-----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, EQXNwTT8aqwKfgzv2dASGNpQ0r+leF2EaX/UxlCk1kRYC71xMxjNj6uHV8YD1Rgi FTWieoKe6hvxr69PReCAHg== 0000950144-99-013630.txt : 19991125 0000950144-99-013630.hdr.sgml : 19991125 ACCESSION NUMBER: 0000950144-99-013630 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19991124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MDPATHWAYS INC CENTRAL INDEX KEY: 0001099613 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 621798114 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-91619 FILM NUMBER: 99764012 BUSINESS ADDRESS: STREET 1: 1913 21ST AVENUE SOUTH CITY: NASHVILLE STATE: TN ZIP: 37212 BUSINESS PHONE: 6153838400 MAIL ADDRESS: STREET 1: 1913 21ST AVENUE SOUTH CITY: NASHVILLE STATE: TN ZIP: 37212 S-1 1 MDPATHWAYS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- MDPATHWAYS, INC. (Exact name of registrant as specified in its charter) GEORGIA 7375 62-1798114 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
1913 21ST AVENUE SOUTH, NASHVILLE, TENNESSEE 37212 (615) 383-8400 (Address, including zip code, and telephone number, including area code, of registrant's executive offices) JOHN E. BLOUNT MDPATHWAYS, INC. 1913 21ST AVENUE SOUTH NASHVILLE, TENNESSEE 37212 (615) 383-8400 (Name, address, including zip code, and telephone number including area code, of agent for service) The Commission is requested to send copies of all communications to: R. GREGORY BROPHY, ESQ. ALSTON & BIRD LLP ONE ATLANTIC CENTER ATLANTA, GEORGIA 30309-3424 (404) 881-7000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] 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
- ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE AGGREGATE OFFERING AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE FEE - ---------------------------------------------------------------------------------------------------------------------------- Series B Convertible Preferred Stock, par value $.01 per share................... 38,500,000 $1.00 38,500,000 $10,703 Series A Convertible Preferred Stock, par value $.01 per share................... 2,000,000 $1.00 2,000,000 $ 556 Common Stock, par value $.01 per share(1)............................... 2,000,000 N/A N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) Registered solely because the shares of Series A Convertible Preferred Stock registered pursuant to this Registration Statement are presently convertible, at the option of the holder, into shares of Common Stock. No additional consideration would be paid by a holder of Series A Convertible Preferred Stock upon such a conversion. Accordingly, no additional fee is paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1999 PROSPECTUS 38,500,000 SHARES MDPATHWAYS, INC. SERIES B CONVERTIBLE PREFERRED STOCK ------------------------- MDpathways, Inc. is offering up to 38,500,000 shares of its Series B Convertible Preferred Stock. MDpathways is conducting this offering simultaneously with an offering of up to 2,000,000 shares of its Series A Convertible Preferred Stock. If we do not receive subscriptions for at least 10,000,000 shares of Series B Convertible Preferred Stock, we will terminate this offering and return all subscription payments plus interest, if any, to subscribers. This is the initial public offering of our Series B Convertible Preferred Stock. The shares offered by this prospectus may not be transferred or re-sold without our prior written consent. No public market for these shares currently exists and we do not expect a public market to develop. Accordingly, we do not intend to apply for listing of our Series B Convertible Preferred Stock on any national securities exchange or on the Nasdaq Stock Market. No underwriters are involved in this offering.
ESTIMATED PROCEEDS TO PRICE TO PUBLIC EXPENSES* MDPATHWAYS --------------- --------- ----------- Per Share (based on minimum offering)...... $1.00 $.04 $.96 Minimum Offering (10,000,000 shares)....... $10,000,000 $450,000 $ 9,550,000 Maximum Offering (38,500,000 shares)....... $38,500,000 $450,000 $38,050,000
- ------------------------- * Includes estimated expenses of the simultaneous offering of Series A Convertible Preferred Stock. ------------------------- INVESTING IN THE SERIES B CONVERTIBLE PREFERRED STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. , 1999 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1999 PROSPECTUS 2,000,000 SHARES MDPATHWAYS, INC. SERIES A CONVERTIBLE PREFERRED STOCK ------------------------ MDpathways, Inc. is offering up to 2,000,000 shares of its Series A Convertible Preferred Stock. MDpathways is conducting this offering simultaneously with an offering of up to 38,500,000 shares of its Series B Convertible Preferred Stock. If we do not receive subscriptions for at least 10,000,000 shares of Series B Convertible Preferred Stock, we will terminate this offering and return all subscription payments plus interest, if any, to subscribers. This is the initial public offering of our Series A Convertible Preferred Stock. The shares offered by this prospectus may not be transferred or re-sold without our prior written consent. No public market for these shares currently exists and we do not expect a public market to develop. Accordingly, we do not intend to apply for listing of our Series A Convertible Preferred Stock on any national securities exchange or on the Nasdaq Stock Market. No underwriters are involved in this offering.
ESTIMATED PROCEEDS TO PRICE TO PUBLIC EXPENSES MDPATHWAYS --------------- --------- ----------- Per Share.................................... $1.00 * $1.00 Total........................................ $2,000,000 * $2,000,000
- ------------------------- * The expenses of this offering together with the expenses of the simultaneous offering of Series B Convertible Preferred Stock are estimated to be $450,000 in the aggregate. We have not separately allocated any of these expenses to the Series A shares. ------------------------ INVESTING IN THE SERIES A CONVERTIBLE PREFERRED STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. , 1999 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 6 Forward Looking Statements.................................. 14 Use of Proceeds............................................. 15 Dividend Policy............................................. 15 Capitalization.............................................. 16 Dilution.................................................... 17 Selected Financial Data..................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business.................................................... 24 Management.................................................. 33 Certain Relationships and Related Transactions.............. 35 Principal Stockholders...................................... 36 Description of Capital Stock................................ 37 Shares Eligible for Future Sale............................. 40 Plan of Distribution........................................ 42 Legal Matters............................................... 43 Experts..................................................... 43 Where You Can Find More Information......................... 44 Index to Financial Statements............................... F-1
2 5 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that you should consider before investing in our common stock. MDPATHWAYS, INC. We were incorporated in July 1999 to develop and operate a web portal as a single source destination for physician and patient communities providing what we consider to be "best of the Web" services and functions as reviewed and selected by physicians. Our goal is for our physician subscribers to rely on MDpathways as a trusted partner to work on their behalf to harness the potential of the Web by securing only those online services and functions that can best benefit them and their patients. We intend to launch our web portal by April 2000. We will work to secure "best of the Web" services and functions for the benefit of the physicians as: (1) clinician; (2) business owner; and (3) consumer. A primary focus of our company will be the physician/patient relationship. We believe that our web portal will be a destination to which our physician subscribers can confidently refer their patients for reliable healthcare information because all of our functions, services and content will have been reviewed and selected by panels of physicians organized by specialty. We have not yet completed the development of our web portal or begun to offer services or generate any revenue. Since incorporation, our founders have been developing the business concept for MDpathways and have engaged Arthur Andersen LLP to assist in developing our technical infrastructure and web portal. Our operations to date have focused primarily on the development, acquisition and configuration of the computer software and hardware necessary for the implementation of our business plan, development and design of our web portal, building a sales and marketing organization, recruiting key management and capital-raising activities to fund our operations. THE OFFERING Series B Convertible Preferred Stock. We are offering a minimum of 10,000,000 shares and a maximum of 38,500,000 shares of our Series B Convertible Preferred Stock at a price of $1.00 per share. This is the initial public offering of our Series B Convertible Preferred Stock. This offering will terminate on the earlier to occur of (1) the sale of all of the shares offered hereby or (2) December 31, 2000. The offering price of $1.00 per share was determined arbitrarily by us and does not necessarily reflect the value of a share of Series B Convertible Preferred Stock. Series A Convertible Preferred Stock. We are also offering up to 2,000,000 shares of our Series A Convertible Preferred Stock to selected investors at a price of $1.00 per share. This is the initial public offering of our Series A Convertible Preferred Stock. The offering of Series A Convertible Preferred Stock will terminate at the same time the offering of Series B Convertible Preferred Stock terminates. The offering price of $1.00 per share was determined arbitrarily by us and does not necessarily reflect the value of a share of Series A Convertible Preferred Stock. 3 6 THE SHARES OFFERED Shares of Series B Convertible Preferred Stock automatically convert into shares of Series A Convertible Preferred Stock (or Common Stock, if on the conversion date we have completed a qualifying underwritten public offering of our Common Stock) on a one-for-one basis at the rate of 20% per year on each anniversary of their issuance. Prior to the completion of the offering and subject to approval of our existing stockholders, we intend to alter the terms of the Series B Convertible Preferred Stock so that it would convert to Series A Convertible Preferred Stock (or Common Stock, as the case may be) at the rate of 33.33% per year, rather than 20% per year. Shares of Series A Convertible Preferred Stock are convertible at any time at the election of the holder into shares of Common Stock on a one-for-one basis. Shares of Series A and Series B Convertible Preferred Stock may not be transferred or re-sold without our prior written consent. Except for certain extraordinary corporate transactions submitted to a vote of stockholders, such as a merger or sale of the company, and except as otherwise required by law, holders of shares of Series A or Series B Convertible Preferred Stock will not have any voting rights with respect to such shares. Upon the liquidation, dissolution or winding up of MDpathways, holders of shares of Series A or Series B Convertible Preferred Stock would be entitled to be paid, before any payment to holders of our Common Stock, an amount equal to $1.00 per share. These terms and all other material terms of the Series A and Series B Convertible Preferred Stock are described in greater detail under the heading "Description of Capital Stock" appearing later in this prospectus. The following table summarizes the pro forma conversion to Common Stock of all shares of Series A and Series B Convertible Preferred Stock currently outstanding (or reserved for issuance pursuant to currently outstanding warrants) and all shares offered in this offering:
SERIES B SERIES A COMMON ---------- ---------- ---------- Preferred Stock outstanding or reserved for issuance prior to offering: Series A............................... -- 5,000,000(1) 5,000,000 Series A issuable pursuant to warrants............................ -- 1,000,000(1) 1,000,000 Preferred Stock offered hereby: Series A............................... -- 2,000,000(1) 2,000,000 Series B............................... 38,500,000(2) 38,500,000(1) 38,500,000 Common Stock outstanding prior to offering............................... -- -- 10,000,000 ---------- Total pro forma Common Stock........ 56,500,000 ==========
- ------------------------- (1) Shares of Series A are convertible into Common Stock at any time on a one-for-one basis. (2) Shares of Series B automatically convert into shares of Series A on a one-for-one basis at a rate of 20% per year (or 33.33% per year pending the effectiveness of an anticipated amendment to our Articles of Incorporation) on each anniversary of their issuance. 4 7 HOW TO PURCHASE SHARES Interested persons may purchase shares of our Series B Convertible Preferred Stock by following the subscription procedures set forth on our web site at www.MDpathways.com. Our web site does not contain subscription procedures for shares of Series A Convertible Preferred Stock. Persons to whom we wish to offer shares of Series A Convertible Preferred Stock will be contacted directly by us. CONDITIONS OF THIS OFFERING If we do not receive subscriptions and payment in full for at least 10,000,000 shares of Series B Convertible Preferred Stock, we will terminate this offering and return subscription payments to subscribers together with interest, if any. USE OF PROCEEDS We plan to use the proceeds from this offering for working capital and general corporate purposes, including developing and expanding the functionality of our web portal, enhancing our marketing and sales organization and pursuing strategic relationships with third party vendors of content and service offerings. ------------------------- Our principal executive offices are located at 1913 21st Avenue South, Nashville, Tennessee 37212. Our telephone number is (615) 383-8400. Our Internet address is www.MDpathways.com. Information contained on or linked to our web site is not incorporated by reference into this prospectus. In this prospectus, reference to the "Company," "MDpathways.com," "we," "us," and "ours" refer to MDpathways, Inc. 5 8 RISK FACTORS You should carefully consider the risks and uncertainties described below before buying shares in this offering. Our business could be adversely affected by any of the following factors, in which event the value of our business could decline, and you could lose part or all of your investment. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us, or that we currently think are immaterial may also impair our business operations. WE HAVE NO OPERATING HISTORY THAT YOU CAN USE TO EVALUATE US We were incorporated in July 1999 and have not yet launched our web portal. To date, we have been devoting our efforts to various organizational activities, including raising capital and entering into arrangements with third parties for the development and design of our web portal and associated databases. As a result, we have no operating history that you can use to evaluate us. Investors must consider our business in light of the risks, uncertainties, expenses, and problems frequently encountered by companies in the early stages of development, particularly companies in the new and rapidly evolving Internet market. To be successful in this market, we must, among other things: - recruit additional members to our management team to further develop and implement our business plan and manage our development and operations; - develop a web portal that provides the content and functionality that subscribers and patient users desire; - attract and maintain a large base of physician subscribers and patient users for our web portal; - increase awareness of our brand and develop physician subscriber and patient loyalty; - locate, obtain, and provide desirable content and services at attractive prices; - establish and maintain revenue generating relationships with content and service providers; - establish and maintain revenue generating relationships with sponsors and with advertisers and their advertising agencies; - respond to competitive and technological developments; - build an operations structure to support our business; and - attract, retain and motivate qualified personnel. We cannot guarantee that we will succeed in achieving these goals. 6 9 WE HAVE NO REVENUES, WE ARE NOT PROFITABLE AND WE EXPECT FUTURE LOSSES Since our inception, we have incurred losses and negative cash flow, and, as of November 23, 1999, we had an accumulated deficit of approximately $237,000. We expect negative cash flow and operating losses to continue for the foreseeable future, and we may never become profitable. We expect our operating costs to increase, but because we have no operating history, we have no historical financial data to use as a basis for determining future operating expenses. The principal costs of expanding our business will include: - substantial direct and indirect selling, marketing, advertising and promotional costs; - costs incurred in connection with hiring a management team and staff to meet our anticipated growth; and - costs incurred to develop our web portal and its services and content. As a result, we expect that it will take some time before we begin generating net income. We cannot assure you that we will ever achieve or sustain profitability. WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN We cannot guarantee that physician subscribers and patients will utilize our web portal, or even the Internet, as a replacement for traditional sources of healthcare information, products and services. Continued growth in the use of the Internet generally and, in particular, as a source of commerce and administrative, communications and information services for the healthcare industry is uncertain. The Internet may not prove to be a viable channel for healthcare commerce or services due to: - inadequate development of the necessary infrastructure or complementary services, such as high speed modems and security procedures for the transmission of confidential healthcare information; - implementation of competing technologies; - delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; - governmental regulation. Acceptance of web portals by physicians will require a broad acceptance of new methods of conducting business and exchanging information. Our viability and future success will depend upon our ability to attract and retain physician subscribers and their patients and motivate them to utilize our web portal to access healthcare information and other products and services. Our failure to achieve market acceptance would have a material adverse effect on our business and could cause us to fail. Initially, we will be soliciting subscriptions to our web portal while our web portal is still under development. Accordingly, in order to obtain such subscriptions, we will be marketing a product that cannot be demonstrated and that has not yet been fully developed. This may prove to be extremely difficult, especially in light of the fact that we will be competing for such subscriptions against existing Internet companies that already have established web portals that have been market tested. 7 10 WE HAVE NO EXISTING PRODUCTS OR SERVICES We currently have no products or services. All of our products and services described in this prospectus will have to be obtained from third parties or developed independently by us. We intend to engage outside firms to develop our web portal and to assist us in establishing relationships with third parties to obtain the content and services to be offered through our web portal. The market for such relationships is very competitive and there can be no assurance that such content or services will be available to us on commercially reasonable terms or on a timely basis. Therefore, there can be no assurance that we will be successful in developing and launching our web portal. The failure to develop and launch our web portal will cause us to fail. WE MUST ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, BRAND AWARENESS AND A LARGE PHYSICIAN SUBSCRIBER BASE, NONE OF WHICH EXISTS TODAY In order to develop physician subscriber and patient bases and create online traffic, we must establish and maintain an active web portal and a brand name, neither of which exists today. For us to be successful in establishing an active web portal and a brand, (1) physicians, their staffs and their patients must view us as offering desirable, relevant and reliable content and services and (2) medical suppliers, pharmaceutical companies and other e-commerce vendors and advertisers to the healthcare community must view our web portal as an effective marketing and sales channel for their products and services. Currently, we do not have any relationships with sources of content or services nor have we launched our web portal. All of this will have to be developed by us, and if we fail in those development efforts our business will fail. Our web portal will only be attractive to healthcare advertisers and other sources of revenue if we have a large base of physician subscribers and patients with desirable demographic characteristics. If we are unable to develop and maintain a large base of such subscribers and patients, we will be unable to secure sources of revenue and our business will fail. WE INTEND FOR SOME OF OUR REVENUES TO COME FROM ADVERTISING AND SPONSORSHIPS, AND THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING AND SPONSORSHIP IS UNCERTAIN A portion of our future success depends on an increase in the use of the Internet as an advertising medium. We intend to derive a meaningful portion of our revenues from the sale of advertisements and sponsorships on our web portal. The Internet advertising market is new and rapidly evolving. It cannot yet be compared with the traditional advertising market to gauge its effectiveness. As a result, there is significant uncertainty about the demand and market acceptance for Internet advertising. Many of our potential advertising customers and sponsors may conclude that Internet advertising and sponsorship are not effective relative to traditional advertising and sponsorship opportunities. Different pricing mechanisms are used to sell advertising on the Internet, and it is difficult to predict which mechanism, if any, will emerge as the industry standard. This makes it difficult to project our future advertising and sponsorship rates and revenues. If the market for Internet advertising and sponsorships fails to develop or develops more slowly than we expect, our business may fail. Widespread adoption or increased use by Internet users of filter software programs that allow them to limit or remove advertising from their desktops or the adoption of this type of software by Internet access providers could have a material adverse effect on the viability of advertising on the Internet. 8 11 Advertisers will want accurate measures of the demographics of our physician subscriber and patient bases and the delivery of advertisements on our web portal. If we cannot obtain these measures successfully or if our measurers are not perceived to be reliable, companies may not advertise on our web portal or may pay less for advertising. WE FACE INTENSE COMPETITION AND RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE The market for Internet services and products is relatively new, intensely competitive and rapidly changing. Since the Internet's commercialization in the early 1990's, the number of web portals on the Internet competing for users' attention has proliferated with no substantial barriers to entry, and we expect that competition will continue to intensify. We will compete for physician subscribers, content and service providers, advertisers and sponsors with the following categories of companies: - online services or web portals targeted to the healthcare industry generally; - publishers and distributors of traditional offline media, including those targeted to physicians, many of which have established or may establish web portals; - general purpose online services which provide access to healthcare content and services; - public sector and non-profit web portals that provide healthcare information without advertising or commercial sponsorships; - vendors of healthcare information, products and services distributed through other means, including direct sales, mail and fax messaging; and - web search and retrieval services and other high-traffic web portals. There are several well capitalized companies that are already pursuing business strategies that are similar to ours. Some of these companies are significantly further along than we are in the development of their business model and brand name. Some of these companies are already providing products similar to those that we are seeking to develop. Competition from these companies will be intense. In addition, we expect competition to increase significantly as new companies enter the market and current competitors expand their product lines and services. Many of these potential competitors are likely to enjoy substantial competitive advantages, including: - greater resources that can be devoted to the development, promotion and sale of their content and services; - longer operating histories; - existing Internet products and services that may have already achieved market acceptance; - greater financial, technical and marketing resources; - existing relationships with key content or service providers; - greater name recognition; and - established subscriber bases. 9 12 To be competitive, we must offer content and services that address the increasingly sophisticated and varied needs of physicians and patients and respond to technological advances and emerging industry standards on a timely and cost-effective basis. We cannot guarantee that we will be successful in using new technologies effectively or adapting our web portal to user requirements or emerging industry standards. WE ARE A DEVELOPMENT STAGE COMPANY WITH VERY LIMITED CAPITAL RESOURCES The proceeds of this offering, together with $5,100,000 previously raised by us in connection with sales of our Common Stock and our Series A Convertible Preferred Stock and warrants will be the only capital resources available to us. These capital resources may not be sufficient to finance in full the implementation of our business strategy. Therefore, we may have to raise additional capital, which could entail issuing additional equity securities or incurring significant amounts of debt. Our incurrence of debt could result in substantial debt service obligations, which, in turn, could cause cash flow problems. Additional capital may not be available to us on commercially reasonable terms or at all. The failure to raise additional needed capital would cause us to fail. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS Our business could be adversely affected if unauthorized parties infringe upon or misappropriate our products, services or proprietary information. Our efforts to protect our intellectual property may not be adequate. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others, which could be time consuming and costly. Intellectual property infringement claims could be made against us as the number of our competitors grows. These claims could be expensive and divert our attention from our operations. In addition, if we become liable to third parties for infringing their intellectual property rights related to our content, services, name or otherwise, we could be required to pay substantial damages and to develop comparable non-infringing intellectual property or obtain a license. We could also be forced to cease providing the services or using the name(s) that contain the infringing intellectual property. We may be unable to develop non-infringing intellectual property or obtain a license on commercially reasonable terms, or at all. WE MAY INCUR LIABILITY FOR CONTENT AND USER DATA CONTAINED ON OUR WEB PORTAL As a content provider, we may face potential liability for intellectual property infringement, defamation, indecency and other claims. In addition, we may incur liability for unauthorized duplication or distribution of third-party content or materials or for information collected from and about our subscribers and users. Third parties or users may bring claims against us relating to proprietary rights or use of personal information. We do not currently maintain general liability insurance for potential claims of this type. IF WE CANNOT ATTRACT ADDITIONAL PERSONNEL TO MANAGE OUR BUSINESS, WE MAY BE UNABLE TO EXECUTE OUR BUSINESS STRATEGY, COMPETE SUCCESSFULLY OR GENERATE REVENUE OPPORTUNITIES We believe that our future success depends on our ability to attract and retain additional technical, sales and marketing and management personnel, particularly well- 10 13 trained and experienced professionals capable of marketing Internet-based services to physicians and their staffs. There is intense competition for employees, at all levels, that possess knowledge of both the Internet industry and the healthcare market. Our failure to attract and retain highly qualified employees could limit our ability to execute our business strategy, compete successfully or generate revenue. OUR ONLINE ACTIVITIES MAY EXPOSE US TO MALPRACTICE LIABILITY AND OTHER LIABILITY INHERENT IN HEALTHCARE DELIVERY We could be exposed to malpractice or other liability against which we are not insured. Patients who file lawsuits against physicians often name as defendants all persons or companies with any relationship to the physicians. As a result, patients could file lawsuits against us based on treatment provided by physicians to which our web portal provides a link. In addition, a plaintiff or government agency could take the position that our delivery of health information directly, or information delivered by a third-party web portal that a patient accesses through our web portal, exposes us to liability for wrongful delivery of healthcare services or erroneous health information. We do not currently have any general liability insurance coverage and the amount of insurance we may maintain with insurance carriers in the future may not be sufficient to cover all of the losses we might incur from these potential claims. In addition, insurance for some risks is difficult, impossible or too costly to obtain, and as a result, we may not be able to purchase insurance for some types of risks. STATE RESTRICTIONS ON THE PRACTICE OF MEDICINE COULD NEGATIVELY AFFECT OUR ACTIVITIES Any finding in a state that we are not in compliance with its laws could require us to restructure our services, which could be time consuming and expensive and which could limit the marketability of our web portal. The laws in some states prohibit some business entities from practicing medicine. This is commonly referred to as the prohibition against the "corporate practice of medicine." In general, these laws prohibit us from employing physicians to practice medicine or from directly furnishing medical care to patients. Each state requires licensure for the practice of medicine within that state, and some states consider the receipt of an electronic transmission of selected healthcare information in that state to be the practice of medicine. These types of laws could restrict our activities and the extent to which we can provide medical information to patients, physicians and others. If our activities are found to be not in compliance with these laws, we could be subjected to penalties or forced to change our business operations in a manner that increases our costs or reduces our revenue. STATE AND FEDERAL LAWS THAT PROTECT THE PRIVACY OF HEALTH INFORMATION MAY LIMIT OUR ABILITY TO COLLECT, USE AND DISCLOSE THAT INFORMATION Our business could be harmed if we fail to comply with current or future laws or regulations governing the collection, dissemination, use and confidentiality of patient health information. Numerous federal and state laws and regulations govern collection, dissemination, use and confidentiality of patient-identifiable health information, including: - state privacy and confidentiality laws; - state laws regulating healthcare professionals, such as physicians, pharmacists and nurse practitioners; 11 14 - Medicaid laws; - the Health Insurance Portability and Accountability Act of 1996 and related rules proposed by the Health Care Financing Administration; and - Health Care Financing Administration standards for Internet transmission of healthcare data. The U.S. Congress has been considering proposed legislation that would establish a new federal standard for protection and use of healthcare information. We may not be able to safeguard patient healthcare information from unauthorized disclosure or use, which may subject us to claims for violations of law. In addition, other third party web sites that consumers may access through our web portal may not maintain systems to safeguard this healthcare information. Future laws or changes in current laws may necessitate costly adaptations to our systems. IF WE ARE NOT BE ABLE TO PREVENT INTERNET SECURITY BREACHES, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED The difficulty of securely transmitting confidential information over the Internet has been a significant barrier to conducting electronic commerce and engaging in sensitive communications over the Internet. It is anticipated that we will rely on browser-level encryption, authentication and certificate technologies, all of which will be licensed from third parties, to provide the security and authentication necessary to effect secure transmission of confidential information. However, we cannot guarantee that advances in computer capabilities, new discoveries in the field of cryptography or other similar developments will not result in a compromise or breach of our security measures. A party who is able to circumvent our security measures could misappropriate proprietary information or confidential communications or cause interruptions to our operations. We may be required to spend significant capital and other resources to protect against the threat of such security breaches or to alleviate problems caused by such breaches. Any well-publicized compromise of Internet security could deter people from using the Internet or from conducting transactions that involve transmitting confidential information, including confidential healthcare information. To the extent that our activities or the activities of third party contractors involve the storage and transmission of confidential information, such as patient records or credit information, security breaches could expose us to claims, litigation or other liabilities. WE MAY EXPERIENCE SYSTEM FAILURES To succeed, we must be able to operate our web portal 24 hours a day, seven days a week, without interruption. It is anticipated that almost all of our communications and information services will be provided to us by third parties. To operate without interruption, our third party providers must guard against: - damage from fire, power loss and other natural disasters; - communication failures; - software and hardware errors, failures or crashes; 12 15 - security breaches, computer viruses and similar disruptive problems; and - other potential interruptions. System failures could delay the launch of our web portal or adversely affect the market acceptance of our web portal. THE INTERNET IS SUBJECT TO MANY LEGAL UNCERTAINTIES AND POTENTIAL GOVERNMENT REGULATIONS THAT MAY DECREASE DEMAND FOR OUR SERVICES, INCREASE OUR COST OF DOING BUSINESS OR OTHERWISE ADVERSELY AFFECT OUR BUSINESS Laws and regulations may be adopted in the future that address Internet-related issues, including content, privacy, pricing and quality of products and services. For example, although it was held unconstitutional in part, the Communications Decency Act of 1996 prohibited the transmission over the Internet of various types of information and content. Any new law or regulation pertaining to the Internet, or the application or interpretation of existing laws, could decrease demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our business. OUR BUSINESS COULD BE HARMED IF INTERNET SALES BECOME TAXABLE The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by certain foreign governments that could impose taxes on the sale of goods and services over the Internet and certain other Internet activities. A recently enacted law places a temporary moratorium on certain types of taxation on Internet commerce. We cannot predict the effect of current attempts at taxing or regulating commerce over the Internet. Because our business will depend on revenues generated by e-commerce activity associated with our web portal, any legislation that impairs the growth of e-commerce could have a material adverse effect on our business. INVESTORS IN THIS OFFERING MAY HAVE TO HOLD THEIR SHARES FOR AN INDEFINITE PERIOD OF TIME Our Articles of Incorporation provide that no holder of shares of our Series A or Series B Convertible Preferred Stock may sell, assign or transfer any of such shares without our prior written consent. In addition, there is no public market for our Series A or Series B Convertible Preferred Stock and no such public market will develop in the future. We do not intend to apply for listing of any class or series of our capital stock on any securities exchange or the Nasdaq Stock Market prior to an underwritten public offering of our Common Stock. After any such public offering, we would only list for trading our Common Stock. There can be no assurance that we will be able to complete such a public offering or that a market for our Common Stock will ever develop. Therefore, investors in this offering may have to hold their shares for an indefinite period of time. INVESTORS IN THIS OFFERING WILL INCUR IMMEDIATE DILUTION IN THE BOOK VALUE OF THEIR SHARES Investors purchasing shares in this offering will incur immediate and substantial dilution of up to $0.43 in the net tangible book value per share from the public offering price of $1.00 per share. In addition, our Board of Directors has the authority to issue a significant number of additional shares of our capital stock without obtaining shareholder 13 16 approval to do so. Any such issuances will dilute the ownership interest in MDpathways obtained by investors in this offering. For more information, see "Dilution." HERITAGE GROUP, LLC WILL MAINTAIN VOTING CONTROL OF OUR COMPANY Heritage Group, LLC owns 10,000,000 shares of our Common Stock, which constitutes all of the issued and outstanding shares of our Common Stock. Holders of our Series A and Series B Convertible Preferred Stock only have the right to vote on certain extraordinary corporate transactions, such as a merger or sale of the company, and not on other matters submitted to a vote of stockholders, such as the election of directors. As a result, Heritage Group, LLC has the ability to control virtually all matters requiring stockholder approval, including the election of directors. FORWARD LOOKING STATEMENTS Some of the statements contained in this prospectus are forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are found in the sections entitled "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Dividend Policy," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." They include statements concerning: - plans for implementing our internet-based strategy, including the introduction of our web portal; - our business and operating strategy; - anticipated sources of funds and the ability to meet future liquidity and capital requirements; - plans for hiring additional personnel; - use of proceeds of this offering; and - plans, objectives, expectations and intentions contained in this prospectus that are not historical facts. When used in this prospectus, the words "expect," "believe," "goal," "plan," "intend," "estimate," "may," "will" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of reasons, including those discussed under "Risk Factors" and elsewhere in this prospectus. We assume no obligation to update any forward-looking statements. 14 17 USE OF PROCEEDS We expect to receive a minimum of $9,550,000 and a maximum of $40,050,000 in net proceeds from the sale of the shares of Series A and Series B Convertible Preferred Stock in this offering, after deducting estimated offering expenses. We expect to use the net proceeds from this offering for working capital and general corporate purposes, including expenditures for implementing and expanding the functionality and services provided on our web portal and associated databases, enhancing our marketing and sales organizations, and pursuing relationships with third-party vendors of content and service offerings. If we receive subscriptions for less than the total number of shares offered hereby, we will apply the proceeds of this offering first to implementing the functionality of our web portal and associated databases. Pending these uses, the net proceeds of this offering will be invested in short-term, investment grade, interest-bearing investments or accounts. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 15 18 CAPITALIZATION The following table sets forth the capitalization of MDpathways as of November 23, 1999: - on an actual basis; - as adjusted to reflect the sale by MDpathways of the minimum 10,000,000 shares of Series B Convertible Preferred Stock offered hereby at a public offering price of $1.00 per share and the receipt of the estimated net proceeds therefrom, after deducting estimated offering expenses; and - as adjusted to reflect the sale by MDpathways of the maximum 38,500,000 shares of Series B Convertible Preferred Stock and 2,000,000 shares of Series A Convertible Preferred Stock offered hereby at a public offering price of $1.00 per share and the receipt of the estimated net proceeds therefrom, after deducting estimated offering expenses. The information below is qualified by and should be read in conjunction with "Management's Discussion and Analysis and Results of Operations" and our financial statements and the notes to those statements appearing at the end of this prospectus.
NOVEMBER 23, 1999 -------------------------------------- AS ADJUSTED ------------------------- ACTUAL MINIMUM MAXIMUM ---------- ----------- ----------- Shareholders' equity: Preferred Stock, $.01 par value; 300,000,000 shares authorized: Series A Convertible; 50,000,000 shares designated; 5,000,000 shares issued and outstanding, actual; 5,000,000 shares issued and outstanding, as adjusted (minimum); 7,000,000 shares issued and outstanding, as adjusted (maximum).................................... $ 50,000 $ 50,000 $ 70,000 Series B Convertible; 50,000,000 shares designated; no shares issued and outstanding, actual; 10,000,000 shares issued and outstanding, as adjusted (minimum); 38,500,000 shares issued and outstanding, as adjusted (maximum)............................................. -- 100,000 385,000 Common Stock, $.01 par value; 300,000,000 shares authorized; 10,000,000 shares issued and outstanding, actual and as adjusted (minimum and maximum)............ 100,000 100,000 100,000 Additional paid-in capital................................ 4,825,055 14,275,055 44,470,055 Deficit accumulated during the development stage.......... (237,280) (237,280) (237,280) ---------- ----------- ----------- Total shareholders' equity............................ $4,737,775 $14,287,775 $44,787,775 ========== =========== ===========
The capitalization information set forth in the table above does not reflect the fact that shares of Series B Convertible Preferred Stock automatically convert into shares of Series A Convertible Preferred Stock on a one-for-one basis at a rate of 20% per year (or 33.33% per year pending the effectiveness of an anticipated amendment to our Articles of Incorporation) on each anniversary of their issuance. Also, the table does not reflect the fact that holders of Series A Convertible Preferred Stock may at any time elect to convert all or any portion of such shares into Common Stock on a one-for-one basis. In addition, the table excludes 1,000,000 shares of Series A Convertible Preferred Stock (or Common Stock, depending on whether we have completed a qualifying underwritten public offering of our Common Stock) that may be issued upon the exercise of outstanding warrants with an exercise price of $1.00 per share. 16 19 DILUTION Our pro forma net tangible book value at November 23, 1999, after giving effect to the conversion of all outstanding shares of Series A Convertible Preferred Stock (excluding the shares issuable upon exercise of such warrants) into Common Stock on a one-for-one basis, was $4,737,775, or $0.32 per share. Pro forma net tangible book value per share is equal to our total tangible assets less our total liabilities, divided by the number of shares of Common Stock outstanding on a pro forma basis. Dilution per share represents the difference between the price per share paid by investors in this offering and the as adjusted pro forma net tangible book value per share immediately after this offering. After giving effect to the sale of the maximum 38,500,000 shares of Series B Convertible Preferred Stock and 2,000,000 shares of Series A Convertible Preferred Stock in this offering at $1.00 per share, and after deducting estimated offering expenses, our as adjusted pro forma net tangible book value at November 23, 1999 would have been approximately $44,787,775, or $0.81 per share. This represents an immediate decrease in pro forma net tangible book value of $0.19 per share to new investors. Similarly, after giving effect to the sale of the minimum 10,000,000 shares of Series B Convertible Preferred Stock in this offering at $1.00 per share, and after deducting estimated offering expenses, our as adjusted pro forma net tangible book value at November 23, 1999 would have been approximately $14,287,775, or $0.57 per share. This represents an immediate decrease in pro forma net tangible book value of $0.43 per share to new investors. The following tables illustrate this dilution: MAXIMUM SHARES SOLD (38,500,000 SERIES B AND 2,000,000 SERIES A) Initial public offering price per share..................... $1.00 Pro forma net tangible book value per share at November 23, 1999............................................... $0.32 Increase per share attributable to new investors.......... 0.49 As adjusted pro forma net tangible book value per share after this offering....................................... 0.81 ----- Dilution per share to new investors......................... $0.19 =====
MINIMUM SHARES SOLD (10,000,000 SERIES B) Initial public offering price per share..................... $1.00 Pro forma net tangible book value per share at November 23, 1999............................................... $0.32 Increase per share attributable to new investors.......... 0.25 As adjusted pro forma net tangible book value per share after this offering....................................... 0.57 ----- Dilution per share to new investors......................... $0.43 =====
The following table summarizes, on a pro forma basis after giving effect to this offering, the difference between the number of shares of capital stock purchased from us, the total consideration paid and the average price per share paid by existing shareholders and by new investors purchasing shares of Series B Convertible Preferred Stock and 17 20 Series A Convertible Preferred Stock in this offering. We have not deducted estimated offering expenses in our calculations. MAXIMUM SHARES SOLD (38,500,000 SERIES B AND 2,000,000 SERIES A)
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing shareholders: Common....................... 10,000,000 18.0% $ 100,000 0.2% $0.01 Series A Convertible 5,000,000 9.0 5,000,000 11.0 1.00 Preferred................. New investors.................. 40,500,000 73.0 40,500,000 88.8 1.00 ---------- ----- ----------- ----- ----- Total..................... 55,500,000 100.0% $45,600,000 100.0% $0.82 ========== ===== =========== ===== =====
MINIMUM SHARES SOLD (10,000,000 SERIES B)
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing shareholders: Common....................... 10,000,000 40.0% $ 100,000 0.7% $0.01 Series A Convertible 5,000,000 20.0 5,000,000 33.1 1.00 Preferred................. New investors.................. 10,000,000 40.0 10,000,000 66.2 1.00 ---------- ----- ----------- ----- ----- Total..................... 25,000,000 100.0% $15,100,000 100.0% $0.60 ========== ===== =========== ===== =====
The foregoing discussion and tables do not reflect that, upon the liquidation dissolution or winding up MDpathways, holders of our Series A and Series B Convertible Preferred Stock are entitled to be paid out of our assets, before any payment to holders of our Common Stock, an amount equal to $1.00 per share, as described in more detail later in this prospectus under the heading "Description of Capital Stock." In addition, the foregoing discussion and tables assume no exercise of outstanding warrants to purchase 1,000,000 shares of Series A Convertible Preferred Stock (or Common Stock, depending on whether we have completed a qualifying underwritten public offering of Common Stock at the time of exercise) at an exercise price of $1.00 per share. 18 21 SELECTED FINANCIAL DATA In the table below, we provide you with selected financial data of MDpathways, Inc. We have prepared this information using our historical financial statements for the period from July 30, 1999 (date of inception) through November 23, 1999. When you read this selected financial data, it is important that you read along with it the historical financial statements and related notes included in this prospectus, as well as the section of this prospectus entitled, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historical results are not necessarily indicative of future results.
PERIOD FROM JULY 30, 1999 (DATE OF INCEPTION) THROUGH NOVEMBER 23, 1999 ------------------------- STATEMENT OF OPERATIONS DATA Revenues................................................. $ -- Costs and expenses: Selling, general and administrative.................... 237,280 ---------- Net loss................................................. $ (237,280) ========== Basic and diluted net loss per share..................... $ (0.001) ========== Weighted average shares used in calculating basic and diluted net loss per share(1).......................... 50,000,000 ==========
AS OF NOVEMBER 23, 1999 ------------------------- BALANCE SHEET DATA Cash..................................................... $5,023,427 Working capital.......................................... 4,658,159 Total assets............................................. 5,103,043 Stockholders' equity..................................... 4,737,775
- ------------------------- (1) See Note 4 of Notes to Financial Statements. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW MDpathways is a development stage company recently formed to develop and operate a web portal designed to serve physician and patient communities. Our strategy is to function as a partner for subscribing physicians, working on their behalf to secure from the Web only those services, functions, and content for our portal that can benefit physicians and their patients. We were incorporated in July 1999. We have not yet completed the development of our web portal or begun to offer services or generate any revenue. Since incorporation, our founders have been developing the business concept for MDpathways and have engaged Arthur Andersen LLP to assist in the development of our technical infrastructure and web portal. Our operations to date have focused primarily on the development, acquisition and configuration of the computer software and hardware necessary for the implementation of our business plan, development and design of our web portal, building a sales and marketing organization, recruiting key management and capital-raising activities to fund our operations. ANTICIPATED SOURCES OF REVENUE We anticipate that our web portal will be operational by April 2000. Once operational, we expect to generate revenue primarily from the following sources: - Fees paid by physician subscribers; - Fees paid by web vendors in connection with installing and managing content, functions and services on our portal, as well as participation in e-commerce revenues generated at the vendor's site from traffic originating from our portal; - Advertising revenue from businesses desiring to access our physician and patient communities; - Fees paid by vendors in connection with business-to-business e-commerce transactions generated through our portal; - Fees paid by vendors in connection with business-to-consumer e-commerce transactions generated through our portal; and - Fees paid by pharmaceutical research and drug manufacturing companies in connection with medical research and/or participation in online clinical drug trials. Physician Subscriptions. We plan to build and retain a physician subscriber base by offering an evolving array of selected functions, services and content designed to serve physicians and their patients. Although we have not yet determined the initial functions and services that we will provide, the following are the types of services we currently anticipate reviewing with our physician panels: - Continuing medical education; - Peer-reviewed aggregation of electronic medical journals; 20 23 - Treatment updates; - Case reviews; - Interactive services (chat rooms, bulletin boards); - Physician reference materials; - Medical bookstores; and - Other personal services, such as financial, sports, travel and weather information. We also intend to offer physician subscribers customized web pages that can be accessed by their patients and the general public. The physician's web page will contain demographic information about the physician and his or her practice, as well as a wide array of possible links including specific medical and health-related content relevant to the physician's practice specialty and formatted for his or her patient base. Each physician subscriber will have the ability to control the content that is included on or linked through his or her page. Web Vendors. For an ongoing fee plus participation in revenues generated from traffic originating from our portal, we will allow web-based vendors to install and manage selected functions, services and content on our portal with links to their site. Such functions, services and content will have been reviewed and selected by our physician specialty panels for inclusion on our portal. We believe that MDpathways will represent an attractive alternative for many web based vendors who desire to directly access physician and patient communities. Advertising. The key factors in attracting advertising revenue is the size of MDpathways' physician and patient communities, our ability to capture demographic information valuable to advertisers, and the frequency with which our web portal is accessed. In connection with the development of our web portal, we are also developing the databases necessary to capture and present the information that we believe will be particularly valuable to advertisers. We are uncertain as to when we will be able to attract third party vendors and secure contracts for advertising revenues. Business-to-Business e-commerce Transactions. We also plan to offer our physician subscribers and their practice staffs functions and services that will assist them in the day-to-day management and operation of their practices. This category of services should allow us to generate additional revenues from business-to-business e-commerce transactions originating from our portal and enhance our ability to improve the administrative and service efficiency of our physician subscribers' practices. Some of the services offered by MDpathways will be beneficial to all physicians, while other services will be targeted to specific medical specialties. We anticipate that these services may include: - Online procurement of medical supplies and equipment; - Claims submission and claims processing functionality; - Physician referral tracking; - Quality assurance and utilization review audits; - Medication management and online prescription capabilities; - Immunization and vaccination records; 21 24 - Online fax and e-mail capabilities; - Insurance eligibility verification; - Referral submission and authorization; - Online medical record management; - Online laboratory results; - Online patient scheduling and registration; - Medical transcription. Business-to-Consumer e-Commerce Transactions. Our physician subscribers will include a large number of affluent consumers with significant disposable income which we believe will be attractive to vendors. We plan to secure relationships with selected vendors that will offer their products and services to our physician subscribers through our portal. We believe we will be able to structure these relationships in a manner that will allow us to charge access fees and otherwise participate in the revenues generated from such transactions. We also believe that our patient community will represent a consumer base that will be attractive to vendors of healthcare products or services. Accordingly, we intend to generate additional revenue by charging access fees and/or a percentage of the revenues generated by transactions between vendors and patients that occur through our portal. Medical Research and Clinical Drug Trials. We plan to promote our physician subscriber base to pharmaceutical research and drug manufacturing companies interested in enrolling physicians in online surveys and clinical drug trials. Participating companies would pay a fee to MDpathways to receive information generated from our database of physician and patient communities, to access subscribing physicians online and to advertise for surveys and drug trials on our web portal. In addition to these relationships, we intend to explore other means by which we may generate revenue through strategic alliances or other relationships with pharmaceutical research, drug manufacturing and other related companies. CURRENT AND ANTICIPATED FINANCIAL COMMITMENTS We have entered into an agreement with Arthur Andersen LLP to assist us in developing our technical infrastructure and web portal. Arthur Andersen will work closely with Mr. Albert Rodewald, our principal technology officer, and the other technology personnel we plan to hire to develop and launch our web portal. We anticipate leasing the servers and the related computer hardware and equipment that will support our web portal. These costs are expected to be expensed as incurred. In addition to the need to hire additional technology personnel, over the next 12 month period we anticipate the need to hire additional executive officers, as well as an administrative staff to support our operations. We also intend to relocate our principal executive offices and have commenced the process of identifying suitable space in or around Nashville, Tennessee that will accommodate anticipated future growth. As a result of these activities, prior to the completion of this offering we anticipate incurring substantial additional costs and expenses related to the continued development of our web portal, the lease and build-out of suitable office space, and the hiring of qualified 22 25 personnel. Future costs and expenses will include sales and marketing expenses incurred to attract physician subscribers to our web services, as well as ongoing technology costs to enhance the functions and services available to our physician subscribers. LIQUIDITY AND CAPITAL RESOURCES Prior to the commencement of this offering, we raised approximately $5,000,000 through a private placement of 5,000,000 shares of our Series A Convertible Preferred Stock. As of November 19, 1999, our principal commitments consisted of our agreements with Arthur Andersen, our web portal consultants, and the costs and expenses incurred in connection with the private placement and this offering. We believe that we have sufficient capital to complete the development of and to launch our web portal. However, we do not believe that we will have sufficient capital to add all of the interactive functions and services to our web portal or fully implement our marketing plan through the next 12 months unless we are successful in selling at least the minimum number of shares of Series B Convertible Preferred Stock available in this offering. While the minimum net proceeds of this offering are expected to be sufficient to meet our anticipated working capital needs through at least the next 12 months, additional capital could be required if unexpected costs arise or if we pursue ventures that enhance or accelerate the implementation of our business plan through the acquisition of complementary businesses. If additional capital requirements arise, we may need to raise additional funds sooner than expected. If we raise additional funds through the issuance of equity or convertible debt securities, these securities may have rights, preferences or privileges that are superior to those of the shares available in this offering and may result in substantial dilution to existing shareholders. If additional funding is needed, there is no assurance that such funding will be available on terms acceptable to MDpathways, if at all. Our losses from inception to November 23, 1999 total approximately $237,000, consisting principally of costs incurred in the form of direct expenses primarily consisting of payroll, legal and consulting fees. These costs relate to the development of our web portal, initial organization and our capital-raising activities to date. YEAR 2000 Many existing computer programs use only two digits to identify a year. These programs were developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We will use software, computer technology and other services provided by third-party vendors. We are also dependent on telecommunications vendors to maintain our communications network. We believe that our third-party supplied software and computer technology will be year 2000 compliant. All of our software and computer technology supplied by third-party vendors has been purchased recently or will be purchased in the near future. In connection with these purchases, we have required or will require our vendors to represent that each of the technology products is year 2000 compliant. Nonetheless, the failure of any software or systems upon which we rely to be year 2000 compliant could have a material adverse impact on the development or operation of our web portal. To date, we have not incurred any costs in connection with the year 2000. Based upon our assessment of our software and computer technology and because our web portal will 23 26 not be operational until after January 1, 2000, we do not believe that we need to develop a year 2000 contingency plan and we have not developed any such plan. However, the failure of any of our third-party service providers to be year 2000 compliant could delay the launch of our web portal. The year 2000 readiness of the general system necessary to support our operations is difficult to assess. For instance, we will depend on the integrity and stability of the Internet to provide our services. We will also depend on the year 2000 compliance of the computer systems used by our members. Thus, the system necessary to support our operations will consist of a network of computers and telecommunications systems located throughout the world and operated by numerous unrelated entities and individuals, none of which has the ability to control or manage the potential year 2000 issues that may impact the entire system. It is not possible to predict potential negative impact of year 2000 issues of these systems. Our worst-case year 2000 scenario would involve a major disruption in access to the Internet, a failure of our systems and a failure in the systems of our third-party service providers. This would result in the delay of the launch of our web portal and would delay the implementation of our business strategy. 24 27 BUSINESS OUR BUSINESS We were incorporated in July 1999 to develop and operate a web portal as a single source destination for physician and patient communities providing what we consider to be "best of the Web" services and functions as reviewed and selected by physicians. Our goal is for our physician subscribers to rely on MDpathways as a trusted partner to work on their behalf to harness the potential of the Web by securing only those online services and functions that can best benefit them and their patients. We intend to launch our web portal by April 2000. We will work to introduce and secure "best of the Web" services and functions for the benefit of the physicians as: (1) clinician; (2) business owner; and (3) consumer. The functions, services and content that will be provided through our web portal will be reviewed and selected by physician panels organized by specialty. These panels will work in tandem with our professionals to determine the vendors they judge as "best of the Web" in providing the desired functions, services and content. A primary focus of our Company will be the physician/patient relationship. We believe that our web portal will be a destination to which our physician subscribers can confidently refer their patients for reliable healthcare information because all of our functions, services and content will have been reviewed and selected by panels of physicians organized by specialty. OUR INDUSTRY The U.S. healthcare system is plagued with information-related problems. Of the roughly $1.2 trillion projected to be spent on healthcare in the U.S. in 1999, an estimated $300 billion relates to the following: - delivery of unnecessary or unavoidable care; - performance of redundant tests; - excessive administrative costs; - lack of information; and - human error. In addition to these inefficiencies, there are significant intangible costs that result from poor information flow. We believe that the Internet will dramatically change how information flows and how people and organizations interact in healthcare. As an inexpensive and flexible technology, we believe the Internet will be used to streamline current processes, enhance the quality of care and create entirely new ways of conducting business relating to healthcare. Both physicians and their patients will benefit from the Internet's strength as an information source and a communications medium. Growth of the Internet The Internet is the fastest growing medium in history and has rapidly become a significant global medium for information, communications, news and commerce. The 25 28 Internet is distinct from traditional media because it offers immediate access to dynamic and interactive content and enables virtually instantaneous communication among users. The Internet enables users to quickly retrieve and transfer information, share their experiences in online communities and purchase a variety of products and services. International Data Corporation, IDC, estimates that the number of worldwide Internet users will grow from approximately 100 million in 1998 to approximately 320 million by 2002. IDC also estimates that Internet users in the United States will grow to approximately 136 million in 2002, reaching approximately 50% of the U.S. population. Internet Use by Patients and Healthcare Consumers Health and medical information is one of the fastest growing areas of interest on the Internet. According to the Harris Poll, up to an estimated 74% of all Internet users in the United States seek healthcare information online. According to Cyber Dialogue, an independent research company, approximately 70% of the people searching for healthcare information on the Internet believes the Internet empowers them by providing them with information before and after they go to a physician's office. We believe that healthcare and pharmaceutical companies will have an increasing interest in using online advertising to reach target groups with appealing and compatible demographics. According to Jupiter Communications, an independent research company, expenditures for online health and medical advertising is expected to exceed $265 million by 2002. Internet Use by Physicians The rapid overall adoption of online health and medical information stands in contrast to the slow rate at which physicians are developing physician-driven web sites. There are more than 16,000 healthcare-related web portals available on the Internet, and the number is growing. However, industry analysts believe that more than 40% of these web portals are not grounded in science or physician peer review. We believe that the massive number of sites has served to frustrate both patients and physicians from a standpoint of reliability, accuracy and trust. According to surveys by industry analysts, approximately 74% of online users seeking health and medical information say that a physician recommendation would make them more likely to trust a web portal; however, only four percent 4% of those surveyed say that physicians are recommending which sites to use. In addition, according to Cyber Dialogue, in a survey among online healthcare users who expressed interest in using a physician's web portal, 29% said they would likely switch doctors to do so. Similarly, among those who expressed interest in e-mailing their physicians, 33% said they would likely to switch doctors to do so. We believe there are clear opportunities for physicians to help improve the quality of information their patients access online. Convergence of the Internet and Healthcare We believe that over the long term the focus of the convergence of the Internet and healthcare will trend towards the physician's office because the delivery of healthcare is moving to the outpatient setting and physicians control the vast majority of healthcare expenditures. Managed care has increased focus on cost control, forcing physicians to become more efficient and sophisticated while also demanding more information and increasing administrative requirements. Patients, increasingly frustrated with the healthcare system, have sought to take matters into their own hands by assuming more responsibility 26 29 for their own care. It is under this backdrop that the Internet healthcare industry is forming. We believe a uniquely attractive opportunity exists to leverage the extraordinary growth of the Internet and capitalize on significant changes occurring in healthcare and e-business capabilities of the Internet. THE MDPATHWAYS STRATEGY Our goal is to function as a trusted and valued business partner to our physician subscribers focused on harnessing the evolving potential of the Internet to benefit physicians and their patients. Our web portal will offer a single site where our physicians and patient communities can find healthcare functions, services and content which we regard as the "best of the Web." We believe our web portal will generate value to the physician subscriber as a (1) clinician, (2) business owner and (3) consumer. We believe the MDpathways strategy will be successful because of the following factors: - Our Portal will be a Trusted and Valued Destination. All of the functions, services and content provided on our web portal will have been reviewed and selected by panels of physicians organized by specialty. - Our Focus on the Physician/Patient Relationship. We believe that the relationship between the physician and the patient is a unique and powerful platform. Because our web portal will provide what our physician panels judge as the "best of the Web," we believe physicians will be comfortable referring their patients to our portal for healthcare information and other helpful functions and services. - Our Focus on Physician Needs. The physician functions in the following capacities: (1) clinician; (2) business owner; and (3) consumer. We intend to function as the physician's Internet partner regularly surveying the Web to identify and introduce new functions, services and content offerings which may be of value to our physician community and/or their patients. We will regularly upgrade our portal offerings as our physician panels review and select new offerings, thus furthering the benefits our physician and patient communities can derive from the Internet. - Leverage the Consumer Purchasing Power of our Physician and Patient Communities. We believe that the physician community represents an attractive consumer group with high disposable income. We also believe that if we develop a large physician subscriber base, we will be able to offer meaningful savings to our physician community on goods and services purchased from vendors and sponsors. Moreover, we believe that the patients of our physician subscribers represent an active segment of consumers who are highly motivated to purchase health related goods and services. We believe our portal can be a valued alternative destination for patients who shop for health related goods and services and serve as a preferred outlet for vendors of health related services and products. 27 30 THE MDPATHWAYS.COM WEB PORTAL Medical Specialty Areas We are designing our web portal to meet the needs of our physician subscribers, as well as their practice staffs and patients, in a personalized and easy-to-use manner. We intend to organize our medical content by medical specialty and subject, areas such as: - Aging - Endocrinology/Diabetes - Gastroenterology - Internal Medicine/Primary Care - Obstetrics and gynecology - Occupational Medicine/Workplace - Orthopedics - Preventive healthcare - Radiology/radiation oncology - Sports Medicine/Rehabilitative Care - Urology - Cardiology - ENT - Infectious Diseases - Neurology - Oncology - Pediatrics - Psychiatry - Respiratory Care - Surgery - Women's Health We intend to add other specialties and subject areas as our physician panels or medical advisory board members deem appropriate in order to provide useful and reliable content to our physician community, their medical staffs and patients. Services Provided to Our Physician Subscribers We plan to provide, via strategic alliances or contractual agreements with third parties, several functions and services that will complement the content offered through our portal. Although we have not yet determined the exact functions and services that we will provide, we anticipate that they may include the following: - Continuing medical education; - Peer-reviewed aggregation of electronic medical journals; - Treatment updates; - Case reviews; - Interactive services (chat rooms, bulletin boards); - Physician reference materials; - Medical bookstore; and - Other personal services, such as financial, sports, travel, weather information, etc. 28 31 We intend to offer to our physician subscribers customized web pages that can be accessed by their patients and the general public. The physician's web page will contain demographic information on the physician and his practice, as well as links to specific medical and health-related content. Each physician subscriber will have the ability to control the content that is included on his or her web page. We believe that the patients of our physician subscribers will be encouraged to visit our physician web pages because the content on any physician's page will have been personally selected by that physician from a library of content that has first been reviewed and selected by our physician specialty panels. A physician's web page would be intended to function as an extension of the physician's practice. For example, physician web pages could allow patients to find answers to questions about issues such as treatment options and drug interactions. This visit to a physician's web page could potentially reduce unnecessary office visits as well as help patients become more informed about their healthcare services and options. We believe the Internet when coupled with the right tools can be utilized effectively and efficiently to extend certain aspects of the physician practice to patients, resulting in convenience and increased loyalty. We also plan to offer to our physician subscribers functions and services that will assist them in the day-to-day management and operation of their practices. We anticipate that these services may include: - Online procurement of medical supplies and equipment - Physician referral tracking - Quality Assurance and Utilization Review audits - Medication management and online prescription capabilities - Immunization and vaccination records - Online fax and e-mail capabilities - Insurance eligibility verification - Referral submission and authorization - Online medical record management - Online laboratory results - Online patient scheduling and registration - Medical transcription - Claims processing/submission; Services Provided to Physicians' Patients Patients of our physician subscribers will be provided with free access to patient-oriented information and services on our web portal. The free patient-oriented information and services would also be reviewed and selected by our physician specialty panels. Such patient-oriented services may include the following: - Disease content information (organized around specific health conditions); - Wellness/fitness information; - Medical news; - Health tracking; - Patient medical record storage; 29 32 - Appointment scheduling with physician's office; - Prescription and medication management and monitoring; - Drugstore/pharmacy; - Nutritional products; - Medical supplies; and - Other personal services, such as financial, sports, travel and weather information. PLAN OF OPERATION For a discussion of our plan of operation for the remainder of fiscal 1999 and for the first six months of fiscal 2000, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR CONTENT All of the functions, services and content for our web portal will be sourced from third parties. All of our services and content will be organized according to major medical specialty and subject areas. Our physician specialty panels will be responsible for reviewing and selecting all of our content and services. STRATEGIC RELATIONSHIPS We will seek to enter strategic alliances with third parties for certain web based functions, services and content as selected by our physician specialty panels as "Best of the Web." We believe these relationships will benefit both our organization and these third parties by providing the third parties with direct access to communities of physicians and their patients. In addition, we intend to pursue strategic partnerships with other third parties for clinical trials, technology, distribution, connectivity, and other potential benefits for MDpathways and its physician and patient communities. Although we are not presently negotiating any such strategic alliances or partnerships, we expect discussions to commence in the near future. SUBSCRIPTION TO OUR WEB PORTAL To utilize all of the features of our web portal, physician users must register as subscribers. We will require each subscriber to provide his or her name and professional credentials. The information provided by the physicians will be secured on our web portal through transfer encryption technology and a firewall server. Subscriptions will be sold for three years of service. Physicians will have the option of paying a lump sum of $1,000 for all three years or a $400 annual fee paid in three installments. In either case, the subscription fee is payable in advance. Patients will have free access to a collection of patient-oriented information and services. 30 33 COMPETITION Due to the rapid expansion of the Internet, the market for Internet services and products is intensely competitive and rapidly changing. There are no substantial barriers to entry in the Internet market, and we expect that competition will continue to intensify. We will compete, directly and indirectly, for subscribers, users and advertisers with other online services or web portals targeted to the healthcare industry generally, including MDadvice.com, Medscape.com, WebMD.com, Americasdoctor.com, drkoop.com and Accesshealth.com We believe the principal competitive factors in attracting and retaining physician subscribers and their patients are the depth, reliability and trustworthiness of our functions, services and content, as well as the value derived from our web portal's services and functions, such as saving time, improving the quality of care and contributing financial benefit to a physician's practice. We believe that the principal competitive factors that will attract and retain advertisers, third party vendors, and strategic alliances include: - Long-term commitment by physicians; - The amount of success that physicians and their staffs have in directing patients to use our web portal; - Depth and penetration of our base of physician subscribers in certain markets; - Continued growth of our base of physician subscribers; and - Generating repeat visits to our web portal from physician and patient populations. SALES AND MARKETING We have a direct sales organization consisting of nine sales professionals, with an average of 19 years of healthcare and sales experience. We anticipate that we will hire additional sales professionals with a focus on selling Internet subscriptions to physicians. We generally seek to hire individuals with significant experience selling to physicians and working with physicians' staffs. We are engaged in a significant sales campaign focused on attracting new physician subscribers and increasing awareness of the MDpathways brand. We will use a combination of direct sales efforts and indirect media based activities including online activities. We will also participate in tradeshows, conferences and speaking engagements focused on physician associations and trade groups. We plan to allocate significant resources to market the MDpathways brand to the physician's office, their staff and their patients. We will employ a variety of methods to promote our brand to attract user traffic. Our direct marketing efforts, which may include direct mail and telemarketing initiatives, will emphasize the trustworthiness, value, ease-of-use and accessibility of our Internet-based functions and services and the convenience of a single destination where physicians, their staffs and their patients can find trusted and valued functions, services and content that our physician panels have judged as "best of the Web" and have been reviewed and selected to address their needs. 31 34 GOVERNMENT REGULATION We are currently not subject to direct government regulation other than regulations that apply to businesses generally. Currently, there are relatively few laws or regulations directly applicable to communications or commerce over the Internet. However, several proposals by federal and foreign governments may lead to laws or regulations concerning various aspects of the Internet, including privacy and the collection of personal information online. If the United States or foreign governments adopt legislation protecting user privacy, our ability to collect or use personal information could become limited, which could make our web portal less attractive to advertisers and sponsors. The applicability to the Internet of existing laws is uncertain. If new laws are adopted or existing laws or applied in an unforeseen manner, use of the Internet may decrease, which could decrease the demand for our services and increase our cost of doing business. In addition, the tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by some foreign governments that could impose taxes on the sale of goods and services and other Internet activities. A recently passed law places a temporary moratorium on certain types of taxation on Internet commerce. We cannot predict the effect of current attempts at taxing or regulating commerce over the Internet. Any legislation that substantially impairs the growth of e-commerce could have a material adverse effect on our business or delay the implementation of our business strategy. INTELLECTUAL PROPERTY We expect that we will obtain all of our functionality, content and service offerings under licenses or other agreements with third parties. We expect to enter into confidentiality agreements with our employees, consultants, vendors and customers. We will generally seek to control access to and distribution of our technology, documentation and other proprietary information. We currently hold the domain name MDpathways.com, however, the legal status of intellectual property on the Internet is currently subject to various uncertainties. The current system for registering, allocating and managing domain names has been the subject of litigation and proposed regulatory reform. Accordingly, the extent of our ability to protect the domain name MDpathways.com is uncertain. We will rely on a variety of technology that we license from third parties, including our Internet server software, which will be used in our web portal to perform key functions. We cannot assure you that these third party technology licenses will be available to us on commercially reasonable terms. The loss of or our inability to maintain or obtain upgrades to any of these technology licenses could materially adversely affect our business or delay the implementation of our business strategy. In addition, because we expect to license a substantial portion of our content from third parties, our exposure to copyright infringement actions may increase because we must rely upon these third parties for information as to the origin and ownership of our licensed content. EMPLOYEES As of November 23, 1999, we had eleven full-time employees, none of whom is represented by a labor union or covered by a collective bargaining arrangement. We believe that our employee relations are good. 32 35 FACILITIES Our principal executive offices are currently located at 1913 2nd Avenue South, Nashville, Tennessee. However, we have commenced the process of identifying new office space in Nashville, Tennessee of between 5,000 and 10,000 square feet that will not only meet our current needs, but also allow for our future growth. LEGAL PROCEEDINGS There are no claims or proceedings pending or threatened against us. However, from time to time, we may be involved in litigation relating to claims arising out of our operations or regulatory proceedings. We may also be subject to third-party claims for defamation, negligence, copyright or trademark infringement or other claims based on the nature and content of information supplied on or through our web portal. 33 36 MANAGEMENT The following table sets forth information with respect to our executive officers and directors as of November 23, 1999. OUR DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION - ---- --- -------- John E. Blount........................... 48 President, Secretary and Director Albert Rodewald.......................... 50 Treasurer and Director Thomas A. Gallagher...................... 42 Director Rock A. Morphis.......................... 41 Director
John E. Blount has served as President, Secretary and Director of MDpathways since its incorporation in July 1999. In addition, Mr. Blount is a founder and Director of Heritage Group, LLC. Mr. Blount is currently serving as a Director of Heritage Health Systems, Inc. and has served as such since co-founding that company in August 1992. Mr. Blount served as Executive Vice President and Secretary of Heritage Health Systems, Inc. from May 1995 to December 1998. From January 1994 until December 1995, Mr. Blount served as Executive Vice President of Development of Surgical Health Corporation. Mr. Blount served as a Director of Heritage Surgical Corporation since its founding in 1991 and as Executive Vice President of such company from 1991 to 1994. From 1986 until 1991, Mr. Blount was co-founder and Managing Director of Heritage Group, Inc. a firm that specialized in partnering with physicians to own and operate imaging centers, surgery centers, and lithotripsy units. A graduate of Duke University, Mr. Blount also holds an M.B.A. from the University of North Dakota and a Masters Degree in Health Administration from the Medical College of Virginia. Mr. Blount has 21 years of health industry experience. Albert Rodewald has served as Treasurer and Director of MDpathways since its incorporation in July 1999. In addition, Mr. Rodewald is a founder and Director of Heritage Group, LLC. Mr. Rodewald is also currently serving as Chairman of the Board and Director of Interlogics, Inc. From co-founding ProSeed, LLC in 1996 until its sale in 1998, Mr. Rodewald served as its Director and Vice President of Development. As a co-founder of Heritage Health Systems, Inc., Mr. Rodewald served as a Director of that company from 1992-1995. Mr. Rodewald is a co-founder of Heritage Surgical Corporation, and served as its director and Vice President of Facility Development from 1991-1994. From 1986 to 1991, he was a co-founder and Managing Director of Heritage Group, Inc. a firm that specialized in partnering with physicians to own and operate imaging centers, surgery centers, and lithotripsy units. A graduate of the University of Wisconsin, Mr. Rodewald holds an MS from City University of New York. Mr. Rodewald has 28 years of health industry experience. Thomas A. Gallagher has served as a Director of MDpathways since its incorporation in July 1999. In addition, Mr. Gallagher is a founder and Director of Heritage Group, LLC. He is also currently Executive Vice President and Chief Development Officer and a Director of Heritage Health Systems, Inc., which he co-founded in August 1992, and has served as such since September 1995. Mr. Gallagher served as Chief Executive Officer and President of Heritage Health Systems, Inc. from January 1994 to September 1995. Between April 1992 and January 1994, Mr. Gallagher served as Executive Vice President 34 37 and Chief Financial Officer of Heritage Surgical Corporation. Prior to joining Heritage Surgical Corporation, Mr. Gallagher was a General Partner in two venture funds: Lawrence Tyrrell Ortale and Smith I & II. Mr. Gallagher holds an M.B.A. from Vanderbilt University's Owen Graduate School of Business and a B.S. in accounting from the University of Tennessee. Mr. Gallagher has 15 years of health industry experience. Rock A. Morphis has served as a Director of MDpathways since its incorporation in July 1999. In addition, Mr. Morphis is a founder and Director of Heritage Group, LLC. He is the current Chairman, President and Chief Executive Officer of Heritage Health Systems, Inc., which he co-founded in August 1992, and has served as its CEO since September 1995. From January 1994 until June 1995, Mr. Morphis served as Chairman of the Board, Chief Executive Officer and President of Surgical Health Corporation. From 1991 until 1994, Mr. Morphis served as President, Chief Executive Officer and Chairman of Heritage Surgical Corporation. From 1986 until 1991, Mr. Morphis was co-founder and Managing Director of Heritage Group, Inc., a firm that specialized in partnering with physicians to own and operate imaging centers, surgery centers, and lithotripsy units. A graduate of the University of Tennessee, Mr. Morphis holds a B.S. in accounting. Mr. Morphis has 16 years of health industry experience. BOARD OF DIRECTORS AND COMMITTEES We intend to expand the size of our Board of Directors to include no less than two of our physician subscribers and no less than two independent non-physician directors. We also intend to establish an Audit Committee of our Board of Directors. The Audit Committee will be responsible for reviewing our external audit procedures and internal accounting controls and recommending the engagement of our independent auditors. DIRECTOR COMPENSATION Our directors do not currently receive any compensation for serving as directors. However, we anticipate implementing a stock-based compensation program for non-employee directors prior to completion of this offering. Additionally, we reimburse directors for out-of-pocket expenses they incur in attending Board meetings or Board committee meetings in their capacities as directors. LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION As permitted under Georgia law, our Articles of Incorporation provide that a director shall not be personally liable to MDpathways or its shareholders for monetary damages for breach of the duty of care or any other duty owed to the corporation as a director, except liability for any of the following: - any appropriation, in violation of his duties, of any business opportunity of the corporation, - for acts or omissions which involve intentional misconduct or a knowing violation of law, - for unlawful corporate distributions, or - for any transaction from which the director received an improper personal benefit. 35 38 Under our Bylaws, we are required to indemnify our directors to the full extent permitted by Georgia law. Georgia law provides that a corporation may indemnify its directors, officers, employees and agents against judgments, fines, penalties, amounts paid in settlement, and reasonable expenses, including attorney's fees, resulting from various types of legal actions or proceedings, including, but not limited to any threatened, pending, or completed action, suit or proceeding whether civil, criminal, administrative, arbitrative or investigative and whether formal or informal, if the actions of the party being indemnified meet the standards of conduct specified therein. Determination concerning whether or not the applicable standard of conduct has been met can be made by the following: - the Board of Directors by a majority vote of all the disinterested directors, if there are at least two disinterested directors; - a majority vote of a committee of two or more disinterested directors; - special legal counsel; or - an affirmative vote of a majority of shares held by disinterested shareholders. No indemnification shall be made in connection with a proceeding by or in the right of MDpathways, except for reasonable expenses incurred in connection with the proceeding if it is determined that the indemnitee has met the relevant standard of conduct. In addition, indemnification shall not be made in connection with any other proceeding in which such person was adjudged liable on the basis that personal benefit was improperly received by him. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On July 30, 1999, we were formed as a wholly owned subsidiary of Heritage Group, LLC and we issued 50,000,000 shares of our Common Stock to Heritage Group, LLC for a purchase price of $100,000. Messrs. Blount, Gallagher, Morphis and Rodewald are the members of Heritage Group, LLC. At the time of such initial issuance, Heritage Group, LLC believed it could attract additional management employees and enter into strategic alliances with third parties through the limited liability company on a tax efficient basis. Heritage Group, LLC subsequently determined that it would be preferable to attract future employees through incentive plans to be adopted by MDpathways and to enter into strategic alliances directly through MDpathways. Accordingly, on November 23, 1999, Heritage Group, LLC effected a recapitalization pursuant to which 40,000,000 shares of Common Stock were returned to MDpathways to be available for reissuance at the discretion of our Board of Directors. 36 39 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of our capital stock by each person or entity who beneficially owns more than 5% of any class or series of our capital stock, each of our directors and executive officers, and all of our directors and executive officers as a group:
SHARES BENEFICIALLY OWNED -------------------------------------------------------- SERIES A SERIES B CONVERTIBLE CONVERTIBLE COMMON PREFERRED PREFERRED NAME STOCK % STOCK % STOCK % - ---- ---------- --- ----------- --- ----------- --- Heritage Group, LLC(1)........ 10,000,000 100% -- -- -- -- John E. Blount(2)............. 10,000,000 100 -- -- -- -- Thomas A. Gallagher(3)........ 10,000,000 100 -- -- -- Rock A. Morphis(4)............ 10,000,000 100 -- -- -- -- Albert Rodewald(5)............ 10,000,000 100 -- -- -- -- All directors and executive officers as a group (4 persons).................... 10,000,000 100 -- -- -- --
- ------------------------- (1) Heritage Group, LLC's business address is 1913 21st Avenue South, Nashville, Tennessee 37212. (2) Includes all shares owned by Heritage Group, LLC, of which Mr. Blount is a member. (3) Includes all shares owned by Heritage Group, LLC, of which Mr. Gallagher is a member. (4) Includes all shares owned by Heritage Group, LLC, of which Mr. Morphis is a member. (5) Includes all shares owned by Heritage Group, LLC, of which Mr. Rodewald is a member. 37 40 DESCRIPTION OF CAPITAL STOCK The following description of our capital stock is a summary of certain provisions set forth in our Articles of Incorporation and is qualified in its entirety by reference to the full text of our Articles of Incorporation which are included as an exhibit to the registration statement of which this prospectus is a part. The total number of shares of stock of all classes that we have authority to issue is 600,000,000 shares, consisting of: (a) 300,000,000 shares of Common Stock, par value $.01 per share; and (b) 300,000,000 shares of Preferred Stock, of which 50,000,000 shares are designated as Series A Convertible Preferred Stock, par value $.01 per share and 50,000,000 shares are designated as Series B Convertible Preferred Stock, par value $.01 per share. There are currently outstanding 10,000,000 shares of our Common Stock, 5,000,000 shares of our Series A Convertible Preferred Stock and no shares of our Series B Convertible Preferred Stock. In addition, there are currently outstanding warrants to purchase 1,000,000 shares of our Series A Convertible Preferred Stock (or Common Stock, depending upon whether we have completed a qualifying underwritten public offering of our Common Stock at the time of exercise). COMMON STOCK Our Common Stock is subject to all of the rights, privileges, preferences and priorities of the Preferred Stock set forth in our Articles of Incorporation. Dividends may be paid on the Common Stock, and on any other class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by our Board of Directors. In the event of any dissolution, liquidation, or winding up of MDpathways, the holders of the Common Stock, together with the holders of the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, are entitled to participate pro rata in the distribution of any of our assets remaining after we have paid all of our debts and liabilities and after we have paid (i) the Convertible Preferred Stock Liquidation Preference (as defined below) to the holders of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock then outstanding and (ii) an amount per share of Common Stock then outstanding equal to the quotient obtained by dividing the Convertible Preferred Stock Liquidation Preference paid by the total number of then outstanding shares of Series A and Series B Convertible Preferred Stock. Each holder of shares of Common Stock is entitled to cast one vote for each outstanding share of Common Stock held upon any matter (including the election of directors) submitted to a vote of our stockholders. During the 180-day period immediately following the effective date of any registration statement filed under the Securities Act of 1933 in connection with our first Qualified Public Offering (as defined below), a holder of shares of Common Stock (including shares of Common Stock issued upon conversion of shares of Preferred Stock) may not transfer record or beneficial ownership of, whether by sale, assignment, gift, bequest, appointment or otherwise, any of such shares of Common Stock unless we shall have given our prior written consent thereto. However, the foregoing restriction does not prohibit any transfer (i) as a bona fide gift, provided the donees thereof agree in writing to be bound by the foregoing restriction, (ii) as a distribution to the general or limited partners, members or 38 41 shareholders of a Common Stock holder, provided that the distributees thereof agree in writing to be bound by the foregoing restriction, or (iii) if the Common Stock holder is an individual, to members of his or her immediate family or to a trust the beneficiaries of which are exclusively such holder and/or members of his or her immediately family, provided that the transferees thereof agree in writing to be bound by the foregoing restriction. SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK Except as required by law and except for any Corporate Transaction (as defined below) submitted to a vote of our shareholders, holders of shares of Series A and Series B Convertible Preferred Stock do not have any voting rights whatsoever. With respect to any Corporate Transaction submitted to a vote of our stockholders, (i) each holder of shares of Series A or Series B Convertible Preferred Stock is entitled to cast one vote for each outstanding share of Series A or Series B Convertible Preferred Stock held and (ii) the holders of shares of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Common Stock vote together and not as separate classes or series. The holders of shares of Series A or Series B Convertible Preferred Stock are entitled to participate on a share for share basis in all dividends declared and paid on Common Stock, provided, however, that in the case of dividends on Common Stock that are payable in Common Stock, (i) the corresponding dividends to be paid to holders of Series A Convertible Preferred Stock must be paid in shares of Series A Convertible Preferred Stock and (ii) the corresponding dividends to be paid to holders of Series B Convertible Preferred Stock must be paid in shares of Series B Convertible Preferred Stock. In the event of any liquidation, dissolution or winding up of MDpathways, each holder of shares of Series A or Series B Convertible Preferred Stock then outstanding is entitled to be paid out of our assets legally available for distribution to our stockholders, before any payment is made in respect of Common Stock, an amount equal in value to the consideration received by MDpathways for the initial issuance of such shares of Series A or Series B Convertible Preferred Stock Convertible Preferred Stock (the "Convertible Preferred Stock Liquidation Preference"). If the assets to be distributed to the holders of Series A or Series B Convertible Preferred Stock are insufficient to permit the payment in full of the Convertible Preferred Stock Liquidation Preference, then all of the assets legally available for distribution will be distributed to such holders ratably in proportion to the full Convertible Preferred Stock Liquidation Preference each such holder is otherwise entitled to receive. After the payment in full of the Convertible Preferred Stock Liquidation Preference, the holders of Common Stock then outstanding are entitled to be paid an amount per share of Common Stock equal to the quotient obtained by dividing the total Convertible Preferred Stock Liquidation Preference paid on all then outstanding shares of Series A or Series B Convertible Preferred Stock by the total number of all then outstanding shares of Series A or Series B Convertible Preferred Stock. If the assets available for distribution to the holders of Common Stock pursuant to the immediately preceding sentence are insufficient to permit the payment in full of the amount referred to in the immediately preceding sentence, then all of such assets will be paid to such holders ratably based on the number of shares of Common Stock they hold. After payment in full of such amount to the holders of Common Stock, all of our remaining assets will be distributed to the holders of shares of Common Stock and to the holders of shares of Series A and Series B Convertible Preferred Stock ratably based on the number of shares of Common Stock and/or Series A and Series B Convertible Preferred Stock they hold. 39 42 Notwithstanding the foregoing, if the foregoing manner of distribution would result in payment with respect to any share of Series A or Series B Convertible Preferred Stock (an "Affected Preferred Share") being less than the amount payable with respect to each share of Common Stock, then the aggregate amount that would be payable with respect to all such Affected Preferred Shares (computed in accordance with the foregoing) plus the aggregate amount that would be payable with respect to all shares of Common Stock (computed in accordance with the foregoing) will instead be paid to the holders of Affected Preferred Shares and to the holders of shares of Common Stock ratably based on the number of Affected Preferred Shares and/or shares of Common Stock they hold. In the case of any Corporate Transaction (as defined below), each holder of outstanding shares of Series A or Series B Convertible Preferred Stock shall have the right to receive the same consideration to which a holder of an equal number of shares of Common Stock would be entitled to receive pursuant to such Corporate Transaction (assuming conversion of all shares of Series A and Series B Convertible Preferred Stock then outstanding into shares of Common Stock on a one-for-one basis); provided, however, that in the event that the consideration so payable to any holder of outstanding shares of Series A or Series B Convertible Preferred Stock is not at least equal in value to the aggregate Convertible Preferred Stock Liquidation Preference of the shares of Series A or Series B Convertible Preferred Stock held by such holder, then the Corporate Transaction shall instead be treated as a liquidation pursuant to the preceding two paragraphs; and provided, further, that any consideration payable with respect to shares of Series B Convertible Preferred Stock (whether or not the Corporate Transaction is treated as a liquidation pursuant to the immediately preceding paragraph) may be made payable on a delayed basis over the same period of time as is set forth below with respect to the automatic conversion of shares of Series B Convertible Preferred Stock. The term "Corporate Transaction" means (i) any consolidation or merger of (or share exchange by) MDpathways, other than any merger, consolidation or share exchange resulting in the holders of the capital stock of MDpathways entitled to vote for the election of directors holding a majority of the capital stock of the surviving or resulting entity entitled to vote for the election of directors, or (ii) any sale or other disposition by MDpathways of all or substantially all of its assets to a third party. Any holder of shares of Series A Convertible Preferred Stock may at any time convert all or any number of such shares held by such holder into shares of Common Stock on a one-for-one basis. In addition, all shares of Series A Convertible Preferred Stock shall automatically be converted into shares of Common Stock on a one-for-one basis upon the closing of a Qualified Public Offering (as defined below). The term "Qualified Public Offering" means a firm commitment underwritten public offering of Common Stock consummated pursuant to a registration statement declared effective under the Securities Act of 1933 in which (i) the gross aggregate proceeds (prior to payment of and without deduction for underwriting discounts and commissions and offering expenses) that we (and any selling securityholders participating in such public offering) receive equals or exceeds $10,000,000 and (ii) the price per share to the public equals or exceeds $1.00 (such number to be adjusted proportionately in the event the outstanding shares of Common Stock are adjusted into a lesser number or subdivided into a greater number). Outstanding shares of Series B Convertible Preferred Stock shall automatically be converted into shares of Series A Convertible Preferred Stock (if the conversion date occurs prior to the closing of a Qualified Public Offering) or Common Stock (if the conversion date occurs on or after the closing of a Qualified Public Offering), on a one- 40 43 for-one basis, at the rate of 20% per year on each anniversary of their date of issuance. Prior to the completion of the offering and subject to approval of our existing stockholders, we intend to alter the terms of the Series B Convertible Preferred Stock so that it would convert to Series A Convertible Preferred Stock (or Common Stock, as the case may be), at the rate of 33.33% per year rather than 20% per year. Each 20% calculation, or 33.33% as the case may be, shall be applied per holder of applicable shares with respect to the aggregate number of applicable shares held, rounding up to the nearest whole share. Outstanding shares of Series B Convertible Preferred Stock will only be converted on an anniversary of their date of issuance and no pro rata adjustments will be made to allow for conversions on any day other than an anniversary of the date of issuance. A holder of Series A or Series B Convertible Preferred Stock may not transfer record or beneficial ownership of, whether by sale, assignment, gift, bequest, appointment or otherwise, any shares of Series A Convertible Preferred Stock or Series B Convertible Preferred Stock without our prior written consent. UNDESIGNATED PREFERRED STOCK There are 200,000,000 shares of undesignated (or "blank check") Preferred Stock authorized by our Articles of Incorporation. Our Board of Directors has the authority, without obtaining prior stockholder approval, to issue shares of undesignated Preferred Stock in one or more classes or series and to determine the dividend rights, conversion rights, liquidation preferences, voting rights, redemption rights, number of shares constituting any class or series and other rights, terms and designations of such classes or series. Such issuances may dilute or otherwise adversely affect the economic, ownership and other rights and interests of the of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and the Common Stock. WARRANTS There are currently outstanding warrants to purchase 1,000,000 shares of our Series A Convertible Preferred Stock (if the Company has not completed a qualifying initial public offering at the time of exercise) or Common Stock (if the Company has completed a qualifying initial public offering of Common Stock at the time of exercise). The shares issuable upon exercise of the warrants are referred to herein as the "Warrant Shares." The exercise price of the Warrants is $1.00 per Warrant Share. The Warrants are exercisable at any time beginning one year after November 18, 1999 (the date of their issuance) and ending on November 18, 2004 (the fifth anniversary of the date of their issuance). Upon exercise of a Warrant, in lieu of paying the Warrant exercise price in cash, the holder of the Warrant may elect to receive a lesser number of Warrant Shares that have a value equal to the difference between the fair market value of the Warrant Shares at the time of exercise and the aggregate exercise price. SHARES ELIGIBLE FOR FUTURE SALE COMMON STOCK We have outstanding an aggregate of 10,000,000 shares of Common Stock that were issued in a private transaction in reliance on an exemption from the registration requirements of the federal securities laws. These shares of Common Stock are considered 41 44 restricted securities under Rule 144 promulgated under the Securities Act of 1933. Accordingly, these shares may only be sold in reliance on and subject to the limitations set forth in Rule 144, which are described below. Under the terms of our Articles of Incorporation, during the 180-day period immediately following the effective date of a registration statement filed in connection with a Qualified Public Offering (as defined in our Articles of Incorporation), no holder of shares of our Common Stock may sell, assign or transfer any of such shares without our prior written consent. The offering to which this prospectus relates is not a "Qualified Public Offering" as defined in our Articles of Incorporation. SERIES A CONVERTIBLE PREFERRED STOCK We have issued and sold an aggregate of 5,000,000 shares of our Series A Convertible Preferred Stock in private transactions in reliance on exemptions from the registration requirements of the federal securities laws. These shares are also considered restricted securities under Rule 144. Although Rule 144 would permit sales of these shares subject to the limitations of Rule 144 described below, our Articles of Incorporation provide that no holder of shares of our Series A Convertible Preferred Stock may sell, assign or transfer any of such shares without our prior written consent. SERIES B CONVERTIBLE PREFERRED STOCK The Series B Convertible Preferred Stock distributed in this offering will be unrestricted for purposes of the federal securities laws and will not be subject to Rule 144. However, our Articles of Incorporation provide that no holder of shares of Series B Convertible Preferred Stock may sell, assign or transfer any of such shares without our prior written consent. SALES FOLLOWING CONVERSION OF SERIES A OR SERIES B CONVERTIBLE PREFERRED STOCK Shares of our Series A Convertible Preferred Stock are convertible at any time at the option of the holder into shares of Common Stock and automatically convert to Common Stock upon the closing of a Qualified Public Offering. Furthermore, shares of our Series B Convertible Preferred Stock automatically convert at the rate of 20% per year (or 33.33% per year pending the effectiveness of an anticipated amendment to our Articles of Incorporation) into shares of Series A Convertible Preferred Stock (if the conversion date occurs prior to the closing of a Qualified Public Offering) or Common Stock (if the conversion date occurs on or after the closing of a Qualified Public Offering). Under the federal securities laws, shares issued upon any such conversion will retain the status of the shares converted for purposes of determining whether or not the shares issued upon conversion are restricted. Accordingly, shares issued upon conversion of shares that are considered restricted under Rule 144 will also be restricted under Rule 144. Similarly, shares issued upon conversion of unrestricted securities will also be unrestricted under Rule 144. Furthermore, if the shares issued upon conversion are shares of Common Stock, such shares will be subject to the 180-day lock-up period following a Qualified Public Offering as discussed above. If the shares issued upon conversion are shares of Series A Convertible Preferred Stock, such shares will be subject to the restriction against transfer provided in our Articles of Incorporation, as discussed above. 42 45 SALES UNDER RULE 144 Rule 144 provides that a person holding restricted securities for a period of at least one year may sell such securities in brokerage transactions in an amount not to exceed in any three-month period 1% of the total outstanding number of shares of that class of securities. Because there is no public market for any of our securities, it will be impossible to sell restricted securities through brokerage transactions. However, Rule 144(k) provides that a person who is a "non-affiliate" of MDpathways and who has held restricted securities for over two years is not subject to these manner of sale and volume limitations as long as the other conditions of Rule 144 are met. Therefore, until we complete a Qualified Public Offering, Rule 144(k) is the only alternative provided for in Rule 144 pursuant to which a shareholder could sell restricted securities. PLAN OF DISTRIBUTION We are offering a minimum of 10,000,000 and a maximum of 38,500,000 shares of our Series B Convertible Preferred Stock and up to 2,000,000 shares of our Series A Convertible Preferred Stock. All subscription payments will be deposited into an escrow account at SunTrust Bank until we receive subscriptions for at least 10,000,000 shares of Series B Convertible Preferred Stock. Once we receive subscriptions for at least 10,000,000 shares of Series B Convertible Preferred Stock, we will conduct an initial closing at which all subscriptions received up to that point will be accepted and all subscription payments then in escrow will be disbursed to us. If we have not received subscriptions for at least 10,000,000 shares of Series B Convertible Preferred Stock by December 31, 2000, all subscription payments will be refunded in full to subscribers with interest, if any, and without deducting any expenses. Following the initial closing, we will hold additional interim closings at such times as we deem desirable until all of the shares in this offering have been subscribed for or until December 31, 2000, whichever occurs first. At such interim closings, all subscriptions received since the immediately preceding closing will be accepted. Pending acceptance at such interim closings, subscription payments will be deposited into an escrow account at SunTrust Bank. To participate in this offering, investors must purchase shares of Series B Convertible Preferred Stock in increments of 1,000 shares. In addition, we will divide the number of shares of Series B Convertible Preferred Stock offered hereby into three tranches and will limit the number of shares that may be purchased by investors in each tranche as follows: - no more than 5,000 shares per investor until the first 10,000,000 shares have been sold; - no more than 4,000 shares per investor until the next 14,000,000 shares have been sold; and - no more than 3,000 shares per investor thereafter. 43 46 The following table illustrates these per investor purchase limits and the maximum number of investors that could participate in each tranche assuming each investor purchases the maximum number of shares allowed per investor:
MAXIMUM NUMBER OF INVESTORS IN TRANCHE MAXIMUM NUMBER OF (ASSUMING EACH INVESTOR SHARES OFFERED PER PURCHASES MAXIMUM TRANCHE INVESTOR NUMBER OF SHARES) - ------- --------------------------- ----------------------- First 10,000,000 shares............. 5,000 2,000 Next 14,000,000 shares.............. 4,000 3,500 Last 14,500,000 shares.............. 3,000 4,833
We will publish our prospectus, which is a part of this registration statement, on the Internet at www.MDpathways.com. We intend to offer electronic delivery of our prospectus to those subscribers who consent to such delivery in accordance with the subscription procedures set forth on our web site. The offering will be managed by MDpathways without underwriter. No officer, director or employee of MDpathways will receive any sales commissions or other compensation in connection with this offering, except for reimbursement of expenses, if any, incurred in connection with this offering. Where necessary to satisfy federal or state securities laws or regulations, or to the extent we otherwise consider it advisable, we may utilize the services of broker/dealers who are members of the National Association of Securities Dealers ("NASD"). Before the involvement of any broker/dealers in this offering, we must obtain a no objection position from the NASD for any compensation arrangements. Any broker/dealers that sell securities in this offering may be deemed an underwriter as defined in Section 2(a)(11) of the Securities Act of 1933. MDpathways has not retained any underwriters for this offering. We believe that we can sell our stock without utilizing an underwriter and thus, maximize the net proceeds to fund our business plan. Since we are offering the shares without the participation of an underwriter, the offering price has not been determined by negotiation with an underwriter, as is customary in many initial public offerings. Instead, the offering price has been determined arbitrarily by MDpathways. LEGAL MATTERS The validity of the securities offered in this offering will be passed upon by Alston & Bird LLP, Atlanta, Georgia. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at November 23, 1999, and for the period from July 30, 1999 (date of inception) to November 23, 1999, as set forth in their report. We've included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. 44 47 WHERE YOU CAN FIND MORE INFORMATION We have filed with Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form S-1 under the Securities Act with respect to the securities offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information about us and the securities offered by this prospectus, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the Commission maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661. You may obtain copies of all or any part of these materials from the Commission upon payment to the Commission of prescribed fees. You may also inspect these reports and other information without charge at a web portal maintained by the Commission. The address of this site is http://www.sec.gov. Upon completion of this offering, we will become subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports and other information with the Commission. Although we do not anticipate that we will send any of these reports to our stockholders, you will be able to inspect and copy these reports and other information at the public reference facilities maintained by the Commission and at the Commission's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Section of the Commission as described above, or inspect them without charge at the Commission's web portal. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering for sale, and seeking offers to buy, shares of our Preferred Stock only in jurisdictions where offers and sales are permitted, 45 48 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Balance Sheet............................................... F-3 Statement of Operations..................................... F-4 Statement of Stockholders' Equity........................... F-5 Statement of Cash Flows..................................... F-6 Notes to Financial Statements............................... F-7
F-1 49 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders MDpathways, Inc. We have audited the accompanying balance sheet of MDpathways, Inc. (a Company in the development stage) as of November 23, 1999, and the related statements of operations, stockholders' equity, and cash flows for the period from July 30, 1999 (date of inception) to November 23, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MDpathways, Inc. at November 23, 1999, and the results of its operations and its cash flows for the period from July 30, 1999 (date of inception) to November 23, 1999, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP November 23, 1999 Nashville, Tennessee F-2 50 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) BALANCE SHEET NOVEMBER 23, 1999 ASSETS CURRENT ASSETS: Cash........................................................ $5,023,427 ---------- Total current assets................................... 5,023,427 Deferred offering costs..................................... 32,385 Computer software costs..................................... 22,751 Computer hardware........................................... 24,480 ---------- Total assets........................................... $5,103,043 ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses....................... $ 365,268 STOCKHOLDERS' EQUITY: Convertible preferred stock, $.01 par value, 300,000,000 shares authorized; -- Series A Convertible; 50,000,000 shares designated; 5,000,000 shares issued and outstanding................ 50,000 -- Series B Convertible; 50,000,000 shares designated; no shares issued and outstanding....................... -- Common stock, $.01 par value, 300,000,000 shares authorized; 10,000,000 shares issued and outstanding.................. 100,000 Additional paid-in capital.................................. 4,825,055 Deficit accumulated during development stage................ (237,280) ---------- 4,737,775 ---------- $5,103,043 ==========
The accompanying notes are an integral part of the financial statements. F-3 51 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) STATEMENT OF OPERATIONS FOR THE PERIOD FROM JULY 30, 1999 (DATE OF INCEPTION) THROUGH NOVEMBER 23, 1999 COSTS AND EXPENSES: Selling, general and administrative......................... $ 237,280 ----------- Net loss.................................................. $ (237,280) =========== Basic and diluted net loss per share........................ $ (0.001) =========== Basic and diluted weighted average shares outstanding....... 50,000,000 ===========
The accompanying notes are an integral part of the financial statements. F-4 52 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JULY 30, 1999 (DATE OF INCEPTION) THROUGH NOVEMBER 23, 1999
DEFICIT SERIES A CONVERTIBLE ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING --------------------- ---------------------- PAID-IN DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL ---------- -------- ----------- -------- ---------- ----------- ---------- Inception, July 30, 1999............... -- $ -- -- $ -- $ -- $ -- $ -- Issuance of common stock.............. -- -- 50,000,000 100,000 -- -- 100,000 Issuance of Series A Convertible Preferred Stock, net of expenses of $124,945........... 5,000,000 50,000 -- -- 4,665,055 -- 4,715,055 Issuance of warrants on Series A Convertible Preferred Stock.... -- -- -- -- 160,000 -- 160,000 Return of common shares............. -- -- (40,000,000) -- -- -- -- Net loss........... -- -- -- -- -- (237,280) (237,280) --------- ------- ----------- -------- ---------- --------- ---------- Balance, November 23, 1999............... 5,000,000 $50,000 10,000,000 $100,000 $4,825,055 $(237,280) $4,737,775 ========= ======= =========== ======== ========== ========= ==========
The accompanying notes are an integral part of the financial statements. F-5 53 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JULY 30, 1999 (DATE OF INCEPTION) THROUGH NOVEMBER 23, 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $ (237,280) Adjustments to reconcile net loss to net cash used from operating activities: Change in assets and liabilities: Accounts payable and accrued expenses.................. 365,268 ---------- Net cash provided by operating activities............ 127,988 ---------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures........................................ (47,231) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock.................................... 100,000 Issuance of Series A Convertible Preferred Stock............ 4,715,055 Issuance of warrants on Series A Convertible Preferred Stock..................................................... 160,000 Deferred offering costs..................................... (32,385) ---------- Net cash provided by financing activities............ 4,942,670 ---------- Net increase in cash................................. 5,023,427 Cash, beginning of period................................... -- ---------- Cash, end of period......................................... $5,023,427 ==========
The accompanying notes are an integral part of the financial statements. F-6 54 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS NOVEMBER 23, 1999 1. ORGANIZATION AND NATURE OF BUSINESS MDpathways, Inc. ("the Company") is a Georgia corporation which was incorporated and capitalized by Heritage Group LLC ("Heritage") in July 1999. The Company is developing a web portal as a single source destination for physician and patient communities. MDpathways is in the development stage as its operations principally involve the building of its web site infrastructure, market analysis, capital raising and other business planning activities. No revenue has been generated. Since MDpathways is in the development stage, the accompanying financial statements should not be regarded as typical for normal operating periods. 2. SIGNIFICANT ACCOUNTING POLICIES a. Concentration of Credit Risk Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash. The Company maintains cash with one financial institution located in Tennessee, which may at times exceed federally insured limits. The carrying amounts reported in the balance sheets for cash and accounts payable approximate their fair values due to the short-term nature of these financial instruments. b. 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 these estimates. c. Computer hardware and software Property and equipment are stated at cost and will be amortized over the expected useful lives of the assets ranging from three to seven years. d. Advertising MDpathways expenses advertising costs when incurred. There were no advertising expenses incurred for the period ended November 23, 1999. F-7 55 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) e. Basic and Diluted Net Loss per Share Basic net loss per share excludes dilution for common stock equivalents and is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if Series A Convertible Preferred Stock and warrants to purchase Series A Convertible Preferred Stock were exercised and converted into common stock. Diluted net loss per share is equal to basic loss per share since all Series A Convertible Preferred Stock and warrants to purchase Series A Convertible Preferred Stock are anti-dilutive. Diluted net loss per common share does not include the effects of 1,000,000 warrants to purchase Series A Convertible Preferred Stock and 5,000,000 shares of Series A Convertible Preferred Stock on an "as if" converted basis for the period ended November 23, 1999. f. Income Taxes Income taxes are computed based on the liability method of accounting whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. g. Comprehensive Income The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," effective July 30, 1999. This statement requires a full set of general purpose financial statements to be expanded to include the reporting of "comprehensive income." Comprehensive income is comprised of two components, net income and other comprehensive income. During the period ended November 23, 1999, the Company had no items qualifying as other comprehensive income; accordingly, the adoption of SFAS No. 130 had no impact on the Company's financial statements. h. Segment Reporting In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." This statement changes the way public business enterprises report segment information, including financial and descriptive information about their selected information in interim and annual financial statements. Under SFAS No. 131, operating segments are defined as revenue producing components of the enterprise which are generally used internally for evaluating segment performance. SFAS No. 131 had no effect on the Company's financial position or results of operations for the period ended November 23, 1999. The Company operates in one segment, which is providing services to the healthcare industry through the internet. F-8 56 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) i. Recently Issued Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company believes SFAS No. 133 will have no material effect on its financial position or results of operations. j. Impact of Year 2000 (Unaudited) Many existing computer programs use only two digits to identify a year. These programs were developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We will use software, computer technology and other services provided by third-party vendors. We are also dependent on telecommunications vendors to maintain our communications network. We believe that our third-party supplied software and computer technology will be year 2000 compliant. All of our software and computer technology supplied by third-party vendors will be purchased in the near future. In connection with these purchases, we anticipate requiring our vendors to represent that each of the technology products is year 2000 compliant. Nonetheless, the failure of any software or systems upon which we rely to be year 2000 compliant could have a material negative impact on the development or operation of our web portal. To date, we have not incurred any costs in connection with the year 2000. Based upon our assessment of our software and computer technology and because our web portal will not be operational until after January 1, 2000, we do not believe that we need to develop a year 2000 contingency plan and we have not developed any such plan. However, the failure of any of our third-party service providers to be year 2000 compliant could delay the launch of our web portal. The year 2000 readiness of the general system necessary to support our operations is difficult to assess. For instance, we will depend on the integrity and stability of the Internet to provide our services. We will also depend on the year 2000 compliance of the computer systems used by our members. Thus, the system necessary to support our operations will consist of a network of computers and telecommunications systems located throughout the world and operated by numerous unrelated entities and individuals, none of which has the ability to control or manage the potential year 2000 issues that may impact the entire system. It is not possible to predict potential negative impact of year 2000 issues of these systems. Our worst-case year 2000 scenario would involve a major disruption in access to the Internet, a failure of our systems and a failure in the systems of our third-party service providers. This would result in the delay of the launch of our web portal and would delay the implementation of our business strategy. F-9 57 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. DEFERRED OFFERING COSTS Deferred offering costs represent costs incurred as of the balance sheet date as they relate to MDpathways' proposed initial public offering. 4. SHAREHOLDERS' EQUITY CAPITAL STOCK The authorized shares of the Company total 600,000,000 shares, consisting of: (a) 300,000,000 shares of Common Stock, $0.01 par value per share ("Common Stock"); and (b) 300,000,000 shares of Preferred Stock, $0.01 par value per share ("Preferred Stock"), of which 50,000,000 shares have been designated as Series A Convertible Preferred Stock ("Series A Preferred") and 50,000,000 shares have been designated as Series B Convertible Preferred Stock ("Series B Preferred"), these preferred shares together are referred to as the "Convertible Preferred Stock." COMMON STOCK On July 30, 1999, the Company was formed as a wholly-owned subsidiary of Heritage Group, LLC ("Heritage") and in connection with such formation, 50,000,000 shares of Common Stock were issued to Heritage for $100,000. For certain business and tax planning purposes, Heritage elected to return 40,000,000 shares of Common Stock to the Company effective November 23, 1999, which is available for reissuance at the discretion of the Board of Directors. The Common Stock is subject to all of the rights, privileges, preferences and priorities of the Preferred Stock as set forth in the Articles. Dividends may be paid on the Common Stock, but only when and as declared by the Board of Directors. Upon any dissolution, liquidation or winding up of the Company, the holders of the Common Stock, and any holders of any class or series of stock entitled to participate therewith will become entitled to participate in the distribution of any assets of the Company after payment of all debt and liabilities, and after the Company has paid or set aside for payment, amounts due to holders of any class of stock having preference over the Common Stock. Each holder of Common Stock is entitled to cast one vote for each outstanding share of Common Stock held upon any matter or thing submitted to a vote of the stockholders of the Company. CONVERTIBLE PREFERRED STOCK Effective November 18, 1999, the Company closed a private placement of Series A Convertible Preferred Stock whereby 5,000,000 shares were sold for $1.00 per share. In addition, investors received warrants to purchase 1,000,000 shares of Series A Convertible Preferred Stock for $1.00 per share and is exercisable beginning one year after the date of issuance. The estimated fair value of those warrants totaled $160,000 at November 18, 1999. F-10 58 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) VOTING RIGHTS. Except as required by law and except for any "Corporate Transaction" submitted to a vote of the stockholders of the Company, holders of shares of Convertible Preferred Stock do not have any voting rights whatsoever. A Corporate Transaction is defined as (a) any consolidation or merger of the Company, other than any merger, consolidation or share exchange resulting in the holders of the capital stock of the Company entitled to vote for the election of directors holding a majority of the capital stock of the surviving or resulting entity entitled to vote for the election of directors, or (b) any sale or other disposition by the Company of all or substantially all of its assets to a third party. With respect to any Corporate Transaction submitted to a vote of the stockholders of the Company, (i) each holder of shares of Convertible Preferred Stock is entitled to cast one vote for each outstanding share of Convertible Preferred Stock so held and (ii) the holders of shares of Convertible Preferred Stock and Common Stock will vote together and not as separate classes or series. DIVIDEND RIGHTS. Holders of Convertible Preferred Stock are entitled to participate on a share for share basis in all dividends declared and paid on Common Stock, provided, however, that in case of dividends on Common Stock that are payable in Common Stock, or in options, warrants or rights to acquire Common Stock, or in securities convertible into or exchangeable for Common Stock, (i) the corresponding dividends to be paid to holders of Series A Preferred Stock will be paid in shares of, or options, warrants or rights to acquire, or securities convertible or exchangeable for, as the case may be, Series A Preferred Stock, and (ii) the corresponding dividends to be paid to holders of Series B Preferred Stock will be paid in shares of, or options, warrants or rights to acquire, or securities convertible into or exchangeable for, as the case may be, Series B preferred Stock. LIQUIDATION. Upon any dissolution, liquidation or winding up of the Company, the holders of the Convertible Preferred Stock will be entitled to be paid out of the assets of the Company legally available for distribution to its stockholders, before any payment or declaration and setting apart for payment of any amount is made in respect to Common Stock, an amount equal in value to the consideration received by the Company for the initial issuance of such shares of Convertible Preferred Stock, as adjusted. If upon liquidation, the assets to be distributed to the Convertible Preferred Stock are insufficient to permit the payment in full of the Convertible Preferred Stock Liquidation Preference, then all of the assets legally available for distribution to the holders of Convertible Preferred Stock will be distributed to such holders ratably in proportion the amount otherwise entitled. CONVERSION OF SERIES A PREFERRED STOCK OPTIONAL CONVERSION. Any holder of shares of Series A Preferred Stock may at any time convert all or any number of the shares held into shares of Common Stock on a one-for-one basis by surrendering the certificate. At the time conversion has been effected, the shares surrendered for conversion will no longer be deemed to be outstanding, all rights of a converting holder with respect to the shares surrendered for will immediately terminate F-11 59 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) and the holder will be deemed to have become the holder of record of the shares of Common Stock issuable upon conversion. AUTOMATIC CONVERSION. All shares of Series A Preferred Stock will automatically be converted into shares of Common Stock on a one-for-one basis upon the closing of a "Qualified Public Offering," defined as a firm commitment underwritten public offering of Common Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, in which (i) the gross aggregate proceeds, before fees and expenses, received by the Company (and any selling shareholders) equals or exceeds $10,000,000 and (ii) the price per share to the public equals or exceeds $1.00; provided, however, that the term "Qualified Public Offering" will not include an offering made in connection with a business acquisition or combination or an employee benefit plan. The Company will at all times reserve out of its authorized but unissued capital stock or out of its capital stock held in treasury sufficient shares of Common Stock to permit the conversion of all outstanding Series A Preferred Stock. CONVERSION OF SERIES B PREFERRED STOCK Outstanding shares of Series B Preferred Stock will automatically be converted into shares of Series A Preferred Stock (if converted prior to a Qualified Public Offering) or Common Stock (if converted after a Qualified Public Offering), on a one-for-one basis, at the rate of 20% per year on the anniversary of their date of issuance. The Company will at all times reserve out of its authorized but unissued capital stock or out of its capital stock held in treasury sufficient shares of Series A Preferred Stock or Common Stock, as applicable, to permit the conversion of all outstanding Series B Preferred Stock. RESTRICTIONS ON TRANSFERS Holders of Convertible Preferred Stock will not transfer record or beneficial ownership of, and the Company will not recognize or register the transfer of, any shares of Convertible Preferred Stock unless the Company gives its prior written consent. F-12 60 MDPATHWAYS, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of November 23, 1999 are as follows:
1999 -------- Deferred tax assets: Start-up costs..................................... $ 85,019 -------- Total deferred tax assets............................ 85,019 Valuation allowance................................ (85,019) -------- Total deferred tax assets, net of valuation allowance.......................................... $ -- ========
The effective income tax rate differed from the federal statutory rate for the period from July 30, 1999 (date of inception) to November 23, 1999 as follows:
1999 ----- U.S. federal income tax rate............................ 34.0% State income tax, net of federal income tax benefit..... 4.0 Increase in valuation allowance......................... (38.0) ----- 0.0% =====
6. INITIAL PUBLIC OFFERING The Company is in the process of filing a Registration Statement with the Securities and Exchange Commission for a proposed initial public offering ("IPO") of its Series A and B Convertible Preferred Stock. In its IPO, the Company plans to issue a maximum of 2,000,000 shares of its Series A Convertible Preferred Stock and 38,500,000 shares of its Series B Convertible Preferred Stock. Offering costs are estimated to be approximately $450,000. F-13 61 ------------------------------------------------------ ------------------------------------------------------ WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY: - EXCEPT THE STOCK OFFERED BY THIS PROSPECTUS; - IN ANY JURISDICTION IN WHICH THE OFFER OR SOLICITATION IS NOT AUTHORIZED; - IN ANY JURISDICTION WHERE THE DEALER OR OTHER SALESPERSON IS NOT QUALIFIED TO MAKE THE OFFER OR SOLICITATION; - TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE THE OFFER OR SOLICITATION; OR - TO ANY PERSON WHO IS NOT A UNITED STATES RESIDENT OR WHO IS OUTSIDE THE JURISDICTION OF THE UNITED STATES. THE DELIVERY OF THIS PROSPECTUS OR ANY ACCOMPANYING SALE DOES NOT IMPLY THAT: - THERE HAVE BEEN NO CHANGES IN THE AFFAIRS OF MDPATHWAYS AFTER THE DATE OF THIS PROSPECTUS; OR - THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 38,500,000 SHARES MDPATHWAYS, INC. SERIES B CONVERTIBLE PREFERRED STOCK PROSPECTUS , 1999 ------------------------------------------------------ ------------------------------------------------------ 62 ------------------------------------------------------ ------------------------------------------------------ WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY: - EXCEPT THE STOCK OFFERED BY THIS PROSPECTUS; - IN ANY JURISDICTION IN WHICH THE OFFER OR SOLICITATION IS NOT AUTHORIZED; - IN ANY JURISDICTION WHERE THE DEALER OR OTHER SALESPERSON IS NOT QUALIFIED TO MAKE THE OFFER OR SOLICITATION; - TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE THE OFFER OR SOLICITATION; OR - TO ANY PERSON WHO IS NOT A UNITED STATES RESIDENT OR WHO IS OUTSIDE THE JURISDICTION OF THE UNITED STATES. THE DELIVERY OF THIS PROSPECTUS OR ANY ACCOMPANYING SALE DOES NOT IMPLY THAT: - THERE HAVE BEEN NO CHANGES IN THE AFFAIRS OF MDPATHWAYS AFTER THE DATE OF THIS PROSPECTUS; OR - THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 2,000,000 SHARES MDPATHWAYS, INC. SERIES A CONVERTIBLE PREFERRED STOCK PROSPECTUS , 1999 ------------------------------------------------------ ------------------------------------------------------ 63 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses payable by the Registrant in connection with the sale of the securities being registered. All amounts are estimates except the SEC registration fee. SEC Registration Fee........................................ $ 11,259 Accounting Fees and Expenses................................ 50,000 Legal Fees and Expenses..................................... 250,000 Printing Costs.............................................. 100,000 Miscellaneous Expenses...................................... 38,741 -------- Total..................................................... $450,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted under Georgia law, our Articles of Incorporation provide that a director shall not be personally liable to the corporation or its shareholders for monetary damages for breach of duty of care or any other duty owed to the corporation as a director, except that such provision shall not eliminate or limit the liability of a director (a) for any appropriation, in violation of his duties, of any business opportunity of the corporation, (b) for acts or omissions which involve intentional misconduct or a knowing violation of law, (c) for unlawful corporate distributions, or (d) for any transaction from which the director received an improper personal benefit. Under our Bylaws, we are required to indemnify our directors to the full extent permitted by Georgia law. Georgia law provides that a corporation may indemnify its directors, officers, employees and agents against judgments, fines, penalties, amounts paid in settlement, and reasonable expenses, including attorney's fees, resulting from various types of legal actions or proceedings, including, but not limited to any threatened, pending, or completed action, suit or proceeding whether civil, criminal, administrative, arbitrative or investigative and whether formal or informal, if the actions of the party being indemnified meet the standards of conduct specified therein. Determination concerning whether or not the applicable standard of conduct has been met can be made by (a) the Board of Directors by a majority vote of all the disinterested directors, if there are at least two disinterested directors, (b) a majority vote of a committee of two or more disinterested directors, (c) special legal counsel, or (d) an affirmative vote of a majority of shares held by disinterested shareholders. No indemnification shall be made (i) in connection with a proceeding by or in the right of MDpathways, except for reasonable expenses incurred in connection with the proceeding if it is determined that the indemnitee has met the relevant standard of conduct, or (ii) in connection with any other proceeding in which such person was adjudged liable on the basis that personal benefit was improperly received by him. II-1 64 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In connection with the formation of MDpathways, on July 30, 1999, we sold 50,000,000 shares of common stock to Heritage Group, LLC for a purchase price of $100,000.00. To raise working capital, on November 18, 1999, we sold 5,000,000 shares of Series A Convertible Preferred Stock to individual investors. The aggregate purchase price for such purchases was $5,000,000. The offer, sale and issuance of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transactions by an issuer not involving a public offering. The recipient of securities represented its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificate issued in the transactions. The recipient had adequate access to information about MDpathways, Inc. On November 23, 1999, Heritage Group, LLC effected a recapitalization pursuant to which 40,000,000 shares of Common Stock were returned to MDpathways to be available for reissuance at the discretion of our Board of Directors. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 3.1 -- Articles of Incorporation of MDpathways, Inc. 3.2 -- Bylaws of MDpathways, Inc. 4.1 -- Specimen Series A Convertible Preferred Stock certificate. 4.2 -- Specimen Series B Convertible Preferred Stock certificate. 5.1 -- Opinion of Alston & Bird LLP. 23.1 -- Consent of Independent Auditors. 23.2 -- Consent of Alston & Bird LLP (included in Exhibit 5.1). 24.1 -- Powers of Attorney (see signature page page). 27.1 -- Financial Data Schedule (for SEC use only).
(b) Financial Statement Schedules None. ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the II-2 65 total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this Section do not apply if the Registration Statement is on Form S-3, Form S-8 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Securities and Exchange Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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 initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. II-3 66 (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 67 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on November 23, 1999. MDpathways, Inc. By: /s/ John E. Blount ----------------------------------- John E. Blount President POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints John E. Blount his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution in him, for him and in his name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1 of MDpathways, Inc. or a related registration statement filed pursuant to Rule 462(b), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on November 23, 1999.
SIGNATURE TITLE --------- ----- /s/ John E. Blount President, Secretary and Director - --------------------------------------------------- (Principal Financial and Accounting John E. Blount Officer) /s/ Albert Rodewald Treasurer and Director - --------------------------------------------------- Albert Rodewald /s/ Thomas A. Gallagher Director - --------------------------------------------------- Thomas A. Gallagher /s/ Rock A. Morphis Director - --------------------------------------------------- Rock A. Morphis
II-5 68 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 3.1 -- Articles of Incorporation of MDpathways, Inc. 3.2 -- Bylaws of MDpathways, Inc. *4.2 -- Specimen Series A Convertible Preferred Stock certificate. *4.3 -- Specimen Series B Convertible Preferred Stock Certificate. *5.1 -- Opinion of Alston & Bird LLP. 23.1 -- Consent of Independent Auditors. *23.2 -- Consent of Alston & Bird LLP (included in Exhibit 5.1). 24.1 -- Powers of Attorney (see signature page). 27.1 -- Financial Data Schedule (for SEC use only).
- ------------------------- * to be filed by amendment EX-3.1 2 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF MDPATHWAYS, INC. ARTICLE 1 NAME The name of the corporation is: MDpathways, Inc. ARTICLE 2 REGISTERED OFFICE AND AGENT The initial registered office of the corporation is located at the following street address: 1201 Peachtree Street, N.E. Atlanta, Georgia 30361 The name of the initial registered agent of the corporation at the registered office named above is: CT Corporation System ARTICLE 3 INCORPORATOR The name and address of the incorporator is: Nils H. Okeson Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 ARTICLE 4 CAPITAL STOCK 4.1 AUTHORIZED SHARES. The total number of shares of stock of all classes that the Corporation shall have authority to issue is 600,000,000 shares, consisting of: (a) 300,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"); and (b) 300,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), of which 50,000,000 shares shall be designated as "Series A Convertible Preferred Stock" (referred to herein as "Series A Preferred Stock") and 50,000,000 shares shall be designated as "Series B Convertible Preferred Stock" (referred to herein as "Series B 2 Preferred Stock," and together with the Series A Preferred Stock, "Convertible Preferred Stock"). 4.2 COMMON STOCK. (A) RELATIVE RIGHTS. The Common Stock shall be subject to all of the rights, privileges, preferences and priorities of the Preferred Stock as set forth in these Articles of Incorporation (as the same may be amended from time to time). (B) DIVIDEND RIGHTS. Dividends may be paid on the Common Stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends thereon, but only when and as declared by the Board of Directors of the Corporation. (C) DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any voluntary or involuntary dissolution, liquidation, or winding up of the Corporation, other than any dissolution, liquidation or winding up in connection with any reincorporation of the Corporation in another jurisdiction, the holders of the Common Stock, and holders of any class or series of stock entitled to participate therewith, in whole or in part, as to the distribution of assets in such event, shall become entitled to participate in the distribution of any assets of the Corporation remaining after the Corporation shall have paid, or provided for payment of, all debts and liabilities of the Corporation and after the Corporation shall have paid, or set aside for payment, to the holders of any class of stock having preference over the Common Stock in the event of dissolution, liquidation or winding up the full preferential amounts (if any) to which they are entitled. (D) VOTING RIGHTS. Each holder of shares of Common Stock shall be entitled, share for share and without regard to class, together with the holders of all other classes of stock entitled to vote (except any class or series of stock having special voting rights), to cast one vote for each outstanding share of Common Stock so held upon any matter or thing (including, without limitation, the election of one or more directors) submitted to a vote of the stockholders of the Corporation. (E) LOCK-UP; LEGEND. During the 180-day period immediately following the effective date of any registration statement filed under the Securities Act of 1933 in connection with the Corporation's first "Qualified Public Offering" (as defined below), a holder of shares of Common Stock (excluding shares of Common Stock registered and sold pursuant to such registration statement and shares of Common Stock issued as a dividend or other distribution on shares of Common Stock registered and sold pursuant to such registration statement (including any distribution pursuant to a stock split or division), but including, without limitation, shares of Common Stock issued upon conversion of shares of Preferred Stock) shall not transfer record or beneficial ownership of, and the Corporation shall not recognize or register the transfer of, whether by sale, assignment, gift, bequest, appointment or otherwise, any of such shares of Common Stock unless the Corporation (acting through its Board of Directors or through an officer duly authorized by the Corporation's Board of Directors) shall have given its prior - 2- 3 written consent thereto; provided, however, that the foregoing shall not prohibit any transfer (i) as a bona fide gift, provided the donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to the general or limited partners, members or shareholders of a holder, provided that the distributees thereof agree in writing to be bound by this restriction, or (iii) if the holder is an individual, to members of his or her immediate family or to a trust the beneficiaries of which are exclusively such holder and/or members of his or her immediately family, provided that the transferees thereof agree in writing to be bound by this restriction. Any attempted transfer of record or beneficial ownership of shares of Common Stock in violation of this Section 4.2(e) shall be null and void and of no force or effect whatsoever. Any certificate(s) representing shares of Common Stock that are subject to the restrictions set forth in this Section 4.2(e) shall bear a legend in substantially the following form: "The shares of MDpathways, Inc. (the "Corporation") evidenced hereby are subject to, among other things, transfer restrictions prohibiting the transfer of such shares to anyone during the 180-day period immediately following the completion of a qualifying initial public offering by the Corporation, except with the prior written consent of the Corporation, all as provided in more detail in the Articles of Incorporation of the Corporation. Copies of the Articles of Incorporation of the Corporation are available from the Corporate Secretary of the Corporation at the Corporation's principal office located at 1913 21st Avenue South, Nashville, Tennessee 37212, and will be furnished to any stockholder upon written request without cost." 4.3 CONVERTIBLE PREFERRED STOCK. The Convertible Preferred Stock shall have the following voting powers, designations, preferences and relative, participating, optional or other rights, qualifications, limitations and restrictions. (A) VOTING RIGHTS. Except as required by law and except for any "Corporate Transaction" (as defined in Section 4.3(d) below) submitted to a vote of the stockholders of the Corporation, holders of shares of Convertible Preferred Stock shall not have any voting rights whatsoever. With respect to any Corporate Transaction submitted to a vote of the stockholders of the Corporation, (i) each holder of shares of Convertible Preferred Stock shall be entitled to cast one vote for each outstanding share of Convertible Preferred Stock so held and (ii) the holders of shares of Convertible Preferred Stock and Common Stock shall vote together and not as separate classes or series. (B) DIVIDEND RIGHTS. The holders of shares of Convertible Preferred Stock shall be entitled to participate on a share for share basis in all dividends declared and paid on Common Stock, provided, however, that in the case of dividends on Common Stock that are payable in Common Stock, or in options, warrants or rights to acquire Common Stock, or in securities convertible into or exchangeable for Common Stock, (i) the corresponding dividends to be paid to holders of Series A Preferred Stock shall be paid in - 3 - 4 shares of, or options, warrants or rights to acquire, or securities convertible into or exchangeable for, as the case may be, Series A Preferred Stock, and (ii) the corresponding dividends to be paid to holders of Series B Preferred Stock shall be paid in shares of, or options, warrants or rights to acquire, or securities convertible into or exchangeable for, as the case may be, Series B Preferred Stock. (C) DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any Liquidation (as defined below), each holder of shares of Convertible Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation legally available for distribution to its stockholders, before any payment or declaration and setting apart for payment of any amount shall be made in respect of Common Stock, an amount equal in value to the consideration received by the Corporation for the initial issuance of such shares of Convertible Preferred Stock, as adjusted to take into account any stock splits, stock dividends, reverse stock splits, combinations of shares of stock or other similar events (such consideration, as so adjusted, being referred to herein as the "Convertible Preferred Stock Liquidation Preference"). If upon any such Liquidation, the assets to be distributed to the holders of Convertible Preferred Stock shall be insufficient to permit the payment in full of the Convertible Preferred Stock Liquidation Preference, then all of the assets legally available for distribution to the holders of Convertible Preferred Stock shall be distributed to such holders ratably in proportion to the full Convertible Preferred Stock Liquidation Preference each such holder is otherwise entitled to receive. After the payment in full, or the setting aside for such payment, of the Convertible Preferred Stock Liquidation Preference, the holders of Common Stock then outstanding shall be entitled to be paid out of the assets of the Corporation legally available for distribution to its stockholders, an amount per share of Common Stock equal to the quotient obtained by dividing the total Convertible Preferred Stock Liquidation Preference paid on all then outstanding shares of Convertible Preferred Stock by the total number of all then outstanding shares of Convertible Preferred Stock. If the assets available for distribution to the holders of Common Stock pursuant to the immediately preceding sentence shall be insufficient to permit the payment in full of the amount referred to in the immediately preceding sentence, then all of such assets shall be paid to such holders ratably based on the number of shares of Common Stock held by such holders. After payment in full, or the setting aside for such payment, of the amount referred to in the immediately preceding paragraph to the holders of Common Stock then outstanding, all of the remaining assets of the Corporation legally available for distribution to its stockholders shall be distributed to the holders of shares of Common Stock and to the holders of shares of Convertible Preferred Stock ratably based on the number of shares of Common Stock and/or Convertible Preferred Stock then held by such holders. Notwithstanding the foregoing, if the foregoing manner of distribution among holders of Common Stock and holders of Convertible Preferred Stock would result in - 4 - 5 payment with respect to any share of Convertible Preferred Stock (an "Affected Preferred Share") being less than the amount payable with respect to each share of Common Stock, then the aggregate amount that would be payable with respect to all such Affected Preferred Shares (computed in accordance with the foregoing) plus the aggregate amount that would be payable with respect to all shares of Common Stock (computed in accordance with the foregoing) shall instead be paid to the holders of Affected Preferred Shares and to the holders of shares of Common Stock ratably based on the number of Affected Preferred Shares and/or shares of Common Stock then held by such holders. The term "Liquidation" means any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, other than any dissolution, liquidation or winding up in connection with any reincorporation of the Corporation in another jurisdiction. (D) MERGER, CONSOLIDATION OR SALE. In the case of any Corporate Transaction (as defined below), each holder of outstanding shares of Convertible Preferred Stock shall have the right to receive with respect to such shares of Convertible Preferred Stock the same Consideration (as defined below) to which a holder of an equal number of shares of Common Stock would be entitled to receive pursuant to such Corporate Transaction (assuming conversion of all shares of Convertible Preferred Stock then outstanding into shares of Common Stock on a one-for-one basis); provided, however, that in the event that the Consideration so payable to any holder of outstanding shares of Convertible Preferred Stock is not at least equal in value to the aggregate Convertible Preferred Stock Liquidation Preference of the shares of Convertible Preferred Stock held by such holder, then the Corporate Transaction shall instead be treated as a "Liquidation" pursuant to Section 4.3(c) above; and provided, further, that any Consideration payable with respect to shares of Series B Preferred Stock (whether or not the Corporate Transaction is treated as a "Liquidation" pursuant to Section 4.3(c) above) may be made payable on a delayed basis over the same period of time as is set forth in Section 4.3(f) with respect to the automatic conversion of shares of Series B Preferred Stock. The "value" of any non-cash Consideration shall be determined in good faith by the Board of Directors of the Corporation and, in the case of Consideration payable to holders of Series B Preferred Stock on a delayed basis pursuant to the second proviso of the immediately preceding sentence, there shall be no discount applied to such value on account of such delay. "Corporate Transaction" means (A) any consolidation or merger of (or share exchange by) the Corporation, other than any merger, consolidation or share exchange resulting in the holders of the capital stock of the Corporation entitled to vote for the election of directors holding a majority of the capital stock of the surviving or resulting entity entitled to vote for the election of directors, or (B) any sale or other disposition by the Corporation of all or substantially all of its assets to a third party. "Consideration" means (A) in the case of any consolidation or merger of (or share exchange by) the Corporation, the aggregate consideration received by any holder of shares of Convertible Preferred Stock from the sale, exchange, transfer or other disposition by such holder of such shares of Convertible Preferred Stock pursuant to such merger, consolidation or - 5 - 6 share exchange and (B) in the case of any other Corporate Transaction, the aggregate consideration that would be received by any holder of shares of Convertible Preferred Stock with respect to such shares of Convertible Preferred Stock if the Corporation were liquidated immediately following receipt of the consideration received by the Corporation in connection with such Corporate Transaction (assuming conversion of all shares of Convertible Preferred Stock then outstanding into shares of Common Stock on a one-for-one basis). (E) CONVERSION OF SERIES A PREFERRED STOCK. (I) OPTIONAL CONVERSION. Any holder of shares of Series A Preferred Stock may at any time convert all or any number of such shares held by such holder into shares of Common Stock on a one-for-one basis by surrendering the certificate or certificates representing shares to be converted in the manner provided in this Section 4.3(e)(i). In order to exercise this optional conversion privilege, the holder of shares of Series A Preferred Stock to be converted shall deliver to the Corporation during regular business hours, at the principal office of the Corporation or at such other place as may be designated by the Corporation, the certificate or certificates representing the shares of Series A Preferred Stock to be converted, duly endorsed or assigned in blank, accompanied by written notice stating that the holder elects to convert such shares. Each conversion of shares of Series A Preferred Stock will be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the shares to be converted have been duly surrendered in accordance with the immediately preceding sentence. At the time such conversion has been effected, the shares surrendered for conversion shall no longer be deemed to be outstanding, all rights of a converting holder with respect to the shares surrendered for conversion shall immediately terminate (except the right to receive shares of Common Stock in conversion thereof), and such holder will be deemed to have become the holder of record of the shares of Common Stock issuable upon such conversion. As soon as practicable after surrender by a converting holder of the certificate or certificates representing the shares of Series A Preferred Stock to be converted, the Corporation will deliver to such holder (A) a certificate or certificates representing shares of Common Stock issuable by reason of such conversion in the name of such holder and in such denomination or denominations as such holder has specified and (B) a certificate representing any shares of Series A Preferred Stock which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (II) AUTOMATIC CONVERSION. All shares of Series A Preferred Stock shall automatically be converted into shares of Common Stock on a one-for-one basis upon the closing of a Qualified Public Offering (as defined below), without any action by the holders of such shares or the Corporation and whether or not the certificates representing such shares are surrendered to the Corporation; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such converted shares of Series A Preferred Stock are either delivered to the Corporation or the holder thereof - 6 - 7 notifies the Corporation that such certificates have been lost, stolen or destroyed and furnishes a bond or executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. At the time such automatic conversion takes place, the shares of Series A Preferred Stock shall no longer be deemed to be outstanding, all rights of a holder with respect to shares of Series A Preferred Stock shall immediately terminate (except the right to receive shares of Common Stock in conversion thereof), and such holder will be deemed to have become the holder of record of the shares of Common Stock issuable upon such conversion. Upon the automatic conversion of Series A Preferred Stock, each holder of Series A Preferred Stock shall surrender the certificate or certificates representing such shares at the principal office of the Corporation or at such other place as may be designated by the Corporation. As soon as practicable thereafter, there shall be issued and delivered to such holder, in the name of such holder, a certificate or certificates for the number of shares of Common Stock into which the surrendered shares of Series A Preferred Stock were automatically converted. The term "Qualified Public Offering" means a firm commitment underwritten public offering of Common Stock consummated pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, in which (i) the gross aggregate proceeds (prior to payment of and without deduction for underwriting discounts and commissions and offering expenses) received by the Corporation (and any selling securityholders participating in such public offering) equals or exceeds $10,000,000 and (ii) the price per share to the public equals or exceeds $1.00 (such number to be adjusted proportionately in the event the outstanding shares of Common Stock are adjusted into a lesser number or subdivided into a greater number); provided, however, that the term "Qualified Public Offering" shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. (III) GENERAL. The conversion ratio of one-for-one shall in all events be accurately preserved in the event of any recapitalization of the Corporation by means of a stock dividend on, or split or combination of, outstanding shares of Series A Preferred Stock, Series B Preferred Stock or Common Stock, or in the event of any merger, consolidation or other reorganization of the Corporation. The Corporation shall reserve out of its authorized but unissued capital stock or out of its capital stock held in treasury sufficient shares of Common Stock to permit the conversion of all outstanding Series A Preferred Stock pursuant to this Section 4.3(e). All shares of Common Stock that are issued upon conversion of Series A Preferred Stock shall be fully paid and nonassessable. (F) CONVERSION OF SERIES B PREFERRED STOCK. Outstanding shares of Series B Preferred Stock shall automatically be converted into shares of Series A Preferred Stock (if the conversion date occurs prior to the closing of a Qualified Public Offering) or Common Stock (if the conversion date occurs on or after the closing of a Qualified Public Offering), on a one-for-one basis, at the rate of 20% per year on each anniversary of their date of issuance. Each 20% calculation shall be applied per holder of applicable shares with respect to the aggregate number of applicable shares held, rounding up to the nearest whole share. Outstanding shares of Series B Preferred Stock will only be converted on - 7 - 8 an anniversary of their date of issuance and no pro rata adjustments will be made to allow for conversions on any day other than an anniversary of the date of issuance. For purposes of this Section 4.3(f), shares of Series B Preferred Stock issued pursuant to any split of or dividend or other distribution on outstanding shares of Series B Preferred Stock shall be deemed to have the same date of issuance as the outstanding shares with respect to which they are issued. Upon the effective date of any conversion pursuant to this Section 4.3(f): (i) certificates representing the shares of Series B Preferred Stock so converted shall thereafter represent (A) the number of shares of Series A Preferred Stock or Common Stock, as the case may be, into which the shares of Series B Preferred Stock represented by such certificate have been converted plus (B) the number of shares of Series B Preferred Stock represented by such certificate that remain unconverted; (ii) each holder of shares of Series B Preferred Stock so converted shall be registered on the books of the Corporation as the record holder of the number of shares of Series A Preferred Stock or Common Stock, as the case may be, into which such shares of Series B Preferred Stock has been converted; and (iii) all rights of each such holder with respect to the shares so converted shall immediately terminate (except the right to receive shares of Series A Preferred Stock or Common Stock, as the case may be, in conversion thereof). Upon surrender by a holder of any certificate representing shares of Series B Preferred Stock that have been converted pursuant to this Section 4.3(f) at the principal office of the Corporation or at such other place as may be designated by the Corporation, the Corporation shall issue to such holder a certificate or certificates representing the number of shares of Series A Preferred Stock and/or Common Stock, as the case may be, into which the shares represented by such surrendered certificate have been converted, and shall issue to such holder a certificate or certificates representing the number of shares of Series B Preferred Stock represented by such surrendered certificate which remain unconverted. The conversion ratio of one-for-one shall in all events be accurately preserved in the event of any recapitalization of the Corporation by means of a stock dividend on, or split or combination of, outstanding shares of Series A Preferred Stock, Series B Preferred Stock or Common Stock, or in the event of any merger, consolidation or other reorganization of the Corporation. The Corporation shall reserve out of its authorized but unissued capital stock or out of its capital stock held in treasury sufficient shares of Series A Preferred Stock or Common Stock, as applicable, to permit the conversion of all outstanding Series B Preferred Stock pursuant to this Section 4.3(f). All shares of either Series A Preferred Stock or Common Stock, as the case may be, that are issued upon conversion of Series B Preferred Stock shall be fully paid and nonassessable. (G) RESTRICTIONS ON TRANSFERS OF CONVERTIBLE PREFERRED STOCK. A holder of Convertible Preferred Stock shall not transfer record or beneficial ownership of, and the Corporation shall not recognize or register the transfer of, whether by sale, assignment, gift, bequest, appointment or otherwise, any shares of Convertible Preferred Stock unless the Corporation (acting through its Board of Directors or through an officer duly authorized by the Corporation's Board of Directors) shall have given its prior written consent thereto. Any attempted transfer of record or beneficial ownership of shares of Convertible Preferred Stock in violation of this Section 4.3(g) shall be null and void and of no force or effect whatsoever. - 8 - 9 (H) NO PREEMPTIVE RIGHTS. None of the holders of Convertible Preferred Stock or Common Stock of the Corporation shall be entitled, as a matter of right, to purchase, subscribe for or otherwise acquire (i) any new or additional shares of stock of the Corporation of any class now or hereafter authorized, (ii) any options or warrants to purchase, subscribe for or otherwise acquire any such new or additional shares of stock of the Corporation of any class now or hereafter authorized or (iii) any shares, evidences of indebtedness or other securities convertible into, or carrying options or warrants to purchase, subscribe for or otherwise acquire, any such new or additional shares of stock of the Corporation of any class now or hereafter authorized. (I) LEGENDS. Any certificates evidencing shares of the Series A Preferred Stock shall bear a legend in substantially the following form: "The shares of MDpathways, Inc. (the "Corporation") evidenced hereby are subject to, among other things, (i) transfer restrictions prohibiting the transfer of such shares to anyone without the prior written consent of the Corporation, (ii) conversion into shares of Common Stock of the Corporation at the option of the holder hereof, and (iii) automatic conversion into shares of Common Stock of the Corporation upon the completion of a qualifying initial public offering by the Corporation, all as provided in more detail in the Articles of Incorporation of the Corporation. Copies of the Articles of Incorporation of the Corporation are available from the Corporate Secretary of the Corporation at the Corporation's principal office located at 1913 21st Avenue South, Nashville, Tennessee 37212, and will be furnished to any stockholder upon written request without cost." Any certificates evidencing shares of the Series B Preferred Stock shall bear a legend in substantially the following form: "The shares of MDpathways, Inc. (the "Corporation") evidenced hereby are subject to, among other things, (i) transfer restrictions prohibiting the transfer of such shares to anyone without the prior written consent of the Corporation and (ii) automatic conversion into shares of Series A Preferred Stock of the Corporation (or Common Stock of the Corporation, depending on whether the Corporation has completed a qualifying initial public offering at the time of conversion) over time, all as provided in more detail in the Articles of Incorporation of the Corporation. Copies of the Articles of Incorporation of the Corporation are available from the Corporate Secretary of the Corporation at the Corporation's principal office located at 1913 21st Avenue South, Nashville, Tennessee 37212, and will be furnished to any stockholder upon written request without cost." (J) STOCK SPLITS, ETC. In the case of any split, combination, reclassification or recapitalization of the Common Stock, the shares of Convertible Preferred Stock shall also be split, combined, reclassified or recapitalized so that the number of shares of Convertible Preferred Stock outstanding immediately following such split, combination, reclassification or recapitalization shall bear the same relationship to the number of shares of Convertible Preferred Stock outstanding immediately prior to such split, - 9 - 10 combination, reclassification or recapitalization as the number of shares of Common Stock outstanding immediately following such split, combination, reclassification or recapitalization bears to the number of shares of Common Stock outstanding immediately prior to such split, combination, reclassification or recapitalization. Shares of Convertible Preferred Stock outstanding at any time shall not be reverse split or combined, whether by reclassification, recapitalization or otherwise, so as to decrease the number of shares thereof issued and outstanding unless at the same time the shares of Common Stock are reverse split or combined so that the number of shares of Common Stock outstanding immediately following such reverse split or combination shall bear the same relationship to the number of shares of Common Stock outstanding immediately prior to such reverse split or combination as the number of shares of Convertible Preferred Stock outstanding immediately following such reverse split or combination bears to the number of shares of Convertible Preferred Stock outstanding immediately prior to such reverse split or combination. In the case of any split, combination, reclassification or recapitalization of the Convertible Preferred Stock, the shares of Common Stock shall also be split, combined, reclassified or recapitalized so that the number of shares of Common Stock outstanding immediately following such split, combination, reclassification or recapitalization shall bear the same relationship to the number of shares of Common Stock outstanding immediately prior to such split, combination, reclassification or recapitalization as the number of shares of Convertible Preferred Stock outstanding immediately following such split, combination, reclassification or recapitalization bears to the number of shares of Convertible Preferred Stock outstanding immediately prior to such split, combination, reclassification or recapitalization. Shares of Common Stock outstanding at any time shall not be reverse split or combined, whether by reclassification, recapitalization or otherwise, so as to decrease the number of shares thereof issued and outstanding unless at the same time the shares of Convertible Preferred Stock are reverse split or combined so that the number of shares of Convertible Preferred Stock outstanding immediately following such reverse split or combination shall bear the same relationship to the number of shares of Convertible Preferred Stock outstanding immediately prior to such reverse split or combination as the number of shares of Common Stock outstanding immediately following such reverse split or combination bears to the number of shares of Common Stock outstanding immediately prior to such reverse split or combination. 4.4 UNDESIGNATED PREFERRED STOCK. The 200,000,000 shares of undesignated Preferred Stock may be issued from time to time in one or more classes or series thereof, the shares of each class or series thereof to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as are stated and expressed herein or in the resolution or resolutions providing for the issue of such class or series, adopted by the Board of Directors of the Corporation as hereinafter provided. Authority is hereby expressly granted to the Board of Directors of the Corporation, subject to the provisions of this Article 4 and to the limitations prescribed by the Georgia Business Corporation Code, to authorize the issue of one or more classes, - 10 - 11 or series thereof, of Preferred Stock and with respect to each such class or series to fix by resolution or resolutions providing for the issue of such class or series the voting powers, full or limited, if any, of the shares of such class or series and the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof. The authority of the board of directors with respect to each class or series thereof shall include, but not be limited to, the determination or fixing of the following: (a) the maximum number of shares to constitute such class or series, which may subsequently be increased or decreased by resolution of the board of directors unless otherwise provided in the resolution providing for the issue of such class or series, the distinctive designation thereof and the stated value thereof if different than the par value thereof; (b) the dividend rate of such class or series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock or any other series of any class of stock of the Corporation, and whether such dividends shall be cumulative or noncumulative; (c) whether the shares of such class or series shall be subject to redemption, in whole or in part, and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption, including whether or not such redemption may occur at the option of the Corporation or at the option of the holder or holders thereof or upon the happening of a specified event; (d) the terms and amount of any sinking fund established for the purchase or redemption of the shares of such class or series; (e) whether or not the shares of such class or series shall be convertible into or exchangeable for shares of any other class or classes of any stock or any other series of any class of stock of the Corporation, and, if provision is made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; (f) the extent, if any, to which the holders of shares of such class or series shall be entitled to vote with respect to the election of directors or otherwise; (g) the restrictions, if any, on the issue or reissue of any additional Preferred Stock; (h) the rights of the holders of the shares of such class or series upon the dissolution of, or upon the subsequent distribution of assets of, the Corporation; and - 11 - 12 (i) the manner in which any facts ascertainable outside the resolution or resolutions providing for the issue of such class or series shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such class or series. ARTICLE 5 PRINCIPAL OFFICE The mailing address of the initial principal office of the corporation is: 1913 21st Avenue South Nashville, Tennessee 37212. ARTICLE 6 BOARD OF DIRECTORS The initial board of directors (hereinafter "Board of Directors") shall consist of four (4) members. The name and address of each member are: John E. Blount 1913 21st Avenue South Nashville, Tennessee 37212 Thomas A. Gallagher 1913 21st Avenue South Nashville, Tennessee 37212 Rock A. Morphis 1913 21st Avenue South Nashville, Tennessee 37212 Albert Rodewald 1913 21st Avenue South Nashville, Tennessee 37212 ARTICLE 7 SHAREHOLDER ACTION BY LESS THAN UNANIMOUS WRITTEN CONSENT Any action required or permitted to be taken at a shareholders' meeting may be taken without a meeting if the action is taken by persons who would be entitled to vote at a meeting shares having voting power to cast not less than the minimum number (or numbers, in the case of voting by groups) of votes that would be necessary to authorize or take the action at a meeting at which all shareholders entitled to vote were present and voted. The action must be evidenced by one or more written consents bearing the date of - 12 - 13 signature and describing the action taken, signed by shareholders entitled to take action without a meeting and delivered to the corporation for inclusion in the minutes or filing with the corporate records. If the action is taken by less than all of the shareholders entitled to vote on the action, all voting shareholders on the record date who did not participate in taking the action shall be given written notice of the action taken, and shall be furnished with the same material that would have been required to be sent to shareholders in a notice of a meeting at which the proposed action would have been submitted to the shareholders for action, including notice of any applicable dissenters' rights, not more than ten days after taking the action without a meeting. ARTICLE 8 LIMITATION OF DIRECTOR LIABILITY SECTION 8.1 A director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for any action taken, or any failure to take any action, as a director, except liability: (A) for any appropriation, in violation of his or her duties, of any business opportunity of the corporation; (B) for acts or omissions which involve intentional misconduct or a knowing violation of law; (C) of the types set forth in Section 14-2-832 of the Georgia Business Corporation Code; or (D) for any transaction from which the director received an improper personal benefit. SECTION 8.2 Any repeal or modification of the provisions of this Article by the shareholders of the corporation shall be prospective only and shall not adversely affect any limitation on the liability of a director of the corporation with respect to any act or omission occurring prior to the effective date of such repeal or modification. SECTION 8.3 If the Georgia Business Corporation Code is amended, after this Article becomes effective, to authorize corporate action further eliminating or limiting the liability of directors, then, without further corporate action, the liability of a director of the corporation, in addition to the limitation on liability provided herein, shall be limited to the fullest extent permitted by the Georgia Business Corporation Code, as so amended. SECTION 8.4 In the event that any of the provisions of this Article (including any provision within a single sentence) is held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the fullest extent permitted by law. - 13 - 14 ARTICLE 9 CONSTITUENCY CONSIDERATIONS In discharging the duties of their respective positions and in determining what is believed to be in the best interests of the corporation, the Board of Directors, committees of the Board of Directors, and individual directors, in addition to considering the effects of any action on the corporation or its shareholders, may consider the interests of the employees, customers, suppliers, and creditors of the corporation and its subsidiaries, the communities in which offices or other establishments of the corporation and its subsidiaries are located, and all other factors such directors consider pertinent; provided, however, that this Article shall be deemed solely to grant discretionary authority to the directors and shall not be deemed to provide to any constituency any right to be considered. IN WITNESS WHEREOF, the undersigned has executed these Articles of Incorporation this 30th day of July in the year 1999. /s/ Nils H. Okeson -------------------------------------- Nils H. Okeson Incorporator - 14 - EX-3.2 3 BYLAWS 1 EXHIBIT 3.2 MDPATHWAYS, INC. BYLAWS Adopted on July 30, 1999 2 TABLE OF CONTENTS
PAGE NO. -------- ARTICLE 1 OFFICES AND AGENT......................................................... 1 SECTION 1.1 REGISTERED OFFICE AND AGENT....................................... 1 SECTION 1.2 OTHER OFFICES..................................................... 1 ARTICLE 2 MEETINGS OF SHAREHOLDERS.................................................. 1 SECTION 2.1 ANNUAL MEETINGS................................................... 1 SECTION 2.2 SPECIAL MEETINGS.................................................. 1 SECTION 2.3 PLACE OF MEETINGS................................................. 1 SECTION 2.4 NOTICE OF MEETINGS................................................ 1 SECTION 2.5 VOTING GROUP...................................................... 2 SECTION 2.6 QUORUM FOR VOTING GROUPS.......................................... 2 SECTION 2.7 VOTE REQUIRED FOR ACTION.......................................... 2 SECTION 2.8 VOTING FOR DIRECTORS.............................................. 2 SECTION 2.9 VOTING OF SHARES.................................................. 3 SECTION 2.10 PROXIES........................................................... 3 SECTION 2.11 PRESIDING OFFICER AND SECRETARY................................... 3 SECTION 2.12 INSPECTORS........................................................ 3 SECTION 2.13 ADJOURNMENTS...................................................... 4 SECTION 2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING.......................... 4 ARTICLE 3 THE BOARD OF DIRECTORS.................................................... 5 SECTION 3.1 GENERAL POWERS.................................................... 5 SECTION 3.2 NUMBER AND ELECTION.............................................. 5 SECTION 3.3 TERM AND RESIGNATION.............................................. 5 SECTION 3.4 REMOVAL........................................................... 5 SECTION 3.5 VACANCIES......................................................... 5 SECTION 3.6 COMPENSATION...................................................... 6 SECTION 3.7 COMMITTEES........................................................ 6 ARTICLE 4 MEETINGS OF THE BOARD OF DIRECTORS........................................ 6 SECTION 4.1 REGULAR MEETINGS.................................................. 6 SECTION 4.2 SPECIAL MEETINGS.................................................. 6 SECTION 4.3 PLACE OF MEETINGS................................................. 6 SECTION 4.4 NOTICE OF MEETINGS................................................ 6 SECTION 4.5 QUORUM............................................................ 7 SECTION 4.6 VOTE REQUIRED FOR ACTION.......................................... 7 SECTION 4.7 PARTICIPATION BY CONFERENCE TELEPHONE............................. 7 SECTION 4.8 ADJOURNMENTS...................................................... 8 SECTION 4.9 ACTION BY DIRECTORS WITHOUT A MEETING............................. 8
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PAGE NO. -------- ARTICLE 5 MANNER OF NOTICE TO AND WAIVER OF NOTICE BY SHAREHOLDERS AND DIRECTORS..... 8 SECTION 5.1 MANNER OF NOTICE.................................................. 8 SECTION 5.2 WAIVER OF NOTICE.................................................. 9 ARTICLE 6 OFFICERS................................................................... 10 SECTION 6.1 NUMBER AND DUTIES................................................. 10 SECTION 6.2 APPOINTMENT AND TERM.............................................. 10 SECTION 6.3 COMPENSATION...................................................... 10 SECTION 6.4 PRESIDENT......................................................... 10 SECTION 6.5 VICE PRESIDENTS................................................... 10 SECTION 6.6 SECRETARY......................................................... 11 SECTION 6.7 TREASURER......................................................... 11 SECTION 6.8 BONDS............................................................. 11 ARTICLE 7 SHARES..................................................................... 11 SECTION 7.1 AUTHORIZATION AND ISSUANCE OF SHARES.............................. 11 SECTION 7.2 SHARE CERTIFICATES................................................ 11 SECTION 7.3 REGISTERED OWNER.................................................. 12 SECTION 7.4 TRANSFERS OF SHARES............................................... 12 SECTION 7.5 DUTY OF CORPORATION TO REGISTER TRANSFER.......................... 12 SECTION 7.6 LOST, STOLEN, OR DESTROYED CERTIFICATES........................... 13 SECTION 7.7 RECORD DATE WITH REGARD TO SHAREHOLDER ACTION..................... 13 ARTICLE 8 DISTRIBUTIONS.............................................................. 13 SECTION 8.1 AUTHORIZATION OR DECLARATION...................................... 13 SECTION 8.2 RECORD DATE WITH REGARD TO DISTRIBUTIONS.......................... 13 ARTICLE 9 INDEMNIFICATION............................................................ 13 SECTION 9.1 DEFINITIONS....................................................... 13 SECTION 9.2 BASIC INDEMNIFICATION ARRANGEMENT................................. 15 SECTION 9.3 ADVANCES FOR EXPENSES............................................. 16 SECTION 9.4 COURT-ORDERED INDEMNIFICATION AND ADVANCES FOR EXPENSES........... 16 SECTION 9.5 DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION................ 17 SECTION 9.6 INDEMNIFICATION OF EMPLOYEES AND AGENTS........................... 18 SECTION 9.7 SHAREHOLDER APPROVED INDEMNIFICATION.............................. 18 SECTION 9.8 INSURANCE......................................................... 19 SECTION 9.9 WITNESS FEES...................................................... 19 SECTION 9.10 REPORT TO SHAREHOLDERS............................................ 19 SECTION 9.11 AMENDMENTS; SEVERABILITY.......................................... 19
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PAGE NO. -------- ARTICLE 10 MISCELLANEOUS............................................................. 19 SECTION 10.1 INSPECTION OF RECORDS............................................ 19 SECTION 10.2 FISCAL YEAR...................................................... 20 SECTION 10.3 CORPORATE SEAL................................................... 20 SECTION 10.4 FINANCIAL STATEMENTS............................................. 20 SECTION 10.5 CONFLICT WITH ARTICLES OF INCORPORATION.......................... 20 ARTICLE 11 AMENDMENTS................................................................ 20 SECTION 11.1 POWER TO AMEND BYLAWS............................................ 20
-iii- 5 ARTICLE 1 OFFICES AND AGENT SECTION 1.1 REGISTERED OFFICE AND AGENT. The corporation shall continuously maintain in the State of Georgia a registered office that may be the same as any of the corporation's places of business. In addition, the corporation shall continuously maintain a registered agent whose business office is identical with the registered office. The registered agent may be an individual who resides in the State of Georgia, a domestic corporation or nonprofit domestic corporation, or a foreign corporation or nonprofit foreign corporation authorized to transact business in the State of Georgia. SECTION 1.2 OTHER OFFICES. In addition to having a registered office, the corporation may have other offices, located in or out of the State of Georgia, as the corporation's board of directors ("Board of Directors") may designate from time to time. ARTICLE 2 MEETINGS OF SHAREHOLDERS SECTION 2.1 ANNUAL MEETINGS. The corporation shall hold a meeting of shareholders annually at a time on or before June 30 as designated by the Board of Directors for the purpose of electing directors and transacting any other business that may properly come before the shareholders. Even if the corporation does not hold an annual meeting as provided in this Section, any business, including the election of directors, that might properly have been acted upon at an annual meeting may be acted upon by the shareholders at a special meeting held in accordance with these bylaws or in accordance with a court order. SECTION 2.2 SPECIAL MEETINGS. The corporation shall hold a special meeting of shareholders on the call at any time of the Board of Directors or the President of the corporation. In addition, the corporation shall hold a special meeting of shareholders upon the written demand of the holders of twenty-five percent (25%) of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. This written demand must be signed, dated, and delivered to the corporation and must describe the purpose for which the special meeting is to be held. SECTION 2.3 PLACE OF MEETINGS. The corporation may hold shareholders' meetings, both annual and special, at any place in or out of the State of Georgia, except that the corporation shall hold any meeting at the place set forth in the notice of the meeting or, if the meeting is held in accordance with a waiver of notice of the meeting, at the place set forth in the waiver of notice. If no place is specified in the notice or the waiver of notice, the corporation shall hold the meeting at the corporation's principal office. SECTION 2.4 NOTICE OF MEETINGS. The corporation shall notify shareholders of the date, time, and place of each annual and special shareholders' meeting no fewer than 10 6 nor more than 60 days before the meeting date. Unless the Georgia Business Corporation Code (the "Code") or the articles of incorporation require otherwise, the corporation shall notify only those shareholders entitled to vote at the meeting who have not waived, in accordance with Section 5.2, the right to receive notice. Notice of an annual meeting need not include a description of the purpose or purposes for which the meeting is called unless the Code or the articles of incorporation require otherwise. Notice of a special meeting, however, must include a description of the purpose or purposes for which the meeting is called. If not otherwise fixed under Section 14-2-703 or 14-2-707 of the Code, the record date for determining shareholders entitled to notice of and entitled to vote at an annual or special shareholders' meeting is the close of business on the day before the first notice is delivered to shareholders. SECTION 2.5 VOTING GROUP. The term "voting group" means all shares of one or more classes or series that under the Code or the articles of incorporation are entitled to vote and be counted together collectively on a matter at a meeting of shareholders. All shares entitled by the Code or the articles of incorporation to vote generally on the matter are for that purpose a single voting group. SECTION 2.6 QUORUM FOR VOTING GROUPS. Shares entitled to vote as a separate voting group may take action on a matter at a meeting of shareholders only if a quorum of those shares exists with respect to that matter. Unless the Code or the articles of incorporation provide otherwise, a majority of the votes (as represented by person or by proxy) entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. Once a share is represented for any purpose at a meeting other than solely to object to holding the meeting or to transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting as provided in Section 7.7. SECTION 2.7 VOTE REQUIRED FOR ACTION. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Code, the articles of incorporation, or a bylaw adopted by the shareholders under Section 14-2-1021 of the Code requires a greater number of affirmative votes. If the Code or the articles of incorporation provide for voting by a single voting group on a matter, action on that matter is taken when voted upon by that voting group as provided in this Section and in Sections 2.5 and 2.6. If the Code or the articles of incorporation provide for voting by two or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately as provided in this section and in Sections 2.5 and 2.6. Action may be taken by one voting group on a matter even though no action is taken by another voting group entitled to vote on the matter. SECTION 2.8 VOTING FOR DIRECTORS. Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Shareholders do not have a right to cumulate their votes for directors unless the articles of incorporation so provide. -5- 7 SECTION 2.9 VOTING OF SHARES. Unless the Code or the articles of incorporation provide otherwise, each outstanding share is entitled to one vote on each matter voted on at a meeting of shareholders. Only shares are entitled to vote. Shareholders voting their shares will vote their shares by voice vote or by show of hands unless a qualified voting shareholder, prior to any voting on a matter, demands a vote by ballot. If a demand occurs, shareholders shall vote by ballot. Each ballot must state the name of the shareholder voting and the number of shares voted by the shareholder. If a ballot is cast by proxy, the ballot must also state the name of the proxy. SECTION 2.10 PROXIES. (a) A shareholder may vote his or her shares in person or by proxy. For a shareholder to vote shares by proxy, a shareholder or his or her agent or attorney-in-fact shall appoint a proxy by executing a writing that authorizes another person or persons to vote or otherwise act for the shareholder by signing and dating an appointment form. An appointment of proxy is effective when the corporate agent authorized to tabulate votes receives an original or facsimile transmission of a signed appointment form. The appointment of proxy is valid for only one meeting and any adjournments, and the appointment form must specify that meeting. In any event, the appointment is not valid for longer than 11 months unless the appointment form expressly provides for a longer period. The Secretary shall file any appointment of proxy with the records of the meeting to which the appointment relates. (b) An appointment of proxy is revocable or irrevocable as provided in the Code. (c) If any person questions the validity of an appointment of proxy, that person shall submit the appointment form for examination to the secretary of the shareholders' meeting or to a proxy officer or committee appointed by the person presiding at the meeting. The secretary, proxy officer, or committee, as the case may be, will determine the appointment form's validity. The secretary's reference in the meeting's minutes to the regularity of the appointment of proxy will be prima facie evidence of the facts stated in the minutes for establishing a quorum at the meeting and for all other purposes. SECTION 2.11 PRESIDING OFFICER AND SECRETARY. The President of the corporation shall preside over every shareholders' meeting unless the shareholders elect another person to preside. The presiding officer will appoint any persons he or she deems necessary to help with the meeting. The Secretary shall have responsibility for preparing minutes of shareholders' meetings and for authenticating records of the corporation. SECTION 2.12 INSPECTORS. The corporation may appoint one or more inspectors to act at a shareholders' meeting and to make a written report of the inspectors' determinations. Each inspector shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of the inspector's ability. -6- 8 The inspector shall: ascertain the number of shares outstanding and the voting power of each; determine the shares represented at a meeting; determine the validity of proxies and ballots; count all votes; and determine the result. An inspector may be an officer or employee of the corporation. SECTION 2.13 ADJOURNMENTS. (a) The holders of a majority of the voting shares represented at a meeting may adjourn the meeting from time to time. This right to adjourn exists whether or not a quorum is present at the meeting and applies to annual as well as special meetings, including any meetings that are adjourned and reconvened. (b) If an annual or special shareholders' meeting is adjourned to a different date, time, or place, the corporation is not required to give notice of the new date, time, or place or of the business to be transacted, if the new date, time, or place is announced at the meeting before adjournment, except that if a new record date for the adjourned meeting is or must be fixed, the corporation must give notice of the adjourned meeting to persons who are shareholders as of the new record date. At the meeting reconvened after adjournment, the corporation may transact any business that could have been transacted at the meeting that was adjourned. (c) The Board of Directors may fix a new record date if the Board of Directors desires, but must fix a new record date if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If a new record date is not fixed, the determination of shareholders entitled to notice of or to vote at a shareholders' meeting is effective for any adjournment of the meeting. SECTION 2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Action required or permitted by the Code to be taken at a shareholders' meeting may be taken without a meeting if the action is taken by all shareholders entitled to vote on the action or, if so provided in the articles of incorporation, by persons who would be entitled to vote at a meeting shares having voting power to cast not less than the minimum number (or numbers, in the case of voting by groups) of votes that would be necessary to authorize or take the action at a meeting at which all shareholders entitled to vote were present and voted. The action must be evidenced by one or more written consents bearing the date of signature and describing the action taken, signed by shareholders entitled to take action without a meeting, and delivered to the corporation for inclusion in the minutes or filing with the corporate records. The corporation must also meet further requirements of the Code concerning these consents, including giving written notice of the action taken when less than all shareholders execute the written consent. -7- 9 ARTICLE 3 THE BOARD OF DIRECTORS SECTION 3.1 GENERAL POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors. In addition to the powers and authority expressly conferred upon it by these bylaws, the Board of Directors may exercise all powers of the corporation and do all lawful acts and things that are not by law, by any legal agreement among shareholders, by the articles of incorporation, or by these bylaws directed or required to be exercised or done by the shareholders. SECTION 3.2 NUMBER AND ELECTION. (a) The number of directors of the corporation shall initially be the number specified in the corporation's articles of incorporation, and thereafter such number can be changed from time to time by resolution of the shareholders or of the Board of Directors. (b) The initial directors shall be those persons named in the articles of incorporation. Thereafter, the directors shall be elected in accordance with Section 2.8 at each annual shareholders' meeting, except that a director filling a vacancy on the Board of Directors shall be elected in accordance with Section 3.5. SECTION 3.3 TERM AND RESIGNATION. (a) The terms of the initial directors shall expire at the first shareholders' meeting at which directors are elected. The terms of all other directors shall expire at the next annual shareholders' meeting following their election. Despite the expiration of a director's term, the director shall continue to serve until a successor is elected and qualifies or until there is a decrease in the number of directors. (b) A director may resign at any time by delivering written notice to the Board of Directors, its chairman, or the corporation. A resignation shall be effective when the notice is delivered unless the notice specifies a later effective date. SECTION 3.4 REMOVAL. The shareholders may remove one or more directors from office with or without cause by a majority of the votes entitled to be cast. If the director was elected by a voting group, only the shareholders of that voting group may participate in the vote to remove him or her. The shareholders may remove a director only at a meeting called for the purpose of removing him or her, and the meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of the director. SECTION 3.5 VACANCIES. A vacancy occurring in the Board of Directors, other than by reason of an increase in the number of directors, shall be filled for the unexpired term by the first to take action of (a) the shareholders or (b) the Board of Directors, and if the directors remaining in office constitute fewer than a quorum of the Board of Directors, -8- 10 they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. If the vacant office was held by a director elected by a voting group, only the holders of shares of that voting group or the remaining directors elected by that voting group are entitled to vote to fill the vacancy. A vacancy occurring in the Board of Directors by reason of an increase in the number of directors shall be filled in like manner as any other vacancy, but, if filled by action of the Board of Directors, shall be for a term of office continuing only until the next election of directors by the shareholders and until the election and qualification of a successor. SECTION 3.6 COMPENSATION. Unless the articles of incorporation provide otherwise, the Board of Directors may determine from time to time the compensation, if any, that directors may receive for their services as directors. A director may also serve the corporation in a capacity other than that of director and receive compensation that is determined by the Board of Directors for services rendered in such other capacity. SECTION 3.7 COMMITTEES. The Board of Directors by resolution may create one or more committees and appoint members of the Board of Directors to serve on such committees. Each committee shall have one or more members, each of whom serve at the pleasure of the Board of Directors. Except as limited by the Code, each committee will have the authority set forth in the resolution establishing the committee. The provisions of Article 4 regarding the Board of Directors and its deliberations shall apply to any committees of the Board of Directors. ARTICLE 4 MEETINGS OF THE BOARD OF DIRECTORS SECTION 4.1 REGULAR MEETINGS. The Board of Directors shall hold a regular meeting immediately after the annual shareholders' meeting or a special shareholders' meeting held in lieu of the annual meeting. In addition, the Board of Directors may schedule and hold other meetings at regular intervals throughout the year. SECTION 4.2 SPECIAL MEETINGS. The Board of Directors shall hold a special meeting upon the call of the President or any two directors. SECTION 4.3 PLACE OF MEETINGS. The Board of Directors may hold meetings, both regular and special, at any place in or out of the State of Georgia. Regular meetings shall be held at the place established from time to time for regular meetings. Special meetings shall be held at the place set forth in the notice of the meeting or, if the special meeting is held in accordance with a waiver of notice of the meeting, at the place set forth in the waiver of notice. SECTION 4.4 NOTICE OF MEETINGS. Unless the articles of incorporation provide otherwise, the corporation is not required to give notice of the date, time, place, or purpose of a regular meeting of the Board of Directors. The corporation shall, however, give at least one day's prior notice of the date, time, and place of a special meeting of the -9- 11 Board of Directors. If the articles of incorporation provide for a longer or shorter period for notice, then the corporation shall comply with that period. Unless the articles of incorporation provide otherwise, notice of a special meeting is not required to describe the purpose of the meeting. Notices of meetings must also comply with Section 5.1 and may be waived in accordance with Section 5.2. SECTION 4.5 QUORUM. Unless the Code, the articles of incorporation, or these bylaws require a greater number or unless otherwise specifically provided in the Code, a quorum of the Board of Directors consists of a majority of the total number of directors that has been initially fixed in the articles of incorporation or that has been later prescribed by resolution of the shareholders or of the Board of Directors in accordance with Section 3.2. SECTION 4.6 VOTE REQUIRED FOR ACTION. (a) If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the Board of Directors unless the Code, the articles of incorporation, or these bylaws require the vote of a greater number of directors. (b) A director who is present at a meeting of the Board of Directors or a committee of the Board of Directors when corporate action is taken is deemed to have assented to the action taken unless: (i) he or she objects at the beginning of the meeting (or promptly upon his or her arrival) to holding it or transacting business at the meeting; (ii) his or her dissent or abstention from the action taken is entered in the minutes of the meeting; or (iii) he or she delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. The right to dissent or abstain is not available to a director who votes in favor of the action taken. SECTION 4.7 PARTICIPATION BY CONFERENCE TELEPHONE. Unless the articles of incorporation or these bylaws provide otherwise, any or all directors may participate in a meeting of the Board of Directors or of a committee of the Board of Directors through the use of any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means shall be deemed to be present in person at the meeting. -10- 12 SECTION 4.8 ADJOURNMENTS. A majority of the directors present at a meeting may adjourn the meeting from time to time. This right to adjourn exists whether or not a quorum is present at the meeting and applies to regular as well as special meetings, including any meetings that are adjourned and reconvened. If a meeting of the Board of Directors is adjourned to a different date, time, or place, the corporation is not required to give notice of the new date, time, or place or of the business to be transacted, if the new date, time, or place is announced at the meeting before adjournment. At the meeting reconvened after adjournment, the Board of Directors may transact any business that could have been transacted at the meeting that was adjourned. SECTION 4.9 ACTION BY DIRECTORS WITHOUT A MEETING. Unless the articles of incorporation or these bylaws provide otherwise, any action required or permitted by the Code to be taken at any meeting of the Board of Directors (or a committee of the Board of Directors) may be taken without a meeting if the action is taken by all the members of the Board of Directors (or the committee, as the case may be). The action must be evidenced by one or more written consents describing the action taken, signed by each director (or each director serving on the committee, as the case may be), and delivered to the corporation for inclusion in the minutes or filing with the corporate records. ARTICLE 5 MANNER OF NOTICE TO AND WAIVER OF NOTICE BY SHAREHOLDERS AND DIRECTORS SECTION 5.1 MANNER OF NOTICE. (a) Whenever these bylaws require notice to be given to any shareholder or director, the notice must comply with this Section 5.1 in addition to any other section of these bylaws concerning notice and any provision in the articles of incorporation. (b) Notice to shareholders shall be in writing unless oral notice is reasonable under the circumstances. Notice to a director may be written or oral. (c) Notice may be communicated in person; by telephone, telegraph, teletype, facsimile, or other form of wire or wireless communication; or by mail or private carrier. If these forms of personal notice are impracticable, notice may be communicated by a newspaper of general circulation in the area where published, or by radio, television, or other form of public broadcast communication. Unless otherwise provided in the Code, the articles of incorporation, or these bylaws, notice by facsimile transmission, telegraph, or teletype shall be deemed to be notice in writing. (d) Written notice to shareholders, if the notice is in a comprehensible form, is effective when mailed, if mailed with first-class postage prepaid and correctly -11- 13 addressed to the shareholder's address shown in the corporation's current record of shareholders. (e) Except as provided in subsection 5.1(d), written notice, if in a comprehensible form, is effective at the earliest of the following: (i) when received, or when delivered, properly addressed, to the addressee's last known principal place of business or residence; (ii) five days after its deposit in the mail, as evidenced by the postmark, or such longer period as provided in the articles of incorporation or these bylaws, if mailed with first-class postage prepaid and correctly addressed; or (iii) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee. (f) Oral notice is effective when communicated if communicated in a comprehensible manner. (g) In calculating time periods for notice, when a period of time measured in days, weeks, months, years, or other measurement of time is prescribed for the exercise of any privilege or the discharge of any duty, the first day shall not be counted but the last day shall be counted. SECTION 5.2 WAIVER OF NOTICE. (a) A shareholder may waive any notice before or after the date and time stated in the notice. Except as provided in subsection 5.2(b), the waiver must be in writing, be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion in the minutes or filing with the corporate records. (b) A shareholder's attendance at a meeting: (i) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and (ii) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. (c) A shareholder's waiver of notice is not required to specify the business transacted or the purpose of the meeting unless required by the Code or these bylaws. -12- 14 (d) A director may waive any notice before or after the date and time stated in the notice. Except as provided in subsection 5.2(e), the waiver must be in writing, signed by the director entitled to the notice, and delivered to the corporation for inclusion in the minutes or filing with the corporate records. (e) A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless the director at the beginning of the meeting (or promptly upon his or her arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. ARTICLE 6 OFFICERS SECTION 6.1 NUMBER AND DUTIES. The officers of the corporation will consist of a President, a Secretary, and a Treasurer and may include one or more Vice Presidents. The Board of Directors may appoint other officers and a duly appointed officer may appoint other officers in accordance with this Article 6. The officers will have the authority and shall perform the duties as set forth in these bylaws. The other officers that are appointed will have the authority and shall perform the duties as established by the Board of Directors from time to time. The same person may hold any two or more offices. SECTION 6.2 APPOINTMENT AND TERM. All officers shall be appointed by the Board of Directors or by a duly appointed officer in accordance with this Article 6 and shall serve at the pleasure of the Board of Directors or the appointing officers, as the case may be. All officers, however appointed, may be removed with or without cause by the Board of Directors and any officer appointed by another officer may also be removed by the appointing officer with or without cause. SECTION 6.3 COMPENSATION. The Board of Directors shall fix the compensation, if any, of all corporate officers, however appointed. SECTION 6.4 PRESIDENT. The President will be the chief executive officer of the corporation and will have general supervision of the business of the corporation. The President shall see that all orders and resolutions of the Board of Directors are carried into effect. Unless the articles of incorporation, these bylaws, or a resolution of the Board of Directors provides otherwise, the President may execute and deliver on behalf of the corporation any contract, conveyance, or similar document not requiring approval by the Board of Directors or shareholders as provided in the Code. The President will have any other authority and shall perform any other duties that the Board of Directors may delegate to him or her from time to time. SECTION 6.5 VICE PRESIDENTS. In the case of absence or disability of the President, or at the direction of the President, the Vice President, if any, will have the -13- 15 authority and shall perform the duties of the President. If the corporation has more than one Vice President, the one designated by the Board of Directors to act in lieu of the President shall act in lieu of the President. A Vice President will have any other authority and shall perform any other duties that the Board of Directors may delegate to him or her from time to time. SECTION 6.6 SECRETARY. The Secretary will have responsibility for preparing minutes of the acts and proceedings of all meetings of the shareholders, of the Board of Directors, and of any committees of the Board of Directors. The Secretary will have authority to give all notices required by the Code, other applicable law, or these bylaws. The Secretary will have responsibility for the custody of the corporate books, records, contracts, and other corporate documents. The Secretary will have authority to affix the corporate seal to any lawfully executed document and shall sign any instruments that require his or her signature. The Secretary shall authenticate records of the corporation. The Secretary will have any other authority and shall perform any other duties that the Board of Directors may delegate to him or her from time to time. In the case of absence or disability of the Secretary, or at the direction of the President, any assistant secretary will have the authority and may perform the duties of the Secretary. SECTION 6.7 TREASURER. The Treasurer will have responsibility for the custody of all funds and securities belonging to the corporation and for the receipt, deposit, or disbursement of funds and securities under the direction of the Board of Directors. The Treasurer shall cause to be maintained true accounts of all receipts and disbursements and shall make reports of these to the Board of Directors, upon its request, and to the President, upon his or her request. The Treasurer will have any other authority and shall perform any other duties that the Board of Directors may delegate to him or her from time to time. SECTION 6.8 BONDS. The Board of Directors by resolution may require any or all of the officers, agents, or employees of the corporation to give bonds to the corporation, with sufficient surety or sureties, conditioned on the faithful performance of the duties of their respective offices or positions, and to comply with any other conditions that from time to time may be required by the Board of Directors. ARTICLE 7 SHARES SECTION 7.1 AUTHORIZATION AND ISSUANCE OF SHARES. In accordance with the Code, the Board of Directors may authorize shares of any class or series provided for in the articles of incorporation to be issued for any consideration valid under the provisions of the Code. To the extent provided in the articles of incorporation, the Board of Directors shall determine the preferences, limitations, and relative rights of the shares. SECTION 7.2 SHARE CERTIFICATES. The interest of each shareholder will be represented by a certificate or certificates representing shares of the corporation. Each -14- 16 certificate will be in the form the Board of Directors may from time to time adopt, but at a minimum each share certificate shall state on its face the name of this corporation and that it is organized under the laws of the State of Georgia; state on its face the name of the shareholder to whom issued; state on its face the number and class of shares and the designation of the series, if any, the certificate represents; and be signed by either the President, a Vice President, the Secretary, or the Treasurer. In addition, at a minimum, each share certificate shall be numbered consecutively, be in registered form, and indicate the date of issuance. It is not required that each share certificate bear the corporate seal. SECTION 7.3 REGISTERED OWNER. The corporation may treat the registered owner of any share of stock of the corporation as the person exclusively entitled to vote such share and to receive any dividend or other distribution with respect to such share and as the exclusive owner of such share for all other purposes. Accordingly, the corporation is not required to recognize any other person's equitable, or other, claim to or interest in such share, whether or not the corporation has express or other notice of the claim or interest, except as provided otherwise by law. SECTION 7.4 TRANSFERS OF SHARES. The Board of Directors shall designate a transfer agent to transfer shares on the transfer books of the corporation when the agent is properly directed to do so. The transfer agent shall keep such books at his or her office. Only the person named on a certificate, or his or her attorney-in-fact lawfully constituted by a writing, may direct the transfer agent to transfer the share represented by that certificate. Before the corporation issues a new certificate to the new owner of the shares, the old certificate must be surrendered to the corporation for cancellation. In the case of a certificate claimed to have been lost, stolen, or destroyed, the person making the claim must comply with Section 7.6. SECTION 7.5 DUTY OF CORPORATION TO REGISTER TRANSFER. Notwithstanding any provision in Section 7.4, the corporation has no duty to register the transfer of a share unless: (a) the certificate representing that share has been endorsed by the appropriate person or persons; (b) reasonable assurance has been given that the endorsement or affidavit (in the case of a lost, stolen, or destroyed certificate) is genuine and effective; (c) the corporation either has no duty to inquire into adverse claims or has discharged that duty; (d) the requirements of any applicable law relating to the collection of taxes for the proposed transfer have been met; and (e) the transfer is in fact rightful or is to a bona fide purchaser. -15- 17 SECTION 7.6 LOST, STOLEN, OR DESTROYED CERTIFICATES. In order to receive a duplicate share certificate to replace a certificate alleged to have been lost, stolen, or destroyed, any person claiming that a share certificate has been lost, stolen, or destroyed must make an affidavit or affirmation of that fact in the manner prescribed by the Board of Directors. In addition, if the Board of Directors so requires, such person must give the corporation a bond of indemnity in a form and amount, and with one or more sureties, satisfactory to the Board of Directors. SECTION 7.7 RECORD DATE WITH REGARD TO SHAREHOLDER ACTION. The Board of Directors may fix a future date as the record date in order to determine the shareholders entitled to notice of a shareholders' meeting, to demand a special meeting, to vote, or to take any other action (except an action provided for in Section 8.2). Any future date fixed as a record date may not be more than 70 days before the date on which the meeting is to be held or the action requiring a determination of shareholders is to be taken. A determination of shareholders entitled to notice of or to vote at a shareholders' meeting shall be effective for any adjournment of the meeting unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If the Board of Directors does not fix a future date as a record date, the corporation shall determine the record date in accordance with the Code. ARTICLE 8 DISTRIBUTIONS SECTION 8.1 AUTHORIZATION OR DECLARATION. Subject to any restriction in the articles of incorporation, the Board of Directors from time to time in its discretion may authorize or declare, and the corporation may make, distributions to the shareholders in accordance with the Code. SECTION 8.2 RECORD DATE WITH REGARD TO DISTRIBUTIONS. The Board of Directors may fix a future date as the record date in order to determine shareholders entitled to a distribution (other than one involving a purchase, redemption, or other reacquisition of the corporation's shares). If the Board of Directors does not fix a future date as the record date, the corporation shall determine the record date in accordance with the Code. ARTICLE 9 INDEMNIFICATION SECTION 9.1 DEFINITIONS. As used in this Article 9, the term: (a) "Corporation" includes any domestic or foreign predecessor entity of the corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. -16- 18 (b) "Director" or "officer" means an individual who is or was a director or board-appointed officer, respectively, of the corporation or who, while a director or officer of the corporation, is or was serving at the corporation's request as a director, officer, partner, trustee, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan or other entity. A director or officer is considered to be serving an employee benefit plan at the corporation's request if his or her duties to the corporation also impose duties on, or otherwise involve services by, the director or officer to the plan or to participants in or beneficiaries of the plan. "Director" or "officer" includes, unless the context otherwise requires, the estate or personal representative of a director or officer. (c) "Disinterested director" or "disinterested officer" means a director or officer, respectively, who at the time of a vote or selection referred to in subsection 9.5(b), 9.5(c) or 9.7(a) is not: (i) a party to the proceeding; or (ii) an individual having a familial, financial, professional or employment relationship with the person whose indemnification or advance for expenses is the subject of the decision being made with respect to the proceeding, which relationship would, in the circumstances, reasonably be expected to exert an influence on the director's or officer's judgment when voting on the decision being made. (d) "Expenses" includes counsel fees. (e) "Liability" means the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan) or reasonable expenses incurred with respect to a proceeding. (f) "Official capacity" means: (i) when used with respect to a director, the office of director in the corporation; and (ii) when used with respect to an officer, the office in the corporation held by the officer. Official capacity does not include service for any other domestic or foreign corporation or any partnership, joint venture, trust, employee benefit plan or other entity. (g) "Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. -17- 19 (h) "Proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative and whether formal or informal. SECTION 9.2 BASIC INDEMNIFICATION ARRANGEMENT. (a) Except as provided in subsection 9.2(d), the corporation shall indemnify an individual who is a party to a proceeding because he or she is or was a director or officer against liability incurred in the proceeding if: (i) such individual conducted himself or herself in good faith; and (ii) such individual reasonably believed: (A) in the case of conduct in his or her official capacity, that such conduct was in the best interests of the corporation; (B) in all other cases, that such conduct was at least not opposed to the best interests of the corporation; and (C) in the case of any criminal proceeding, that the individual had no reasonable cause to believe such conduct was unlawful. (b) A director's or officer's conduct with respect to an employee benefit plan for a purpose he or she believed in good faith to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subsection 9.2(a)(ii)(B). (c) The termination of a proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director or officer did not meet the standard of conduct described in subsection 9.2(a). (d) The corporation may not indemnify a director or officer under this Article 9: (i) in connection with a proceeding by or in the right of the corporation, except for reasonable expenses incurred in connection with the proceeding if it is determined that the director or officer has met the relevant standard of conduct under subsection 9.2(a); or (ii) in connection with any proceeding with respect to conduct for which he or she was adjudged liable on the basis that personal benefit was -18- 20 improperly received by him or her, whether or not involving action in his or her official capacity. SECTION 9.3 ADVANCES FOR EXPENSES. (a) The corporation shall, before final disposition of a proceeding, advance funds to pay for or reimburse the reasonable expenses incurred by a director or officer who is a party to a proceeding because he or she is a director or officer if he or she delivers to the corporation: (i) a written affirmation of his or her good faith belief that he or she has met the relevant standard of conduct described in subsection 9.2(a) or that the proceeding involves conduct for which such person's liability has been eliminated under the corporation's articles of incorporation; and (ii) his or her written undertaking to repay any funds advanced if it is ultimately determined that the director or officer is not entitled to indemnification under this Article 9 or the Code. (b) The undertaking required by subsection 9.3(a)(ii) must be an unlimited general obligation of the director or officer but need not be secured and may be accepted without reference to the financial ability of the director or officer to make repayment. SECTION 9.4 COURT-ORDERED INDEMNIFICATION AND ADVANCES FOR EXPENSES. (a) A director or officer who is a party to a proceeding because he or she is a director or officer may apply for indemnification or advance for expenses to the court conducting the proceeding or to another court of competent jurisdiction. Pursuant to Section 14-2-854 of the Code, after receipt of an application and after giving any notice it considers necessary, the court shall: (i) order indemnification or advance for expenses if it determines that the director or officer is entitled to indemnification; or (ii) order indemnification or advance for expenses if it determines, in view of all the relevant circumstances, that it is fair and reasonable to indemnify the director or officer, or to advance expenses to the director or officer, even if the director or officer has not met the relevant standard of conduct, failed to comply with the requirements for advance of expenses, or was adjudged liable in a proceeding referred to in subsection 9.2(d), but if the director or officer was adjudged so liable, the indemnification shall be limited to reasonable expenses incurred in connection with the proceeding. (b) If the court determines that the director or officer is entitled to indemnification or advance for expenses, it may also order the corporation to pay the -19- 21 director's or officer's reasonable expenses to obtain court-ordered indemnification or advance for expenses. SECTION 9.5 DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION. (a) The corporation acknowledges that indemnification of a director or officer under Section 9.2 has been pre-authorized by the corporation as permitted by Section 14-2-859(a) of the Code. Nevertheless, the corporation shall not indemnify a director or officer under Section 9.2 unless a determination has been made for the specific proceeding that indemnification of the director or officer is permissible in the circumstances because he or she has met the relevant standard of conduct set forth in subsection 9.2(a); provided, however, that regardless of the result or absence of any such determination, the corporation shall indemnify a director or officer who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she was a party because he or she was a director or officer of the corporation against reasonable expenses incurred by the director or officer in connection with the proceeding. (b) The determination referred to in subsection 9.5(a) shall be made: (i) if there are two or more disinterested directors, by the Board of Directors of the corporation by a majority vote of all disinterested directors (a majority of whom shall for such purpose constitute a quorum) or by a majority of the members of a committee of two or more disinterested directors appointed by such a vote; (ii) by special legal counsel: (A) selected in the manner prescribed in paragraph (i) of this subsection 9.5(b); or (B) if there are fewer than two disinterested directors, selected by the Board of Directors (in which selection directors who do not qualify as disinterested directors may participate); or (iii) by the shareholders, but shares owned by or voted under the control of a director or officer who at the time does not qualify as a disinterested director or disinterested officer may not be voted on the determination. (c) As acknowledged above, the corporation has pre-authorized the indemnification of directors and officers hereunder, subject to a determination for a specific proceeding that the director or officer met the relevant standard of conduct under subsection 9.2(a). Consequently, no further decision need or shall be made on a case-by-case basis as to the authorization of the corporation's indemnification of directors or officers hereunder. Nevertheless, evaluation as to reasonableness of expenses of a director or officer for a specific proceeding shall be made in the same manner as the -20- 22 determination that indemnification is permissible, as described in subsection 9.5(b), except that if there are fewer than two disinterested directors or if the determination is made by special legal counsel, evaluation as to reasonableness of expenses shall be made by those entitled under subsection 9.5(b)(ii)(B) to select special legal counsel. SECTION 9.6 INDEMNIFICATION OF EMPLOYEES AND AGENTS. The corporation may indemnify and advance expenses under this Article 9 to an employee or agent of the corporation who is not a director or officer to the extent, consistent with public policy, that such indemnification and advances may be provided to a director or officer. SECTION 9.7 SHAREHOLDER APPROVED INDEMNIFICATION. (a) If authorized by the articles of incorporation or a bylaw, contract or resolution approved or ratified by shareholders of the corporation by a majority of the votes entitled to be cast, the corporation may indemnify or obligate itself to indemnify a director or officer made a party to a proceeding, including a proceeding brought by or in the right of the corporation, without regard to the limitations in other sections of this Article 9, but shares owned or voted under the control of a director or officer who at the time of such authorization does not qualify as a disinterested director or disinterested officer with respect to any existing or threatened proceeding that would be covered by the authorization may not be voted on the authorization. (b) The corporation shall not indemnify a director or officer under this Section 9.7 for any liability incurred in a proceeding in which the director or officer is adjudged liable to the corporation or is subjected to injunctive relief in favor of the corporation: (i) for any appropriation, in violation of his or her duties, of any business opportunity of the corporation; (ii) for acts or omissions which involve intentional misconduct or a knowing violation of law; (iii) for the types of liability set forth in Section 14-2-832 of the Code; or (iv) for any transaction from which he or she received an improper personal benefit. (c) Where approved or authorized in the manner described in subsection 9.7(a), the corporation may advance or reimburse expenses incurred in advance of final disposition of the proceeding only if: (i) the director or officer furnishes the corporation a written affirmation of his or her good faith belief that his or her conduct does not constitute behavior of the kind described in subsection 9.7(b); and -21- 23 (ii) the director or officer furnishes the corporation a written undertaking, executed personally or on his or her behalf, to repay any advances if it is ultimately determined that he or she is not entitled to indemnification under this Article 9. SECTION 9.8 INSURANCE. The corporation may purchase and maintain insurance on behalf of an individual who is a director, officer, employee or agent of the corporation or who, while a director, officer, employee or agent of the corporation, serves at the corporation's request as a director, officer, partner, trustee, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan or other entity against liability asserted against or incurred by him or her in that capacity or arising from his or her status as a director, officer, employee or agent, whether or not the corporation would have power to indemnify or advance expenses to him or her against the same liability under this Article 9 or the Code. SECTION 9.9 WITNESS FEES. Nothing in this Article 9 shall limit the corporation's power to pay or reimburse expenses incurred by a director or officer in connection with his or her appearance as a witness in a proceeding involving the corporation at a time when he or she is not a party. SECTION 9.10 REPORT TO SHAREHOLDERS. To the extent and in the manner required by the Code from time to time, if the corporation indemnifies or advances expenses to a director or officer in connection with a proceeding by or in the right of the corporation, the corporation shall report the indemnification or advance to the shareholders. SECTION 9.11 AMENDMENTS; SEVERABILITY. No amendment, modification or rescission of this Article 9, or any provision hereof, the effect of which would diminish the rights to indemnification or advancement of expenses as set forth herein shall be effective as to any person with respect to any action taken or omitted by such person prior to such amendment, modification or rescission. In the event that any of the provisions of this Article 9 (including any provision within a single section, subsection, division or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions of this Article 9 shall remain enforceable to the fullest extent permitted by law. ARTICLE 10 MISCELLANEOUS SECTION 10.1 INSPECTION OF RECORDS. The Board of Directors may determine what corporate records, other than those specifically required by the Code to be made open to inspection, will be made open to the right of inspection by the shareholders. In addition, the Board of Directors may fix reasonable rules not in conflict with the Code regarding the inspection of corporate records that are required by the Code or are permitted by determination of the Board of Directors to be made open to inspection. The -22- 24 right of inspection granted in Section 14-2-1602(c) of the Code is not available to any shareholder owning two percent (2%) or less of the shares outstanding, unless the Board of Directors in its discretion grants prior approval for the inspection to the shareholder. SECTION 10.2 FISCAL YEAR. The Board of Directors may determine the fiscal year of the corporation and may change the fiscal year from time to time as the Board of Directors deems appropriate. SECTION 10.3 CORPORATE SEAL. If the Board of Directors determines that the corporation should have a corporate seal for the corporation, the corporate seal will be in the form the Board of Directors from time to time determines. SECTION 10.4 FINANCIAL STATEMENTS. Not later than four months after the close of each fiscal year and in any case prior to the annual shareholders' meeting, the corporation shall prepare: (a) a balance sheet showing in reasonable detail the financial condition of the corporation as of the close of its fiscal year; and (b) a profit and loss statement showing the results of its operation during its fiscal year. Upon written request, the corporation shall promptly mail to any shareholder of record a copy of the most recent balance sheet and profit and loss statement. SECTION 10.5 CONFLICT WITH ARTICLES OF INCORPORATION. In the event that any provision of these bylaws conflicts with any provision of the articles of incorporation, the provision in the articles of incorporation will govern. ARTICLE 11 AMENDMENTS SECTION 11.1 POWER TO AMEND BYLAWS. The Board of Directors may amend or repeal the bylaws or adopt new bylaws unless the articles of incorporation or the Code reserves this power exclusively to the shareholders or unless the shareholders in amending or repealing a particular bylaw provide expressly that the Board of Directors may not amend or repeal such bylaw. The shareholders may amend or repeal the bylaws or adopt new bylaws even though the bylaws may also be amended or repealed by the Board of Directors. In amending or repealing bylaws or adopting new bylaws, the Board of Directors and the shareholders shall comply with any other applicable provisions of the Code. -23- EX-23.1 4 CONSENT OF INDEPENDENT AUDITORS' 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS' We consent to the reference to our firm under the caption "Experts" and to the use of our report dated November 23, 1999, in the Registration Statement (Form S-1) and related Prospectus of MDpathways, Inc. for the registration of up to 38,500,000 shares of Series B Convertible Preferred Stock and 2,000,000 shares of Series A Convertible Preferred Stock. /s/ Ernst & Young LLP November 23, 1999 Nashville, Tennessee EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MDPATHWAYS, INC. FINANCIAL STATEMENTS FOR THE PERIOD FROM JULY 30, 1999 THROUGH NOVEMBER 23, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 4-MOS DEC-31-1999 JUL-30-1999 NOV-23-1999 5,023,427 0 0 0 0 5,023,427 0 0 5,103,043 365,268 0 0 50,000 100,000 4,825,055 5,103,043 0 0 0 0 237,280 0 0 (237,280) 0 (237,280) 0 0 0 (237,280) (.001) (.001)
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