends to enter are characterized by intense competition and an increasing number of new market entrants who have developed or are developing competitive products. The Company will face competition from numerous sources, including prospective customers which may develop and market their own competitive products and services, health information system vendors, software companies and online and Internet service providers. The Company believes that competition will be based primarily on ease of use, features (including communications capabilities and content) and price. The Company believes that the combination of desktop and online functionality of HealthDesk OnLine may provide the Company with a competitive advantage. In addition, certain companies have developed or may be expected to develop technologies or products in related market segments which could compete with certain technologies or products being developed by the Company. The Company expects that companies which have developed or are developing such technologies or products, as well as other companies (including established and newly formed companies) may attempt to develop products directly competitive with HealthDesk OnLine. In particular, several companies, including Healtheon, IBM Global Health Village, MedAccess Corporation, CareSoft, Inc., Access Health, Inc. and America's Housecalls Network, have announced plans to develop and commercialize competitive product and service offerings. Among other things, these products and services include the use of the Internet for electronic communication between health plans and consumers regarding plan matters, World Wide Web sites with information 27 regarding healthcare related matters and other Internet based products which are to offer health related information. Certain of such competitors have substantially greater financial, technical, marketing, distribution personnel and other resources than the Company, permitting such companies to implement extensive marketing campaigns, both generally and in response to efforts by additional competitors to enter into new markets and market new products and services. Healtheon has announced that it has entered into an agreement with BCMA relating primarily to the electronic exchange of health plan benefit information between consumers and health plans. There can be no assurance that Healtheon's relationship with BCMA will not adversely affect the Company's ability to successfully market HealthDesk OnLine to BCMA or that the Company will be able to compete successfully. INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY The Company intends to make HealthDesk OnLine available to users through a set of network servers housed in Berkeley, California. The Company anticipates that access to the Internet will be provided on a 24 hour a day, seven days a week basis through various communications line providers. The Company's operations will depend upon the capacity, reliability and security of its system infrastructure. The Company currently has limited system capacity and will be required to continually expand its system infrastructure to accommodate significant numbers of users and increasing amounts of information they may wish to access. Expansion of the Company's system infrastructure will require substantial financial, operational and management resources. The Company intends to use a portion of the proceeds of this offering to purchase computer equipment to expand system capacity. There can be no assurance that the Company will be able to expand its system infrastructure to meet potential demand on a timely basis, at a commercially reasonable cost, or at all. Failure by the Company to expand its network infrastructure on a timely basis could have a material adverse effect on the Company. In addition, the Company will be dependent upon Web browsers and third-party Internet and online service providers for access to the Company's services, hardware suppliers for prompt delivery, installation and service of computer equipment used to deliver the Company's services and on content providers to provide current healthcare information for use by consumers. The Company has entered into an Online Vendor License Agreement with Information Access Company ("IAC") for online access to an electronic database of proprietary content. The IAC database is currently the principal source of content available on the Company's private Website and includes a wide range of consumer-oriented health publications, medical journals, articles, pamphlets and reference books. The non-exclusive, worldwide, royalty-bearing license requires the Company to include IAC's standard terms and conditions in the Company's standard subscriber terms and conditions, and display certain IAC legends and copyright notices. Either party may terminate the agreement with ninety days' notice after completion of a nine-month beta test period, which expires in May 1997. Thereafter, the agreement continues for a three-year period and may be terminated by either party at the end of each year with ninety days' notice. The Company has entered into a Content License Agreement with Healthwise, Inc. ("Healthwise"), a publisher of self care health information for consumers. The agreement provides a non-exclusive, worldwide, license to the Company for the use of certain content published by Healthwise, including the Healthwise Handbook and Pathways. The agreement continues indefinitely and is terminable for cause upon two weeks' notice and without cause upon six months' notice. In addition, the Company has entered into a Software License Agreement with Healthwise for the use of Healthwise's Knowledgebase Symptom Manager and Health and Disease Manager software in the Company's products. Such software is designed to allow the Company's customers to triage their symptoms and locate information on specific disease states. The agreement provides for a non-exclusive, worldwide, royalty-bearing license. The agreement has renewable one-year terms, unless terminated by either party upon ninety-days' notice prior to expiration of the then current term. The Company has entered into a Subscription License Agreement with Verity, Inc. ("Verity") for the use in the Company's on-line products of certain information indexing and retrieval software. The search engine feature is used to locate content on the IAC database through the Company's development of search queries. The agreement provides for a non-exclusive, worldwide, royalty-bearing license. The agreement expires in May 1997. The Company has entered into a license agreement with Netscape, Inc. to license Netscape's browser technology for integration into the Company's product. The license is a royalty bearing non-exclusive license for an initial one year period expiring in September 1997. 28 The Company has entered into an OEM Master License Agreement with RSA Data Security, Inc. ("RSA") for the use of certain encryption software to secure the Company's messaging system. The Company intends to use the RSA encryption software on both the desktop as well as the Company's private website to ensure that all communications are secure. Through the use of a public key system of encryption, the Company is able to encode patient communications, which may only be decrypted by the designated receiver. The agreement provides for a non-exclusive, royalty-bearing license. The Company believes that if any of such licenses are terminated, that there are multiple other sources from which the Company will be able to license appropriate content or similar technology. POTENTIAL LIABILITY AND INSURANCE In recent years, participants in the healthcare industry have been subject to an increasing number of lawsuits alleging malpractice, product liability and related legal theories, many of which involve large claims and significant defense costs. Due to the nature of its business, the Company could become involved in litigation regarding the healthcare information transmitted over its system with the risk of adverse publicity, significant defense costs and substantial damage awards. The Company has adopted policies and procedures intended to reduce the risk of claims, which include the provision of disclaimers in connection with its services. The Company does not maintain malpractice liability insurance. In addition, because healthcare information and materials may be downloaded and may be subsequently distributed to others, there is a potential that claims will be made against the Company for defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of such materials. The Company also could be exposed to liability in connection with the selection of materials that may be accessible over its system. Claims could be made against the Company if material deemed inappropriate for viewing by children could be accessed. The Company carries an umbrella insurance policy with a limit of $4 million in the aggregate, general liability insurance with a limitation of $2 million in aggregate and $1 million per occurrence and errors and omissions insurance with a limitation of $1 million in the aggregate. Nevertheless, the Company's insurance may not cover potential claims of this type or may not be adequate to cover liability that may be imposed or related defense costs. There can be no assurance that the Company will not face claims resulting in substantial liability for which the Company is partially or completely uninsured. Any partially or completely uninsured claim against the Company, if successful and of sufficient magnitude, would have a material adverse effect on the Company. GOVERNMENT REGULATION The healthcare industry is subject to extensive, stringent and frequently changing federal and state regulation which is interpreted and enforced by regulatory authorities with broad discretion. Among other things, these regulations govern the provision of healthcare services and the marketing of medical devices. These regulations generally predate the development of products and services such as those offered by the Company and the application and enforcement of such regulations to the Company and its products and services is uncertain. However, certain of the statutes governing the provision of healthcare services could be construed by regulatory authorities to apply to the Company's proposed business activities. There can be no assurance that regulatory authorities do not or will not deem the Company's business activities to constitute the unlicensed practice of medicine. Furthermore, in the event the Company develops features which facilitate the input of data from medical devices directly into HealthDesk OnLine, it is possible that the Federal Food and Drug Administration could require the Company and/or an equipment manufacturer to obtain pre-marketing clearance with respect to any such product. The process of obtaining and maintaining required regulatory approval can be lengthy, expensive and uncertain. Even if regulatory approvals are obtained, a marketed product and its manufacturer are subject to continuing regulatory review, and discovery of previously unknown problems could result in restrictions on such product or manufacturer, including withdrawal of the product from the market. Amendments to or interpretation and enforcement of existing statutes or regulations, the adoption of new statutes or regulations or the development of new enhancements and features to HealthDesk OnLine could subject the Company to increased regulation and require the Company to alter methods of operation at costs which could be substantial. Failure to comply with applicable laws and regulations could subject the Company to civil remedies, including substantial fines, penalties and injunctions, as well as possible criminal sanctions. 29 Although there are currently few laws or regulations directly applicable to access to or commerce on the Internet, due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing and characteristics and quality of products and services. The Telecommunications Reform Act of 1996, which was recently enacted, imposes criminal penalties on anyone who distributes obscene, lascivious or indecent communications on the Internet. Although the enforcement of such statute has been enjoined and is currently subject to challenge in the courts, the adoption of any such laws or regulations may limit the growth of the Internet, which could in turn decrease the demand for the Company's products and services and increase the Company's cost of doing business. Inasmuch as the applicability to the Internet of the existing laws governing issues such as property ownership, libel and personal privacy is uncertain, any such new legislation or regulation or the application of existing laws and regulations to the Internet could have an adverse effect on the Company's proposed business and prospects. PROPRIETARY INFORMATION AND TRADEMARKS The Company does not hold any patents or registered copyrights. The Company regards certain computer software it has developed for HealthDesk OnLine as proprietary and attempts to protect it with copyrights, trade secret laws, proprietary rights agreements and internal nondisclosure agreements and safeguards. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop know-how or obtain access to the Company's know-how or software codes, concepts, ideas and documentation. Furthermore, there can be no assurance that nondisclosure agreements with the Company's employees will adequately protect the Company's trade secrets. Although the Company believes that its proposed products do not and will not infringe patents or violate proprietary rights of others, it is possible that infringement of existing or future patents or proprietary rights of others have occurred or may occur. In the event the Company's proposed products infringe patents or proprietary rights of others, the Company may be required to modify the design of its proposed products or obtain a license. There can be no assurance that the Company will be able to do so in a timely manner, upon acceptable terms and conditions or at all. The failure to do any of the foregoing could have a material adverse effect upon the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement action and the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. The Company currently holds a United States trademark registration for the "HealthDesk" name and related logo. The Company is not aware of any claims or infringement or other challenges to the Company's rights to use this mark. EMPLOYEES As of November 30, 1996, the Company had 24 full time employees, of which four were executive officers, eleven were engaged in product development, three were engaged in marketing and six were engaged in administrative activities. The Company's employees are not represented by a collective bargaining unit. The Company believes that its relations with its employees are good. FACILITIES The Company's facilities are located in 5,701 square feet of leased office space in Berkeley, California. The lease expires in January 1999 and provides for an annual rental of $108,564. The Company's operations will be dependent on the Company's ability to protect its computer equipment against damage from fire, earthquakes, power loss, telecommunications failures and similar events. The Company does not presently have redundant, multiple site capacity in the event of any such occurrence. Notwithstanding the implementation of system security measures by the Company, its servers will also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with the Company's computer systems. Computer viruses or problems caused by third parties could lead to material interruptions, delays or cessation in service to consumers. LEGAL PROCEEDINGS The Company is subject to two complaints filed by former employees with the California Department of Fair Employment & Housing. One claim alleges wrongful termination as a result of alleged denial of reasonable 30 accommodation for a wrist and neck injury. The second complaint alleges that the former employee was subject to sexual harassment by a former officer of the Company. The Company intends to defend these matters vigorously. There can be no assurance, however, that such matters will be resolved in a manner favorable to the Company. 31 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
Name Age Position ---- ----- --------- Peter O'Donnell ....... 47 President, Chief Executive Officer and Chairman of the Board Dr. Molly J. Coye ..... 49 Executive Vice President for Strategic Development Gerald W. Zieg ........ 46 Senior Vice President of Sales Timothy S. Yamauchi ... 35 Chief Financial Officer, Secretary and Treasurer John Pappajohn ........ 68 Director James A. Gordon ....... 46 Director Dr. Joseph Rudick, Jr. 39 Director David Sengpiel ........ 44 Director Dr. Edward C. Geehr ... 47 Director
Peter O'Donnell has been President, Chief Executive Officer and Chairman of the Board of the Company since September 1995. From May 1995 to August 1995 Mr. O'Donnell was a consultant to the Company. From February 1993 to April 1995, Mr. O'Donnell was Executive Vice President of Sales and Marketing at The Partnership Group, a company which provides consulting services to employees regarding child and elder care matters. From October 1991 to February 1993, Mr. O'Donnell was Executive Vice President of Sales and Marketing for Wellmark Inc., a healthcare company offering electronic data interchange services that allow hospitals and other healthcare providers to transmit files electronically to payers. Mr. O'Donnell received an M.A. degree in government in 1972 from Rutgers University and a B.A. degree in psychology in 1971 from Pennsylvania State University. Dr. Molly J. Coye has been Executive Vice President for Strategic Development of the Company since June 1996. Dr. Coye served as Senior Vice President of the Good Samaritan Health System, a non-profit, integrated health care system from September 1993 to January 1996. From June 1991 to September 1993, Dr. Coye served as Director of the California Department of Health Services. From 1986 to 1990 Dr. Coye was the Commissioner of Health for the State of New Jersey. Dr. Coye received a B.S. degree in political science from the University of California at Berkeley in 1968, an M.A. degree in Asian history from Stanford University in 1972, and an M.D. and an M.P.H. from Johns Hopkins University in 1977. Dr. Coye completed an internship in Family Medicine at San Francisco General Hospital and a residency in Preventative Medicine at the Robert Wood Johnson Foundation Clinical Scholars Program at the University of California at San Francisco. Gerald W. Zieg has been Senior Vice President of Sales of the Company since December 1996. Mr. Zieg was Senior Vice President of Business Development of Ambulatory Pharmaceutical Services of America, Inc., a home health care company, from April 1996 to November 1996. From 1991 until April 1996, Mr. Zieg was Director of Marketing, Infusion/Chronic Homecare Program for Apria Healthcare Incorporated, a medical services company. Mr. Zieg received a B.S. in Pharmacy from the University of Michigan in 1973 and a M.S. in Pharmacy from Wayne State University in 1979. Timothy S. Yamauchi has been Chief Financial Officer, Secretary and Treasurer of the Company since September 1995. From May 1994 to June 1995, Mr. Yamauchi served as Chief Financial Officer of Innofusion Corporation, a private home healthcare company. From May 1991 to May 1994, Mr. Yamauchi was employed by Total Pharmaceutical Care Inc., a public healthcare service company, as Treasurer and Director of Planning and Analysis. Mr. Yamauchi received a B.S. degree in accounting from California State University, Los Angeles in 1983, an M.B.A. from Harvard Graduate School of Business Administration in 1991 and is a Certified Public Accountant. John Pappajohn has been a director of the Company since 1993. Mr. Pappajohn also serves as a director of the following companies: CareGroup, Inc.; Core, Inc.; Drug Screening Systems, Inc.; Fuisz Technologies Ltd.; GalaGen, Inc.; OncorMed Inc.; PACE Health Management Systems, Inc.; and, Patient Infosystems, Inc. Mr. Pappajohn has been the sole owner of Pappajohn Capital Resources, a venture capital firm, and has served as President of Equity Dynamics, Inc., a financial consulting firm, since 1969. Mr. Pappajohn received a B.S.C. degree from the University of Iowa in 1952. 32 James A. Gordon has been director of the Company since September 1996. Mr. Gordon is the President of the General Partner of Edgewater II Management, L.P., a venture capital management firm. Mr. Gordon is also the General Partner of Edgewater Private Equity Fund II, L.P., a venture capital firm. Mr. Gordon also serves as a director of the following companies: IMNET Systems, Inc.; Advanced Photonix, Inc.; SoftNet Systems, Inc.; Pac Vision; Pride Industries; Microware Systems; Pangea, Inc.; Bankers Trust Co. of Iowa; and Cellular World Corp. Mr. Gordon has been President of Gordon Management, an investment management company, since February 1992. Mr. Gordon received a B.A. degree summa cum laude from Northwestern University. Dr. Joseph Rudick, Jr., a founder of the Company, has been a director of the Company since August 1992. Dr. Rudick has been employed as a physician with Associate Ophthalmologists, P.C. since 1988. Dr. Rudick has also served as Vice President of Castle Group/Paramount Capital, a venture capital firm, since 1993. Dr. Rudick currently serves as a director of Headland Technologies, Optex Ophthalmics and Channel Pharmaceuticals. Dr. Rudick received a B.A. from Williams College in 1978 and an M.D. from University of Pennsylvania in 1983. David Sengpiel has been a director of the Company since September 1995. Mr. Sengpiel also serves as a director of both Image Guided Technologies and CVE, Inc, and as a Vice President of Equity Dynamics, a venture capital firm since March 1995. From January 1993 to March 1995, Mr. Sengpiel was employed as an Alternative Investment Manager with Farm Bureau Insurance, a life insurance company. From August 1990 to January 1993, Mr. Sengpiel served as President of Vantage Cable International, a telecommunications company. Edward C. Geehr, M.D. has been a director of the Company since November 1996. Dr. Geehr has been Senior Vice President, Strategic Development for UniHealth, a hospital, insurance and medical services company since January 1996. From February 1995 to November 1996, Dr. Geehr was President of the Health Care Delivery System Division of UniHealth and from 1990 to January 1995, Senior Vice President and Chief Medical Officer. Dr. Geehr received a B.A. degree from Yale University in 1971, a B.M.S. degree from Dartmouth Medical School in 1974 and a M.D. degree from Duke University School of Medicine in 1976. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors or officers of the Company. The Company has established a Compensation Committee of the Board of Directors which is currently comprised of Messrs. Pappajohn, Sengpiel and Geehr. The Compensation Committee makes recommendations to the Board concerning salaries and incentive compensation for the Company's executive officers and key personnel and administers the Company's Stock Option Plan. The Company has also established an Audit Committee of the Board of Directors which is currently comprised of Messrs. Pappajohn and Gordon. EXECUTIVE COMPENSATION The following table sets forth certain compensation paid by the Company during the fiscal year ended December 31, 1995 to its President and Chief Executive Officer. No other officer of the Company received compensation in excess of $100,000 for the fiscal year ended December 31, 1995. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation ---------------------------------------- ---------------------------- Other Annual Options All Other Name and Principal Position Year Salary Bonus Compensation(1) Granted(#) Compensation --------------------------- ------ --------- --------- --------------- ---------- -------------- Peter O'Donnell President & Chief Executive Officer .................. 1995 $53,033 $13,333 $79,699 180,000 --
- ------ (1) Represents consulting fees of $63,699 from May to September 1995 and relocation costs. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with each of Peter O'Donnell, Molly J. Coye and Timothy S. Yamauchi which expire in December 1997 and are automatically renewable for additional one-year terms. The agreements provide for base compensation payable to Mr. O'Donnell, Dr. Coye and Mr. Yamauchi 33 of $163,200, $140,000 and $110,000, respectively, and bonuses to be determined based on annual pre-tax earnings, if any, of the Company. Dr. Coye, who will be entitled to receive base compensation commencing in 1997, is entitled to receive a bonus of $80,000 in February 1997. The agreements also provide for employment on a full-time basis and contain a provision that the employee will not compete or engage in a business competitive with the Company for a period of one year after termination. In the event of termination of the employee's employment by the Company other than for cause (including non-renewal of the agreement) or by reason of death or disability, the Company is obligated to make payments equal to one-half of the then applicable annual base salary plus a pro rata portion of the bonus payable for such year. The Company has also entered into a letter agreement with Gerald Zieg pursuant to which Mr. Zieg is entitled to receive an annual salary of $90,000 plus commissions equal to 1% of net revenues, subject to certain exclusions. In the event that Mr. Zieg's employment is terminated by the Company during the first twelve months of employment, he will be entitled to severance pay equal to three months salary. 1994 STOCK OPTION PLAN The Company's 1994 Founder's Stock Option Plan (the "Option Plan") became effective in June 1994 and was amended most recently in March 1996. The purpose of the Option Plan is to attract and retain qualified personnel, to provide additional incentives to employees, officers and consultants of the Company and to promote the success of the Company's business. A reserve of 950,000 shares of the Company's Common Stock has been established for issuance under the Option Plan. The Option Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). Subject to the Option Plan, the Committee has complete discretion to determine which eligible individuals are to receive option grants, the number of shares subject to each such grant, the status of any granted option as either an incentive stock option or a non-statutory option, the vesting schedule to be in effect for the option grant and the maximum term for which any granted option is to remain outstanding. Each option granted under the Option Plan has a maximum term of ten years, subject to earlier termination following the optionee's cessation of service with the Company. Options are generally immediately exercisable subject to a right of repurchase in favor of the Company at the original exercise price which expires over a four-year vesting period. The exercise price of incentive stock options and non-statutory stock options granted under the Option Plan must be at least 100% and 85% of the fair market value of the stock subject to the option on the date of grant, respectively or 110% with respect to holders of more than 10% of the voting power of the Company's outstanding stock. The Committee determines the fair market value of the stock. The purchase price is payable immediately upon the exercise of the option. Such payment may be made in cash, or at the discretion of the Committee, in outstanding shares of Common Stock held by the participant, through a full recourse promissory note payable in installments over a period of years or any combination of the foregoing. The Board of Directors may amend or modify the Option Plan at any time, provided that no such amendment or modification may adversely affect the rights and obligations of the participants with respect to their outstanding options or unvested shares without their consent. In addition, no amendment of the Option Plan may, without the approval of the Company's shareholders, (i) materially modify the class of individuals eligible for participation, (ii) increase the number of shares available for issuance, except in the event of certain changes to the Company's capital structure, (iii) materially increase the benefits accruing to Optionees under the Option Plan, or (iv) extend the term of the Option Plan. The Option Plan will terminate in June 2004, unless terminated earlier by the Board. As of the date of this Prospectus, there are options to purchase an aggregate of 768,050 shares outstanding under the Plan with an average exercise price of $2.95. Peter O'Donnell holds 180,000 outstanding options, 135,324 of which were granted at an exercise price of $1.04 per share and 44,676 of which were granted at an exercise price of $2.08 per share. Joseph Rudick holds 24,000 options, 12,000 of which were granted at an exercise price of $1.04 per share, and 12,000 of which were granted at an exercise price of $1.67 per share. Molly Coye holds 132,000 outstanding options, 96,000 of which were granted at an exercise price of $3.33 per share and 36,000 of which were granted at $5.00 per share. Timothy Yamauchi holds 60,000 outstanding options, 45,210 of which were granted at an exercise price of $1.04 per share, and 14,790 of which were granted at an exercise price of $2.08 per share. Gerald Zieg holds 50,000 outstanding options which were granted at an exercise price of $5.00 per share. 34 All options are immediately exercisable subject to repurchase rights in favor of the Company based upon the following vesting schedule: the optionee shall acquire a vested interest in, and the Company's repurchase rights will accordingly lapse with respect to, (i) twenty-five percent (25%) of the option shares upon completion of one year of service (as a director or employee, as the case may be) measured from the respective vesting commencement date, and (ii) the balance of the option shares in equal successive monthly installments upon completion of each of the next thirty-six (36) months of service measured from and after the first anniversary of such vesting commencement date. OTHER BENEFIT PLANS The Company maintains a 401(k) savings plan and a Section 125 medical and dental savings plan. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Articles of Incorporation (the "Articles") limit the liability of directors to the maximum extent permitted by California law. The Articles authorize the Company to indemnify agents of the Company in excess of the indemnification otherwise permitted by Section 317 of the California General Corporation Law, subject only to applicable limits set forth in Section 204 of the California General Corporation Law with respect to actions for breach of duty to the corporation and its shareholders. The Company's Bylaws provide that the Company shall indemnify its directors, officers, employees and other agents to the fullest extent permitted by law. The Company believes that indemnification under its Bylaws covers at least negligence and gross negligence on the part of indemnified parties. The Company's Bylaws also permit it to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Bylaws would permit indemnification. The Company has entered into agreements to indemnify its directors and executive officers. These agreements, among other things, indemnify the Company's directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or executive officer of the Company or any other company or enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 35 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of November 30, 1996, and as adjusted to reflect the sale of the 1,800,000 shares of Common Stock offered hereby, by: (i) each person or group of affiliated persons who is known by the Company to own beneficially 5% or more of the Company's Common Stock, (ii) each of the Company's directors, (iii) the Chief Executive Officer, and (iv) all directors and executive officers as a group. Except as otherwise noted, the persons or entities in this table have sole voting and investment power with respect to all the shares of Common Stock beneficially owned by them.
Percentage of Total ------------------------ Name and Address of Amount and Nature of Before After Beneficial Owner (1) Beneficial Ownership (2) Offering Offering - -------------------- ------------------------ -------- ---------- Peter S. O'Donnell (3) ................... 180,000 4.7% 3.3% John Pappajohn(4) ........................ 1,055,000 28.5 19.2 Edgewater Private Equity Fund II, L.P. 666 Grand Avenue, Suite 200 Des Moines, Iowa 50309 ................... 901,000 24.4 16.4 James Gordon (5) ......................... 901,000 24.4 16.4 Dr. Joseph Rudick 150 Broadway New York, New York 10038(6) .............. 219,000 5.9 4.0 David Sengpiel(7) ........................ 15,000 .4 .3 Dr. Edward C. Geehr(8) ................... 20,000 .5 .4 All officers and directors as a group (nine persons) (9) ..................... 2,632,000 62.9% 44.0%
- ------ (1) Except as otherwise indicated, the address for each beneficial owner identified is c/o HealthDesk Corporation, 2560 Ninth Street, Suite 220, Berkeley, California 94710. (2) Unless otherwise indicated, the Company believes that all persons and entities named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of shares of Common Stock that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that convertible securities and options that are held by such person (but not those held by any other person) and which are exercisable within such period have been exercised. (3) Represents immediately exercisable options to purchase 180,000 shares. (4) Includes immediately exercisable options to purchase 10,000 shares. Excludes 10,000 shares owned by Ann Pappajohn, Mr. Pappajohn's daughter. Mr. Pappajohn disclaims beneficial ownership of such shares. (5) Includes 901,000 shares of Common Stock held by Edgewater Private Equity Fund II, L.P. Mr. Gordon may be deemed to be the beneficial owner of such shares. Excludes 30,000 shares of Common Stock held by Laura Gordon 1985 Trust over which Mr. Gordon has voting power but no pecuniary interest. Mr. Gordon disclaims beneficial ownership of such 30,000 shares. (6) Includes immediately exercisable options to purchase 24,000 shares. (7) Includes immediately exercisable options to purchase 15,000 shares. (8) Includes immediately exercisable options to purchase 20,000 shares. (9) Includes immediately exercisable options to purchase 491,000 shares. CERTAIN TRANSACTIONS In May 1993, the Company issued 120,000 shares of Common Stock to John Pappajohn, a director and principal shareholder of the Company, for an aggregate consideration of $125,000. In May 1994, the Company issued 30,000 shares of Common Stock to Mr. Pappajohn for an aggregate consideration of $31,250 (or $1.04 per share). The Company has granted registration rights to Mr. Pappajohn with respect to all of such shares. In August 1995, Mr. Pappajohn and Edgewater Private Equity Fund II, L.P. ("Edgewater") purchased an aggregate of 636,000 shares of Common Stock from David Hehman, the former Chief Executive Officer of the 36 Company, and certain of his family members, for an aggregate consideration of $662,500. James Gordon, a director of the Company, is president of the General Partner of Edgewater. In connection with such transaction, Mr. Hehman and such family members entered into a severance agreement with the Company which provided for their respective resignations as officers, directors and employees of the Company, their agreement not to compete for one year with the Company and the termination of options to purchase an aggregate of 198,000 shares of Common Stock. Pursuant to such severance agreement, the Company paid such individuals an aggregate of $50,000. In addition, in consideration of $5,000, Spartina Corporation, a company controlled by Mr. Hehman, assigned to the Company all of its right, title and interest in and to certain software development tools previously licensed by the Company from Spartina Corporation pursuant to a non-exclusive license agreement entered into in April 1993. In connection with such transaction, Mr. Pappajohn and Edgewater were granted registration rights with respect to all of such shares. In August 1995, the Company granted to Mr. Pappajohn options to purchase 96,000 shares of Common Stock at an exercise price of $1.04 per share. Such options were exercised in December 1995. In September 1996, the Company granted Mr. Pappajohn and Mr. Sengpiel, a director of the Company, options to purchase 10,000 and 15,000 shares of Common Stock, respectively, at an exercise price of $5.00 per share. During the period from June through September 1995, the Company borrowed an aggregate of $800,000 from Mr. Pappajohn and Edgewater, evidenced by convertible promissory notes bearing interest at the rate of 6% per annum. The principal of the notes were converted into an aggregate of 768,000 shares of Common Stock in September 1995. In December 1995, Mr. Pappajohn and Edgewater, purchased 69,000 and 129,000 shares of the Company's Series A Preferred Stock for an aggregate purchase price of approximately $144,000 and $268,000, respectively. In May 1996, the Company and PII entered into cross-license agreements in connection with possible product development and marketing arrangements. Pursuant to such agreements, each party paid the other an initial license fee of $25,000. Similar fees are payable upon any renewal of such agreements. Mr. Pappajohn is a principal shareholder and a director of PII. Edgewater is also a principal shareholder of PII. In July and August 1996, the Company borrowed an aggregate of $500,000 from Mr. Pappajohn and Edgewater. Such indebtedness bears interest at the rate of 8% per annum. The principal of such notes will automatically convert into approximately 100,000 shares of Common Stock on the date of this Prospectus. Mr. Pappajohn and Edgewater each purchased $100,000 of Units consisting of 20,000 shares of Common Stock at an attributed price of $2.25 per share and a 9% non-negotiable promissory note in the principal amount of $100,000 in connection with the Bridge Financing. The Company believes that all of the foregoing transactions and arrangements were fair and reasonable to the Company and were on terms no less favorable than could have been obtained from unaffiliated third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will continue to be advantageous to the Company, that conflicts of interest will not arise with respect thereto, or that if conflicts do arise, they will be resolved in a manner favorable to the Company. Any such future transactions will be on terms no less favorable to the Company than could be obtained from unaffiliated parties and will be approved by a majority of the independent and disinterested members of the Board of Directors, outside the presence of any interested directors and, to the extent deemed appropriate by the Board of Directors, the Company will obtain shareholder approval or fairness opinions in connection with any such transaction. 37 DESCRIPTION OF SECURITIES Upon completion of this offering, the authorized capital stock of the Company will consist of 17,000,000 shares of Common Stock, 5,489,720 of which will be outstanding, and 3,000,000 shares of Preferred Stock, none of which will be outstanding. The following description of the capital stock of the Company and certain provisions of the Company's Restated Articles of Incorporation and Bylaws is a summary and is qualified in its entirety by the provisions of the Restated Articles of Incorporation and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. Common Stock The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the shareholders, including the election of directors, and, subject to preferences that may be applicable to any Preferred Stock outstanding at the time, are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of liquidation or dissolution of the Company, the holders of Common Stock are entitled to receive all assets available for distribution to the shareholders, subject to any preferential rights of any preferred stock then outstanding. The holders of Common Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All outstanding shares of Common Stock are, and the shares offered hereby upon issuance and sale will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock which the Company may designate and issue in the future. The Company's shareholders currently may cumulate their votes for the election of directors so long as at least one shareholder has given notice at the meeting of shareholders prior to the voting of that shareholder's desire to cumulate his or her votes. Cumulative voting may be eliminated by amendment to the Articles or the Company's Bylaws if (i) the Company's shares of Common Stock are listed on the Nasdaq National Market and the Company has at least 800 holders of its equity securities as of the record date of the Company's most recent annual meeting of shareholders or (ii) the Company's shares of Common Stock are listed on the New York Stock Exchange or the American Stock Exchange. Preferred Stock The Company is authorized to issue 3,000,000 shares of preferred stock. Of such shares, 1,200,000 represent Series A Preferred Stock of which the 1,059,600 outstanding shares will automatically convert upon the consummation of this offering. The remaining 1,800,000 shares may be issued from time to time in one or more series upon authorization by the Company's Board of Directors. The Board of Directors, without further approval of the shareholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each series of preferred stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company, discourage bids for the Company's Common Stock at a premium or otherwise adversely affect the market price of the Common Stock. The Company has no current plans to issue any preferred stock. REDEEMABLE WARRANTS Each Warrant entitles the registered holder thereof to purchase one share of Common Stock, at a price of $5.00, subject to adjustment in certain circumstances, at any time after , 1998 until , 2002. The Warrants are redeemable by the Company, upon the consent of the Underwriter, at any time after , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the clos- 38 ing bid price of the Common Stock on all 30 of the trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. All warrantholders have exercise rights until the close of business on the date fixed for redemption. The Warrants will be issued in registered form under a Warrant Agreement between the Company and American Stock Transfer & Trust Company as Warrant Agent. Reference is made to said Warrant Agreement for a complete description of the terms and conditions therein (the description herein contained being qualified in its entirety by reference thereto). The exercise price and number of shares of Common Stock or other securities issuable on exercise of the Warrants are subject to adjustments in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. However, such Warrants are not subject to adjustment for issuances of Common Stock at a price below the exercise price of the Warrants, including the issuance of shares of Common Stock pursuant to the Option Plan. The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the certificate completed and executed as indicated, accompanied by full payment of the exercise price (by certified check payable to the Company) to the Warrant Agent for the number of Warrants being exercised. The warrantholders do not have the rights or privileges of holders of Common Stock. No Warrant will be exercisable unless at the time of exercise the Company has filed a current registration statement with the Commission covering the shares of Common Stock issuable upon exercise of such Warrant and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such Warrant. The Company will use its best efforts to have all such shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to do so, there is no assurance that it will be able to do so. No fractional shares will be issued upon exercise of the Warrants. However, if a warrantholder exercises all Warrants then owned of record by him, the Company will pay such warrantholder, in lieu of the issuance of any fractional shares which is otherwise issuable, an amount in cash based on the market value of the Common Stock on the last trading day prior to the exercise date. Registration Rights In connection with this offering, in addition to the registration obligations with respect to the shares of Common Stock issuable upon exercise of the Warrants, the Company has agreed to grant to the Underwriter certain demand and piggyback registration rights in connection with the 360,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants and the warrants included therein. See "Underwriting." Pursuant to the terms of the Bridge Financing, the Company has included the shares issued in the Bridge Financing in the Registration Statement of which this Prospectus forms a part. The Company has agreed to use its best efforts to keep the Registration Statement effective until the earlier of (i) the date that all of the shares included in the Registration Statement have been sold pursuant thereto and (ii) the date the Selling Shareholders receive an opinion of counsel that the full amount of their shares may be freely sold by such holders. All registration expenses related to such shares will be paid by the Company. If the Company defaults in its obligations to maintain the Registration Statement effective or otherwise fails to comply with certain other registration rights obligations of the Bridge Financing, the Company may be obligated to issue up to an additional 100,000 shares of Common Stock to the investors which participated in the Bridge Financing. The shares offered by the Selling Shareholders may not be sold prior to twelve months from the date of this Prospectus and, without the prior written consent of the Underwriter, may not be sold prior to eighteen months after the date of this Prospectus. In addition to the rights described above, the holders ("Holders") of an aggregate of approximately 1,341,600 shares of Common Stock are entitled to certain rights with respect to the registration of such shares for offer and sale to the public under the Securities Act. Under these provisions, the Holders may request that 39 the Company file up to one registration statement under the Securities Act with respect to at least 50% of such Common Stock. Upon receipt of such a request, the Company is required to notify all other Holders and to effect as soon as practicable such registration, subject to certain conditions, including that the request must be received one year or more after the effective date of this offering, and no later than December 31, 2000. Further, whenever the Company proposes to register any of its securities under the Securities Act for its own account or for the account of other security holders, the Company is required to promptly notify each Holder of the proposed registration and include all Common Stock which such Holder may request to be included in such registration, subject to certain limitations. The Company has obtained a waiver of these rights to the extent they would have applied to this offering. Transfer and Warrant Agent The transfer and warrant agent for the Common Stock and Warrants is American Stock Transfer and Trust Company, New York, New York. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of this offering, the Company will have 5,489,720 shares of Common Stock outstanding (assuming no exercise of the Warrants), of which 2,200,000 shares, consisting of 1,800,000 shares offered hereby and, subject to certain contractual restrictions described below, the 400,000 shares being offered by the Selling Shareholders, will be freely tradable without restriction or further registration under the Securities Act. All of the remaining 3,289,720 shares of Common Stock outstanding are "restricted securities," as that term is defined in Rule 144 promulgated under the Securities Act, and in the future may be sold only pursuant to an effective registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. Of the 3,289,720 restricted shares, an aggregate of 237,000 shares will be eligible for sale, without registration, under Rule 144 (subject to the contractual restrictions described below), on the date of this Prospectus, and 417,000 shares will be eligible (subject to certain volume limitations and the contractual restrictions described below) commencing 90 days from the date of this Prospectus. In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from either the Company or any affiliate of the Company, the acquirer or subsequent holder thereof may sell, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock, or the average weekly trading volume of the Common Stock on the Nasdaq SmallCap Market during the four calendar weeks preceding the date on which notice of the proposed sale is sent to the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If three years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from the Company or any affiliate of the Company, a person who is not deemed to have been an affiliate of the Company at any time for 90 days preceding a sale would be entitled to sell such shares under Rule 144 without regard to the volume limitations, manner of sale provisions or notice requirements. The Company's officers, directors and security holders (excluding the holders of 42,000 shares of Common Stock) have agreed not to sell or dispose of any of their securities of the Company for a period of eighteen months from the date of this Prospectus without the Underwriter's prior written consent. Prior to this offering, there has been no market for the Common Stock and no prediction can be made as to the effect, if any, that public sales of shares of Common Stock or the availability of such shares for sale will have on the market prices of the Common Stock and Warrants prevailing from time to time. However, the possibility that a substantial amount of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. UNDERWRITING Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase 1,800,000 shares of Common Stock and 1,800,000 Warrants from the 40 Company. The Underwriter is committed to purchase and pay for all of the Common Stock and Warrants offered hereby if any of such securities are purchased. The Common Stock and Warrants are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the Common Stock and Warrants to the public at the public offering prices set forth on the cover page of this Prospectus. The Underwriter may allow to certain dealers who are members of the National Association of Securities Dealer, Inc. (the "NASD") concessions, not in excess of $ per share of Common Stock and $ per Warrant, of which not in excess of $ per share of Common Stock and $ per Warrant may be reallowed to other dealers who are members of the NASD. The Company has granted to the Underwriter an option, exercisable for 45 days from the date of this Prospectus, to purchase up to 270,000 additional shares of Common Stock and/or 270,000 additional Warrants at the public offering prices set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The Underwriter may exercise this option in whole or, from time to time, in part, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the shares of Common Stock and/or Warrants offered hereby. The Company has agreed to pay to the Underwriter a non-accountable expense allowance of 3% of the gross proceeds of this offering, of which $50,000 has been paid as of the date of this Prospectus. The Company has also agreed to pay all expenses in connection with qualifying the shares of Common Stock and Warrants offered hereby for sale under the laws of such states as the Underwriter may designate, including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to grant to the Underwriter and its designees warrants (the "Underwriter's Warrants") to purchase up to 180,000 shares of Common Stock at a purchase price of $6.60 per share and/or up to 180,000 Warrants (each to purchase one share of Common Stock at $8.25 per share) at an exercise price of $.132 per Warrant. The Underwriter's Warrants may not be sold, transferred, assigned or hypothecated for one year from the date of this Prospectus, except to the officers and partners of the Underwriter and members of the selling group, and are exercisable during the five-year period commencing on the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the sale of the Underwriter's Warrants or the underlying securities may be deemed additional underwriting compensation. Subject to certain limitations and exclusions, the Company has agreed, at the request of the holders of a majority of the Underwriter's Warrants, at the Company's expense, to register the securities issuable upon exercise of the Underwriter's Warrants under the Securities Act on one occasion during the Warrant Exercise Term and to include such underlying securities in any appropriate Registration Statement which is filed by the Company during the seven years following the date of this Prospectus. The Company has agreed, in connection with the exercise of the Warrants pursuant to solicitation (commencing one year from the date of this Prospectus), to pay to the Underwriter for bona fide services provided a fee of 5% of the exercise price for each Warrant exercised; provided, however, that the Underwriter will not be entitled to receive such compensation in Warrant exercise transactions in which (i) the market price of shares at the time of exercise is lower than the exercise price of the Warrants; (ii) the Warrants are held in any discretionary account; (iii) disclosure of compensation arrangements is not made, in addition to the disclosure provided in this Prospectus, in documents provided to holders of the Warrants at the time of exercise; (iv) the holder of the Warrants has not confirmed in writing that the Underwriter solicited such exercise; or (v) the solicitation of exercise of the Warrants was in violation of Rule 10b-6 promulgated under the Exchange Act. In addition to soliciting, either orally or in writing, the exercise of the Warrants, such bona fide services may also include disseminating information, either orally or in writing, to the holders of the Warrants about the Company or the market for the Company's securities, and assisting in the processing of the exercise of Warrants. The Underwriter acted as placement agent in connection with the Bridge Financing and received $200,000 (representing 10% of the purchase price of the units) and a non-accountable expense allowance of $35,000. 41 All of the officers and directors and shareholders of the Company holding an aggregate of 3,569,720 shares of the Common Stock (excluding the holders of 42,000 shares of Common Stock) have agreed that they will not sell any shares of Common Stock of the Company for a period of eighteen months after the date of this Prospectus without prior written consent of the Underwriter. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act. The Underwriter has informed the Company that it does not expect sales made to discretionary accounts to exceed 1% of the securities offered hereby. Prior to this offering, there has been no public trading market for the Common Stock or the Warrants. Consequently, the initial public offering prices of the Common Stock and the Warrants has been determined by negotiations between the Company and the Underwriter. Among the factors considered in determining the offering price were the Company's financial condition and prospects, market prices of similar securities of comparable publicly-traded companies, certain financial and operating information of companies engaged in activities similar to those of the Company and the general condition of the securities market. 42 SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION An aggregate of up to 400,000 shares may be offered and sold pursuant to this Prospectus by the Selling Shareholders. The Company has agreed to register the public offering of such shares under the Securities Act concurrently with this offering and to pay all expenses in connection therewith. The shares have been included in the Registration Statement of which this Prospectus forms a part. None of the such shares may be sold by the Selling Shareholders prior to twelve months after the date of this Prospectus and, without the prior written consent of the Underwriter, may not be sold prior to eighteen months from the date of this Prospectus. None of the Selling Shareholders has ever held any position or office with the Company or had any other material relationship with the Company except that John Pappajohn is a director and principal shareholder of the Company and Edgewater is a principal shareholder of the Company. James Gordon, a director of the Company is president of the General Partner of Edgewater. The Company will not receive any of the proceeds from the sale of the shares by the Selling Shareholders. The following table sets forth certain information with respect to the Selling Shareholders.
Beneficial Percentage Beneficial Amount of Ownership of of Beneficial Ownership Common Common Stock Ownership of of Common Stock Stock After Common Stock Selling Shareholders Prior to Sale Offered Offering After Offering --------------------------------------- --------------- ----------- -------------- -------------- Wilensky, Allan S. .................... 45,000 45,000 -- -- Worthington, John R. .................. 30,000 30,000 -- -- Pappajohn, John ....................... 1,055,000 20,000 1,035,000 18.8% Edgewater Private Equity Fund II, L.P. 901,000 20,000 881,000 16.0% Brown, Michael & Brown, Alana (JT) .... 20,000 20,000 -- -- Chafoulias, Gus ....................... 53,600 20,000 33,600 .6% Chastek, Chester ...................... 20,000 20,000 -- -- Toboroff, Leonard ..................... 20,000 20,000 -- -- Shaykin, Leonard ...................... 15,000 15,000 -- -- Atlas Capital Partners, L.P. .......... 10,000 10,000 -- -- Catalyst Partners, L.P. ............... 10,000 10,000 -- -- David, Todd & Loewenberg, Tiffany (JT) 10,000 10,000 -- -- Egge, R.D. ............................ 10,000 10,000 -- -- FGR Akel .............................. 10,000 10,000 -- -- Gottlieb, Scott C. .................... 10,000 10,000 -- -- IASD Health Services Corp. ............ 106,000 10,000 96,000 1.7% JIBS Equities, L.P. ................... 34,000 10,000 24,000 .4% Marino, Robert R. ..................... 10,000 10,000 -- -- Natale, Steve ......................... 10,000 10,000 -- -- Pappajohn, Ann ........................ 10,000 10,000 -- -- Penn Footwear Retirement Invest. ...... 34,000 10,000 24,000 .4% Goldberg, Jay N. ...................... 6,000 6,000 -- -- Howard, Lawrence ...................... 6,000 6,000 -- -- Kier, Isaac ........................... 6,000 6,000 -- -- Segal, Gordon ......................... 17,000 5,000 12,000 .2% Cantor, Michael ....................... 5,000 5,000 -- -- Lyons, Allan R. ....................... 5,000 5,000 -- -- McGowan Corporation ................... 5,000 5,000 -- -- Merenstein, Lewis IRA ................. 5,000 5,000 -- -- Miot, Sanford B. ...................... 5,000 5,000 -- -- Newman, Gary .......................... 5,000 5,000 -- -- Nocciolino, Albert .................... 5,000 5,000 -- -- Nusbaum, Lawrence G. .................. 5,000 5,000 -- -- Odenthal, William ..................... 5,000 5,000 -- -- Christos, Peter N. .................... 2,000 2,000 -- --
43 The shares may be offered and sold from time to time as market conditions permit in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. The shares may be sold by one or more of the following methods, without limitation: (a) a block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchases; and (d) face-to-face transactions between sellers and purchasers without a broker/dealer. In effecting sales, brokers or dealers engaged by the Selling Shareholders may arrange for other brokers or dealers to participate. Such brokers or dealers may receive commissions or discounts from Selling Shareholders in amounts to be negotiated. Such broker and dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Gray Cary Ware & Freidenrich, a Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriter by Tenzer Greenblatt LLP, New York, New York. EXPERTS The balance sheets as of December 31, 1994 and 1995 and the statements of operations, shareholders' equity and cash flows for the years ended December 31, 1994 and 1995 and for the period from August 28, 1992 (inception) to December 31, 1995, included in this Prospectus, have been included herein in reliance on the report, which includes an explanatory paragraph regarding the ability of the Company to continue as a going concern, of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement on Form SB-2, including amendments thereto, under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which this Prospectus forms a part, each such statement being qualified in all respects by such reference. The Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: 13th Floor, Seven World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C. at prescribed rates. The Commission also maintains a Web site at www.sec.gov. that contains reports, proxy and information statements. Such reports and other information may also be inspected at NASDAQ, 1735 K Street, N.W. Washington, D.C. 20006. 44 HEALTHDESK CORPORATION (A DEVELOPMENT STAGE COMPANY) CONTENTS
PAGE -------- Independent Accountant's Report ..................................... F-2 Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996 ............................................................... F-3 Statements of Operations for the years ended December 31, 1994 and 1995, nine months ended September 30, 1995 and 1996 and period from inception to September 30, 1996 .................................... F-4 Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1992, 1993, 1994 and 1995 and nine months ended September 30, 1996 ................................................. F-5 Statements of Cash Flows for the years ended December 1994 and 1995, nine months ended September 30, 1995 and 1996 and period from inception to September 30, 1996 .................................... F-6 Notes to Financial Statements ....................................... F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of HealthDesk Corporation: We have audited the accompanying balance sheets of HealthDesk Corporation (a development stage company) as of December 31, 1994 and 1995, and the related statements of operations, shareholders' equity (deficit), and cash flows for the years then ended, and for the period from August 28, 1992 (inception) to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HealthDesk Corporation as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the years then ended, and for the period from August 28, 1992 (inception) to December 31, 1995 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is still in the development stage and, therefore, has incurred losses from operations and negative cash flows from operating activities since inception. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND L.L.P. San Francisco, California July 30, 1996, except for Note 12 as to which the date is December 2, 1996 F-2 HEALTHDESK CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
December 31, September 30, 1996 ---------------------------- September 30, Pro Forma 1994 1995 1996 (Note 13) ----------- ------------- --------------- ------------------ (unaudited) (unaudited) ASSETS Current assets: Cash and cash equivalents .................. $ 376,334 $ 1,554,034 $ 6,778 $ 1,145,695 Receivable from shareholder ................ -- 100,000 -- -- Prepaid expenses and other ................. 928 19,709 137,444 137,444 Deferred offering costs .................... -- -- 159,895 313,895 ----------- ------------- --------------- ------------------ Total current assets .................. 377,262 1,673,743 304,117 1,597,034 Property and equipment, net .................. 70,490 234,963 468,549 468,549 Other assets ................................. 3,987 94,650 17,934 17,934 ----------- ------------- --------------- ------------------ Total assets .......................... $ 451,739 $ 2,003,356 $ 790,600 $ 2,083,517 =========== ============= =============== ================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable ........................... $ 14,710 $ 104,759 $ 399,615 $ 399,615 Accrued liabilities ........................ 78,626 143,715 453,331 453,331 Due to related parties ..................... 22,939 -- -- -- Deferred compensation ...................... 21,165 -- -- -- Convertible notes payable and accrued interest ................................ -- 554,833 1,088,042 6,959 Notes payable .............................. -- -- -- 1,100,000 ----------- ------------- --------------- ------------------ Total current liabilities ............. 137,440 803,307 1,940,988 1,959,905 Convertible notes payable and accrued interest 519,834 -- -- -- ----------- ------------- --------------- ------------------ Total liabilities ..................... 657,274 803,307 1,940,988 1,959,905 ----------- ------------- --------------- ------------------ Commitments and contingencies (Note 7) Shareholders' equity (deficit): Convertible preferred stock, no par value; authorized 3,000,000 shares; issued and outstanding 939,600 and 1,059,600 shares at December 31, 1995 and September 30, 1996, respectively (liquidation preference $2,207,500 at September 30, 1996); none outstanding, pro forma ...... -- 1,935,807 2,183,036 -- Common stock, no par value; authorized 17,000,000 shares; issued and outstanding 1,260,000, 2,130,000, 2,130,120 and 3,689,720 at December 31, 1994, 1995 and September 30, 1996 and pro forma, respectively ............................ 314,980 1,221,230 1,221,355 4,678,391 Deficit accumulated during the development stage ................................... (520,515) (1,956,988) (4,554,779) (4,554,779) ----------- ------------- --------------- ------------------ Total shareholders' equity (deficit) .. (205,535) 1,200,049 (1,150,388) 123,612 ----------- ------------- --------------- ------------------ Total liabilities and shareholders' equity (deficit) ................. $ 451,739 $ 2,003,356 $ 790,600 $ 2,083,517 =========== ============= =============== ==================
The accompanying notes are an integral part of these financial statements. F-3 HEALTHDESK CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
August 28, August 28, Year Ended December 31, 1992 Nine-Months Ended September 30, 1992 ------------------------------- (Inception) to -------------------------------- (inception) to 1994 1995 December 31, 1995 1995 1996 September 30, 1996 ------------- -------------- ----------------- ------------- --------------- ------------------ (unaudited) (unaudited) Revenues: Software development and licensing ..... $ 387,740 $ 224,011 $ 691,314 $ 223,432 $ 6,170 $ 697,484 Other ............ 9,500 -- 10,158 -- -- 10,158 ------------- -------------- ----------------- ------------- --------------- ------------------ Total revenues 397,240 224,011 701,472 223,432 6,170 707,642 ------------- -------------- ----------------- ------------- --------------- ------------------ Costs and expenses: Product development 231,243 680,886 1,087,516 386,409 1,194,038 2,281,554 Sales and marketing 220,243 349,133 704,307 199,757 836,291 1,540,598 General and administrative . 170,598 581,043 803,437 395,853 562,986 1,366,423 ------------- -------------- ----------------- ------------- --------------- ------------------ Total costs and expenses . 622,084 1,611,062 2,595,260 982,019 2,593,315 5,188,575 ------------- -------------- ----------------- ------------- --------------- ------------------ Loss from operations (224,844) (1,387,051) (1,893,788) (758,587) (2,587,145) (4,480,933) Interest expense .. (11,378) (40,300) (51,678) (31,256) (33,707) (85,385) Interest income ... -- 6,000 6,000 8,849 23,661 29,661 Other expense . -- (14,322) (14,322) -- -- (14,322) ------------- -------------- ----------------- ------------- --------------- ------------------ Loss before income taxes .... (236,222) (1,435,673) (1,953,788) (780,994) (2,597,191) (4,550,979) Provision for income taxes ............ 800 800 3,200 600 600 3,800 ------------- -------------- ----------------- ------------- --------------- ------------------ Net loss .... $ (237,022) $(1,436,473) $(1,956,988) $ (781,594) $(2,597,791) $ (4,554,779) ============= ============== ================= ============= =============== ================== Net loss per share . $ (0.08) $ (0.45) $ (0.26) $ (0.67) ============= ============== ============= =============== Weighted average number of shares of common stock ..... 2,964,581 3,181,929 2,986,878 3,854,742 ============= ============== ============= ===============
The accompanying notes are an integral part of these financial statements. F-4 HEALTHDESK CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Deficit Accumulated Total Preferred Stock Common Stock During the Shareholders' --------------------------- --------------------------- Development Equity Shares Amount Shares Amount Stage (Deficit) ----------- ------------ ----------- ------------ -------------- -------------- Balances at August 28, 1992 (inception) .............. -- -- -- -- -- -- Common stock issued for cash on October 1, 1992 at $0.003 per share ......... -- -- 960,000 $ 2,480 -- $ 2,480 Net loss .................. -- -- $ (92,744) (92,744) ----------- ------------ ----------- ------------ -------------- -------------- Balances at December 31, 1992 -- -- 960,000 2,480 (92,744) (90,264) Common stock issued for cash in April and May 1993 at $1.04 per share .......... -- -- 240,000 250,000 -- 250,000 Net loss .................. -- -- -- -- (190,749) (190,749) ----------- ------------ ----------- ------------ -------------- -------------- Balances at December 31, 1993 -- -- 1,200,000 252,480 (283,493) (31,013) Common stock issued for cash on May 2, 1994 at $1.04 per share ................ -- -- 60,000 62,500 -- 62,500 Net loss .................. -- -- -- -- (237,022) (237,022) ----------- ------------ ----------- ------------ -------------- -------------- Balances at December 31, 1994 -- -- 1,260,000 314,980 (520,515) (205,535) Common stock issued in exchange for convertible debt on September 29, 1995 at $1.04 per share ....... -- -- 768,000 800,000 -- 800,000 Common stock issued upon exercise of options in June and December 1995 at $1.04 per share .......... -- -- 102,000 106,250 -- 106,250 Preferred stock issued for cash in November and December 1995 at $2.08 per share, net of issuance costs of $21,693 .................. 939,600 $1,935,807 -- -- -- 1,935,807 Net loss .................. -- -- -- -- (1,436,473) (1,436,473) ----------- ------------ ----------- ------------ -------------- -------------- Balances at December 31, 1995 939,600 1,935,807 2,130,000 1,221,230 (1,956,988) 1,200,049 Common stock issued upon exercise of options on February 1, 1996 at $1.04 per share (unaudited) .... -- -- 120 125 -- 125 Preferred stock issued for cash in February 1996 at $2.08 per share, net of issuance costs of $2,771 (unaudited) 120,000 247,229 -- -- -- 247,229 Net loss (unaudited) ...... -- -- -- -- (2,597,791) (2,597,791) ----------- ------------ ----------- ------------ -------------- -------------- Balances at September 30, 1996 (unaudited) .............. 1,059,600 $2,183,036 2,130,120 $1,221,355 $(4,554,779) $(1,150,388) =========== ============ =========== ============ ============== ==============
The accompanying notes are an integral part of these financial statements. F-5 HEALTHDESK CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
August 28, August 28, Year Ended December 31, 1992 Nine-Months Ended September 30, 1992 ------------------------------- (Inception) to -------------------------------- (inception) to 1994 1995 December 31, 1995 1995 1996 September 30, 1996 ------------- -------------- ----------------- ------------- --------------- ------------------ (unaudited) (unaudited) Cash flows from operating activities: Net loss .................. $(237,022) $(1,436,473) $(1,956,988) $(781,594) $(2,597,791) $(4,554,779) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......... 10,908 50,384 91,301 33,910 159,871 251,172 Other .................... -- 11,556 11,556 (9,382) 17,254 28,810 Changes in assets and liabilities: Increase in prepaid expenses and deferred offering costs ........... (928) (9,643) (19,709) (9,391) (277,630) (297,339) (Increase) decrease in other assets ............. (3,987) (50,802) 19,655 (68,025) (37,589) (17,934) Increase in accounts payable .................. 14,710 90,049 104,759 41,429 294,856 399,615 Increase (decrease) in accrued liabilities and deferred compensation 114,468 43,924 98,506 34,075 354,825 453,331 ------------ -------------- ----------------- ------------ -------------- ------------ Net cash used in operating activities .... (101,851) (1,301,005) (1,650,920) (758,978) (2,086,204) (3,737,124) ------------ -------------- ----------------- ------------ -------------- ------------ Cash flows from investing activities: Additions to property, plant and equipment ............ (64,442) (252,425) (364,095) (122,494) (296,394) (660,489) ------------ -------------- ----------------- ------------ -------------- ----------- Net cash used in investing activities .............. (64,442) (252,425) (364,095) (122,494) (296,394) (660,489) ------------- -------------- ----------------- ------------ -------------- ------------ Cash flows from financing activities: Proceeds from issuance of convertible notes payable 500,000 800,000 1,300,000 800,000 500,000 1,800,000 Proceeds from issuance of common stock ............. 62,500 -- 314,980 -- -- 314,980 Net proceeds from issuance of preferred stock .......... -- 1,947,819 1,947,819 -- 235,217 2,183,036 Proceeds from shareholders' loans .................... 2,203 -- 118,164 -- -- 118,164 Repayment of loans from shareholders ............. (25,000) (22,939) (118,164) (10,939) -- (118,164) Proceeds from the exercise of stock options ............ -- 6,250 6,250 6,250 100,125 106,375 ------------ -------------- ----------------- ------------ -------------- ------------ Net cash provided by financing activities .... 539,703 2,731,130 3,569,049 795,311 835,342 4,404,391 ------------ -------------- ----------------- ------------ -------------- ------------ Net increase (decrease) in cash and cash equivalents 373,410 1,177,700 1,554,034 (86,161) (1,547,256) 6,778 Cash and cash equivalents at beginning of period ........ 2,924 376,334 -- 376,334 1,554,034 -- ------------ -------------- ----------------- ------------ -------------- ----------- Cash and cash equivalents at end of period .................. $ 376,334 $ 1,554,034 $ 1,554,034 $ 290,173 $ 6,778 $ 6,778 ============ ============== ================= ============ ============== ============ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest ................... -- $ 2,208 $ 2,208 $ -- $ 2,797 $ 5,005 ============ ============== ================= ============ ============== ============= Income taxes ............... $ 800 $ 800 $ 2,400 $ 800 $ 800 $ 3,200 ============ ============== ================= ============ ============== =============
Noncash Financing Activities (Note 9) The accompanying notes are an integral part of these financial statements. F-6 HEALTHDESK CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION: HealthDesk Corporation (the Company), a development stage company, is engaged in designing, developing and marketing HealthDesk(R) Online, a healthcare management and information system which enables consumers to take a more active role in their personal and family health. HealthDesk Online features easy-to-use Windows-based software designed to develop personal medical records and health management programs and access educational, health related information from the Company's private website and over the Internet. The Company's financial statements have been prepared assuming the Company will continue as a going concern. The Company is still in the development stage and substantially all of its revenues were derived from certain development contracts relating to specific disease management modules in its initial product. Since inception, the Company has devoted a substantial effort to developing new products and has therefore incurred losses from operations and negative cash flows from operating activities since inception. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. The Company is striving to achieve profitable operations by commercializing its products and obtaining contracts with potential sponsoring organizations. The Company is also actively seeking to raise additional capital through the offering of debt and common stock. However, there can be no assurance that the Company's efforts to achieve profitable operations or raise additional capital will be successful. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: UNAUDITED INTERIM FINANCIAL INFORMATION: The financial statements as of and for the nine month periods ended September 30, 1995 and 1996 are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for such periods. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results to be expected for the full year. REVENUE RECOGNITION: During 1994 and 1995, the Company's revenues were generated primarily from two software development contracts. These revenues were recognized when the Company achieved designated milestones and received customer acceptance as specified in the related contracts. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all cash balances, money market instruments, and other highly liquid investments with insignificant interest rate risk and original maturities of three months or less. SOFTWARE DEVELOPMENT COSTS: Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS 86), requires that software development costs be capitalized once the technological feasibility of the software product has been established. To date, such amounts eligible for capitalization have been insignificant and have been charged to product development expense in the period incurred. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of three years for computer hardware and purchased computer software and five years for furniture and fixtures, and over the remaining term of the facility lease for leasehold improvements. F-7 HEALTHDESK CORPORATION (a Development Stage Company) NOTES TO FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies: - (Continued) When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations. Maintenance and repairs are charged to operations as incurred. INCOME TAXES: Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under SFAS No. 109, deferred income tax liabilities and assets are determined based on the difference between the financial reporting amounts and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates in effect for the years in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. COMPUTATION OF NET LOSS PER SHARE: Net loss per share is computed using the weighted average number of common shares outstanding during each period. Common equivalent shares, consisting of stock options and convertible preferred stock are excluded from the computation, except as required by Securities and Exchange Commission Staff Accounting Bulletin No. 83 (SAB 83), because they would have an anti-dilutive impact. Pursuant to SAB 83, common shares and convertible preferred shares issued by the Company during the twelve months immediately preceding an offering date, plus the number of common equivalent shares which became issuable during the same period pursuant to the grant of stock options (using the treasury stock method and the proposed public offering price) have been included in the calculation of common and common equivalent shares as if they were outstanding for all periods presented. SHAREHOLDERS' EQUITY: On September 19, 1996, the Company's Board of Directors approved a 1.2 for 1 stock split of the Company's common and preferred stock. All share and per share amounts included in these financial statements have been restated to retroactively reflect the stock split. On September 19, 1996, the Company also amended its Articles of Incorporation to increase its authorized shares of common stock and preferred stock to 17,000,000 and 3,000,000, respectively, and to increase the number of shares of preferred stock designated as Series A to 1,200,000. ACCOUNTING FOR STOCK-BASED COMPENSATION: In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) was issued and is effective for the Company's 1996 year. The Company intends to continue to account for employee stock options in accordance with APB Opinion No. 25 and, accordingly, will comply with the pro forma disclosures required by FAS 123. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 HEALTHDESK CORPORATION (a Development Stage Company) NOTES TO FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies: - (Continued) RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform to the current year's presentation. Such reclassifications had no impact on net loss or shareholders' deficit as previously reported. 3. CONCENTRATIONS OF CREDIT RISK: The Company places its temporary cash investments with one financial institution. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Two customers accounted for approximately 76% and 5%, respectively, of revenues in 1994 and 40% and 56%, respectively, in 1995. Additionally, one customer accounted for approximately 96% and 92%, respectively, of revenues for the nine-month periods ended September 30, 1995 and 1996. 4. PROPERTY AND EQUIPMENT: Property and equipment at December 31, 1994 and 1995 and September 30, 1996, consisted of the following:
September 30, 1994 1995 1996 --------- ---------- --------------- (unaudited) Computer equipment and software ............... $76,930 $ 27,527 $525,414 Furniture and fixtures ........................ 8,188 11,297 101,406 Leasehold improvements ........................ 1,000 1,000 7,301 --------- ---------- --------------- 86,118 284,824 634,121 Less accumulated depreciation and amortization 15,628 49,861 165,572 --------- ---------- --------------- Total property and equipment, net ........ $70,490 $234,963 $468,549 ========= ========== ===============
5. INCOME TAXES: The provision for income taxes for the years ended December 31, 1994 and 1995, relates to current state income tax. The estimated tax effect of significant temporary differences and carryforwards that gave rise to deferred income tax assets as of December 31, 1994 and 1995, is as follows:
1994 1995 ------------------------- ------------------------- Federal State Federal State ----------- ---------- ----------- ---------- Deferred tax assets: Net operating loss carryforwards $ 106,000 $ 14,000 $ 578,000 $ 52,500 Research and experimentation credit carryforwards and other 68,000 22,000 42,000 25,000 ----------- ---------- ----------- ---------- 174,000 36,000 620,000 77,500 Valuation allowance ............. (174,000) (36,000) (620,000) (77,500) ----------- ---------- ----------- ---------- Net deferred tax assets ......... $ -- $ -- $ -- $ -- ========== ========== =========== ==========
Due to the uncertainty of realization, a valuation allowance has been provided to eliminate the net deferred tax assets at both December 31, 1994 and 1995. The increase in the valuation allowance was $122,000 and $487,500 during the years ended December 31, 1994 and 1995, respectively. As of December 31, 1995, the Company had net operating loss carryforwards of approximately $1,700,000 and $860,000 for federal income tax and California state franchise tax purposes, respectively. The federal carryforwards expire through 2010 (through 2000 for state carryforwards). As of December 31, 1995, the Company also has research and experimentation tax credit carryforwards of $35,000 and $24,000 for federal and state tax purposes, respectively. These carryforwards expire in the years ending 2007 through 2009. F-9 HEALTHDESK CORPORATION (a Development Stage Company) NOTES TO FINANCIAL STATEMENTS 5. Income Taxes: - (Continued) Pursuant to the provisions of the Tax Reform Act of 1986, utilization of these net operating loss and tax credit carryforwards will be subject to an annual limitation due to the occurrence of a greater than 50% change in the ownership of the Company during fiscal 1995 as it applies to net operating losses which occurred prior to the change in ownership. 6. NOTES PAYABLE: On May 23, 1994, the Company entered into a $500,000 convertible promissory note agreement with simple interest at the rate of 7% per annum. The agreement provided the holder with the option of converting the principal amount plus the accrued interest into shares of the Company's common stock at a conversion price of $3.33 per share prior to the due date. Both principal and accrued interest thereof were due and payable two years from the agreement date. Subsequent to May 23, 1996, the Company and the note holder reached an agreement on a revised due date (see Note 12). At December 31, 1994 and 1995 and September 30, 1996, accrued interest relating to this note was $19,834, $54,833 and $81,083, respectively. The Company believes that the carrying amount of this note approximates fair value. In July and August 1996, the Company issued two term notes (the Notes) to two existing shareholders and directors for $500,000. The Notes bear interest at 8% per annum and will convert into 100,000 shares of the Company's common stock on the earlier of the closing date of an initial public offering or March 31, 1997. 7. COMMITMENTS AND CONTINGENCIES: LEASES: The Company entered into a noncancellable lease for its office in January 1996 which expires in early 1999. Additionally, the Company has other noncancelable operating leases expiring through November 2000. Total rent expense for 1994 and 1995 aggreated $17,438 and $32,688, respectively. Minimum future rentals under these operating leases as of December 31, 1995, are as follows:
Years ending December 31: ------------------------- 1996 .................... $115,994 1997 .................... 114,060 1998 .................... 114,060 1999 .................... 17,956 2000 .................... 8,219 ---------- $370,289 ==========
AGREEMENTS: In May 1996, the Company entered into a cross-licensing agreement with another company. Pursuant to this agreement, the two companies granted each other a non-exclusive right to market the other party's principal product in exchange for a semiannual licensing fee of $25,000. The Company has also entered into various agreements granting it a non-exclusive right to use products of third parties in exchange for royalties based on usage levels. The Company has incurred $16,667 in royalty expenses under these agreements as of September 30, 1996. The Company has entered into various software and content agreements pursuant to which it is committed to pay, as of September 30, 1996, non-refundable minimum royalties of approximately $190,000. F-10 HEALTHDESK CORPORATION (a Development Stage Company) NOTES TO FINANCIAL STATEMENTS 7. Commitments and Contingencies: - (Continued) LEGAL PROCEEDINGS: The Company is subject to two complaints filed by former employees with the California Department of Fair Employment and Housing. Management intends to defend them vigorously. Since the financial impact of the ultimate outcome of these matters is neither probable nor estimable, no amounts have been accrued in these financial statements. 8. EMPLOYEE BENEFIT PLANS: On February 28, 1996, the Company adopted a 401(k) plan for employees. All employees who meet certain service requirements are eligible to participate. Matching contributions are at the discretion of the Company. As of September 30, 1996, the Company had not elected to make any discretionary contributions. On August 1, 1994, the Company commenced the deferral of the payment of a portion of all future compensation of the Company's president. During 1995, all amounts due were paid to the Company's president as part of an agreement to terminate his employment as discussed in Note 9. 9. RELATED PARTY TRANSACTIONS: At December 31, 1994 and 1995, loans payable to related parties consisted of the following:
President Shareholders Total ----------- -------------- ----------- Balance of loans payable at December 31, 1993 $ 20,970 $ 24,766 $ 45,736 Proceeds from loans received ................. 2,203 -- 2,203 Repayment of loans ........................... (15,000) (10,000) (25,000) ----------- -------------- ----------- Balance of loans payable at December 31, 1994 8,173 14,766 22,939 Repayment of loans ........................... (8,173) (12,000) (20,173) Balance of loan forgiven ..................... -- (2,766) (2,766) Proceeds from convertible debt received ...... -- 800,000 800,000 Convertible debt exchanged for common stock .. -- (800,000) (800,000) ----------- -------------- ----------- Balance of loans payable at December 31, 1995 $ -- $ -- $ -- =========== ============== ===========
On April 8, 1993, the Company and a related entity (Spartina Corporation), which was wholly owned by the Company's president and director, entered into an agreement under which the related entity granted the Company a non-exclusive, royalty free license to use the source code of a certain software engine and tools in connection with the development of the Company's software products in the fields of health and medical management. The Company currently does not use any of this technology in the current product. On August 31, 1995, the Company's president signed an agreement to terminate his employment with the Company. Under the agreement, the president received a cash payment in consideration for an agreement not to compete with the Company and the termination of options to purchase an aggregate of 198,000 shares of the Company's common stock. In addition, Spartina Corporation assigned to the Company all of its right, title and interest in and to certain technology previously licensed by the Company from Spartina Corporation pursuant to the agreement discussed above. During the period from June 7, 1995 through September 28, 1995, the Company issued two convertible promissory notes (the Notes) to two existing shareholders for $800,000. The Notes bore interest at 6% per annum. Interest expense relating to these Notes amounted to $5,005 during 1995. On September 29, 1995, the principal of the Notes was converted at a rate of $1.04 per share into 768,000 shares of common stock of the Company. F-11 HEALTHDESK CORPORATION (a Development Stage Company) NOTES TO FINANCIAL STATEMENTS 9. Related Party Transactions: - (Continued) On August 15, 1995, the Company granted an option to acquire 96,000 shares of common stock at $1.04 per share to a board member and existing shareholder. The option was exercised on December 29, 1995 and the proceeds of $100,000 were received by the Company on January 8, 1996. In December 1995, two principal shareholders and related Board members purchased 69,000 and 129,000 shares of the Company's Series A preferred stock for an aggregate purchase price of approximately $144,000 and $268,000, respectively, in connection with the Company's Series A financing. As discussed in Note 6. in July and August 1996, the Company issued two term notes to two existing shareholders and related Board members. 10. PREFERRED STOCK: At December 31, 1995, the Company was authorized to issue 2,000,000 shares of preferred stock. Of the authorized preferred stock, 1,200,000 shares are designated as Series A. As of December 31, 1995, the Company had issued 939,600 shares of Series A preferred stock for gross proceeds of $1,957,500. In February 1996, an additional 120,000 shares of Series A preferred stock were issued for gross proceeds of $250,000. The preferred stock is convertible at the option of the holder, into the Company's common stock at a rate of one share of common stock for one share of preferred stock. The conversion rate for the preferred stock is subject to future adjustments. The preferred stock will automatically convert immediately upon the closing of an initial public offering of the Company's common stock with gross proceeds exceeding $5 million or upon the approval of the holders of at least two thirds of the outstanding shares of preferred stock. Each share of preferred stock issued and outstanding has the number of votes equal to the number of shares of common stock into which such shares of preferred stock is convertible. The Series A preferred stock may receive noncumulative dividends in preference to holders of common stock, if and when, declared by the Board of Directors. In the event of any liquidation or dissolution, the holders of preferred stock shall be entitled to receive $2.08 per share in preference to any distribution to holders of common stock. After payment has been made to the holders of the preferred stock, any remaining assets shall be distributed ratably among the holders of the preferred and common stock based on the number of common shares held or, in the case of preferred stock, the number of shares of common stock on an as if converted basis. If the Company's assets are insufficient to provide for the full preference amount for the preferred stock outstanding, then such assets shall be distributed ratably among the holders of the preferred stock in proportion to the preferential amount each such holder would have been entitled to receive. 11. STOCK OPTIONS: In June 1994, the Company adopted the 1994 Stock Option Plan (the Plan) under which eligible employees, directors, and consultants can receive options to purchase shares of the Company's common stock at a price generally not less than 100% and 85% of the fair value of the common stock on the date of the grant for incentive stock options and nonstatutory stock options, respectively. However, the Company never granted options at below fair value as determined by the Board of Directors. The Plan, as amended, allows for the issuance of a maximum of 840,000 shares of the Company's common stock. This number of shares of common stock has been reserved for issuance under the Plan. The options granted under the Plan are exercisable over a maximum term of ten years from the date of grant and vest immediately. Shares purchased under the Plan are subject to a right of repurchase by the Company at the original exercise price. This repurchase right lapses with respect to 25% of the shares upon completion of one year of service and the balance in equal successive monthly installments upon completion of each of the next 36 months of service. With respect to certain of the options issued, the repurchase right is eliminated in the event there is a change in control of the Company. F-12 HEALTHDESK CORPORATION (a Development Stage Company) NOTES TO FINANCIAL STATEMENTS 11. Stock Options: - (Continued) A summary of the activity under the Plan is set forth below:
Options Outstanding ----------------------------- Number of Shares Exercise Price ----------- -------------- Balance at January 1, 1994 ................... -- -- Granted ...................................... 352,800 $1.04 ----------- -------------- Balance at December 31, 1994 ................. 352,800 1.04 Granted ...................................... 771,300 1.04 to 2.08 Exercised .................................... (102,000) 1.04 Forfeited .................................... (475,900) 1.04 to 1.67 ----------- -------------- Balance at December 31, 1995 ................. 546,200 1.04 to 2.08 Granted (unaudited) .......................... 345,000 2.08 to 5.00 Exercised (unaudited) ........................ (120) 1.04 Forfeited (unaudited) ........................ (175,780) 2.08 to 5.00 ----------- -------------- Balance at September 30, 1996 (unaudited) .... 715,300 $1.04 to $5.00 =========== ============== Exercisable at September 30, 1996 (unaudited) 715,300 $1.04 to $5.00 =========== ==============
At September 30, 1996, 575,778 of the exercisable options are subject to the Company's repurchase provision. 12. SUBSEQUENT EVENTS: Subsequent to September 30, 1996 and through December 2, 1996, the Company granted 140,000 additional options to purchase shares of common stock at an exercise price of $5.00 per share. As of December 2, 1996, there were 768,050 options outstanding under the Plan. On December 2, 1996, the shareholders authorized the issuance of options to purchase up to a maximum of 950,000 shares of common stock under the Plan. On October 11, 1996, the Company consummated a Bridge Financing pursuant to which it issued an aggregate of (i) $2,000,000 principal amount of promissory notes which bear interest at the rate of 9% per annum and are due on the earlier of the consummation of the Company's proposed initial public offering or October 11, 1997, and (ii) 400,000 shares of the Company's common stock. The effective interest rate for the Bridge Financing notes, assuming a one-year term, is 54% and, assuming a 60-day term is 279%. The Company will record the notes at a discount of $900,000, which discount will be allocated to the 400,000 shares of common stock issued. Additionally, $154,000 of debt issuance costs will be recorded in connection with the Bridge Financing. On October 16, 1996, the Company used approximately $583,000 of the net proceeds from the Bridge Financing to repay the promissory note, including accrued interest (Note 6). 13. PRO FORMA INFORMATION (UNAUDITED): The pro forma information as of September 30, 1996, reflected in the accompanying balance sheet, gives effect to (i) the conversion of all outstanding shares of convertible preferred stock into 1,059,600 shares of common stock (Note 10); (ii) the consummation of the Bridge Financing (Note 12) in October 1996 and the application of a portion of the proceeds to repay a note payable plus accrued interest (Note 6); and (iii) the issuance of 100,000 shares of common stock upon conversion of $500,000 of convertible notes payable (Note 6). F-13 ============================================================================= No dealer, salesperson or other person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this Prospectus, or an offer to buy any security by any person in any jurisdiction in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, imply that the information in this Prospectus is correct as of any time subsequent to the date of this Prospectus. ------ TABLE OF CONTENTS
Page -------- Prospectus Summary .............................. 3 Risk Factors .................................... 7 Use of Proceeds ................................. 15 Capitalization .................................. 16 Dividend Policy ................................. 16 Dilution ........................................ 17 Selected Financial Data ......................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 19 Business ........................................ 22 Management ...................................... 32 Principal Shareholders .......................... 36 Certain Transactions ............................ 36 Description of Securities ....................... 38 Shares Eligible for Future Sale ................. 40 Underwriting .................................... 40 Selling Shareholders and Plan of Distribution ... 43 Legal Matters ................................... 44 Experts ......................................... 44 Additional Information .......................... 44 Index to Financial Statements ................... F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This 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. ============================================================================= ============================================================================= HEALTHDESK CORPORATION 1,800,000 SHARES OF COMMON STOCK AND REDEEMABLE WARRANTS TO PURCHASE 1,800,000 SHARES OF COMMON STOCK ------ PROSPECTUS ------ WHALE SECURITIES CO., L.P. , 1997 ============================================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The California Corporations Code provides for the indemnification of directors, officers, employees and agents of the Corporation under certain circumstances set forth in section 317. Section 317 permits a corporation to indemnify its agents, typically directors and officers, for expenses incurred or settlements or judgments paid in connection with certain legal proceedings. Only those legal proceedings arising out of such persons' actions as agents of the corporation may be grounds for indemnification. Whether or not indemnification may be paid in a particular case depends upon whether the agent wins, loses or settles the suit and upon whether a third party or the Corporation itself is the plaintiff. The section provides for mandatory indemnification, no matter who the plaintiff is, when an agent is successful on the merits of a suit. In all other cases, indemnification is permissive. If the agent loses or settles a suit brought by a third party, he or she may be indemnified for expenses incurred and settlements or judgments paid. Such indemnification may be authorized upon finding that the agent acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation. If the agent loses or settles a suit brought by or on behalf of the corporation, his or her right to indemnification is more limited. If he or she is adjudged to be liable to the Corporation, the court in which such proceeding was held must determine whether it would be fair and reasonable to indemnify him or her for expenses which such court shall determine. If the agent settles such a suit with court approval, he or she may be indemnified for expenses incurred upon a finding that the agent acted in good faith and in a manner he or she reasonably believed to be in the best interest of the Corporation and, in addition, that he or she acted with the care, including reasonable inquiry of an ordinarily prudent person. The indemnification discussed above may be authorized by a majority vote of the disinterested directors or shareholders (the person to be indemnified is excluded from voting his or her shares) or the court in which the proceeding was brought. The Corporation's Board of Directors makes all decisions regarding the indemnification of its officers and directors on a case-by-case basis. Any provision in the Corporation's Articles of Incorporation or Bylaws contained in a shareholder or director resolution that indemnifies its officers or directors must be consistent with section 317. Moreover, such a provision may prohibit permissive, but not mandatory, indemnification as described above. Last, a corporation has the power to purchase indemnity insurance for its agents even if it would not have the power to indemnify them. The Corporation's Articles authorize the Board of Directors to provide indemnification of its agents through bylaw provisions or indemnification agreements, or both, in excess of the indemnification otherwise permitted by section 317, subject to the limits on such excess indemnification set forth in section 204 of the California Corporations Code. Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the act and is therefore unenforceable. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, in connection with the sale of Common Stock being registered. All amounts are estimated except the registration fee and the NASD filing fee and the Nasdaq listing fee.
Amount to Be Paid Item by Registrant - ---- --------------- SEC Registration Fee .......................... $ 6,942 NASD Filing Fee ............................... 2,791 Nasdaq Listing Fee ............................ 7,700 Printing and Engraving Expenses ............... 55,000 Legal Fees and Expenses ....................... 170,000 Blue Sky Fees and Expenses .................... 25,000 Accounting Fees and Expenses .................. 50,000 Transfer Agent and Registrar Fees ............. 3,500 Underwriter's non-accountable expense allowance 275,400 Miscellaneous ................................. 53,667 --------------- Total ..................................... $650,000 ===============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Since its incorporation in September 1992, the Registrant has issued securities without registration under the Securities Act of 1933, as amended (the "Act") in the following transactions (in each case giving retroactive effect to all subsequent stock splits): The Registrant issued an aggregate of 165,600 shares of Common Stock in September 1992 to its 4 founders at $0.008 per share. In April 1993 the Registrant issued an additional 132,000 shares at $0.008 per share to 7 investors including officers, employees and directors. From May 1993 to April 1994, the Registrant issued an aggregate of 300,000 shares to 4 investors at $1.04 per share, including one director. In September 1995, the Registrant issued an aggregate of 768,000 shares of Common Stock to 2 investors, including one director, pursuant to their exercise of Convertible Notes at $1.04 per share. From December 1995 through February 1996, the Registrant issued an aggregate of 1,059,600 shares of Series A Preferred Stock to 27 investors, including an individual who was then a director of the Company, at a purchase price of $2.08 per share (which will automatically convert into the same number of shares of Common Stock upon the consummation of this offering). During the current fiscal year, the Registrant issued 102,120 shares of Common Stock to three individuals all of whom were employees or directors of the Registrant, upon the exercise of stock options previously issued under the Registrant's 1994 Founder's Stock Option Plan at an exercise price of $1.04 per share. In October 1996, the Registrant issued 40 Units, with each Unit consisting of 10,000 shares of Common Stock and a promissory note in the principal amount of $50,000. The Units were purchased by 35 accredited investors in a private placement. The sales and issuances of the Preferred Stock and Common Stock described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as transactions not involving a public offering. The purchasers in such private offerings represented their intention to acquire the securities for investment only and not with a view to the distribution thereof and appropriate legends were affixed to the stock certificates issued in such transactions. All purchasers had adequate access, through their employment or other relationships, to sufficient information about the Registrant to make an informed investment decision. No underwriter was employed with respect to any such sales. II-2 ITEM 27. EXHIBITS.
Exhibits --------- 1.1* Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation of the Company 3.2 Bylaws of the Company 4.1 Form of Stock Certificate 4.2* Form of Warrant Agreement 5.1* Opinion of and Consent of Gray Cary Ware & Freidenrich, a Professional Corporation, as to legality of securities being registered 10.1 1994 Founder's Stock Option Plan, as amended 10.2 Form of Indemnification Agreement 10.3 Registration Rights Agreement dated March 1993 by and among the Registrant and the Investors named therein 10.4 Form of Registration Rights Agreement between the Registrant and Purchasers of the Registrant's Series A Preferred Stock. 10.5 Employment Agreement dated as of September 19, 1996 between the Registrant and Peter O'Donnell 10.6 Employment Agreement dated as of September 19, 1996 between the Registrant and Molly Coye 10.7 Employment Agreement dated as of September 19, 1996 between the Registrant and Timothy Yamauchi 10.8* Form of Warrant Agreement to be granted to Underwriter 10.9 Form of Bridge Financing Registration Rights Agreement dated October 11, 1996 23.1* Consent of Independent Accountants 23.2* Consent of Counsel contained in Exhibit 5.1 24.1 Powers of Attorney 27* Financial Data Schedule
- ------ * Filed herewith. ITEM 28. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of 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 undertakes that: 1) for purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 421(b)(1) or (4) or 497(b) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared II-3 effective and 2) for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to provide to the Underwriters at the Closing, as 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. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused Amendment No. 3 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Berkeley, State of California, on December 19, 1996. HEALTHDESK CORPORATION By /s/ Peter O'Donnell -------------------------------- Peter O'Donnell, President Pursuant to the requirements of the Securities Act, Amendment No. 3 to this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Peter O'Donnell President, Chief Executive Officer and Chairman December 19, 1996 - ------------------------ of the Board (Principal Executive Officer) Peter O'Donnell * Chief Financial Officer, Secretary and December 19, 1996 - ------------------------ Treasurer (Principal Financial and Accounting Timothy S. Yamauchi Officer) * Director December 19, 1996 - ------------------------ John Pappajohn * Director December 19, 1996 - ------------------------ James A. Gordon * Director December 19, 1996 - ------------------------ Dr. Joseph Rudick * Director December 19, 1996 - ------------------------ David Sengpiel Director December , 1996 - ------------------------ Dr. Edward C. Geehr *By: /s/ Peter O'Donnell - ------------------------------- Peter O'Donnell,as Attorney-in-Fact
II-5 EXHIBIT INDEX
Description Page No. ------------ ------------ 1.1* Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation of the Company 3.2 Bylaws of the Company 4.1 Form of Stock Certificate 4.2* Form of Warrant Agreement 5.1* Opinion and Consent of Gray Cary Ware & Freidenrich, a Professional Corporation, as to legality of securities being registered 10.1 1994 Founder's Stock Option Plan, as amended 10.2 Form of Indemnification Agreement 10.3 Registration Rights Agreement dated March 1993 by and among the Registrant and the Investors named therein 10.4 Form of Registration Rights Agreement between the Registrant and Purchasers of the Registrant's Series A Preferred Stock. 10.5 Employment Agreement dated as of September 19, 1996 between the Registrant and Peter O'Donnell 10.6 Employment Agreement dated as of September 19, 1996 between the Registrant and Molly Coye 10.7 Employment Agreement dated as of September 19, 1996 between the Registrant and Timothy Yamauchi 10.8* Form of Warrant Agreement to be granted to Underwriter 10.9 Form of Bridge Financing Registration Rights Agreement dated October 11, 1996 23.1* Consent of Independent Accountants 23.2* Consent of Counsel contained in Exhibit 5.1 24.1 Powers of Attorney 27* Financial Data Schedule
- ------ * Filed herewith. EX-1 2 EXHIBIT 1.1 Exhibit 1.1 HEALTHDESK CORPORATION 2,000,000 Shares of Common Stock (No Par Value) UNDERWRITING AGREEMENT Whale Securities Co., L.P. New York, New York 650 Fifth Avenue ______________, 1996 New York, New York 10019 Ladies and Gentlemen: HealthDesk Corporation, a California corporation (the "Company"), proposes to issue and sell to Whale Securities Co., L.P. (the "Underwriter") 2,000,000 shares of common stock, no par value (the "Offered Shares"), which Offered Shares are presently authorized but unissued shares of the common stock, no par value (individually, a "Common Share" and collectively the "Common Shares"), of the Company. In addition, the Underwriter, in order to cover over-allotments in the sale of the Offered Shares, may purchase up to an aggregate of 300,000 Common Shares (the "Optional Shares"; the Offered Shares and the Optional Shares are hereinafter sometimes collectively referred to as the "Shares"). The Shares are described in the Registration Statement, as defined below. The Company also proposes to issue and sell to the Underwriter for its own account and the accounts of its designees, warrants to purchase an aggregate of 200,000 Common Shares at an exercise price of $_____ per share (the "Underwriter's Warrants"), which sale will be consummated in accordance with the terms and conditions of the form of Underwriter's Warrant filed as an exhibit to the Registration Statement (as hereinafter defined). The Company hereby confirms its agreement with the Underwriter as follows: 1. Purchase and Sale of Offered Shares. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby agrees to sell the Offered Shares to the Underwriter, and the Underwriter agrees to purchase the Offered Shares from the Company, at a purchase price of $____ per share. The Underwriter plans to offer the Shares to the public at a public offering price of $5.00 per Offered Share. 2. Payment and Delivery. (a) Payment for the Offered Shares will be made to the Company by wire transfer or certified or official bank check or checks payable to its order in New York Clearing House funds, at the offices of the Underwriter, Whale Securities Co., L.P., 650 Fifth Avenue, New York, New York 10019, against delivery of the Offered Shares to the Underwriter. Such payment and delivery will be made at ________, New York City time, on the third business day following the Effective Date (the fourth business day following the Effective Date in the event that trading of the Offered Shares commences on the day following the Effective Date), the date and time of such payment and delivery being herein called the "Closing Date." The certificates representing the Offered Shares to be delivered will be in such denominations and registered in such names as the Underwriter may request not less than two full business days prior to the Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the office of the Company's transfer agent or correspondent in New York City, _________________________, _____________________ not less than one full business day prior to the Closing Date. (b) On the Closing Date, the Company will sell the Underwriter's Warrants to the Underwriter or to the designees of the Underwriter limited to officers and partners of the Underwriter, members of the selling group and/or their officers, directors or partners (collectively, the "Underwriter's Designees"). The Underwriter's Warrants will be in the form of, and in accordance with, the provisions of the Underwriter's Warrant attached as an exhibit to the Registration Statement. The aggregate purchase price for the Underwriter's Warrants is $200.00. The Underwriter's Warrants will be restricted from sale, transfer, assignment or hypothecation for a period of one year from the Effective Date, except to the Underwriter's Designees. Payment for the Underwriter's Warrant Agreement will be made to the Company by check or checks payable to its order on the Closing Date against delivery of the certificates representing the Underwriter's Warrants. The certificates representing the Underwriter's Warrants will be in such denominations and such names as the Underwriter may request prior to the Closing Date. 3. Option to Purchase Optional Shares. (a) For the purposes of covering any over-allotments in connection with the distribution and sale of the Offered Shares as contemplated by the Prospectus, the Underwriter is hereby granted an option to purchase all or any part of the Optional Shares from the Company. The purchase price to be paid for the Optional Shares will be the same price per Optional Share as the price per Offered Share set forth in Section 1 hereof. The option granted hereby may be exercised by the Underwriter as -2- to all or any part of the Optional Shares at any time within 45 days after the Effective Date. The Underwriter will not be under any obligation to purchase any Optional Shares prior to the exercise of such option. (b) The option granted hereby may be exercised by the Underwriter by giving oral notice to the Company, which must be confirmed by a letter, telex or telegraph setting forth the number of Optional Shares to be purchased, the date and time for delivery of and payment for the Optional Shares to be purchased and stating that the Optional Shares referred to therein are to be used for the purpose of covering over-allotments in connection with the distribution and sale of the Offered Shares. If such notice is given prior to the Closing Date, the date set forth therein for such delivery and payment will not be earlier than either two full business days thereafter or the Closing Date, whichever occurs later. If such notice is given on or after the Closing Date, the date set forth therein for such delivery and payment will not be earlier than two full business days thereafter. In either event, the date so set forth will not be more than 15 full business days after the date of such notice. The date and time set forth in such notice is herein called the "Option Closing Date." Upon exercise of such option, the Company will become obligated to convey to the Underwriter, and, subject to the terms and conditions set forth in Section 3(d) hereof, the Underwriter will become obligated to purchase, the number of Optional Shares specified in such notice. (c) Payment for any Optional Shares purchased will be made to the Company by wire transfer or certified or official bank check or checks pay-able to its order in New York Clearing House funds, at the office of the Underwriter, against delivery of the Optional Shares purchased to the Underwriter. The certificates representing the Optional Shares to be delivered will be in such denominations and registered in such names as the Underwriter requests not less than two full business days prior to the Option Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the aforesaid office of the Company's transfer agent or correspondent not less than one full business day prior to the Option Closing Date. (d) The obligation of the Underwriter to purchase and pay for any of the Optional Shares is subject to the accuracy and completeness (as of the date hereof and as of the Option Closing Date) of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy and completeness of the statements of the Company or its officers made in any certificate or other document to be delivered by the Company pursuant to this Agreement, to the performance in all material respects by the Company of its obligations hereunder, to the satisfaction by the Company of the conditions, -3- as of the date hereof and as of the Option Closing Date, set forth in Section 3(b) hereof, and to the delivery to the Underwriter of opinions, certificates and letters dated the Option Closing Date substantially similar in scope to those specified in Section 5, 6(b), (c), (d) and (e) hereof, but with each reference to "Offered Shares" and "Closing Date" to be, respectively, to the Optional Shares and the Option Closing Date. 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriter that: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California, with full power and authority, corporate and other, to own or lease and operate, as the case may be, its properties, whether tangible or intangible, and to conduct its business as described in the Registration Statement and to execute, deliver and perform this Agreement and the Underwriter's Warrant Agreement and to consummate the transactions contemplated hereby and thereby. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company. The Company has no subsidiaries. (b) This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, and the Underwriter's Warrant Agreement, when executed and delivered by the Company on the Closing Date, will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The execution, delivery and performance of this Agreement and the Underwriter's Warrant Agreement by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement and the Underwriter's Warrant Agreement have been duly authorized by all necessary corporate action and do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of the Articles of Incorporation or By-Laws, each as amended, of the Company; (ii) result in a breach of or conflict with any of the terms or provisions of, or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company pursuant to any indenture, mortgage, note, contract, commitment or other agreement or instrument to which the Company is a party or by which the Company or any of its properties or assets is or may be bound or affected; (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any govern- -4- mental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or business; or (iv) have any effect on any permit, certification, registration, approval, consent order, license, franchise or other authorization (collectively, the "Permits") necessary for the Company to own or lease and operate its properties and to conduct its business or the ability of the Company to make use thereof. (c) No Permits of any court or governmental agency or body, other than under the Securities Act of 1933, as amended (the "Act"), the Regulations (as hereinafter defined) and applicable state securities or Blue Sky laws, are required (i) for the valid authorization, issuance, sale and delivery of the Shares to the Underwriter, and (ii) the consummation by the Company of the transactions contemplated by this Agreement or the Underwriter's Warrant Agreement. (d) The conditions for use of a registration statement on Form SB-2 set forth in the General Instructions to Form SB-2 have been satisfied with respect to the Company, the transactions contemplated herein and in the Registration Statement. The Company has prepared in conformity with the requirements of the Act and the rules and regulations (the "Regulations") of the Securities and Exchange Commission (the "Commission") and filed with the Commission a registration statement (File No. 333-_______ ) on Form SB-2 and has filed one or more amendments thereto, covering the registration of the Shares and the Warrant Shares under the Act, including the related preliminary prospectus or preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was endorsed with the legend required by Item 501(a)(5) of Regulation S-B of the Regulations and, if applicable, Rule 430A of the Regulations. Such registration statement including any documents incorporated by reference therein and all financial schedules and exhibits thereto, as amended at the time it becomes effective, and the final prospectus included therein are herein, respectively, called the "Registration Statement" and the "Prospectus," except that, (i) if the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations differs from the Prospectus, the term "Prospectus" will also include the prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement is amended or such Prospectus is supplemented after the date the Registration Statement is declared effective by the Commission (the "Effective Date") and prior to the Option Closing Date, the terms "Registration Statement" and "Prospectus" shall include the Registration Statement as amended or supplemented. (e) Neither the Commission nor, to the best of the Company's knowledge, any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus or has instituted or, to the best of the Company's knowledge, threatened to institute any proceedings with respect to such an order. -5- (f) The Registration Statement when it becomes effective, the Prospectus (and any amendment or supplement thereto) when it is filed with the Commission pursuant to Rule 424(b), and both documents as of the Closing Date and the Option Closing Date, referred to below, will contain all statements which are required to be stated therein in accordance with the Act and the Regulations and will in all material respects conform to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, on such dates, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company in connection with the Registration Statement or Prospectus or any amendment or supplement thereto by the Under- writer expressly for use therein. (g) The Company had at the date or dates indicated in the Prospectus a duly authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. Based on the assumptions stated in the Registration Statement and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in the Registration Statement or the Prospectus, on the Effective Date and on the Closing Date, there will be no options to purchase, warrants or other rights to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of the Company's capital stock or any such warrants, convertible securities or obligations. Except as set forth in the Prospectus, no holders of any of the Company's securities has any rights, "demand," "piggyback" or otherwise, to have such securities registered under the Act. (h) The descriptions in the Registration Statement and the Prospectus of contracts and other documents are accurate and present fairly the information required to be disclosed, and there are no contracts or other documents required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement under the Act or the Regulations which have not been so described or filed as required. -6- (i) Coopers & Lybrand LLP, the accountants who have certified certain of the financial statements filed and to be filed with the Commission as part of the Registration Statement and the Prospectus, are independent public accountants within the meaning of the Act and Regulations. The financial statements and schedules and the notes thereto filed as part of the Registration Statement and included in the Prospectus are complete, correct and present fairly the financial position of the Company as of the dates thereof, and the results of operations and changes in financial position of the Company for the periods indicated therein, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved except as otherwise stated in the Registration Statement and the Prospectus. The selected financial data set forth in the Registration Statement and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited and unaudited financial statements included in the Registration Statement and the Prospectus. (j) The Company has filed with the appropriate federal, state and local governmental agencies, and all appropriate foreign countries and political subdivisions thereof, all tax returns, including franchise tax returns, which are required to be filed or has duly obtained extensions of time for the filing thereof and has paid all taxes shown on such returns and all assessments received by it to the extent that the same have become due; and the provisions for income taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid foreign and domestic taxes, whether or not disputed, and for all periods to and including the dates of such financial statements. Except as disclosed in writing to the Underwriter, the Company has not executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company. -7- (k) The outstanding Common Shares and shares of preferred stock (the "Preferred Shares") and outstanding options and warrants to purchase Common Shares have been duly authorized and validly issued. The outstanding Common Shares and Preferred Shares are fully paid and nonassessable. The outstanding options and warrants to purchase Common Shares constitute the valid and binding obligations of the Company, enforceable in accordance with their terms. None of the outstanding Common Shares or Preferred Shares or options or warrants to purchase Common Shares has been issued in violation of the preemptive rights of any shareholder of the Company. None of the holders of the outstanding Common Shares or Preferred Shares is subject to personal liability solely by reason of being such a holder. The offers and sales of the outstanding Common Shares and Preferred Shares and outstanding options and warrants to purchase Common Shares were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or exempt from such registration requirements. The authorized Common Shares and Preferred Shares and outstanding options and warrants to purchase Common Shares conform to the descriptions thereof contained in the Registration Statement and Prospectus. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and the Closing Date, there will be no outstanding options or warrants for the purchase of, or other outstanding rights to purchase, Common Shares or securities convertible into Common Shares. (l) No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company within the three years prior to the date hereof, except as disclosed in the Registration Statement. (m) The issuance and sale of the Shares have been duly authorized and, when the Shares have been issued and duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The Shares will not be subject to preemptive rights of any shareholder of the Company. (n) The issuance and sale of the Common Shares issuable upon exercise of the Underwriter's Warrants have been duly authorized and, when such Common Shares have been duly delivered against payment therefor, as contemplated by the Underwriter's Warrant Agreement, such Common Shares will be validly issued, fully paid and nonassessable. Holders of Common Shares issuable upon the exercise of the Underwriter's Warrants will not be subject to personal liability solely by reason of being such holders. Neither the Underwriter's Warrants nor the Common Shares issuable upon exercise thereof will be subject to preemptive rights of any shareholder of the Company. The Common Shares issuable upon exercise of the Underwriter's Warrants have been duly reserved for issuance upon exercise of the Underwriter's Warrants in accordance with the provisions of the Underwriter's Warrant Agreement. The Underwriter's Warrants conform to the descriptions thereof contained in the Registration Statement and the Prospectus. -8- (o) The Company is not in violation of, or in default under, (i) any term or provision of its Articles of Incorporation or By-Laws, each as amended; (ii) any material term or provision or any financial covenants of any indenture, mortgage, contract, commitment or other agreement or instrument to which it is a party or by which it or any of its property or business is or may be bound or affected; or (iii) any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of the Company's properties or business. The Company owns, possesses or has obtained all governmental and other (including those obtainable from third parties) Permits, necessary to own or lease, as the case may be, and to operate its properties, whether tangible or intangible, and to conduct the business and operations of the Company as presently conducted and all such Permits are outstanding and in good standing, and there are no proceedings pending or, to the best of the Company's knowledge, threatened, or any basis therefor, seeking to cancel, terminate or limit such Permits. (p) Except as set forth in the Prospectus, there are no claims, actions, suits, proceedings, arbitrations, invesigations or inquiries before any governmental agency, court or tribunal, domestic or foreign, or before any private arbitration tribunal, pending, or, to the best of the Company's knowledge, threatened against the Company or involving the Company's properties or business which, if determined adversely to the Company, would, individually or in the aggregate, result in any material adverse change in the financial position, shareholders' equity, results of operations, properties, business, management or affairs or business prospects of the Company or which question the validity of the capital stock of the Company or this Agreement or of any action taken or to be taken by the Company pursuant to, or in connection with, this Agreement; nor, to the best of the Company's knowledge, is there any basis for any such claim, action, suit, proceeding, arbitration, investigation or inquiry. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal naming the Company and enjoining the Company from taking, or requiring the Company to take, any action, or to which the Company, or the Company's properties or business is bound or subject. (q) Neither the Company nor any of its affiliates has incurred any liability for any finder's fees or similar payments in connection with the transactions herein contemplated. (r) The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, rights, trade secrets, confidential information, processes and formulations used or proposed to be used in the conduct of its business as described in the Prospectus (collectively the "Intangibles"); to the best of the Company's knowledge, the Company has not infringed and is not infringing upon the rights of others with respect to the Intangibles; and the Company has not received any notice of conflict with the asserted rights of others with respect to the Intangibles which could, singly or in the aggregate, materially adversely affect its business as presently conducted or the prospects, financial condition or results of operations of the Company, and the Company knows of no basis therefor; and, to the best of the Company's knowledge, no others have infringed upon the Intangibles of the Company. -9- (s) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and the Company's latest financial statements, the Company has not incurred any material liability or obligation, direct or contingent, or entered into any material transaction, whether or not incurred in the ordinary course of business, and has not sustained any material loss or interference with its business from fire, storm, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there have not been, and prior to the Closing Date referred to below there will not be, any changes in the capital stock or any material increases in the long-term debt of the Company or any material adverse change in or affecting the general affairs, management, financial condition, shareholders' equity, results of operations or prospects of the Company, otherwise than as set forth or contemplated in the Prospectus. (t) The Company does not own any real property. The Company has good title to all personal property (tangible and intangible) owned by it, free and clear of all security interests, charges, mortgages, liens, encumbrances and defects, except such as are described in the Registration Statement and Prospectus or such as do not materially affect the value or transferability of such property and do not interfere with the use of such property made, or proposed to be made, by the Company. The leases, licenses or other contracts or instruments under which the Company leases, holds or is entitled to use any property, real or personal, are valid, subsisting and enforceable only with such exceptions as are not material and do not interfere with the use of such property made, or proposed to be made, by the Company, and all rentals, royalties or other payments accruing thereunder which became due prior to the date of this Agreement have been duly paid, and neither the Company, nor, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default thereunder. The Company has not received notice of any violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. The Company has adequately insured its properties against loss or damage by fire or other casualty and maintains, in adequate amounts, such other insurance as is usually maintained by companies engaged in the same or similar businesses located in its geographic area. -10- (u) Each contract or other instrument (however characterized or described) to which the Company is a party or by which its property or business is or may be bound or affected and to which reference is made in the Prospectus has been duly and validly executed, is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, and none of such contracts or instruments has been assigned by the Company, and neither the Company, nor, to the best of the Company's knowledge, any other party, is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the material provisions of such contracts or instruments violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of its assets or businesses. (v) The employment, consulting, confidentiality and non-competition agreements between the Company and its officers, employees and consultants, described in the Registration Statement, are binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity. (w) Except as set forth in the Prospectus, the Company has no employee benefit plans (including, without limitation, profit sharing and welfare benefit plans) or deferred compensation arrangements that are subject to the provisions of the Employee Retirement Income Security Act of 1974. (x) Except as set forth in the Prospectus, the Company does not manufacture, fabricate or market any product or perform any service which is subject to regulation by the Federal Food and Drug Administration (the "FDA"), or to any provision of the Food, Drug and Cosmetic Act, as amended (the "FD&C Act"), or any rule or regulation promulgated thereunder or any regulatory authority relating to the practice of medicine. (y) To the best of the Company's knowledge, no labor problem exists with any of the Company's employees or is imminent which could adversely affect the Company. (z) The Company has not, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution in violation of law or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. -11- (aa) Shares have been approved for listing on the Nasdaq SmallCap Market. (ab) The Company has provided to Tenzer Greenblatt LLP, counsel to the Underwriter ("Underwriter's Counsel"), all agreements, certificates, correspondence and other items, documents and information requested by such counsel's Corporate Review Memorandum dated ____________, 199__. Any certificate signed by an officer of the Company and delivered to the Underwriter or to Underwriter's Counsel shall be deemed to be a representation and warranty by the Company to the Underwriter as to the matters covered thereby. 5. Certain Covenants of the Company. The Company covenants with the Underwriter as follows: (a) The Company will not at any time, whether before the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with the sales of the Shares by the Underwriter or a dealer, file or publish any amendment or supplement to the Registration Statement or Prospectus of which the Underwriter has not been previously advised and furnished a copy, or to which the Underwriter shall object in writing. (b) The Company will use its best efforts to cause the Registration Statement to become effective and will advise the Underwriter immediately, and, if requested by the Underwriter, confirm such advice in writing, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement or any supplemented Prospectus is filed with the Commission; (ii) of the receipt of any comments from the Commission; (iii) of any request of the Commission for amendment or supplementation of the Registration Statement or Prospectus or for additional information; and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation of any proceedings for any of such purposes. The Company will use its best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use and to obtain as soon as possible the lifting thereof, if any such order is issued. -12- (c) The Company will deliver to the Underwriter, without charge, from time to time until the Effective Date, as many copies of each Preliminary Prospectus as the Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the Act. The Company will deliver to the Underwriter, without charge, as soon as the Registration Statement becomes effective, and thereafter from time to time as requested, such number of copies of the Prospectus (as supplemented, if the Company makes any supplements to the Prospectus) as the Underwriter may reasonably request. The Company has furnished or will furnish to the Underwriter two signed copies of the Registration Statement as originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, two copies of all exhibits filed therewith and two signed copies of all consents and certificates of experts. (d) The Company will comply with the Act, the Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Offered Shares and in any Optional Shares which may be issued and sold. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Registration Statement and Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend or supplement the Registration Statement and Prospectus to comply with the Act or the regulations thereunder, the Company will promptly file with the Commission, subject to Section 5(a) hereof, an amendment or supplement which will correct such statement or omission or which will effect such compliance. (e) The Company will furnish such proper information as may be required and otherwise cooperate in qualifying the Shares for offering and sale under the securities or Blue Sky laws relating to the offering in such jurisdictions as the Underwriter may reasonably designate, provided that no such qualification will be required in any jurisdiction where, solely as a result thereof, the Company would be subject to service of general process or to taxation or qualification as a foreign corporation doing business in such jurisdiction. (f) The Company will make generally available to its security holders, in the manner specified in Rule 158(b) under the Act, and deliver to the Underwriter and Underwriter's Counsel as soon as practicable and in any event not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earning statement meeting the requirements of Rule 158(a) under the Act covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement. -13- (g) For a period of five years from the Effective Date, the Company will deliver to the Underwriter and to Underwriter's Counsel on a timely basis (i) a copy of each report or document, including, without limitation, reports on Forms 8-K, 10-C, 10-K (or 10-K SB), 10-Q (or 10-Q SB) and 10-C and exhibits thereto, filed or furnished to the Commission, any securities exchange or the National Association of Securities Dealers, Inc. (the "NASD") on the date each such report or document is so filed or furnished; (ii) as soon as practicable, copies of any reports or communications (financial or other) of the Company mailed to its security holders; (iii) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1 or 13E-3 received or prepared by the Company from time to time; (iv) monthly statements setting forth such information regarding the Company's results of operations and financial position (including balance sheet, profit and loss statements and data regarding outstanding purchase orders) as is regularly prepared by management of the Company; and (v) such additional information concerning the business and financial condition of the Company as the Underwriter may from time to time reasonably request and which can be prepared or obtained by the Company without unreasonable effort or expense. The Company will furnish to its shareholders annual reports containing audited financial statements and such other periodic reports as it may determine to be appropriate or as may be required by law. (h) Neither the Company nor any person that controls, is controlled by or is under common control with the Company will take any action designed to or which might be reasonably expected to cause or result in the stabilization or manipulation of the price of the Common Shares. (i) If the transactions contemplated by this Agreement are consummated, the Underwriter shall retain the $50,000 previously paid to it, and the Company will pay or cause to be paid the following: all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to, the fees and expenses of accountants and counsel for the Company; the preparation, printing, mailing and filing of the Registration Statement (including financial statements and exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or supplements thereto; the printing and mailing of the Selected Dealer Agreement, the issuance and delivery of the Shares to the Underwriter; all taxes, if any, on the issuance of the Shares; the fees, expenses and other costs of qualifying the Shares for sale under the Blue Sky or securities laws of those states in which the Shares are to be offered or sold, including fees and disbursements of counsel in connection therewith, and including those of such local counsel as may have been retained for such purpose; the filing fees incident to securing any required review by the NASD [and either the Boston Stock Exchange or Pacific Stock Exchange]; the cost of printing and mailing the "Blue Sky Survey"the cost of furnishing to the Underwriter copies of the Registration Statement, Preliminary Prospectuses and the Prospectus as herein provided; the costs of placing "tombstone advertisements" in any publications which may be selected by the Underwriter; and all other costs and expenses incident to the performance of the Company's obligations hereunder which are not otherwise specifically provided for in this Section 5(i). -14- In addition, at the Closing Date or the Option Closing Date, as the case may be, the Underwriter will deduct from the payment for the Offered Shares or any Optional Shares three percent (3%) of the gross proceeds of the offering (less the sum of $50,000 previously paid to the Underwriter), as payment for the Underwriter's nonaccountable expense allowance relating to the transactions contemplated hereby, which amount will include the fees and expenses of Underwriter's Counsel (other than the fees and expenses of Underwriter's Counsel relating to Blue Sky qualifications and registrations, which, as provided for above, shall be in addition to the three percent (3%) nonaccountable expense allowance and shall be payable directly by the Company to Underwriter's Counsel on or prior to the Closing Date). (j) If the transactions contemplated by this Agreement or related hereto because the Company or Underwriter decides not to proceed with the offering for any reason, then the Company will be obligated to reimburse the Underwriter for its accountable out-of-pocket expenses up to the sum of $50,000, inclusive of $50,000 previously paid to the Underwriter by the Company. In no event, however, will the Underwriter, in the event the offering is terminated, be entitled to retain or receive more than an amount equal to its actual accountable out-of-pocket expenses. (k) The Company intends to apply the net proceeds from the sale of the Shares for the purposes set forth in the Prospectus. No portion of the net proceeds from the sale of the Shares will be used to repay any indebtedness, except for the repayment of the Bridge Notes (as defined in the Prospectus). The Company will file with the Commission all required reports on Form S-R in accordance with the provisions of Rule 463 promulgated under the Act and will provide a copy of each such report to the Underwriter and its counsel. (l) During the period of eighteen (18) months from the date hereof, none of the Company's officers, directors or securityholders will offer for sale or sell or otherwise dispose of, directly or indirectly, any securities of the Company, in any manner whatsoever, whether pursuant to Rule 144 of the Regulations or otherwise, and no holder of registration rights relating to buy securities of the Company will exercise any such registration rights, in either case, without the prior written consent of the Underwriter. -15- (m) The Company will not file any registration statement relating to the offer or sale of any of the Company's securities, including any registration statement on Form S-8, during the eighteen (18) months from the Effective Date, without the Underwriter's prior written consent. (n) The Company maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (o) The Company will use its best efforts to maintain the listing of the Shares on NASDAQ for so long as qualified, list the Shares on the NASDAQ National Market System and maintain such listing for so long as qualified. (p) The Company will, concurrently with the Effective Date, register the class of equity securities of which the Shares are a part under Section 12(g) of the Exchange Act and the Company will maintain such registration for a minimum of five (5) years from the Effective Date. (q) Subject to the sale of the Offered Shares, the Underwriter and its successors will have the right to designate a nominee for election, at its or their option, either as a member of or a non-voting advisor to the Board of Directors of the Company, and the Company will use its best efforts to cause such nominee to be elected and continued in office as a director of the Company or as such advisor until the expiration of five (5) years from the Effective Date. Each of the Company's current officers, directors and shareholders agrees to vote all of the Common Shares owned by such person or entity so as to elect and continue in office such nominee of the Underwriter. Following the election of such nominee as a director or advisor, such person shall receive no more or less compensation than is paid to other non-officer directors of the Company for attendance at meetings of the Board of Directors of the Company and shall be entitled to receive reimbursement for all reasonable -16- costs incurred in attending such meetings including, but not limited to, food, lodging and transportation. The Company agrees to indemnify and hold such director or advisor harmless, to the maximum extent permitted by law, against any and all claims, actions, awards and judgments arising out of his service as a director or advisor and, in the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, to include such director or advisor as an insured under such policy. The rights and benefits of such indemnification and the benefits of such insurance shall, to the extent possible, extend to the Underwriter insofar as it may be or may be alleged to be responsible for such director or advisor. If the Underwriter does not exercise its option to designate a member of or advisor to the Company's Board of Directors, the Underwriter shall nonetheless have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors. The Company agrees to give the Underwriter notice of each such meeting and to provide the Underwriter with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the directors. (r) The Company shall retain a transfer agent for the Common Shares, reasonably acceptable to the Underwriter, for a period of five (5) years from the Effective Date. In addition, for a period of five (5) years from the Effective Date, the Company, at its own expense, shall cause such transfer agent to provide the Underwriter, if so requested in writing, with copies of the Company's daily transfer sheets, and, when requested by the Underwriter, a current list of the Company's securityholders, including a list of the beneficial owners of securities held by a depository trust company and other nominees. (s) The Company hereby agrees, at its sole cost and expense, to supply and deliver to the Underwriter and Underwriter's Counsel, within a reasonable period from the date hereof, four bound volumes, including the Registration Statement, as amended or supplemented, all exhibits to the Registration Statement, the Prospectus and all other underwriting documents. (t) The Company shall, as of the date hereof, have applied for listing in Standard & Poor's Corporation Records Service (including annual report information) or Moody's Industrial Manual (Moody's OTC Industrial Manual not being sufficient for these purposes) and shall use its best efforts to have the Company listed in such manual and shall maintain such listing for a period of five years from the Effective Date. (u) For a period of five (5) years from the Effective Date, the Company shall provide the Underwriter, on a not less than annual basis, with internal forecasts setting forth projected results of operations for each quarterly and annual period in the two (2) fiscal years following the respective dates of such forecasts. Such forecasts shall be provided to the Underwriter more frequently than annually if prepared more frequently by management, and revised forecasts shall be prepared and provided to the Underwriter when required to reflect more current information, revised assumptions or actual results that differ materially from those set forth in the forecasts. -17- (v) For a period of five (5) years from the Effective Date, or until such earlier time as the Common Shares are listed on the New York Stock Exchange or the American Stock Exchange, the Company shall cause its legal counsel to provide the Underwriter with a list, to be updated at least annually, of those states in which the Common Shares may be traded in non-issuer transactions under the Blue Sky laws of the 50 states. (w) For a period of five (5) years from the Effective Date, the Company shall continue to retain Cooper & Lybrand LLP (or such other nationally recognized accounting firm acceptable to the Underwriter) as the Company's independent public accountants. (x) For a period of five (5) years from the Effective Date, the Company, at its expense, shall cause its then independent certified public accountants, as described in Section 5(w) above, to review (but not audit) the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q (or 10-QSB) quarterly report (or other equivalent report) and the mailing of quarterly financial information to shareholders. (y) For a period of twenty-five (25) days from the Effective Date, the Company will not issue press releases or engage in any other publicity without the Underwriter's prior written consent, other than normal and customary releases issued in the ordinary course of the Company's business or those releases required by law. (z) For a period of three (3) years from the Effective Date, the Company will promptly submit to the Underwriter copies of accountant's management reports and similar correspondence between the Company's accountants and the Company. (aa) For a period of three (3) years from the Effective Date, the Company will not offer or sell any of its securities pursuant to Regulation S promulgated under the Act without the prior written consent of the Underwriter. -18- (ab) For a period of five (5) years from the Effective Date, the Company will provide to the Underwriter ten day's written notice prior to any issuance by the Company or its subsidiaries of any equity securities or securities exchangeable for or convertible into equity securities of the Company, except for (i) shares of Common Stock issuable upon exercise of currently outstanding options and warrants or conversion of currently outstanding convertible securities and (ii) options available for future grant pursuant to any stock option plan in effect on the Effective Date and the issuance of shares of Common Stock upon the exercise of such options. (ac) Prior to the Effective Date and for a period of three (3) years thereafter, the Company will retain a financial public relations firm reasonably acceptable to the Underwriter. (ad) For a period of three (3) years from the Effective Date, the Company will cause its Board of Directors to meet, either in person or telephonically, a minimum of four (4) times per year and will hold a shareholder's meeting at least once per annum. 6. Conditions of the Underwriter's Obligation to Purchase Shares from the Company. The obligation of the Underwriter to purchase and pay for the Offered Shares which it has agreed to purchase from the Company is subject (as of the date hereof and the Closing Date) to the accuracy of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy of the statements of the Company or its officers made pursuant hereto, to the performance in all material respects by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement will have become effective not later than .M., New York City time, on the day following the date of this Agreement, or at such later time or on such later date as the Underwriter may agree to in writing; prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement will have been issued and no proceedings for that purpose will have been initiated or will be pending or, to the best of the Underwriter's or the Company's knowledge, will be contemplated by the Commission; and any request on the part of the Commission for additional information will have been complied with to the satisfaction of Underwriter's Counsel. (b) At the time that this Agreement is executed and at the Closing Date, there will have been delivered to the Underwriter a signed opinion of _______________, counsel for the Company ("Company Counsel"), dated as of the date hereof or the Closing Date, as the case may be (and any other opinions of counsel referred to in such opinion of Company Counsel or relied upon by Company Counsel in rendering their opinion), reasonably satisfactory to Underwriter's Counsel, to the effect that: -19- (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California, with full power and authority, corporate and other, and with all Permits necessary to own or lease, as the case may be, and operate its properties, whether tangible or intangible, and to conduct its business as described in the Registration Statement. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company. To the best of Company Counsel's knowledge, the Company has no subsidiaries. (ii) The Company has full power and authority, corporate and other, to execute, deliver and perform this Agreement and the Underwriter's Warrant Agreement and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the Underwriter's Warrant Agreement by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement and the Underwriter's Warrant Agreement have been duly authorized by all necessary corporate action, and this Agreement [for Closing Date opinion: the Underwriter's Warrant Agreement] has been duly executed and delivered by the Company. This Agreement is (assuming for the purposes of this opinion that it is valid and binding upon the other party thereto) and, when executed and delivered by the Company on the Closing Date, the Underwriter's Warrant Agreement will be, valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally and the discretion of courts in granting equitable remedies and except that enforceability of the indemnification provisions set forth in Section 7 hereof and the contribution provisions set forth in Section 8 hereof may be limited by the federal securities laws or public policy underlying such laws. (iii) The execution, delivery and performance of this Agreement and the Underwriter's Warrant Agreement by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement and the Underwriter's Warrant Agreement do not, and will not, with or without the giving of notice or the lapse of time, or both, (A) result in a violation of the Articles of Incorporation or By-Laws, each as amended, of the Company, (B) result -20- in a breach of or conflict with any terms or provisions of, or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company pursuant to any indenture, mortgage, note, contract, commitment or other material agreement or instrument to which the Company is a party or by which the Company or any of the Company's properties or assets are or may be bound or affected; (C) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of the Company's properties or business; or (D) have any effect on any Permit necessary for the Company to own or lease and operate its properties or conduct its business or the ability of the Company to make use thereof. (iv) To the best of Company Counsel's knowledge, no Permits of any court or governmental agency or body (other than under the Act, the Regulations and applicable state securities or Blue Sky laws) are required for the valid authorization, issuance, sale and delivery of the Shares or the Underwriter's Warrants to the Underwriter, and the consummation by the Company of the transactions contemplated by this Agreement or the Underwriter's Warrant Agreement. (v) The Registration Statement has become effective under the Act; to the best of Company Counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending, threatened or contemplated under the Act or applicable state securities laws. (vi) The Registration Statement and the Prospectus, as of the Effective Date, and each amendment or supplement thereto as of its effective or issue date (except for the financial statements and other financial data included therein or omitted therefrom, as to which Company Counsel need not express an opinion) comply as to form in all material respects with the requirements of the Act and Regulations and the conditions for use of a registration statement on Form SB-2 have been satisfied by the Company. (vii) The descriptions in the Registration Statement and the Prospectus of statutes, regulations, government classifications, contracts and other documents (including opinions of such counsel); and the response to Item 13 of Form SB-2 have been reviewed by Company Counsel, and, based upon such review, are accurate in all material respects and present fairly the information required to be disclosed, and there are no material statutes, regulations or government classifications, or, to the best of Company Counsel's knowledge, material contracts or documents, of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration State ment, which are not so described or filed as required. -21- None of the material provisions of the contracts or instruments described above violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of its assets or business. (viii) The outstanding Common Shares and Preferred Shares and outstanding options and warrants to purchase Common Shares have been duly authorized and validly issued. The outstanding Common Shares and Preferred Shares are fully paid and nonassessable. The outstanding options and warrants to purchase Common Shares constitute the valid and binding obligations of the Company, enforceable in accordance with their terms. None of the outstanding Common Shares or Preferred Shares or options or warrants to purchase Common Shares has been issued in violation of the preemptive rights of any shareholder of the Company. None of the holders of the outstanding Common Shares or Preferred Shares is subject to personal liability solely by reason of being such a holder. The offers and sales of the outstanding Common Shares and Preferred Shares and outstanding options and warrants to purchase Common Shares were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or exempt from such registration requirements. The authorized Common Shares and Preferred Shares and outstanding options and warrants to purchase Common Shares conform to the descriptions thereof contained in the Registration Statement and Prospectus. To the best of Company Counsel's knowledge, except as set forth in the Prospectus, no holders of any of the Company's securities has any rights, "demand", "piggyback" or otherwise, to have such securities registered under the Act. (ix) The issuance and sale of the Shares have been duly authorized and, when the Shares have been issued and duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The Shares are not subject to preemptive rights of any shareholder of the Company. The certificates representing the Shares are in proper legal form. (x) The issuance and sale of the Common Shares issuable upon exercise of the Underwriter's Warrants have been duly authorized and, when such Common Shares have been duly delivered against payment therefor, as contemplated by the Underwriter's Warrant Agreement, such Common Shares will be validly issued, fully paid and nonassessable. Holders of Common Shares -22- issuable upon exercise of the Underwriter's Warrants will not be subject to personal liability solely by reason of being such holders. Neither the Underwriter's Warrants nor the Common Shares issuable upon exercise thereof will be subject to preemptive rights of any shareholder of the Company. The Warrant Shares issuable upon exercise of the Underwriter's Warrants have been duly reserved for issuance upon exercise of the Underwriter's Warrants in accordance with the provisions of the Underwriter's Warrant Agreement. The Underwriter's Warrants conform to the descriptions thereof in the Registration Statement and Prospectus. (xi) Upon delivery of the Offered Shares to the Underwriter against payment therefor as provided in this Agreement, the Underwriter (assuming it is a bona fide purchaser within the meaning of the Uniform Commercial Code) will acquire good title to the Offered Shares, free and clear of all liens, encumbrances, equities, security interests and claims. (xii) Assuming that the Underwriter exer cises the over-allotment option to purchase any of the Optional Shares and makes payment therefor in accordance with the terms of this Agreement, upon delivery of the Optional Shares to the Underwriter hereunder, the Underwriter (assuming it is a bona fide purchaser within the meaning of the Uniform Commercial Code) will acquire good title to such Optional Shares, free and clear of any liens, encumbrances, equities, security interests and claims. (xiii) To the best of Company Counsel's knowledge, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, foreign or domestic, or before any private arbitration tribunal, pending or threatened against the Company, or involving the Company's properties or business, other than as described in the Prospectus, such description being accurate, and other than litigation incident to the kind of business conducted by the Company which, individually and in the aggregate, is not material. (xiv) The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, rights, trade secrets, confidential information, processes and formulations used or proposed to be used in the conduct of its business as described in the Prospectus (collectively the "Intan gibles"); to the best of Company Counsel's knowledge, the Company has not infringed and is not infringing with the rights of others with respect to the Intangibles; and, to the best of Company Counsel's knowledge, the Company has not received any notice that -23- it has or may have infringed, is infringing upon or is conflicting with the asserted rights of others with respect to the Intangibles which might, singly or in the aggregate, materially adversely affect its business, results of operations or financial condition and such counsel is not aware of any licenses with respect to the Intangibles which are required to be obtained by the Company. The opinions described in this Section 6(b)(xiv) may be given by Company Counsel in reliance on the opinion of an attorney, reasonably acceptable to Underwriter's Counsel, practicing in the patent area. (xv) Company Counsel has participated in reviews and discussions in connection with the preparation of the Registration Statement and the Prospectus, and in the course of such reviews and discussions and such other investigation as Company Counsel deemed necessary, no facts came to its attention which lead it to believe that (A) the Registration Statement (except as to the financial statements and other financial data contained therein, as to which Company Counsel need not express an opinion), on the Effective Date, contained any untrue statement of a material fact required to be stated therein or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that (B) the Prospectus (except as to the financial statements and other financial data contained therein, as to which Company Counsel need not express an opinion) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering its opinion pursuant to this Section 6(b), Company Counsel may rely upon the certificates of government officials and officers of the Company as to matters of fact, provided that Company Counsel shall state that they have no reason to believe, and do not believe, that they are not justified in relying upon such opinions or such certificates of government officials and officers of the Company as to matters of fact, as the case may be. The opinion letter delivered pursuant to this Section 6(b) shall state that any opinion given therein qualified by the phrase "to the best of our knowledge" is being given by Company Counsel after due investigation of the matters therein discussed. (c) At the Closing Date, there will have been delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as of the Closing Date, to the effect that the opinions delivered pursuant to Section 6(b) hereof appear on their face to be appropriately responsive to the requirements of this Agreement, except to the extent waived by the Underwriter, specifying the same, and with respect to such related matters as the Underwriter may require. -24- (d) At the Closing Date (i) the Registration Statement and the Prospectus and any amendments or supplements thereto will contain all material statements which are required to be stated therein in accordance with the Act and the Regulations and will conform in all material respects to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there will not have been any material adverse change in the financial condition, results of operations or general affairs of the Company from that set forth or contemplated in the Registration Statement and the Prospectus, except changes which the Registration Statement and the Prospectus indicate might occur after the Effective Date; (iii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no material transaction, contract or agreement entered into by the Company, other than in the ordinary course of business, which would be required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein; and (iv) no action, suit or proceeding at law or in equity will be pending or, to the best of the Company's knowledge, threatened against the Company which is required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein, and no proceedings will be pending or, to the best of the Company's knowledge, threatened against the Company before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding would materially adversely affect the business, property, financial condition or results of operations of the Company, other than as set forth in the Registration Statement and the Prospectus. At the Closing Date, there will be delivered to the Underwriter a certificate signed by the Chairman of the Board or the President or a Vice President of the Company, dated the Closing Date, evidencing compliance with the provisions of this Section 6(d) and stating that the representations and warranties of the Company set forth in Section 4 hereof were accurate and complete in all material respects when made on the date hereof and are accurate and complete in all material respects on the Closing Date as if then made; that the Company has performed all covenants and complied with all conditions required by this Agreement to be performed or complied with by the Company prior to or as of the Closing Date; and that, as of the Closing Date, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or, to the best of his knowledge, are contemplated or threatened. In addition, the Underwriter will have received such other and further certificates of officers of the Company as the Underwriter or Underwriter's Counsel may reasonably request. -25- (e) At the time that this Agreement is executed and at the Closing Date, the Underwriter will have received a signed letter from Cooper & Lybrand LLP, dated the date such letter is to be received by the Underwriter and addressed to it, confirming that it is a firm of independent public accountants within the meaning of the Act and Regulations and stating that: (i) insofar as reported on by them, in their opinion, the financial statements of the Company included in the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable Regulations; (ii) on the basis of procedures and inquiries (not constituting an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim financial statements of the Company, if any, appearing in the Registration Statement and the Prospectus and the latest available unaudited interim financial statements of the Company, if more recent than that appearing in the Registration Statement and Prospectus, inquiries of officers of the Company responsible for financial and accounting matters as to the transactions and events subsequent to the date of the latest audited financial statements of the Company, and a reading of the minutes of meetings of the shareholders, the Board of Directors of the Company and any committees of the Board of Directors, as set forth in the minute books of the Company, nothing has come to their attention which, in their judgment, would indicate that (A) during the period from the date of the latest financial statements of the Company appearing in the Registration Statement and Prospectus to a specified date not more than three business days prior to the date of such letter, there have been any decreases in net current assets or net assets as compared with amounts shown in such financial statements or decreases in net sales or decreases [increases] in total or per share net income [loss] compared with the corresponding period in the preceding year or any change in the capitalization or long-term debt of the Company, except in all cases as set forth in or contemplated by the Registration Statement and the Prospectus, and (B) the unaudited interim financial statements of the Company, if any, appearing in the Registration Statement and the Prospectus, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles and practices on a basis substantially consistent with the audited financial statements included in the Registration Statement or the Prospectus; and (iii) they have compared specific dollar amounts, numbers of shares, numerical data, percentages of revenues and earnings, and other financial information pertaining to the Company set forth in the Prospectus (with respect to all dollar amounts, numbers of shares, percentages and other financial information contained in the Prospectus, to the extent that such amounts, numbers, percentages and information may be derived from the general accounting records of the Company, and excluding any questions requiring an interpretation by legal counsel) with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. -26- (f) There shall have been duly tendered to the Underwriter certificates representing the Offered Shares to be sold on the Closing Date. (g) The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of the Shares by the Underwriter. (h) No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date or the Option Closing Date, as the case may be, for any member firm of the NASD to execute transactions (as principal or as agent) in the Shares, and no proceedings for the purpose of taking such action shall have been instituted or shall be pending, or, to the best of the Underwriter's or the Company's knowledge, shall be contemplated by the Commission or the NASD. The Company represents at the date hereof, and shall represent as of the Closing Date or Option Closing Date, as the case may be, that it has no knowledge that any such action is in fact contemplated by the Commission or the NASD. (i) The Company meets the current and any existing and proposed criteria for inclusion of the Shares in Nasdaq. (j) All proceedings taken at or prior to the Closing Date or the Option Closing Date, as the case may be, in connection with the authorization, issuance and sale of the Shares shall be reasonably satisfactory in form and substance to the Underwriter and to Underwriter's Counsel, and such counsel shall have been furnished with all such documents, certificates and opinions as they may request for the purpose of enabling them to pass upon the matters referred to in Section 6(c) hereof and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company, the performance of any covenants of the Company, or the compliance by the Company with any of the conditions herein contained. -27- (k) As of the date hereof, the Company will have delivered to the Underwriter the written undertakings of its officers, directors, securityholders and/or registration rights holders, as the case may be, to the effect of the matters set forth in Sections 5(l) and (q). If any of the conditions specified in this Section 6 have not been fulfilled, this Agreement may be terminated by the Underwriter on notice to the Company. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless the Underwriter, each officer, director, partner, employee and agent of the Underwriter, and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Underwriter and each such person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application or other document executed by the Company, or based upon written information furnished by or on behalf of the Company, filed in any jurisdiction in order to qualify the Shares under the securities laws thereof (hereinafter "application"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, unless such untrue statement or omission was made in such Registration Statement, Preliminary Prospectus, Prospectus or application in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter or any such person through the Underwriter expressly for use therein; provided, however, that the indemnity agreement contained in this Section 7(a) with respect to any Preliminary Prospectus will not inure to the benefit of the Underwriter (or to the benefit of any other person that may be indemnified pursuant to this Section 7(a)) if (A) the person asserting any such losses, claims, damages, expenses or liabilities purchased the Shares which are the subject thereof from the Underwriter or other indemnified person; (B) the Underwriter or other indemnified person failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Shares to such person; and (C) the Prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, expense or liability. -28- (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer or controlling person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application (including any application for registration of the Shares under state securities or Blue Sky laws), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter expressly for use therein. (c) Promptly after receipt of notice of the commencement of any action in respect of which indemnity may be sought against any indemnifying party under this Section 7, the indemnified party will notify the indemnifying -29- party in writing of the commencement thereof, and the indemnifying party will, subject to the provisions hereinafter stated, assume the defense of such action (including the employment of counsel satisfactory to the indemnified party and the payment of expenses) insofar as such action relates to an alleged liability in respect of which indemnity may be sought against the indemnifying party. After notice from the indemnifying party of its election to assume the defense of such claim or action, the indemnifying party shall no longer be liable to the indemnified party under this Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of the indemnified party or parties, it is advisable for the indemnified party or parties to be represented by separate counsel, the indemnified party or parties shall have the right to employ a single counsel to represent the indemnified parties who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified parties thereof against the indemnifying party, in which event the fees and expenses of such separate counsel shall be borne by the indemnifying party. Any party against whom indemnification may be sought under this Section 7 shall not be liable to indemnify any person that might otherwise be indemnified pursuant hereto for any settlement of any action effected without such indemnifying party's consent, which consent shall not be unreasonably withheld. 8. Contribution. To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 7 hereof (subject to the limitations thereof) and it is finally determined, by a judgment, order or decree not subject to further appeal, that such claim for indemnification may not be enforced, even though this Agreement expressly provides for indemnification in such case; or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including, for this purpose, any contribution made by or on behalf of any director of the Company, any officer of the Company who signed the Registration Statement and any controlling person of the Company) as one entity and the Underwriter (including, for this purpose, any contribution by or on behalf of each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee and agent of the Underwriter) as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, so that the Underwriter is responsible for the proportion thereof equal to the percentage which the underwriting discount per Share set forth on the cover page of the Prospectus -30- represents of the initial public offering price per Share set forth on the cover page of the Prospectus and the Company is responsible for the remaining portion; provided, how ever, that if applicable law does not permit such allocation, then, if applicable law permits, other relevant equitable considerations such as the relative fault of the Company and the Underwriter in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses shall also be considered. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission, shall be determined by, among other things, whether such state ment, alleged statement, omission or alleged omission relates to information supplied by the Company or by the Underwriter, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Underwriter agree that it would be unjust and inequitable if the respective obligations of the Company and the Underwriter for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 8. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee and agent of the Underwriter will have the same rights to contribution as the Underwriter, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who has signed the Registration Statement and each director of the Company will have the same rights to contribution as the Company, subject in each case to the provisions of this Section 8. Anything in this Section 8 to the contrary notwithstanding, no party will be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8 is intended to supersede, to the extent permitted by law, any right to contribution under the Act or the Exchange Act or otherwise available. 9. Survival of Indemnities, Contribution, Warranties and Representations. The respective indemnity and contribution agreements of the Company and the Underwriter contained in Sections 7 and 8 hereof, and the representations and warranties of the Company contained herein shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Underwriter, the Company or any of its directors and officers, or any controlling person referred to in said Sections, and shall survive the delivery of, and payment for, the Shares. 10. Termination of Agreement. (a) The Company, by written or telegraphic notice to the Underwriter, or the Underwriter, by written or telegraphic notice to the Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M., New York City time, on the first full business day after the Effective Date; or (ii) the time when the Underwriter, after the Registration Statement becomes effective, releases the Offered Shares for public offering. The time when the Underwriter "releases the Offered Shares for public offering" for the purposes of this Section 10 means the time when the Underwriter releases for publication the first newspaper advertisement, which is subsequently published, relating to the Offered Shares, or the time when the Underwriter releases for delivery to members of a selling group copies of the Prospectus and an offering letter or an offering telegram relating to the Offered Shares, whichever will first occur. -31- (b) This Agreement, including without limitation, the obligation to purchase the Shares and the obligation to purchase the Optional Shares after exercise of the option referred to in Section 3 hereof, are subject to termination in the absolute discretion of the Underwriter, by notice given to the Company prior to delivery of and payment for all the Offered Shares or such Optional Shares, as the case may be, if, prior to such time, any of the following shall have occurred: (i) the Company withdraws the Registration Statement from the Commission or the Company does not or cannot expeditiously proceed with the public offering; (ii) the representations and warranties in Section 4 hereof are not materially correct or cannot be complied with; (iii) trading in securities generally on the New York Stock Exchange or the American Stock Exchange will have been suspended; (iv) limited or minimum prices will have been established on either such Exchange; (v) a banking moratorium will have been declared either by federal or New York State authorities; (vi) any other restrictions on transactions in securities materially affecting the free market for securities or the payment for such securities, including the Offered Shares or the Optional Shares, will be established by either of such Exchanges, by the Commission, by any other federal or state agency, by action of the Congress or by Executive Order; (vii) trading in any securities of the Company shall have been suspended or halted by any national securities exchange, the NASD or the Commission; (viii) there has been a materially adverse change in the condition (financial or otherwise), prospects or obligations of the Company; (ix) the Company will have sustained a material loss, whether or not insured, by reason of fire, flood, accident or other calamity; (x) any action has been taken by the government of the United States or any department or agency thereof which, in the judgment of the Underwriter, has had a material adverse effect upon the market or potential market for securities in general; or (xi) the market for securities in general or political, financial or economic conditions will have so materially adversely changed that, in the judgment of the Underwriter, it will be impracticable to offer for sale, or to enforce contracts made by the Underwriter for the resale of, the Offered Shares or the Optional Shares, as the case may be. (c) If this Agreement is terminated pursuant to Section 6 hereof or this Section 10 or if the purchases provided for herein are not consummated because any condition of the Underwriter's obligations hereunder is not satisfied or because of any refusal, inability or failure on the part of the Company to comply with any of the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to or does not perform all of its obligations under this Agreement, the Company will not be liable to the Underwriter for damages on account of loss of anticipated profits arising out of the transactions covered by this Agreement, but the Company will remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this Agreement. -32- 11. Information Furnished by the Underwriter to the Company. It is hereby acknowledged and agreed by the parties hereto that for the purposes of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and 8 hereof, the only information given by the Underwriter to the Company for use in the Prospectus are the statements set forth in the last sentence of the last paragraph on the cover page, the statement appearing in the last paragraph on page __ with respect to stabilizing the market price of Shares, the information in the __ paragraph on page __ with respect to concessions and reallowances, and the information in the ___ paragraph on page ___ with respect to the determination of the public offering price, as such information appears in any Preliminary Prospectus and in the Prospectus. 12. Notices and Governing Law. All communications hereunder will be in writing and, except as otherwise provided, will be delivered at, or mailed by certified mail, return receipt requested, or telegraphed to, the following addresses: if to the Underwriter, to Whale Securities Co., L.P., 650 Fifth Avenue, New York, New York 10019 with a copy to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405 Lexington Avenue, New York, New York 10174; if to the Company, addressed to it at 2560 Ninth Street, Suite 220, Berkeley, California 94710, with a copy to _____________________, __________________. This Agreement shall be deemed to have been made and delivered in New York City and shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York. The Company (1) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company's address shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding. -33- 13. Parties in Interest. This Agreement is made solely for the benefit of the Underwriter, the Company and, to the extent expressed, any person controlling the Company or the Underwriter, each officer, director, partner, employee and agent of the Underwriter, the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns, and, no other person will acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" will not include any purchaser of the Shares from the Underwriter, as such purchaser. -34- If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement between the Company and the Underwriter in accordance with its terms. Very truly yours, HEALTHDESK CORPORATION By_______________________ Name: Title: Confirmed and accepted in New York, N.Y., as of the date first above written: WHALE SECURITIES CO., L.P. By: Whale Securities Corp., General Partner By: _________________________ Name: Title: -35- EX-4.2 3 WARRANT AGREEMENT HEALTHDESK CORPORATION A California Corporation and AMERICAN STOCK TRANSFER AND TRUST COMPANY Warrant Agent and WHALE SECURITIES CO., L.P. Underwriter WARRANT AGREEMENT Table of Contents ------------------ Section Page - ------- ---- 1 Appointment of Warrant Agent ................... 1 2 Form of Warrant ............................... 2 3 Countersignature and Registration .............. 3 4 Transfers and Exchanges ........................ 3 5 Exercise of Warrants; Payment of Warrant Solicitation Fee ............................ 4 6 Payment of Taxes ............................... 8 7 Mutilated or Missing Warrants .................. 9 8 Reservation of Common Stock .................... 9 9 Warrant Price; Adjustments ..................... 11 10 Fractional Interest ............................ 18 11 Notices to Warrantholders ...................... 18 12 Disposition of Proceeds on Exercise of Warrants ....................................... 20 13 Redemption of Warrants ......................... 21 14 Merger or Consolidation or Change of Name of Warrant Agent ............................... 21 15 Duties of Warrant Agent ........................ 22 16 Change of Warrant Agent ........................ 26 17 Identity of Transfer Agent ..................... 27 18 Notices ........................................ 27 19 Supplements and Amendments ..................... 29 20 New York Contract .............................. 29 21 Benefits of this Agreement ..................... 30 22 Successors ..................................... 30 Exhibit A - Form of Warrant .................... WARRANT AGREEMENT dated as of __________, 1997, by and among HealthDesk Corporation, a Washington corporation (the "Company"), Whale Securities, Co., L.P. (the "Underwriter") and American Stock Transfer and Trust Company, as warrant agent (hereinafter called the "Warrant Agent"). WHEREAS, the Company proposes to issue and sell to the public up to 1,800,000 shares of the common stock of the Company, no par value (hereinafter, together with the stock of any other class to which such shares may hereafter have been changed, called "Common Stock"), and up to 1,800,000 Common Stock Purchase Warrants (the "Warrants"); WHEREAS, each Warrant will entitle the holder to pur- chase one share of Common Stock; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and exercise of the Warrants; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as Warrant Agent for the Company in accordance with the instructions hereinafter set forth in this Agreement, and the Warrant Agent hereby accepts such appointment. Section 2. Form of Warrant. The text of the Warrants and of the form of election to purchase Common Stock to be printed on the reverse thereof shall be substantially as set forth in Exhibit A attached hereto. Each Warrant shall entitle the registered holder thereof to purchase one share of Common Stock at a purchase price of five Dollars ($5.00), at any time from ___________, 1998 until 5:00 p.m. Eastern time, on __________, 2002 (the "Warrant Exercise Period"). The warrant price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chief Executive Officer, President or Vice President of the Company, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrants shall be dated as of the issuance by the Warrant Agent either upon initial issuance or upon transfer or exchange. In the event the aforesaid expiration dates of the Warrants fall on a Saturday or Sunday, or on a legal holiday on which the New York Stock Exchange is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on the next succeeding business day. -2- Section 3. Countersignature and Registration. The Warrant Agent shall maintain books for the transfer and registration of the Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue and register the Warrants in the names of the respective holders thereof. The Warrants shall be countersigned manually or by facsimile by the Warrant Agent (or by any successor to the Warrant Agent then acting as warrant agent under this Agreement) and shall not be valid for any purpose unless so countersigned. Warrants may, however, be so countersigned by the Warrant Agent (or by its successor as 6 Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the persons whose manual or facsimile signatures appear thereon as proper officers of the Company shall have ceased to be such officers at the time of such countersignature or delivery. Section 4. Transfers and Exchanges. The Warrant Agent shall transfer, from time to time, any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender thereof for transfer properly endorsed or accompanied by appropriate instructions for transfer. Upon any such transfer, a new Warrant shall be issued to the transferee and the surrendered Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be delivered by the Warrant Agent to the Company from time to time upon request. Warrants may be exchanged at the option of the holder thereof, when surrendered at the office of the Warrant Agent, for another -3- Warrant, or other Warrants of different denominations of like tenor and representing in the aggregate the right to purchase a like number of shares of Common Stock. Section 5. Exercise of Warrants; Payment of Warrant Solicitation Fee. (a) Subject to the provisions of this Agreement, each registered holder of Warrants shall have the right, which may be exercised commencing at the opening of business on the first day of the Warrant Exercise Period, to purchase from the Company (and the Company shall issue and sell to such registered holder of Warrants) the number of fully paid and non-assessable shares of Common Stock specified in such Warrants upon surrender of such Warrants to the Company at the office of the Warrant Agent, with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Company of the warrant price, determined in accordance with the provisions of Sections 9 and 10 of this Agreement, for the number of shares of Common Stock in respect of which such Warrants are then exercised. Payment of such warrant price shall be made in cash or by certified check or bank draft to the order of the Company. Subject to Section 6, upon such surrender of Warrants and payment of the warrant price, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the registered holder of such Warrants and in such name or names as -4- such registered holder may designate, a certificate or certificates for the number of full shares of Common Stock so purchased upon the exercise of such Warrants. Such certificate or certificates shall be deemed to have been issued, and any person so designated to be named therein shall be deemed to have become a holder of record of such shares of Common Stock, as of the date of the surrender of such Warrants and payment of the warrant price as aforesaid. The rights of purchase represented by the Warrants shall be exercisable, at the election of the registered holders thereof, either as an entirety or from time to time for a portion of the shares specified therein and, in the event that any Warrant is exercised in respect of less than all of the shares of Common Stock specified therein at any time prior to the date of expiration of the Warrants, a new Warrant or Warrants will be issued to the registered holder for the remaining number of shares of Common Stock specified in the Warrant so surrendered, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Warrants pursuant to the provisions of this Section and of Section 3 of this Agreement and the Company, whenever requested by the Warrant Agent, will supply the Warrant Agent with Warrants duly executed on behalf of the Company for such purpose. Anything in the foregoing to the contrary notwithstanding, no Warrant will be exercisable unless at the time of exercise the Company has filed with the Securities and Exchange Commission a -5- registration statement under the Securities Act of 1933, as amended (the "Act"), covering the shares of Common Stock issuable upon exercise of such Warrant and such shares have been so registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such Warrant. The Company shall use its best efforts to have all shares so registered or qualified on or before the date on which the Warrants become exercisable. (b) If at the time of exercise of any Warrant after (i) ________, 1998 (i) the market price of the Company's Common Stock is equal to or greater than the then purchase price of the Warrant, (ii) the exercise of the Warrant is solicited by the Underwriter at such time while the Underwriter is a member of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a discretionary account, (iv) disclosure of the compensation arrangement is made in documents provided to the holders of the Warrants; and (v) the solicitation of the exercise of the Warrant is not in violation of Rule 10b-6 (as such rule or any successor rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, then the Underwriter shall be entitled to receive from the Company upon exercise of each of the Warrant(s) so exercised a fee of five percent (5%) of the aggregate price of the Warrants so exercised (the "Exercise Fee"). The procedures for payment of the warrant solicitation fee are set forth in Section 5(c) below. -6- (c) (1) Within five (5) days of the last day of each month commencing with _______, 1998 the Warrant Agent will notify the Underwriter of each Warrant Certificate which has been properly completed for exercise by holders of Warrants during the last month. The Company and Warrant Agent shall determine, in their sole and absolute discretion, whether a Warrant Certificate has been properly completed. The Warrant Agent will provide the Underwriter with such information, in connection with the exercise of each Warrant, as the Underwriter shall reasonably request. (2) The Company hereby authorizes and instructs the Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after receipt by the Warrant Agent from the Company of a check payable to the order of the Underwriter in the amount of the Exercise Fee. The Warrant Agent shall not issue the shares of Common Stock issuable upon exercise of the Warrants until receipt and forwarding of such check to the Underwriter. In the event that an Exercise Fee is paid to the Underwriter with respect to a Warrant which the Company or the Warrant agent determines is not properly completed for exercise or in respect of which the Underwriter is not entitled to an Exercise Fee, the Underwriter will promptly return such Exercise Fee to the Warrant Agent which shall forthwith return such fee to the Company. -7- The Underwriter and the Company may at any time, after ____________, 1998, and during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant certificates returned to the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to the contrary, the provisions of paragraphs 5(b) and 5(c) may not be modified, amended or deleted without the prior written consent of the Underwriter. Section 6. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the initial issuance of Common Stock issuable upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of any certificates of shares of Common Stock in a name other than that of the registered holder of Warrants in respect of which such shares are issued, and in such case neither the Company nor the Warrant Agent shall be required to issue or deliver any certificate for shares of Common Stock or any Warrant until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's satisfaction that such tax has been paid. Section 7. Mutilated or Missing Warrants. In case any of the Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue and the Warrant Agent shall countersign and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company and the Warrant Agent -8- of such loss, theft or destruction and, in case of a lost, stolen or destroyed Warrant, indemnity, if requested, also satisfactory to them. Applicants for such substitute Warrants shall also comply with such other reasonable regulations and pay such reasonable charges as the Company or the Warrant Agent may prescribe. Section 8. Reservation of Common Stock. There have been reserved, and the Company shall at all times keep reserved, out of the authorized and unissued shares of Common Stock, a number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by the Warrants, and the transfer agent for the shares of Common Stock and every subsequent transfer agent for any shares of the Company's Common Stock issuable upon the exercise of any of the rights of purchase aforesaid are irrevocably authorized and directed at all times to reserve such number of authorized and unissued shares of Common Stock as shall be required for such purpose. The Company agrees that all shares of Common Stock issued upon exercise of the Warrants shall be, at the time of delivery of the certificates of such shares, validly issued and outstanding, fully paid and non-assessable and listed on any national securities exchange upon which the other shares of Common Stock are then listed. So long as any unexpired Warrants remain outstanding, the Company will file such post-effective amendments to the registration statement (Form SB-2, Registration No. 333-14519) (the "Registration Statement") filed pursuant to the Act with respect to the Warrants (or other appropriate registration statements or post-effective amendment or supplements) as may be necessary to permit it to deliver to each person exercising a Warrant, a prospectus meeting the requirements of Section 10(a)(3) of the Act and otherwise -9- complying therewith, and will deliver such a prospectus to each such person. To the extent that during any period it is not reasonably likely that the Warrants will be exercised, due to market price or otherwise, the Company need not file such a post-effective amendment during such period. The Company will keep a copy of this Agreement on file with the transfer agent for the shares of Common Stock and with every subsequent transfer agent for any shares of the Company's Common Stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is irrevocably authorized to requisition from time to time from such transfer agent stock certificates required to honor outstanding Warrants. The Company will supply such transfer agent with duly executed stock certificates for that purpose. All Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company, and such cancelled Warrants -10- shall constitute sufficient evidence of the number of shares of Common Stock which have been issued upon the exercise of such Warrants. Promptly after the date of expiration of the Warrants, the Warrant Agent shall certify to the Company the total aggregate amount of Warrants then outstanding, and thereafter no shares of Common Stock shall be subject to reservation in respect of such Warrants which shall have expired. Section 9. Warrant Price; Adjustments. (a) The warrant price at which Common Stock shall be purchasable upon the exercise of the Warrants shall be $5.00 per share or after adjustment, as provided in this Section, shall be such price as so adjusted (the "Warrant Price"). (b) The Warrant Price shall be subject to adjustment from time to time as follows: (i) In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution the Warrant Price in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing: (A) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Warrant Price in effect immediately prior to such dividend or distribution, by -11- (B) the total number of shares of Common Stock outstanding immediately after such issuance or sale. For the purposes of any computation to be made in accordance with the provisions of this Section 9(b)(i), the following provisions shall be applicable: Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution. (ii) In case the Company shall at any time subdivide or combine the outstanding Common Stock, the Warrant Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination to the nearest one cent. Any such adjustment shall become effective at the time such subdivision or combination shall become effective. (iii) Within a reasonable time after the close of each quarterly fiscal period of the Company during which the Warrant Price has been adjusted as herein provided, the Company shall: (A) file with the Warrant Agent a certificate signed by the Chief Executive Officer, President or Vice President of the Company and by the Treasurer or Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, showing in detail the facts requiring all such adjustments occurring during such period and the Warrant Price after each such adjustment; and -12- (B) the Warrant Agent shall have no duty with respect to any such certificate filed with it except to keep the same on file and available for inspection by holders of Warrants during reasonable business hours, and the Warrant Agent may conclusively rely upon the latest certificate furnished to it hereunder. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of a Warrant to determine whether any facts exist which may require any adjustment of the Warrant Price, or with respect to the nature or extent of any adjustment of the Warrant Price when made, or with respect to the method employed in making any such adjustment, or with respect to the nature or extent of the property or securities deliverable hereunder. In the absence of a certificate having been furnished, the Warrant Agent may conclusively rely upon the provisions of the Warrants with respect to the Common Stock deliverable upon the exercise of the Warrants and the applicable Warrant Price thereof. (iv) Notwithstanding anything contained herein to the contrary, no adjustment of the Warrant Price shall be made if the amount of such adjustment shall be less than $.05, but in such case any adjustment that would otherwise be required then to be made shall be carried -13- forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to not less than $.02. (v) In the event that the number of outstanding shares of Common Stock is increased by a stock dividend payable in Common Stock or by a subdivision of the outstanding Common Stock, then, from and after the time at which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of this Section by reason of such dividend or subdivision, the number of shares of Common Stock issuable upon the exercise of each Warrant shall be increased in proportion to such increase in outstanding shares. In the event that the number of shares of Common Stock outstanding is decreased by a combination of the outstanding Common Stock, then, from and after the time at which the adjusted Warrant Price becomes effective pursuant to this Section 9(b) by reason of such combination, the number of shares of Common Stock issuable upon the exercise of each Warrant shall be decreased in proportion to such decrease in the outstanding shares of Common Stock. (vi) In case of any reorganization or reclassification of the outstanding Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination), or in case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any -14- reclassification of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the holder of each Warrant then outstanding shall thereafter have the right to purchase the kind and amount of shares of Common Stock and other securities and property receivable upon such reorganization, reclassification, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which the holder of such Warrant shall then be entitled to purchase; such adjustments shall apply with respect to all such changes occurring between the date of this Warrant Agreement and the date of exercise of such Warrant. (vii) Subject to the provisions of this Section 9, in case the Company shall, at any time prior to the exercise of the Warrants, make any distribution of its assets to holders of its Common Stock as a liquidating or a partial liquidating dividend, then the holder of Warrants who exercises its Warrants after the record date for the determination of those holders of Common Stock entitled to such distribution of assets as a liquidating or partial liquidating dividend shall be entitled to receive for the Warrant Price per Warrant, in addition to each share of Common Stock, the amount of such distribution (or, at the option of the Company, a sum equal to the value of any -15- such assets at the time of such distribution as determined by the Board of Directors of the Company in good faith), which would have been payable to such holder had he been the holder of record of the Common Stock receivable upon exercise of its Warrant on the record date for the determination of those entitled to such distribution. (viii) In case of the dissolution, liquidation or winding up of the Company, all rights under the Warrants shall terminate on a date fixed by the Company, such date to be no earlier than ten (10) days prior to the effectiveness of such dissolution, liquidation or winding up and not later than five (5) days prior to such effectiveness. Notice of such termination of purchase rights shall be given to the last registered holder of the Warrants, as the same shall appear on the books of the Company maintained by the Warrant Agent, by registered mail at least thirty (30) days prior to such termination date. (ix) In case the Company shall, at any time prior to the expiration of the Warrants and prior to the exercise thereof, offer to the holders of its Common Stock any rights to subscribe for additional shares of any class of the Company, then the Company shall give written notice thereof to the last registered holder thereof not less than thirty (30) days prior to the date on which the books of the Company are closed or a record date is fixed for the determination of the stockholders entitled to such subscription rights. Such notice shall specify the date as to which the books shall be closed or record -16- date fixed with respect to such offer of subscription and the right of the holder thereof to participate in such offer of subscription shall terminate if the Warrant shall not be exercised on or before the date of such closing of the books or such record date. (x) Any adjustment pursuant to the aforesaid provisions of this Section 9 shall be made on the basis of the number of shares of Common Stock which the holder thereof would have been entitled to acquire by the exercise of the Warrant immediately prior to the event giving rise to such adjustment. (xi) Irrespective of any adjustments in the Warrant Price or the number or kind of shares purchasable upon exercise of the Warrants, Warrants previously or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Warrant Agreement. (xii) The Company may retain a firm of independent public accountants (who may be any such firm regularly employed by the Company) to make any computation required under this Section 9, and any certificate setting forth such computation signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 9. (xiii) If at any time, as a result of an adjustment made pursuant to Section 9(b)(vi) above, the holders of a Warrant or Warrants shall become entitled to purchase any securities other than shares of Common Stock, thereafter the number of such securities so purchasable upon exercise of each Warrant and the Warrant Price for such shares shall be subject -17- to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Sections 9(b)(ii) through (v). Section 10. Fractional Interest. The Warrants may only be exercised to purchase full shares of Common Stock and the Company shall not be required to issue fractions of shares of Common Stock on the exercise of Warrants. However, if a Warrant holder exercises all Warrants then owned of record by it and such exercise would result in the issuance of a fractional share, the Company will pay to such Warrant holder, in lieu of the issuance of any fractional share otherwise issuable, an amount of cash based on the market value of the Common Stock of the Company on the last trading day prior to the exercise date. Section 11. Notices to Warrantholders. (a) Upon any adjustment of the Warrant Price and the number of shares of Common Stock issuable upon exercise of a Warrant, then and in each such case the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company shall also mail such notice to the holders of the Warrants at their -18- addresses appearing in the Warrant register. Failure to give or mail such notice, or any defect therein, shall not affect the validity of the adjustments. (b) In case at any time: (i) the Company shall pay dividends payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; or (ii) the Company shall offer for subscrip- tion pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; or (iii) there shall be any capital reorgani- zation or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale or substantially all of its assets to, another corporation; or (iv) there shall be a voluntary or involun- tary dissolution, liquidation or winding up of the Company; then in any one or more of such cases, the Company shall give written notice in the manner set forth in Section 11(a) of the date on which (A) a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to -19- exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up as the case may be. Such notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date in respect thereof. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any of the matters set forth in this Section 11(b). (c) The Company shall cause copies of all financial statements and reports, proxy statements and other documents that are sent to its stockholders to be sent by first-class mail, postage prepaid, on the date of mailing to such stockholders, to each registered holder of Warrants at his address appearing in the warrant register as of the record date for the determination of the stockholders entitled to such documents. Section 12. Disposition of Proceeds on Exercise of Warrants. (i) The Warrant Agent shall promptly forward to the Company all monies received by the Warrant Agent for the purchase of shares of Common Stock through the exercise of such Warrants. (ii) The Warrant Agent shall keep copies of this Agreement available for inspection by holders of Warrants during normal business hours. -20- Section 13. Redemption of Warrants. The Warrants are redeemable by the Company upon the consent of the Underwriter, in whole or in part, on not less than thirty (30) days' prior written notice at a redemption price of $.10 per Warrant at any time commencing _________, 1998; provided that (i) the closing sale price of the Common Stock on all thirty (30) trading days ending on the third day prior to the day on which the Company gives notice of redemption has been at least 150% of the then effective exercise price of the Warrants (the "Target Redemption Price") and ii) the Warrants are currently exercisable]. The redemption notice shall be mailed to the holders of the Warrants at their addresses appearing in the Warrant register. Holders of the Warrants will have exercise rights until the close of business on the date fixed for redemption. Section 14. Merger or Consolidation or Change of Name of Warrant Agent. Any corporation or company which may succeed to the corporate trust business of the Warrant Agent by any merger or consolidation or otherwise shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible to serve as a successor Warrant Agent under the provisions of Section 16 of this Agreement. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this -21- Agreement, any of the Warrants shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrants so countersigned. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrants shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrants so countersigned. In all such cases such Warrants shall have the full force provided in the Warrants and in the Agreement. Section 15. Duties of Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrants, by their acceptance thereof, shall be bound: (a) The statements of fact and recitals contained herein and in the Warrants shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or action taken or to be taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrants except as herein expressly provided. (b) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants in this Agreement or in the Warrants to be complied with by the Company. -22- (c) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. (d) The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate or other instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (e) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence, willful misconduct or bad faith. -23- (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expenses unless the Company or one or more registered holders of Warrants shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights and interests may appear. (g) The Warrant Agent and any stockholder, director, officer, partner or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not the Warrant -24- Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (h) The Warrant Agent shall act hereunder solely as agent and its duties shall be determined solely by the provisions hereof. (i) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, and the Warrant Agent shall not be answerable or accountable for any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct, provided reasonable care had been exercised in the selection and continued employment thereof. (j) Any request, direction, election, order or demand of the Company shall be sufficiently evidenced by an instrument signed in the name of the Company by its Chief Executive Officer, President or a Vice President or its Secretary or an Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Warrant Agent by a copy thereof certified by the Secretary or an Assistant Secretary of the Company. Section 16. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement by -25- giving to the Company notice in writing, and to the holders of the Warrants notice by mailing such notice to the holders at their addresses appearing on the Warrant register, of such resignation, specifying a date when such resignation shall take effect. The Warrant Agent may be removed by like notice to the Warrant Agent from the Company and the like mailing of notice to the holders of the Warrants. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or after the Company has received such notice from a registered holder of a Warrant (who shall, with such notice, submit his Warrant for inspection by the Company), then the registered holder of any Warrant may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or by such a court, shall be a bank or trust company, in good standing, incorporated under New York or federal law. After appointment, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed and the former Warrant Agent shall deliver and transfer to the successor Warrant Agent all cancelled Warrants, records and property at the time held by it hereunder, and execute and deliver any further assurance or conveyance necessary for the purpose. Failure to file or mail any notice provided for in this Section, however, or any defect therein, shall not affect the validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. -26- Section 17. Identity of Transfer Agent. Forthwith upon the appointment of any transfer agent for the shares of Common Stock or of any subsequent transfer agent for the shares of Common Stock or other shares of the Company's Common Stock issuable upon the exercise of the rights of purchase represented by the Warrants, the Company will file with the Warrant Agent a statement setting forth the name and address of such transfer agent. Section 18. Notices. Any notice pursuant to this Agreement to be given by the Warrant Agent, or by the registered holder of any Warrant to the Company, shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another is filed in writing by the Company with the Warrant Agent) as follows: HealthDesk Corporation 2560 Ninth Street, Suite 220 Berkeley, California 94710 Attention: Peter O'Donnell -27- and a copy thereof to: Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301 Attention: Peter Astiz Any notice pursuant to this Agreement to be given by the Company or by the registered holder of any Warrant to the Warrant Agent shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: American Stock Transfer and Trust Company 40 Wall Street New York, New York 10005 Attention: George Karfunkel Any notice pursuant to this Agreement to be given by the Warrant Agent or by the Company to the Underwriter shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another address if filed in writing with the Warrant agent) as follows: Whale Securities Co., L.P. 650 Fifth Avenue New York, New York 10019 Attention: William G. Walters and a copy thereof to: Tenzer Greenblatt LLP 405 Lexington Avenue New York, New York 10174 Attention: Robert J. Mittman, Esq. Section 19. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to -28- make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not adversely affect the interest of the holders of Warrants. Section 20. New York Contract. This Agreement and each Warrant issued hereunder shall be deemed to be a contract made under the laws of the State of New York and shall be construed in accordance with the laws of New York applicable to agreements to be performed wholly within New York. Section 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of the Warrants any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrants. Section 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company, the Warrant Agent or the Underwriter shall bind and inure to the benefit of their respective successors and assigns hereunder. -29- IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. HEALTHDESK CORPORATION By: ------------------------------------- AMERICAN STOCK TRANSFER AND TRUST COMPANY By: ------------------------------------- WHALE SECURITIES CO., L.P. By: Whale Securities Corp., General Partner By: ------------------------------------- -30- EX-5.1 4 EXHIBIT 5.1 EXHIBIT 5.1 December 19, 1996 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: HealthDesk Corporation, Registration Statement on Form SB-2 Ladies and Gentlemen: As counsel to HealthDesk Corporation (the "Company"), we are rendering this opinion in connection with a proposed sale of those certain shares of the Company's newly-issued Common Stock and those certain warrants exercisable for shares of the Company's newly-issued Common Stock as set forth in the Registration Statement on Form SB-2 to which this opinion is being filed as Exhibit 5.1 (collectively, the "Shares"). We have examined all instruments, documents and records which we deemed relevant and necessary for the basis of our opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. We express no opinion with respect to (i) the availability of equitable remedies, including specific performance, or (ii) the effect of bankruptcy, insolvency, reorganization, moratorium or equitable principles relating to or limiting creditors' rights generally. Based on such examination, we are of the opinion that the Shares identified in the above-referenced Registration Statement will be, upon effectiveness of the Registration Statement and receipt by the Company of payment therefor, validly authorized, legally issued, fully paid, and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement and to the use of our name wherever it appears in said Registration Statement, including the Prospectus constituting a part thereof, as originally filed or as subsequently amended. Respectfully submitted, GRAY CARY WARE & FREIDENRICH A Professional Corporation EX-10.8 5 EXHIBIT 10.8 WARRANT AGREEMENT dated as of __________, 1997 between HealthDesk Corporation, a California corporation (the "Company"), and Whale Securities Co., L.P. (hereinafter referred to as the "Underwriter"). W I T N E S S E T H: WHEREAS, the Company proposes to issue to the Underwriter warrants (the "Warrants") to purchase up to 180,000 (as such number may be adjusted from time to time pursuant to Article 8 of this Warrant Agreement) shares (the "Shares") of Common Stock, no par value (the "Common Stock"), of the Company, and up to 180,000 (as such number may be adjusted from time to time pursuant to Article 8 of this Warrant Agreement) Common Stock purchase warrants (the "Underlying Warrants"); and WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement (the "Underwriting Agreement") dated _____________, 1997 between the Underwriter and the Company, to act as the underwriter in connection with the Company's proposed public offering (the "Public Offering") of 1,800,000 shares of Common Stock (the "Public Shares") at an initial public offering price of $5.00 per Public Share and 1,800,000 warrants (the "Public Warrants") at an initial public offering price of $.10 per Public Warrant; and WHEREAS, the Warrants issued pursuant to this Agreement are being issued by the Company to the Underwriter or to its designees who are directors, officers and partners of the Underwriter or to members of the selling group participating in the distribution of the Public Shares and Public Warrants to the public in the Public Offering and/or their respective directors, officers or partners (collectively, the "Designees"), in consideration for, and as part of the Underwriter's compensation in connection with, the Underwriter acting as the Underwriter pursuant to the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter or its designees to the Company of ONE HUNDRED NINETY EIGHT DOLLARS ($198), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Underwriter and/or the Designees are hereby granted the right to purchase, at any time from _____________, 1997 until 5:00 P.M., New York time, on _________, 2002 (the "Warrant Exercise Term"), up to 180,000 fully-paid and non-assessable Shares at an initial exercise price (subject to adjustment as provided in Article 6 hereof) of $6.60 per Share and up to 180,000 Underlying Warrants at an initial exercise price (subject to adjustment as provided in Article 6 hereof) of $.132 per Underlying Warrant. The Underlying Warrants are each exercisable to purchase are fully-paid and non-assessable share of Common Stock at a price of $8.25 per share (the "Underlying Warrant Shares"). The Underlying Warrants are exercisable at any time until 5:00 P.M., New York City time on ________, 2002. The Holder may purchase, upon exercise of this Warrant, either the Shares or the Underlying Warrants or both. Except as provided in Article 13 hereof, the Shares and the Underlying Warrants are in all respects identical to the Public Shares and Public Warrants being sold to the public pursuant to the terms and provisions of the Underwriting Agreement. 2. Warrant Certificates. The warrant certificates delivered and to be delivered pursuant to this Agreement (the "Warrant Certificates") shall be, for the Warrants exercisable for the purchase of Underlying Shares, in the form set forth in Exhibit A attached hereto and made a part hereof, and, for the Warrants exercisable for the purchase of Underlying Warrants, in the form of Exhibit B attached hereto and made a part hereof, each with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. 3.1. Cash Exercise. The Warrants initially are exercisable at a price of $6.60 per Share purchased and $.132 per Underlying Warrant purchased, payable in cash, wire transfer, or by check to the order of the Company, or any combination thereof, subject to adjustment as provided in Article 8 hereof. Upon surrender of the Warrant Certificate(s) with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the Shares and Underlying Warrants purchased, at the Company's principal offices in California (currently located at 2560 Ninth Street, Suite 220, Berkeley, California 94710) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the Shares so purchased and/or a certificate or certificates for the Underlying Warrants so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder hereof, in whole or in part (but not as to fractional Shares or fractional Underlying Warrants). In the case of the purchase of less than all Shares or Underlying Warrants purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares or Underlying Warrants purchasable thereunder. -2- 3.2. Cashless Exercise. At any time during the Warrant Exercise Term, the Holder may, at the Holder's option, exchange, in whole or in part, the Warrants represented by such Holder's Warrant Certificate which are exercisable for the purchase of Shares (a "Warrant Exchange"), into the number of Shares and Underlying Warrants determined in accordance with this Section 3.2, by surrendering such Warrant Certificate at the principal office of the Company or at the office of its transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrants to be so exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant Certificate of like tenor representing the Warrants which were subject to the surrendered Warrant Certificate and not included in the Warrant Exchange, shall be issued as of the Exchange Date and delivered to the Holder within three (3) business days following the Exchange Date. In connection with any Warrant Exchange, the Holder shall be entitled to subscribe for and acquire (i) the number of Shares (rounded to the next highest integer) which would, but for such Warrant Exchange, than be issuable pursuant to the provisions of Section 3.1 above upon the exercise of the Warrants specified by the Holder in its Notice of Exchange (the "Total Share Number") less (ii) the number of Shares equal to the quotient obtained by dividing (a) the product of the Total Share Number and the existing Exercise Price per Share (as hereinafter defined) by (b) the Fair Market Price (as hereinafter defined) of a Public Share on the day preceding the Warrant Exchange. "Fair Market Price" at any date shall be deemed to be the last reported sale price, or, in case no such reported sales takes place on such day, the average of the last reported sale prices for the last five (5) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or as reported in the NASDAQ National Market System, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the NASDAQ National Market System, the average of the last reported closing bid price as furnished by (i) the National Association of Securities Dealers, Inc. through NASDAQ or (ii) a similar organization if NASDAQ is no longer reporting such information in either case averaged over the five (5) trading days preceding the Warrant Exchange. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for the Shares purchased and certificates for the Underlying Warrants purchased, and upon the exercise of the Underlying Warrants, the issuance of certificates for the Underlying Warrant Shares purchased, shall be made forthwith (and in any event within three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. -3- The Warrant Certificates and the certificates representing the Shares and the Underlying Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Vice Chairman of the Board of Directors or Chief Executive Officer , President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant Certificates and certificates representing the Underlying Warrants shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares and the Underlying Warrants purchased, and upon exercise, in whole or in part, of the Underlying Warrants, certificates representing the Underlying Warrant Shares purchased (collectively, the "Warrant Securities"), shall bear a legend substantially similar to the following: "The securities represented by this certificate and the other securities issuable upon exercise thereof have not been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"), and may not be offered or sold except (i) pursuant to an effective registration statement under the Act, (ii) to the extent applicable, pursuant to Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably satisfactory to counsel to the Company, stating that an exemption from registration under such Act is available." 5. Restriction on Transfer of Warrants. The Holder, by the Holder's acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof, and that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to the Underwriter or to the Designees. Any such transfer, assignment, hypothecation or other disposition shall be in a manner which complies with applicable state and federal securities laws and regulations. 6. Price. 6.1. Initial and Adjusted Exercise Price. The initial exercise price of each Warrant shall be $6.60 per Share and $.132 per Underlying Warrant. The adjusted exercise price per Share and the adjusted exercise price per Underlying Warrant shall be the prices which shall result from time to time from any and all adjustments of the initial exercise price per Share or per Underlying Warrant, as the case may be, in accordance with the provisions of Article 8 hereof. -4- 6.2. Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1. Registration Under the Securities Act of 1933. None of the Warrants, the Shares, the Underlying Warrants, or the Underlying Warrant Shares have been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"). 7.2. Registrable Securities. As used herein the term "Registrable Security" means each of the Warrants, the Shares, the Underlying Warrants, the Underlying Warrant Shares and any shares of Common Stock issued upon any stock split or stock dividend in respect of such Shares or Underlying Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Act and disposed of pursuant thereto, (ii) registration under the Act is no longer required for subsequent public distribution of such security, or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Article 7. 7.3. Piggyback Registration. If (but without any obligation of the Company to do so), at any time during the seven years following the effective date of the Public Offering, the Company proposes to prepare and file one or more post-effective amendments to the registration statement filed in connection with the Public Offering or any new registration statement or post-effective amendments thereto covering equity or debt securities of the Company, or any such securities of the Company held by its shareholders (in any such case, other than in connection with a registration relating solely to a transaction pursuant to Rule 145 or a registration relating to employee benefit plans on Form S-8 or successor form) (for purposes of this Article 7, collectively, the "Registration Statement"), it will give written notice of its intention to do so by registered mail ("Notice"), at least thirty (30) days prior to the filing of each such Registration Statement, to all holders of the Registrable Securities. Upon the written request of such a holder (a "Requesting Holder"), made within twenty (20) days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, use its best efforts to effect the registration under the Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holders (except as provided in Section 7.5(b) hereof). Notwithstanding the provisions of this Section 7.3, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.3 (irrespective of whether any written request for inclusion of Registrable Securities shall have already been made by a Requesting Holder or received by the Company) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof. -5- 7.4. Demand Registration. (a) At any time during the Warrant Exercise Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Section 7.3 hereof), exercisable by written notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Commission on one occasion, at the sole expense of the Company (except as provided in Section 7.5(b) hereof), a Registration Statement and such other documents, including a prospectus, as may be necessary (in the opinion of both counsel for the Company and counsel for such Majority Holder) in order to comply with the provisions of the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof; provided that the Company shall not be obligated to effect any such registration if the Company shall furnish to the Majority Holder a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it is currently entering into a transaction for which a Form 8-K, including financial statements, will need to be filed with the Commission, in which event the Company shall have the right to defer the filing of the registrations statement for a period of not more than ninety (90) days after receipt of the request of the Majority Holder under this Section 7.4(a). The Company shall use its best efforts to cause the Registration Statement to become effective under the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof. Once effective, the Company will use its best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold or (ii) the date the holders thereof receive an opinion of counsel to the Company that all of the Registrable Securities may be freely traded without registration under the Act, under Rule 144(k) promulgated under the Act or otherwise. (b) The Company covenants and agrees to give written notice of any Demand Registration Request to all holders of the Registrable Securities within ten (10) days from the date of the Company's receipt of any such Demand Registration Request. After receiving notice from the Company as provided in this Section 7.4(b), holders of Registrable Securities may request the Company to include their Registrable Securities in the Registration Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company of their decision to have such securities included within ten (10) days of their receipt of the Company's notice. -6- (c) The term "Majority Holder" as used in Section 7.4 hereof shall mean any holder or any combination of holders of Registrable Securities, if included in such holders' Registrable Securities are that aggregate number of shares of Common Stock (including Shares already issued, Shares issuable pursuant to the exercise of outstanding Warrants, Underlying Warrant Shares already issued and Underlying Warrant Shares issuable pursuant to the exercise of outstanding Underlying Warrants) as would constitute a majority of the aggregate number of shares of Common Stock (including Shares already issued, Shares issuable pursuant to the exercise of outstanding Warrants, Underlying Warrant Shares already issued and Underlying Warrant Shares issuable pursuant to the exercise of outstanding Underlying Warrants) included in all the Registrable Securities. 7.5. Covenants of the Company With Respect to Registration. The Company covenants and agrees as follows: (a) In connection with any registration under Section 7.4 hereof, the Company shall file the Registration Statement as expeditiously as possible, but in any event no later than thirty (30) days following receipt of any demand therefor, shall use its best efforts to have any such Registration Statement declared effective at the earliest possible time, and shall furnish each Holder such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs, fees and expenses (other than underwriting fees, discounts and nonaccountable expense allowance applicable to the Registrable Securities and fees and expenses of counsel retained by the Holders) in connection with all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. (c) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in the Registration Statement, for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the holders of such securities. (d) The Company shall indemnify any holder of the Registrable Securities to be sold pursuant to any Registration Statement and any underwriter or person deemed to be an underwriter under the Act and each person, if any, who controls such Holder or underwriter or person deemed to be an underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such Registration Statement to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter as set forth in Section 7 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. -7- (e) Any Holder of Registrable Securities to be sold pursuant to a Registration Statement, and such Holder's successors and assigns, shall severally, and not jointly, indemnify, the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holder, or such Holder's successors or assigns, for inclusion in such Registration Statement to the same extent and with the same effect as the provisions pursuant to which the Underwriter has agreed to indemnify the Company as set forth in Section 7 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. (f) Nothing contained in this Agreement shall be construed as requiring any holder to exercise the Warrants or the Underlying Warrants held by such Holder prior to the initial filing of any registration statement or the effectiveness thereof. (g) The Company shall not permit the inclusion of any securities other than the Registrable Securities to be included in any Registration Statement filed pursuant to Section 7.4 hereof, without the prior written consent of the Majority Holders, which consent shall not be unreasonably withheld. (h) The Company shall promptly deliver copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the Registration Statement to each Holder of Registrable Securities included for such registration in such Registration Statement pursuant to Section 7.3 or Section 7.4 hereof that requests such correspondence and memoranda and to the managing underwriter, if any, of the offering in connection with which such Holder's Registrable Securities are being registered and shall permit each Holder of Registrable Securities and such underwriter to do such reasonable investigation, upon reasonable advance notice, with respect to information contained in or omitted from the Registration Statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder or underwriter shall reasonably request. -8- 8. Adjustments of Exercise Price and Number of Securities. The following adjustments apply to the Exercise Price of the Warrants with respect to the Shares and the number of Shares purchasable upon exercise of the Warrants. In the event the Exercise Price per Share and/or the number of Shares so purchasable is adjusted, then the Exercise Price of the Warrants relating to the Underlying Warrants and the number of underlying Warrants purchasable hereunder shall be adjusted in the same proportion. 8.1. Computation of Adjusted Price. In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution, the Exercise Price in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing: (a) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Exercise Price in effect immediately prior to such dividend or distribution, by (b) the total number of shares of Common Stock outstanding immediately after such issuance or sale. For the purposes of any computation to be made in accordance with the provisions of this Section 8.1, the Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution. 8.2. Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 8.3. Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Article 8, the number of Shares issuable upon the exercise of each Warrant shall be adjusted to the nearest full number by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the Exercise Price, adjusted as provided for in Sections 8.1 and 8.2 hereof, provided, however, that if an event occurs that results in an adjustment of the number and/or price of the shares of Common Stock issuable upon exercise of the Public Warrants pursuant to Section 9 of the Warrant Agreement by and among the Company, the Underwriter and American Stock Transfer and Trust Company dated as of ___________, 1997 ("Public Warrant Agreement"), resulting in automatic adjustment in the number and/or price of the Underlying Warrant Shares issuable upon exercise of the Underlying Warrants pursuant to Section 8.5 hereof, then the adjustment provided for in this Section 8.3 shall not, in such instance, result in any further adjustment in the aggregate number of shares of Common Stock ultimately issuable upon exercise of the Underlying Warrants. -9- 8.4. Reclassification, Consolidation, Merger, etc. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holders shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holders were the owners of both the Shares and the Underlying Warrant Shares immediately prior to any such events, at a price equal to the product of (x) the number of shares of Common Stock issuable upon exercise of the Holders' Warrants and the Underlying Warrants and (y) the exercise prices for the Warrants and the Underlying Warrants in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holders had exercised the Warrants and the Underlying Warrants. 8.5. Determination of Outstanding Common Shares. The number of Common Shares at any one time outstanding shall include the aggregate number of shares issued and the aggregate number of shares issuable upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities. 8.6. Adjustment of Underlying Warrants' Exercise Price and Securities Issuable Upon Exercise of Underlying Warrants. With respect to any of the Underlying Warrants, whether or not the Warrants have been exercised and whether or not the Warrants are issued and outstanding, the exercise price for, and the number of, Underlying Warrant Shares issuable upon exercise of the Underlying Warrants shall be automatically adjusted in accordance with Section 9 of the Public Warrant Agreement, upon the occurrence of any of the events described therein. Thereafter, until the next such adjustment or until otherwise adjusted in accordance with this Section 8, the Underlying Warrants shall be exercisable at such adjusted exercise price and for such adjusted number of Underlying Warrant Shares. -10- 8.7. Dividends and Other Distributions with Respect to Outstanding Securities. In the event that the Company shall at any time prior to the exercise of all Warrants make any distribution of its assets to holders of its Common Stock as a liquidating or a partial liquidating dividend, then the holder of Warrants who exercises its Warrants after the record date for the determination of those holders of Common Stock entitled to such distribution of assets as a liquidating or partial liquidating dividend shall be entitled to receive for the Exercise Price per Warrant, in addition to each share of Common Stock, the amount of such distribution (or, at the option of the Company, a sum equal to the value of any such assets at the time of such distribution as determined by the Board of Directors of the Company in good faith) which would have been payable to such holder had he been the holder of record of the Common Stock receivable upon exercise of his Warrant on the record date for the determination of those entitled to such distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Subsection 8.7. 8.8. Subscription Rights for Shares of Common Stock or Other Securities. In the case that the Company or an affiliate of the Company shall at any time after the date hereof and prior to the exercise of all the Warrants issue any rights, warrants or options to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company, the Holders of unexercised Warrants on the record date set by the Company or such affiliate in connection with such issuance of rights, warrants or options shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to receive such rights, warrants or options shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to receive such rights at the time such rights, warrants or options that such Holders would have been entitled to receive had they been, on such record date, the holders of record of the number of whole shares of Common Stock then issuable upon exercise of their outstanding Warrants (assuming for purposes of this Section 8.8), that the exercise of the Warrants is permissible immediately upon issuance). 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrant Certificate, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. -11- 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares or fractions of Underlying Warrants upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of Shares and Underlying Warrants. 11. Reservation and Listing of Securities. The Company shall, during the period the Warrants are exercisable, reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants and the Underlying Warrants, such number of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and assuming receipt of the payment of the Exercise Price therefor, all Shares issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. The Company further covenants and agrees that upon exercise of the Underlying Warrants and payment of the respective Underlying Warrant exercise price therefor, all Underlying Warrant Shares issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants and the Underlying Warrants and all Underlying Warrants to be listed on or quoted by NASDAQ or listed on such national securities exchange, in the event the Common Stock is listed on a national securities exchange. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holder or Holders the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or -12- (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; or (d) reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or a sale or conveyance to another corporation of the property of the Company as an entirety is proposed; or (e) The Company or an affiliate of the Company shall propose to issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company; then, in any one or more of said events, the Company shall give written notice to the Holder or Holders of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. -13- 13. Underlying Warrants. The form of the certificates representing the Underlying Warrants (and the form of election to purchase shares of Common Stock upon the exercise of the Underlying Warrants and the form of assignment printed on the reverse thereof) shall be substantially as set forth in Exhibit "A" to the Public Warrant Agreement; provided, however, (i) each Underlying Warrant issuable upon exercise of the Warrants shall evidence the right to initially purchase 180,000 fully paid and non-assessable share(s) of Common Stock in respect of the Underlying Warrant at an initial purchase price of $8.25 per share until __________, 2002 and (ii) the Target Redemption Price (as defined in the Public Warrant Agreement) of the Underlying Warrants is 150% of the then effective exercise price of the Underlying Warrants. As set forth in Section 8.5 of this Agreement, the exercise price of the Underlying Warrants and the number of shares of Common Stock issuable upon the exercise of the Underlying Warrants are subject to adjustment, whether or not the Warrants have been exercised and the Underlying Warrants have been issued, in the manner and upon the occurrence of the events set forth in Section 9 of the Public Warrant Agreement, which is hereby incorporated herein by reference and made a part hereof as if set forth in its entirety herein. Subject to the provisions of this Agreement and upon issuance of the Underlying Warrants, each registered holder of such Underlying Warrants shall have the right to purchase from the Company (and the Company shall issue to such registered holders) up to the number of fully paid and non-assessable Underlying Warrant Shares (subject to adjustment as provided herein and in the Public Warrant Agreement), free and clear of all preemptive rights of shareholders, provided that such registered holder complies, in connection with the exercise of such holders' Underlying Warrants, with the terms governing exercise of the Public Warrants set forth in the Public Warrant Agreement, and pays the applicable exercise price, determined in accordance with the terms of the Public Warrant Agreement. Upon exercise of the Underlying Warrants, the Company shall forthwith issue to the registered holder of any such Underlying Warrants, in such holder's name or in such name as may be directed by such holder, certificates for the number of Underlying Warrant Shares so purchased. The Underlying Warrants shall be transferable in the manner provided in the Public Warrant Agreement, and upon any such transfer, a new Underlying Warrant shall be issued promptly to the transferee. The Company covenants to, and agrees with, each Holder that without the prior written consent of all the Holders, the Public Warrant Agreement will not be modified, amended, cancelled, altered or superseded, and that the Company will send to each Holder, irrespective of whether or not the Warrants have been exercised, any and all notices required by the Public Warrant Agreement to be sent to holders of the Public Warrants. 14. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to a Holder, to the address of such Holder as shown on the books of the Company; or -14- (b) If to the Company, to the address set forth in Section 3 of this Agreement or to such other address as the Company may designate by notice to the Holders. 15. Supplements and Amendments. The Company and the Underwriter may from time to time supplement or amend this Agreement without the approval of any Holders of the Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem not to adversely affect the interests of the Holders of Warrant Certificates. 16. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder. 17. Termination. This Agreement shall terminate at the close of business on _________, 2005. Notwithstanding the foregoing, this Agreement will terminate on any earlier date when all Warrants and Underlying Warrants have been exercised and all Warrant Securities have been resold to the public; provided, however, that the provisions of Section 7 shall survive any termination pursuant to this Section 17 until the close of business on __________, 2008. 18. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State. -15- 19. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriter and any other Holder or Holders any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other Holder or Holders. 20. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. [SEAL] HEALTHDESK CORPORATION By: -------------------------------- Name: Title: Attest: - ------------------------- WHALE SECURITIES CO., L.P. By: Whale Securities Corp. General Partner By: -------------------------------- Name: Title: -16- EXHIBIT A THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, _______, 2002 No. W- _______ Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that ________ _____________________________ or registered assigns, is the registered holder of __________ Warrants to purchase, at any time until 5:00 P.M. New York City time on _______, 2002 ("Expiration Date"), up to _______ fully-paid and non-assessable shares (the "Shares") of the common stock, no par value (the "Common Stock"), of HealthDesk Corporation, a California corporation (the "Company"), at an initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $____ per Share, upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of _______, 199__ between the Company and Whale Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination thereof. No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. -17- The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: _______, 199__ HEALTHDESK CORPORATION [SEAL] By:__________________________ Name: Title: Attest: - ---------------------- [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _________ Shares of Common Stock and herewith tenders in payment for such securities, cash or a certified or official bank check payable in New York Clearing House Funds to the order of ____________________________ in the amount of $ , all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of , whose address is , and that such Certificate be delivered to ___________________________, whose address is _____________. Dated: Signature:____________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) -------------------------------- -------------------------------- (Insert Social Security or Other Identifying Number of Holder) [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED____________________________________________________ hereby sells, assigns and transfers unto _______________________________________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: Signature:____________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) - ------------------------------- - ------------------------------- (Insert Social Security or Other Identifying Number of Assignee) EXHIBIT B THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, _______, 2002 No. W- _________ Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that _____________ ____________________, or registered assigns, is the registered holder of ___________________________ (_______) Warrants to purchase, at any time until 5:00 P.M. New York City time on _______, 2002 ("Expiration Date"), an aggregate of up to ___________________________ (_______) common stock purchase warrants, each common stock purchase warrant entitling the holder thereof to purchase [one] share of common stock, no par value (collectively, the "Underlying Warrants"), of HealthDesk Corporation, a California corporation (the "Company"), at an initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $____ per Underlying Warrant, upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of _______, 199__ between the Company and Whale Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination thereof. The Underlying Warrants issuable upon exercise of the Warrants will be exercisable at any time until 5:00 P.M. Eastern Time _______, 2002 each Underlying Warrant entitling the holder thereof to purchase one fully-paid and non-assessable share of common stock of the Company, at an initial exercise price, subject to adjustment in certain events, of $____ per share. The Underlying Warrants are issuable pursuant to the terms and provisions of a certain agreement dated as of _______, 1997 by and among the Company, Whale Securities Co., L.P. and American Stock Transfer and Trust Company (the "Public Warrant Agreement"). The Public Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to (except as otherwise provided in the Warrant Agreement) for a description of the rights, limitations of rights, manner of exercise, anti-dilution provisions and other provisions with respect to the Underlying Warrants. No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that, upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: _______, 1997 HEALTHDESK CORPORATION [SEAL] By:__________________________ Name: Title: Attest: - ---------------------- [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _________ Underlying Warrants and herewith tenders, in payment for such securities, cash or a certified or official bank check payable in New York Clearing House Funds to the order of _______________________ in the amount of $ , all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of , whose address is , and that such Certificate be delivered to , whose address is _____________. Dated: Signature:_____________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) -------------------------------- -------------------------------- (Insert Social Security or Other Identifying Number of Holder) [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED___________________________________________ hereby sells, assigns and transfers unto _______________________________________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: Signature:_____________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) - -------------------------------- - -------------------------------- (Insert Social Security or Other Identifying Number of Assignee) EX-23 6 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form SB-2 of our report dated July 30, 1996, except for Note 12 as to which the date is December 2, 1996, on our audits of the financial statements of HealthDesk Corporation. We also consent to the reference to our firm under the caption "Experts". /s/ COOPERS & LYBRAND LLP ------------------------------ COOPERS & LYBRAND LLP San Francisco, California December 19, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 6,778 0 0 0 0 304,117 694,121 165,572 790,600 1,940,988 0 0 2,183,036 1,221,355 0 790,600 6,170 6,170 0 0 2,593,315 0 33,707 (2,997,192) 600 (2,397,797) 0 0 0 (2,597,797) (.67) 0
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